Dead Waste of a Shilling ?

[GD]

Thanks Bill, I just saw your reply from the other day. I'll stick to my guns, this bubble would have burst anyway, thanks to the enormous amounts of irresponsible lending that the bankers have overseen (and why would they do that, if they thought, back in 2005, that BAU growth was no longer possible?).

Whilst I recognise the destabilizing effects of the current situation regarding energy, I am wholly convinced that this "crisis of confidence" would have occurred regardless, even if we were to assume (for argument's sake) $20 / barrel oil and (perhaps) another trillion barrels of known recoverable resources.

[Totally_Baffled]

Regarding the US housing bust and subsequent 'toxic debt, if oil was still $20 (along with cheap other commodities) central banks would not of needed to raise rates to bring inflation back into line.

If US rates were kept at 1%, and not hiked to 5.25% within 18 months, would the US housing bust been so violent?

At 1% a $200K mortgage could be financed at $166 per month (interest only). Not beyond the average income in the US by any means, but at 5,25% this became over $800 which would of caused alsorts of affordability issues (on top of rising food, energy prices etc).

So in this case - was it not an external event that caused the financial crisis? (higher oil/commodity prices although not necessarily at a supply peak)

[snow hope]

I agree with TB's post. I think we need to stop holding or portraying the view that senior people don't know anything about Peak Oil and its impact on the concept of economic growth. They are not stupid, so they DO know!

Hence why I also believe the whole house of cards is crashing due to the end of growth for the forseeable future.

[Totally_Baffled]

I notice there is even a special edition of New Scientist magazine this month all about infinite exponential economic growth and it's impact on a finite world.

Interesting stuff - worth a read.

Regarding oil, I find it interesting that even when there is the slightest glimpse of news that growth may recover, oil prices immediately respond.

So once we get a recovery, cost price inflation (via oil) is just going to bitch slap us back down again....

Of course IF it turns out there is more spare capacity than anticipated, we will get a longer recover (in part due to more conservative credit) but eventually it will bust again as supply peaks and prices go nuts again

[GD]

TB, what about the UK housing bubble burst? We have not seen such a drastic uptick in rates, yet we are still in the fastest crash ever.

Inflation was running out of control because rates were so low (shadow stats had something like 16% ? )

It is disingenuous to say that people would easily have coped with small increases in rates, because there is a tendency for people to stretch their budgets to buy their first house and hence, any upward movement was always going to tip them over the edge.

Also, there is no precedent to the fabled soft landing scenario - it could never have happened. Once people are unable to bid up house prices any more, they have to fall.

The cyclical nature of the housing (read Land) market is well known and it has been traced to the very advent of the building society.

[GD]

I agree with TB's post. I think we need to stop holding or portraying the view that senior people don't know anything about Peak Oil and its impact on the concept of economic growth. They are not stupid, so they DO know!

I absolutely don't doubt for a second that there are many good people, such as Billhook pointed out, in the banking industry, as in any other industry, to be honest, that have a very good handle on the reality of the situation.

What I am saying is that the actions of the entire banking sector in recent years (even post 2005) have been as though risk has been all but abolished from the global economic system.

Hence why I also believe the whole house of cards is crashing due to the end of growth for the forseeable future.

Once again, I have to disagree with this.

[Totally_Baffled]

TB, what about the UK housing bubble burst? We have not seen such a drastic uptick in rates, yet we are still in the fastest crash ever.

Hi GD

Rates went from 3.5% to 5.5% so not so dramatic but bad enough - so you are right.

But - what has happened is that mortgages in reality are now more expensive than the 5.5% suggests (due to the fall out from the US housing crash - if this hadnt happened the 5.5% may not of caused such a violent crash in demand)

You used to be able to get 110% mortgages (ie no deposit and cash back), at a discounted interest rate for a period of circa 2-3 years.

Now, despite rates of 4.5% you are lucky if you can get <6% and 15%-25% deposit! That is catastrophic for demand - who has 25K-50K lying around for a deposit!

So the US interest rate rises and subsequent housing bust had knock on effects that took the cost of UK credit/mortgages beyond the 5.5% figure.

I guess we will never know looking back if this would of popped the bubble or not, but my point remains - if inflation had remained low due to low oil then rates could of stayed at 3.5% and the bubble need not of burst so violently

Inflation was running out of control because rates were so low (shadow stats had something like 16% ? )

But if the BoE isnt working on the 'unofficial' rate, then rates dont rise. If rates don't rise then the mortgage repayments stay the same and remain affordable.

It is disingenuous to say that people would easily have coped with small increases in rates, because there is a tendency for people to stretch their budgets to buy their first house and hence, any upward movement was always going to tip them over the edge.

Also, there is no precedent to the fabled soft landing scenario - it could never have happened. Once people are unable to bid up house prices any more, they have to fall.

Yes - they had to fall eventually, but you have to ask the question why has every violent housing bust in the UK been preceded by a hike in interest rates?

