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Tuesday, November 13, 2007

Helter skelter at E-Trade

She's comin' down fast.

Comments (8)

It is scary when you think of what triggered the 29 crash was the book (false) value of real estate in Florida in particular, and the outsourcing to Japan the manufacture of cheap goods for the consumer during the roaring 20's.

It's actually up 15% today, so it looks like it's gonna survive.

Credit card debt...the write offs on that will be huge!
Get your tin cups and apples ready folks.

The '29 crash was due in part to the Federal Reserve hiking interest rates and reducing money supply at a time when folks were much more levered in their stock positions then today (I think margins were only 10 percent versus 50 percent, today). In addition, bank deposits had no guarantees. Hence the run on banks.

But the Federal Reserve is in a hard spot, today, too. It has to make money easier at a time when commodity prices are escalating and the dollar falling. It could turn to Europe and ask them to lower their rates so as to prop up the dollar. But the Europeans are facing similar inflation pressures. So far, both the U.S and European central banks have targeted an inflation rate of 1 to 2 percent per year. I think the U.S will succumb to lifting its target inflation rate to 2 to 3% especially with democratic regulatory efforts to raise wages and perceived environmental standards (elements of stagflation).

I think we'll be o.k relative to '29 and even the 1981 recession (which was hard on Oregon because of its dependence on timber at the time).

Could someone explain what "WRITE DOWN" debt means? I also see a headline in the WashPost that says Bank of America will "WRITE DOWN" $3B in debt.

I'm reading the article and can't figure out what exactly this means. What exactly happens?

Does someone not get paid? (I'm sure it isn't the CEO) Does someone else pay the piper? Or is it all virtual?

I haven't investigated the specifics of Bank of America's write down, but I think it means they have marked down the value of a segment of loans they had bought from other third parties. For B of A, its a reduction in their assets based on current market (re-sale) prices for such loans (bond assets). These loans are worth less because of the growing risk the borrower (homeowner) doesn't make payment. The borrower may not be able to pay because of insufficient income, and the ability to refinance for subprime borrowers has pretty much evaporated as of late. Falling home prices don't help.

Banks have more than a trillion dollars in assets. So far, banks are said to have written down about 30 to 40 billion dollars in loans (bond assets for the banks). Some estimates put ultimate total write downs at $200 billion. The Federal Reserve has to grease the skids (make credit/money available) so to speak to help U.S financial institutions digest this amount of bad debt.

One would think collection agencies might do very well, but can't bring myself to invest in such bad news entities.

E-trade stock gained 41% today on takeover rumors...

Bob Clark,

Regarding margin loans and leverage, what do you think about financing a house with just 5% to 10% down (or even "no downpayment" piggyback loans)?

If 9 times leverage was bad for the stock market in 1929, maybe that's part of the problem with the housing market in 2007?

Low interest rates, the belief that housing prices only go up, and too much financial leverage sounds like a speculative bubble to me.


You are right about there being a housing bubble, today. However, it is not compounded by a speculative bubble in stocks and an obstinate Federal Reserve as it was in '29. Also, there are other safety valves to moderate the excesses in housing. For instance, government agencies are a significant buyer/guarantor of mortgages today, and big federal government spending is also a constant today. (The federal government actually attempted to cut back spending after the '29 crash).

Housing will put a dent in us for a while but I think we can weather it. knock on wood.

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