The Humpty Dumpty Economy

Saturday, March 08, 2008 | 11:31 AM
in Media

Nice mention in Barron's this weekend, from our Thursday commentary, Household Equity at all time lows.  Its in Alan Abelson's Up & Down Wall Street column.

Here is the excerpt via Barron's:

"The wrenching changes being wrought by a falling Humpty Dumpty economy, largely created by credit, and a swooning stock market, kited by leverage, are everywhere evident. Housing foreclosures swirled up to an all-time high of 0.83% of all mortgages nationwide. Over 5.8% of homeowners were behind in their mortgage payments, the largest number in upwards of two decades. House prices lost a staggering 8.9% in 2007 as a whole (and they're still tumbling).

Yet, despite the ubiquitous plunge in prices, the supply of unsold houses rose to four million, or to over 10 months' worth. Homeowners' equity fell below 50% for the first time since 1945, hitting a new low of 47.9%. As Barry Ritholtz nicely put it, never before have banks and the other various and sundry lenders owned more of the average American's house than he or she does.

Speaking of lenders, thrifts and savings outfits lost a cool $5.24 billion in the final quarter of '07, as they diligently wrote down tons of goodwill (perhaps it should more properly be called ill will).

In January, to continue this lugubrious litany of the damage done in the Humpty Dumpty economy and the ravages wrought by the bear market, the equity portfolios of the largest U.S pension plans, according to the calculations of Mercer, which keeps tabs on such things, shrunk by $110 billion. Not exactly chump change, even when it's other peoples' money.

We've long been a fan of Abelson's unvarnished views and delightful prose. Its always a privilege when our thoughts find their way into his columns . . .

Federal Reserve: Household Equity at all time lows

The Great Fall: Here Comes The Humpty Dumpty Economy
Barron's MARCH 10, 2008



Saturday, March 08, 2008 | 11:31 AM | Permalink | Comments (24) | TrackBack (0) add to | digg digg this! | technorati add to technorati | email email this post



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Although all manner of standard banking institutions have been impacted and will continue to be impacted, the real horrow show is waiting offstage in the "shadow banking system".

This is the heart of the beast known as the great debt explosion.

"Satyajit Das, an author and derivatives industry expert, cites an example where just $10m of real, unlevered hedge fund money supports an $850m mortgage-backed deal. This means $1 of real money is being used to create $85 of mortgage lending – credit creation far beyond the wildest dreams of high-street bankers."

The shadow banking system - basically intermediaries who issue commercial paper to finance long-term debt - have their collective backs against the wall. Credit spreads are exploding as demand for short term money increases...there is a whiff of panic in the air....and who will be there to put a foot down to stop the forced liquidation of overleveraged assets?

If the shadow banking system contracts significantly, what will happen to worldwide economies that depend on the 50:1, 80:1, 100:1 (who really knows?) reserve ratios of the shadow banking system when they are forced to deal with the 10:1 reserve ratio of standard banking?

The competition for capital will be fierce.

Posted by: Winston Munn | Mar 8, 2008 12:22:18 PM

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