The cyclical nature of the housing (read Land) market is well known and it has been traced to the very advent of the building society.

Yep the business cycle - which includes a cycle of ups and downs in interest rates to control aggregate demand in the economy (usually to control vost push or wage inflation or even both). When rates go up, house prices deflate, unemployment rises and credit tightens.

If inflation remained low at the time of the previous housing busts, would rates of risen so high?

[GD]

Gaaah this is getting too circular now... I'll have to re-read when I'm at home

[Totally_Baffled]

Gaaah this is getting too circular now... I'll have to re-read when I'm at home

[GD]

OK I think I'm done...

Hi GD Smile

Rates went from 3.5% to 5.5% so not so dramatic but bad enough - so you are right.

But - what has happened is that mortgages in reality are now more expensive than the 5.5% suggests (due to the fall out from the US housing crash - if this hadnt happened the 5.5% may not of caused such a violent crash in demand)

You used to be able to get 110% mortgages (ie no deposit and cash back), at a discounted interest rate for a period of circa 2-3 years.

Now, despite rates of 4.5% you are lucky if you can get <6% and 15%-25% deposit! That is catastrophic for demand - who has 25K-50K lying around for a deposit!

So the US interest rate rises and subsequent housing bust had knock on effects that took the cost of UK credit/mortgages beyond the 5.5% figure.

I guess we will never know looking back if this would of popped the bubble or not, but my point remains - if inflation had remained low due to low oil then rates could of stayed at 3.5% and the bubble need not of burst so violently

I thought the US would have come into it. They were the first to go but that does not mean the UK wouldn't have crashed, or that the inevitable crash would have been any softer. Reason's given below.

Quote:
Inflation was running out of control because rates were so low (shadow stats had something like 16% ? )


But if the BoE isnt working on the 'unofficial' rate, then rates dont rise. If rates don't rise then the mortgage repayments stay the same and remain affordable.

They are not affordable for new entrants to the market. Mortgages were getting more and more difficult to finance for some years preceeding the crash - note the increase in average first time buyer age from mid-late 20's to early-mid 30's.

The situation also cripples those "outside" of the mortgage market, as renters have their rates upped either because they moved or, simply because the landlord can. The wholesale creation of credit bids up prices for everything and increases the cost of living for all. (Plus there's the fact is encourages speculators to come in and flip assets using credit). This rampant real inflation causes the financial economy to eat away the real economy. Michael Hudson says it better than me (emphasis mine):

http://www.michael-hudson.com/interview ... eOver.html

Today, the prospects are dim for paying off debts out of further price gains for homes and real estate. Speculators have pulled out of the market – and as late as 2006 they accounted for about a sixth of new purchases. The United States and other countries have reached the point where interest and amortization payments are absorbing the entire economic surplus of so many individuals, so many companies and so many government bodies that new construction, investment and employment are grinding to a halt. Families, real estate investors and companies are obliged to use their disposable income to pay their creditors. This leaves them without enough money to sustain the living standards of recent years – and they no longer can wipe out their debts by declaring bankruptcy as in times past, because Congress has passed the harsh bankruptcy law that credit-card and bank lobbies paid them to pass.

This means that there won’t be a rebound, and it will take longer than 2009 to recover.

...

Prices will keep going back down, because they no longer can be bolstered by interest rates plunging further. The zero-amortization mortgages and low or zero (or even negative) down payments in recent years are as low as can be achieved mathematically. This means the end of the Bubble Economy.

The actual real estate market is much worse even than the present price statistics show, because many people are frozen in with negative equity. So instead of price declines, we’ll simply see many more foreclosures.

I guess what I'm saying is that it is not necessary for interest rate rises to pop the bubble (although it obviously helps). But they have to rise, because if they fall below inflation, then the banks are losing out (negative real interest). Therefore LIBOR rises, and the 'official' rate has to follow (as it can't lead at this stage of the cycle, see the current spread).

Quote:
It is disingenuous to say that people would easily have coped with small increases in rates, because there is a tendency for people to stretch their budgets to buy their first house and hence, any upward movement was always going to tip them over the edge.

Also, there is no precedent to the fabled soft landing scenario - it could never have happened. Once people are unable to bid up house prices any more, they have to fall.


Yes - they had to fall eventually, but you have to ask the question why has every violent housing bust in the UK been preceded by a hike in interest rates?

See above and, I think you kind of answer your own question too, below.

Quote:
The cyclical nature of the housing (read Land) market is well known and it has been traced to the very advent of the building society.


Yep the business cycle - which includes a cycle of ups and downs in interest rates to control aggregate demand in the economy (usually to control vost push or wage inflation or even both). When rates go up, house prices deflate, unemployment rises and credit tightens.

If inflation remained low at the time of the previous housing busts, would rates of risen so high?

I guess you mean a stable steady-state economy? Not possible with the current set-up (see Andy Hunts's conundrum thread).

