Sunday, April 24, 2005

S&L Bust Revisited

The writer of this editorial reviews the last major housing bust. "One such calamity struck the USA in 1986-1989. The S&L's were rendered unable to further support the price of real estate by rolling over old credits, refinancing residential equity, and underwriting development projects. Endemic corruption and mismanagement exacerbated the ruin. The bubble burst."

"Hundreds of thousands of depositors scrambled to withdraw their funds and hundreds of savings and loans association (out of a total of more than 3,000) became insolvent instantly."

"As institutions closed their gates, one by one, they left in their wake major financial upheavals, wrecked businesses and homeowners, and devastated communities. At one point, the contagion threatened the stability of the entire banking system."

Although I can't agree with his conclusions, he does see an indifference that this blog points out. "It is instructive to study the decisive reaction of the administration and Congress alike. They tackled both the ensuing liquidity crunch and the structural flaws exposed by the crisis with tenacity and skill. Compare this to the lackluster and hesitant tentativeness of the current lot."


At 2:04 PM, Anonymous Anonymous said...

"It was managed by the autonomous, able, utterly professional, largely a-political Federal Reserve. The political class provided the professionals with the tools they needed to do the job. This mode of collaboration may well be the most important lesson of this crisis."

Spoken like a true statist. What is Washington concerned with? Steroids.

At 3:06 PM, Anonymous Anonymous said...

...and gay marriage and other stuff instead of all the really important things like health care. That's what happens when a bunch of right-wing idealogues take power beholden to a bunch or religious nuts.

At 4:02 PM, Anonymous Anonymous said...

I agree with the writer that the banks could be in trouble. I suspect that they've got huge portfolios of highly leveraged real estate and I suspect they have large hedge operations. All it would take is a significant rise in short term interest rates or a dollar collapse and they'd be in trouble.

I say they'd be in trouble because they would have to start calling (or not renewing) loans and mortgages and that would set off a crisis across the country. Suddenly all the highly leveraged consumers that they've been so staunchly supporting would be facing a cash crisis and the value of everything they own (ie their houses) would be down the tube.

There is WAY more risk to the current housing situation than what most people realize. People are spending over 1M$ on a house that should be worth $350,000. When the prices correct, where do you think Joe Boomer is going to get the $650K ? HE CAN'T !

This scenario is going to ripple across the economy at terrific speed, taking down Fannie Mae, banks and hot housing markets with it.

Everyone says that we came through the dot com boom with relatively little pain. And they are right, excluding the present situation.

However, the thing about the stock market is that there wasn't any debt involved. People lost their SAVINGS and that was the end of it. Now, not only are they going to lose their savings, ie house, but they are also going to have HUGE future liabilities !

Here we are in 2005 running massive deficits and complaining that we don't have enough money saved for retirement and for Social Security. After the crash, it is going to be 4x worse because the economy is going to go into recession and people are going to have to deal with huge debt loads. Lets say Joe Boomer wants to retire in 10 years. What happens to his "savings" when his $600K home gets adjusted to $300K ? I realize that is a 50% drop, but that is what I think is going to happen.

At 4:08 PM, Blogger Ben Jones said...

(Here we are in 2005 running massive deficits and complaining that we don't have enough money saved for retirement and for Social Security)

Amazing isn't it? You make a lot of great points. The stock market had limits on leverage and housing doesn't anymore, that's why it will be worse than the dotcom bust.Thanks.

At 10:03 PM, Anonymous Anonymous said...

The big guns at the Federal Reserve don't buy the idea of a real estate bubble. In remarks at an economic conference in San Francisco sponsored by the Federal Reserve Bank of San Francisco and the Stanford Institute for Economic Policy Research on February 28, Federal Reserve Governor Donald Kohn said there was little reason to worry that current low interest rates may cause a potential bubble in the rate-sensitive housing market.

At 10:40 PM, Anonymous Anonymous said...

Kohn recently gave a talk April 22 saying there probably was a bubble. There is an article on this blog about it.


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