Tuesday, August 21, 2007

just say it: recession

I've been following the ongoing crisis in the credit markets obsessively. This is a fascinating addition to the global picture: China's mortgage quality worse than US.
Yi Xianrong, a banking and finance expert at the Chinese Academy of Social Sciences, said Chinese banks had been lax as they built up 3 trillion yuan (S$583 billion) of mortgage lending.
Defaults in the US subprime mortgage market now total about S$200 billion, on some S$1 trillion of loans, according to Credit Suisse.
'The quality of housing loans are much worse than the subprime loans in the United States,' Mr Yi was quoted as saying by the South China Morning Post.

Interesting. I have read elsewhere that England, Austalia and Spain have all had massive real estate appreciation bubbles. So at least we know that Americans are not the only greedy ones. But if we are expecting foreigners to bail us out (see this insightful Asia Times story), that is to say keep on financing our debt, we may have an even bigger problem. Maybe China (and Austalia, et al) will be dealing with their own liquidity problems? At present the Chinese must be relieved that their massive pile of US Treasury bonds are rising in value. But they will have to sell off their treasury book eventually, as the profitability of global trade begins to falter with the coming recession.

Recession. Lets just all say it. We should get used to it. The economy is not going to be "growing" for a while. All those American workers who are losing their jobs in the mortgage industry - are they going to find work anywhere near as well paid as the jobs they had? I don't think so. And see CNN's Job cuts at financial services firms surge. BTW, mortgage brokers also have homes with adjustable rate mortgages (like everyone else on the planet). And the construction workers, the decorators, the realtors.. they too are at risk of losing not just their jobs, but their homes. The Mexican and Latino immigants and illegals who did the unskilled labor? They will no doubt have to go home, and their families will lose their remittances. And the Wal-Marts that fed and clothed them in the USA will not get their dollars either. And there will be layoffs in retail. It is a shrinking pie now. We will all be losing our dessert, and for many, dinner too. It sucks.

I should say something positive and optimistic. Well here is one way forward: the biggest problem is that all the debt, at least coming from the USA, was mis-rated, some of it faudulently. We will need some truth and reconciliation, as well as litigation and prosecution. John Maudlin, a Wise Old Man of finance, is calling for Warren Buffet to step up to the plate:
..the rating agencies need to restore their credibility. Warren Buffett's Berkshire Hathaway owns about 19% of Moody's [a prominent bond rating agency]. I would suggest that Mr. Buffett step in take over the company (much as he did with Salomon years ago) and put his not inconsiderable credibility on the line for all future ratings and the inevitable re-ratings that are going to be done.

Suppose Buffet takes Maudlin's advice. Then all the actuaries and appraisers will have to go over all those bonds and find out what they are really worth (at least it will keep some people employed). Such a process would be slow and very painful because people will simply be told that the value of their home or condo just went down 30%. And that the chance of selling a home or condo, even with a 30% discount, this year, is very small. But it is better to know what things are worth, and then deal.

No comments: