In a tradition that is as regular as Tax Day (only more frequent), the New York Times is again updating us on the vast discrepancy in income between the top wage earners and most U.S. taxpayers. The slant of most such articles is one to suggest remedy is required, with the implication that the redistributionistas ought to help level the playing field in order to make things more “fair” — whatever that’s supposed to mean.
Many regular readers might expect our publication to defend the free market and the rights of individuals to keep what they’ve duly earn. After all, most wage earners do not find themselves among the top 1% earning more than $348,000 by collecting welfare checks or blaming society for their problems. Most are providing something of value in exchange for what they earn. The demand for what it is they offer — a unique talent, service or product, is what gets them their wage, after all. Right?
Well, that’s the idea — at least with free market capitalism.
However, assertions that the U.S. is a system of free market capitalism is a MYTH. Today it more closely resembles what should be called a neo-fascist state.
Gasp! Did you just read the word “Fascist” being used to describe the U.S.? Indeed you did, but not in the context often used by radicals mislabeled as “anarchists” (who are really Marxists) who protest world trade meetings.
In the last five years, municipalities that tax real estate values have experienced a boon in tax receipts. That’s because in many cases, when a property is sold at a higher value, the assessed value tracks upward to the sale value. With growth in property values in markets nationally far exceeding the pace of inflation, municipalities have found it far easier to meet their obligations.
But that might be about to change. Now that property values are starting to drop, municipalities may be faced with the dilemma of home owners challenging their old assessed values causing a decline in heady tax receipts.
20 months ago there was still mainstream denial that there was a housing bubble.
6 months ago there was denial that sub-prime mortgages would be a problem, and lots of talk that housing would continue to go up in price, but only at a more “normal” pace.
In January sub-prime was only a small problem.
Today sub primes are an undeniable, huge mess, but the mainstream still insists that it’ll remain contained to sub-prime.
Don’t hold your breath hoping it stays that way. (Why would you continue to believe those who have been wrong repeatedly on these issues?)
There are a variety of reasons why things will get worse for housing (just leaf through our archives), and now bond managing giant, PIMCO, is hopping on some of the more obvious reasons. Those reasons are still gaining very little traction in the mainstream… at least for now, but expect it to catch on in the coming months.
In the meantime, you can get some advance info on why sub-primes will drag down housing and spending as a whole, and lead the U.S. into an officially acknowledged recession, likely by year’s end.1
1 Today’s calculation of GDP is far more generous towards indicating growth vs. prior methodologies. Using older versions of GDP calculation, the U.S. economy has been running a recession for some months now:
Taking a view from 30,000 feet, I can’t help but remind myself that Wall Street is the beneficiary of an artificial construct of legislation that creates inefficiencies and barriers against what was once considered to be the American Dream / the free flow of capital.
On the simplest level, most entrepreneurs I work with have their retirement tied into their business. Easily 50%++ of what they have was invested there. Good luck at putting that asset into a non-taxed qualified plan or IRA. Only approved Wall Street paper is allowed, and so we have $ trillions directed to Wall Street for most folks. As for the hurdles of doing business, small biz is severely hampered by excessive legislation and fewer and fewer people bother to try, especially in an era where many lines of biz require establishing facilities abroad. That attitude of passing on giving it a shot was heavily reinforced in the 1990s when it became much easier to earn 20-30% a year simply by investing into Wall Street. Why bother with the extra headaches? The American Dream? Invest in the stock market, retire.
All that said, what is Wall Street these days? Is it representative of the free market? Or something else?
Inflation is not the natural state of an economy. Rather, it is a man made decision — one that all people, world-wide, would benefit from understanding better. Be Vigilant!
When Warren Buffet refers to derivatives as financial weapons of mass destruction, you ought to pay attention. One area we think could lead to serious trouble is in the mortgage derivatives market, where CCC rated mortgages are converted into 65%-80% AAA securities. That’s all fine so long as your default assumptions are correct, and not based on peak bubble figures. What’s more alarming with mortgage derivatives is that the leftover CCC rated junk — about 10% of the original pool that remains after the AAAs are created — are then pooled and run through the alchemy machine once more, creating 65%-80% AAA securities from the initial leftover garbage.
Given how Wall Street has so far underestimated the real risk of the sub-prime markets, it makes you wonder how many derivatives players have underestimated the real risks.
But what does that matter when you are buying up 10-12% income streams, repackaging them and selling them off as 6% payment streams, letting you keep the difference? Those kinds of profit spreads are what record 2006 bonuses are all about!
Last October we commented on naked shorting and potential abuses taking place on Wall Street. Here’s an update from Bloomberg on the situation.
