South Park: How the Financial System Really Works

Dollar Devalued Yet Again

Check out this post. Here's a summary (emphasis mine):

On Wednesday, right around the time the US markets were winding down, the Dollar was deliberately devalued. Everyone in the world watched it happen, except for Americans, who were outraged or offended by some manufactured distraction, as usual. The Federal Open Market Committee {FOMC] published an historic press release. Here's an excerpt:

"Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession...."

So what does that mean?...

It means the Federal Reserve is now printing its own money. It's a defacto devaluation of the U.S. Dollar, with a promise of more to come. The Federal Reserve is going to buy everything in America that's not nailed down, throwing another $1,150,000,000,000 lifeline at markets...

President Obama may have no other choice than to take this route as foreign investors grow wary about the capability of the USA to service its debts. We will see less participation in Treasury auctions, since sovereign wealth funds will likely decide that domestic investment is probably a better idea that depreciating Treasuries. For the time being gold investments will look like a safer place to hold wealth, along with oil, silver, and certain other commodities.

Maybe Ben Bernanke will be able to do what no central banker has ever done before: put in just the right amount of inflation... not too much, not too little.

[How successful will Bernanke be at 'quantitative easing'?] In the past, they tended to overdo it.

There are not many examples. France, England and America in the 18th century. Practically no examples we know of in the 19th century (they'd learned their lesson!). And in the 20th century - only marginal countries... or countries with nothing left to lose... engaged in 'quantitative easing.' Germany did it in the 1920s, because her war reparations burden was greater than she could sustain. Argentina did it in the 1980s, because it owed too much money to too many foreigners. And Zimbabwe did it in 2003-2009, for reasons of its own.

There are not many examples because the consequences of over-doing it are so horrible, central bankers have generally not done it at all. Quantitative easing was always a possibility... but it was always a last resort... like blowing up the powder and spiking the guns; it was something you did when you knew you'd lost the battle already.

While all this was happening, the American people were off gnashing their teeth over the relatively miniscule AIG bonuses. And then Obama went on Jay Leno, which had to be discussed, and then he spoke to Iran, which was a big deal. And then there's Limbaugh and Beck to bash. Plus, the Special Olympics. And so it went.

Want more? How about this post over at Seeking Alpha which probably should have been titled "The United States of America is Now a Banana Republic".

Anyway, I think it's pretty clear that the U.S. government doesn't need our money. I mean, if the Fed can manufacture money, any amount, at will, out of "thin air", whenever it feels like it, then the Federal government doesn't need nor deserve our hard-earned tax dollars. We might as well keep it for ourselves (to buy gold, as kindling for a fire, you know, for stuff of real value).

DataQuick, January, 2005 to Present

(Click on picture for larger view)

As one commentor over at CalculatedRisk said, "it is nice to see marin get bitchslapped".

Source

Note: I forgot to mention that these data points are year-over-year percent (de)appreciation.

Update February 22, 2009: Due to the incredulity of one commentor regarding the previous chart, I made the following chart using the same DataQuick source:

(Click on picture for larger view)

For the Marin data series in the above chart, peak (June, 2007) to trough (January, 2009) is a -45.4% decline. For the Bay Area series, it's a -54.9% decline.

Foreclosure Is Part of the Solution, Not the Problem

As the Obama Administration rushes to prove that it is just as clueless and fiscally irresponsible as the previous administration vis the "credit crisis", I found this Wall Street Journal article refreshing. Yes, foreclosure is a perfectly acceptable choice for people who find their precious house price is less than their mortgage -- that is precisely why the house is held as collateral. There is absolutely nothing wrong with "walking away", "jingle mail", or "mailing in the keys".

The cure for the current economic "illness" is not greater and greater amounts of what got the economy sick in the first place. It's not effectively 0% interest rates. It is not massively punishing savers. It's not more lax lending. It is not more artificial asset price inflation. It's not more housing tax incentives. It is not forcing tax payers to bail out failed businesses that deserve to be weeded out of the business "gene pool". It's not the Fed buying bad assets at ridiculously inflated prices or setting up bogus banks to hold the bad assets. And it most certainly is not preventing or delaying foreclosures.

How long will it be before the myopic, short-sighted, entrenched group-think in Washington is finally forced to admit or shamed into admitting this simple truth? How impoverished must our country become, how much crushing debt must we pile on to the younger generations before they understand this?

The cure for the current economic mess is what's been needed for the last decade or more: to allow the free-market to remove the excesses in the economy and to price assets based on what people earn for themselves. Foreclosure is the free-market in action doing exactly what it should be doing and what needs to be done.

Government and government-sponsored market interventions and manipulations are the exact opposite of what the markets need.

Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit as a free-market solution to the crisis.

If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.

Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.

If the intent is to help the credit markets, then foreclosure is undoubtedly the best solution. The securitization model has proven to be flawed...

...The intent of [loan] modification programs to date is to create a generation of mortgage slaves. Fortunately, mortgage slaves can free themselves via foreclosure, and the masses are choosing to do so.

Just In Case You Were Wondering

I was out in west Marin the other day and drove past the boat-garage-pretending-to-be-a-desirable-Marin-abode. It's still for sale. I last blogged it in a post entitled Waiting for Mr. Market to Catch Up to Their Marin Wishing Prices. Apparently, the sellers are still waiting for a Mr. Right buyer to come along "with a bucket of money and a box of stupid".

I first blogged this POS back in November, 2005. So that makes its real DOM something in the neighborhood of 1130 days (give or take). They are currently asking the bubblicious, staggering price of $525K for this 1br, 1ba, 543 ft^2 boat garage (but to put things in to their proper context, $795K was the highest, delusional listing price I've seen for this POS). Three cheers for Marin seller obstinacy, wishful thinking, and denial!

Price Decline from Peak

I found the following graphic over on Mish's blog. Please check it out for the whole story.

A -44.55% decline from the peak in single family residence prices in the San Francisco Bay area in just 18 months! Anathema!

November YOY Results for "Immune" Marin

More year-over-year declines for Marin. Rather surprising considering we were supposed to have "dodged the subprime bullet". At least that's what the Marin IJ once quoted our esteemed local real estate industry as saying.

From the Marin IJ:

Another month of plummeting home sales in Marin included a price drop of nearly 30 percent from November 2007, as discounted foreclosure sales continued to drive the Bay Area market. The median price of a single-family home in Marin last month was $790,000, down from $975,000 last year, MDA DataQuick reported Thursday. In October, the median single-family home price in Marin was $850,000. Realtor Peter Harris in Novato said bank-owned properties and short sales have made up about 85 percent of his business over the past year. ‘Prices are half of what they were,’ Harris said. ‘Condos are selling in the low $100,000s. We haven’t seen this for a long time.’

From DataQuick:

By the way, the graphic for this post is from a May 16, 2007 IJ article. I saved it knowing this day would come.