Quote:

The decline in housing prices has to be solved for things to get better

I'd like to think the decline in housing prices IS part of a solution.


Good stuff, as always!

The problem is that a 30% decline in home prices will wipe out about $6.5 Trillion. A 30% decline in equity prices will wipe out about $7 Trillion. GDP is about $12-13 Trillion. As I understand a depression is a 10% decline in GDP-how do we not have a depression? Even if they can keep the equity baloon inflated somewhat- you can't stop housing. So if we even experience half of the above loss- how do you replace half of GDP? What am I missing?

I simply cant argue with your logic on todays ticker KD.

Yet the market seems loaded up and ready to hit the collective "buy" button as soon as they can find a reason (perhaps a new product announcement from AAPL when they report on Wed.?) all the while barely even glancing at the sell button no matter how bad the news.........

Not only can i not argue with the Ticker but unfortunately i cant seem to get myself to trade against it either..........guess i wont be getting rich anytime soon - LOL!!

We may very likely see a $13+ Trillion writedown in USA economy assets as suggested by Financeguy. But I doubt we'll see a corresponding full contraction in economic activity. Workers are still needed to find oil, farm commodities, serve patients, manufacture necessities, etc. And the Federal Reserve will hold 10T TAF(s) every single day if they have to in order to get another bubble going.

By daily 10T TAF(s) I mean a daily $10,000,000,000,000.00 Term Auction Facility that'll even be open to hedge funds to put in their D- rated HELOC bonds at par value since they are self-marked as Level 3 assets at par value. The Federal Reserve has decided its going to inflate us out of this credit crisis. This will make home prices in the US quite cheap compared to comparables in most of Asia and Europe thanks to the weak dollar. With all that USD flowing around we'll see an even greater tightening of the in-demand skilled labor market in the USA. We'll see more influx of foreign capital buying up cheap US assets. This combination will get the bubble moving again.

But yes there will be plenty of carnage in the meantime.

"The problem is that a 30% decline in home prices will wipe out about $6.5 Trillion. A 30% decline in equity prices will wipe out about $7 Trillion. GDP is about $12-13 Trillion. As I understand a depression is a 10% decline in GDP-how do we not have a depression? Even if they can keep the equity baloon inflated somewhat- you can't stop housing. So if we even experience half of the above loss- how do you replace half of GDP? What am I missing?"

A loss in asset prices does not necessarily include a decline in GDP. We can lose the wealth in homes and equities without a Depression. In October of 1987, we had a 22% loss in equities, and we didn't even have a Recession.

An example of what happens when bubble real estate values pop can be seen in Hawaiian real estate values after the Japanese stock market fell precipitously starting in 1990. Many wealthy, highly leveraged Japanese had come to the islands with a lot of cash and bought houses that they liked, money no object, driving prices artificially high. High-end waterfront houses more than tripled in price in the two years prior to the Japanese stock market crash, but then lost 50-75% or more after the crash, and even in 2004, high-end houses were still less than half of the peak value, fourteen years later. In the last three-four years the prices have about doubled (maybe more for high-end houses), bringing it back to about where it had been at the peak, but this last advance was driven by the current bubble, now eighteen years later.

Thus, the estimate of a 15-20 year crawl back to normal valuations has a recent historical example.

Historical information gathered from the following WSJ article from 2004:
http://www.realestatejournal.com/buysell....

This is a picture of Mervyn King:



This is a picture of Ben Bernanke




Every time another one of the bailout schemes comes up, I think of these insects (dung beetles)... just rolling the turd on down the road.

We are in the perfect storm.

The early innings of a horrible financial nightmare.

luxuria, gula, avaritia, acedia, ira, invidia, and superbia.

Mankind every so often needs a leason in humility, the leason is due, it's going to be a whopper.

Take notes and be ready to hide, cause this is going to be bad.

As long as the bond market doesn't react, the U.S. government in alliance with the Federal Reserve will be able to inflate their way out of this. It's the most palatable solution. It's the path of least resistance and Congress and the Fed are already actively doing this.

I wouldn't start worrying about deflation until Treasury auctions start failing (investors saying No Mas to inflationary practices). Anyone else who might be more knowledgeable about this should pipe in now and tell us more signs that the end is near. I'm tired of losing money betting too early on a collapse.

Boz:

As degaston pointed out i'm really not sure what choice the FED has if it wants to protect the rich other than to try and inflate their way out.

I guess my question is "can they really pull it off"?

If SO we could see what BW is suggesting happening to people.

If not we could see what BW is suggesting happening to equities.

Inflating does not protect the rich. And it only helps debtors if their wages rise. I'm not seeing rising wages or employment. This will feed back to reduced tax revenue which will impact government debt service even if the market for treasuries doesn't change.

I fully expect a depression. But the world is a different place than it was in 1930. I think energy and food prices will continue to rise even as the contraction occurs. Because these are necessities, the increasing proportion of income needed to buy them will further squeeze spending on everything else, aggravating the situation but perhaps skewing the data. Deterioration of earnings of companies not engaged in providing bare necessities will result in further layoffs, more real estate decline, decreased tax revenue, etc. It's not a pretty picture.