Is something truly illegal going on, and should you be concerned? Above is part one in the series. Click the “More” link below for parts two and three. Continue Reading »
Tune in today at 3:30 p.m. ET for our weekly show. We’ll be updating on the Sub-Prime fiasco and discuss inflation, as well as give you our two cents on March Madness. Click below for more information!
“The truth will set you free. But first, it will piss you off.”
–Gloria Steinem
One of the more interesting aspects of human behavior is the way people tend to handle news, which is contrary to their expectations – and desires.
We find the most successful people we know, tend to handle all news as objectively as possible – and respond accordingly. These folks readily accept current conditions for what they are – also acknowledging where things appear to be headed. In this way, they allow themselves to deal effectively with reality.
And we admit the whole thing does drip with irony. With the prescience of one predicting a ball he threw into the air will fall back to earth — Sir Alan (the great credit & housing bubble meister-engineer) — is now warning of its predictable collapse. Not only do his critics find his comments surprising, they grow increasingly bitter over them. We get a kick out of watching the same folks who once lionized Greenspan for “stimulating” the economy via wide open liquidity spigots – now criticizing him for speaking his mind…and the truth. The same folks who loved him back in 2005, when he stated lenders had mastered the art of judging and pricing risk in the sub-prime mortgage market – are now attacking him.
Are we surprised Alan Greenspan, the former (and perhaps still) gold bug has suddenly, seemingly regained his objectivity?
Nope. After all, he’s not Chairman of the Fed anymore.
You have a rare chance to listen in on one of the premier minds on what goes on with interest rates, and such things related, speaking about the meltdown in sub-primes.
Will it remained contained?
Will it work over your “40″ in your 60/40?
Will you need to worry more frequently about the retirement you have planned?
Make better decisions on all of these questions. Watch Jim’s recent interview on Blomberg here, and seriously consider an investment in a subscription to one of the most candid and sober (e.g. not imbibing from the Wall Street kool-aid) views of credit and interest rates around.
However, one point of criticism is Grant’s blaming society for the bubble. Perhaps that’s just being diplomatic, but absent the Fed, the liquidity fueling this all simply is not there to be had. As the credit bubble unwinds, fingers will be pointed — very likely at the free market. Let’s not forget how it all came about.
There will be those who will be quick to blame the free market for the problems in housing and the mortgage markets, especially if we’re only seeing the beginning of serious problems as we suspect. But don’t be fooled.
The U.S. housing market, long considered vulnerable by many economists, is now on the verge of suffering a serious collapse in many regions.Commodities guru and hedge fund manager Jim Rogers warns that real estate in expensive bubble areas will drop 40 or 50%.Mainstream media outlets like the New York Times are reporting breathlessly about the possibility of widespread defaults on subprime mortgages.
When the bubble finally bursts completely, millions of Americans will be looking for someone to blame.Look for Congress to hold hearings into subprime lending practices and “predatory” mortgages.We’ll hear a lot of grandstanding about how unscrupulous lenders took advantage of poor people, and how rampant speculation caused real estate markets around the country to overheat.It will be reminiscent of the Enron hearings, and the message will be explicitly or implicitly the same: free-market capitalism, left unchecked, leads to greed, fraud, and unethical if not illegal business practices.
But capitalism is not to blame for the housing bubble, the Federal Reserve is.Specifically, Fed intervention in the economy– through the manipulation of interest rates and the creation of money– caused the artificial boom in mortgage lending.
Readers are sure to recall our following of the website CondoFlip.com, the Miami based site for trading interests in Miami area condos - both built and on the drawing board. Back in 2005 we suggested this was the ultimate bubble indicator at a time when Wall Street, the Fed and D.C. were still telling us that there was nothing to worry about in housing. We couldn’t help but point out the obvious - that the existence of the site reminded us of the day traders of the late 1990s who were getting rich sitting at the kitchen table in their underwear.
Then in the Spring of 2006, we knew the market had cracked: Condoflip.com had added 3 levels of Panic Buttons (patented, no less) where sellers could slash their asking price on their “investment.” Still, at the time, our cocksure mainstream prognosticators and bubble-vision media were still telling us there was very little to worry about.
Well, the sub-prime market is currently imploding and the Wall Street has awakened from its oblivious slumber, having been blindsided by several blows to the jaw in the last few weeks via the equity markets. What’s happening over at CondoFlip.com?
Go figure.
Let us add that the optimism reflected in the analysis of what went wrong, as well as the announced re-branding of condoflip into a new condo sales site, is a sure sign that the housing bubble still has a long way to deflate. Read it for yourself.
