16th March 2008

Doomsaging: The St. Patrick’s Day Massacre

posted in News |

When people are mentioning the Great Depression in mainstream articles about financial news, one tends to get a wee tad nervous.  When articles say the Fed made a move on Friday that hasn’t been since since the 1930s to bail out Bear Stearns, one tends to get a wee tad nervous.  (Interestingly, they say that, but then don’t explain exactly what the move is, how it differs from other moves the Fed has made recently, and they don’t offer the example back in the ’30s to compare to.)

Then again, I’m the one who read up on Y2K disaster scenarios and made sure OmegaDad and I had two cords of wood on hand for 1/1/00, plus a small supply of drinking water and canned food.  So I’m a Nervous Nellie in general, prone to being swept up on the tides of professional doomsagers across the internet.  That means, if I’m nervous about something, you can probably bet against it.

On the other hand, the doomsagers have been waving their hands at the housing bubble for three years now, prophesying major financial disaster once the house of cards based on outrageous mortgages and real estate prices started tumbling down.

What can one say when the Treasury of the Secretary, in one interview, says both "The financial system is more fragile than we would like right now" and "our financial institutions, our banks and investments banks are very strong".  So which is it?  Is it "strong" or is it "fragile"?  After all, on Monday, the CEO of Bear Stearns came out in an interview and said that BS was in great shape and not facing any problems.  Four days later, Bear Stearns is on the verge of bankruptcy and being bailed out by JP Morgan Stanley and the Feds.

Wasn’t Standard and Poors saying just last week that the worst of the mortgage write-downs are behind us??

Anyway, on my financial blogs, people are nervous about Monday’s market.  They are saying that a deal must be made to settle the Bear Stearns problem before the U.S. markets open.  But things have been so volatile lately, goodness only knows what will happen.

(Ahah!  Deal made, for less than half of Friday’s value of BS stocks!  Later note: Not "less than half"–$2 per share…BS stocks were at $61.85 at Wednesday’s close, $30 at Friday’s close.  Holy cow.  Talk about a fire sale…)

(Note:  I’m still thinking about the Dutch documentary on Chinese adoption.  I haven’t been able to find a transcript anywhere, or any real discussion of the actual details, and am hesitant to make any commentary unless I have real facts to base the commentary on…)

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There are currently 3 responses to “Doomsaging: The St. Patrick’s Day Massacre”

  1. 1 On March 17th, 2008, lisa said:

    I’ve been saying it was a house of cards for 6 years-not because I’m especially smart, but because I saw some of the first ripple impacts. As a small landlord, I was hit hard when my city went from 0-7% vacancy rate in less than 6 months. Many of us were exposed, when steady renters jumped into home ownership because of all the cheap loans. I went from excellent tenants, to weak, to outright cons taking advantage of landlords who needed to fill their units and strong tenants’ rights laws. I ended up with judgments against tenants upwards of 30k, never likely to be paid. As all of the long term renters who added to the stability of our neighborhood started moving out, and small time landlords who lived in the neighborhood and owned maybe 1-3 properties that they treated like their own homes, started selling cheap to out of state investors, crime went up-with the associated costs both in damages and property values. When I put my properties on the market in 2005 (mostly for personal reasons, but also to cut my losses) there were 42 roughly identical duplexes in my neighborhood on the market, in addition to all the single family homes. I and some of my neighbors, sold one of my properties for less than what I owed on it-and 100k less than appraised value.
    I’m slowly bouncing back-but I feel very sad for what was a fabulous neighborhood full of people with more creative enrgy than money-people who created all sorts of community programs and beauty through home improvement-all of which made it a great place to live.
    It amazes me that people still talk about subprime being THE problem. It goes so much deeper than that in terms of the socioeconomics of neighborhoods and the artificial incentives for people to jump into homeownership and the new housing boom. There’s an alderman in Cincinnati who wrote a great piece on the impact on neighborhoods several months ago-wish I could find it again. Yeah, someday I mean to blog on this…
    Those interviews were indeed amazing feats of prevarication. ~lmc

  2. 2 On March 17th, 2008, k2 said:

    >>Wasn’t Standard and Poors saying just last week that the worst of the >>mortgage write-downs are behind us??

    While the terms of the Bear/JP Morgan deal certainly seem to indicate that there is more ugly yet to be found in Bear’s portfolio, they seem to have been taken down not by subprime mess per se, but by a good, old-fashioned run on the bank. And that’s the kind of thing that makes the Fed’s Board of Governors’ blood run cold.

    Mark Carlson, a staff economist at the Fed, published a research paper on the Depression-Era bank runs back in February. According to his research many of the banks that failed were at least as financially sound as those that survived and that their failure was primarily the result of the banking panic. He believes that the failure of these banks worsened the economic conditions of the day.

    The Wall Street Journal has a good summary of the paper here: http://blogs.wsj.com/economics/2008/02/15/lessons-for-today-bank-panics-and-the-great-depression/, as well a link to the full paper on the Fed’s website.

    >the Fed made a move on Friday that hasn’t been seen since the 1930s

    That might be a wee bit of an exaggeration. Keep in mind that in 1998 the Federal Reserve Bank of New York bailed out a big hedge fund, Long-Term Capital Management, to the tune of $3.6 billion. And the Resolution Trust Corp. bailout and liquidation of insolvent savings and loans in 1980s (also primarily caused by failed mortgages, BTW) cost approximately $450 billion dollars.

    Hang in there Omegamom. There’s a reason why economics is called The Dismal Profession. :-)

  3. 3 On March 17th, 2008, gh1f said:

    I’m with K2. Stay calm.

    JP Morgan got a good deal-I think their market value rose by a whole lot today.

    Dismally yours,

    gh1f

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