So, I guess the only thing I haven't commented on, is why it's in such a dire state of affairs this time around. See this chart on house prices v's wages from global house price crash:



How has it got so far from the long term average? Low interest rates? Partly. But how can I not mention the dubious mortgage products that you scratched the surface of above. The not insignificant role of speculators. But the biggest part has to go to the financial "weapons of mass destruction" that have been deployed well outside of the bounds they were originally designed for (derivatives were only ever meant to be small time). It's because of these "products" that bankers have no idea how much of the debt they are holding is good or toxic, hence the collapse of confidence in lending.

[Billhook]

Thanks Bill, I just saw your reply from the other day. I'll stick to my guns, this bubble would have burst anyway,
thanks to the enormous amounts of irresponsible lending that the bankers have overseen
(and why would they do that, if they thought, back in 2005, that BAU growth was no longer possible?).

Whilst I recognise the destabilizing effects of the current situation regarding energy, I am wholly convinced that this "crisis of confidence" would have occurred regardless,
even if we were to assume (for argument's sake) $20 / barrel oil and (perhaps) another trillion barrels of known recoverable resources.

Perhaps a mutual step sideways for some further perspective might be helpful -

Might we agree, for instance, that monocausal events are vanishingly rare in nature ?

If so, then I'd suggest that you are certainly right that the credit boom would have come unstuck at some point,
(to which I'd only add that, without PO, it would have done so later than it did),
but that the very fragility of the basis of confidence allowing the boom's continuation
was such that a 30% year on year rise of oil prices, surmounted by the well evidenced PO hypothesis,
was a sufficient shock to start the dominoes falling.

In this sense, awareness of PO (detailed academic or Sam-the-plumber's-wallet version) was but the trigger for the collapse of the housing bubble -
while the magnitude of the collapse reflects the corporately suicidal nature of the financial instruments facilitated by pliant Thascist politicians.
(An intriguing parallel here may be the oil industry's strange failure to ensure sufficient tankers & refineries
for normal volume growth past this decade).

That said, it must be observed that the growing systemic fragility made for rising vulnerability to abrupt unexpected change (shocks).
Without PO, something else (the next sufficient shock) would have been the trigger, toppling the first (untraceable) domino.

Indeed, I'd be interested to see data tracking popular perspectives on the merits of buying property
by residents of US states hit by extreme weather events, over the last decade
as compared to those in states not hit by such events..
How much of a knock to confidence have novel weather impacts been imposing ?

Having followed reports over the years of the difficulties faced by those suffering weather-impact losses,
(including human, material & commercial losses)
I'd expect to see signs of unprecedented weather having been a significant "domino toppler".

Perhaps we may further agree that PO & CD are the two most shocking prospects now facing this society ?
And that, as such,
it would be somewhat surprising if they'd not played their parts in undermining confidence in a grossly unsound financial system ?

What we have yet to see is any clear indication of how much the present collapse already reflects an underlying fear
that economic growth is effectively over,
and how much further the recognition of this prospect has yet to move through society.


Regards,

Billhook

[GD]

Hi Bill,

Whilst I agree with much of what you say, I think I'll make one last clarification of my position on the topic of the banking system.

This was something I wrote back in May 2006 that largely agrees with your statements above:

Land and, by extension, house prices have the tendency to go into periodical bubbles and crash all by themselves, without the need for anything like PO. Has done so like clockwork for the last 300 years, with the exception of the depressing effect of 2 world wars - see this Fred Harrison article.

This happens in times of plenty, and PO is definitely a watershed event.

The PO influence I think would be to either (i)shorten the cycle, (ii)dampen the cycle or (iii)both - that is, of course, if there's another cycle to run before everything's changed drastically!

Who knows, maybe the housing crash will wipe out a lot of demand from industry, and we start over from $20 oil...

So I thought, back then, that high oil prices would have a similar effect to what you have said above. It turns out I was wrong, and Fred Harrison has been remarkably spot-on.

Here's a short quote from the above article, which was published in August 2005:

property prices around the world will start to fall in three years’ time and a global economic depression will follow in 2010 as consumer consumption collapses.

Moreover, Fred Harrison's prediction about the 2008 crash was first published in 1997 ("The Chaos Makers"). His analysis is based on basic principles from classical economics combined with simple mathematics. So far I've not seen or heard of him mentioning anything related to energy. Which is why it surprised me, to be honest, that the crash came when he said so.

All I can think is that the world of finance is, in a large way, divorced from the physical world we live in - particularly during a frenzied greed driven bubble. It is indeed true that the size of the derivatives market outnumbered GDP for the entire world by over 9 times (at the peak before the banks stopped lending to each other, I'm not sure what they are at this present).

Much has been said in the powerswitch forums regarding the lack of reality concerned within mainstream economic models (there was also Stern with his "greatest market failure that the world has seen" comment regarding CC).

Cheers,

GD