The Big One

Lehman Brothers employees carry out personal belongings Sunday night. The company is toast. Merrill LYnch is also going under, and AIG is wobbling. This is no crisis. More like a financial nuclear winter.

Circle these days on your calendar. They will long be remembered, especially by those Polyannas in the housing biz who have been trying to mislead consumers for their own gain.

The housing crisis in North America created a financial crisis, which spawned denial, and has now blossomed into nuclear winter. As I write this, the fourth-largest private investment bank in the US, Lehman Brothers, is being flushed away into insolvency. Mighty Merrill Lynch is about to disappear, and the vastly important insurer, AIG, is staggering.

This comes after the collapse earlier this year of Bear Stearns, and the shocking government takeover of Freddie and Fannie just days ago. This also arrives against a backdrop of a still-declining real estate market, a looming sea change in American politics and a rapidly slowing global economy.

To conclude: Holy crap.

The full implications of this can’t be clearly seen by anyone at the moment, but I’d say this is what Canadians can expect:

  • The stock market will be hammered, eroding the value of every investor’s portfolio, RRSP and pension. This brings household wealth down, drops confidence and is nothing but negative news for real estate as liquidity is drained away in financial losses.
  • Credit is going to be a lot harder to find. Banks on both sides of the border have already pulled their horns in a little, and that can only accelerate. Look for far tighter restrictions on loans and mortgages to new borrowers, to builders, for renovation and lines of credit.
  • An inevitable result is a sharp acceleration in the decline of the Canadian market. Without a steady flow of new investors and buckets of borrowed money, there is no alternative, especially in real estate markets where prices are unsustainable – Vancouver and Victoria, for example.
  • Further restrictions on mortgage lending mandated by government. In this environment of declining equity, allowing buyers to finance 95% of the purchase prices, is like shooting carp in a tub.
  • The descent of prices will quicken. With about 90,000 resale listings currently on the market – the highest ever – and this financial crisis spilling over from the south, along with a very costly winter setting in, many sellers will be motivated to bail for a far lower asking price.

Those Canadians who thought we could end up with a five-month adjustment, after the Americans have been through a three-year Armageddon, had better think again. This is just the beginning, pushed along by big events like those unfolding on Wall Street and in Washington this week.

Circle these days. You’ll want to recall when the lights started failing.

104 comments ↓

#1 Rob in Madrid on 09.15.08 at 6:43 am

Be a bull nor a bear be. I’m surprised that you haven’t started hyping gold yet.

yes I expect Canada and specifically Ontario to dip into a recession but I don’t think we’ll see the kind of meltdown that we saw in the states. An end to the boom for sure, flat lining of prices for the next 5-10 yes for sure. A substantial drop in house prices, possible.

Personally I think what will happen is that Canadians stretched to max like Americans will simply cut back and hunker down for the next few years and we’ll see a house prices gradually drop.

BTW I think Harper was smart to call an election while Canadians are still feeling good about themselves. Gordon Brown of the UK faced the same dilemma a while back and chicken out and it is going to cost him dearly.

#2 Dr Phil on 09.15.08 at 7:13 am

Market Meltdown…. So no Greater fool for Lehman…

Sept 10th interview with a coffee cart guy outside Lehman HQ…

“It is sad for anybody,” the coffee vendor said. “They just bought houses for a couple million dollars and now they are going to lose their jobs. How are they going to manage?”

http://blogs.reuters.com/reuters-dealzone/2008/09/10/at-lehman-a-stunning-loss-leads-to-serious-thought/

… How are they going to manage…..? I hope these folks spent within their means as well as ensuring a reasonable portion of their wealth in more liquid assets so perhaps they can still hang on to their million dollar houses. Bonuses at Lehman have been more than decent, they spent around $9.5B on 24,000 employees last year (ok the distribution wasn’t linear… while some got a hell of a lot more than others most should have fared well… ).
…Otherwise as Garth said “Liquidity is a bitch” selling that house in this climate will be hard, and even if they do would they even get $0.50 on the dollar?

I take a moment of silence to pay my respects to the poor souls at Lehman as they go into chapter 11.

#3 brazer on 09.15.08 at 8:18 am

2 Wall St. Banks Falter; Markets Shaken
http://www.nytimes.com/2008/09/15/business/15lehman.html

“In one of the most dramatic days in Wall Street’s history, Merrill Lynch agreed to sell itself on Sunday to Bank of America for roughly $50 billion to avert a deepening financial crisis, while another prominent securities firm, Lehman Brothers, filed for bankruptcy protection and hurtled toward liquidation after it failed to find a buyer.”

another one bites the dust…

#4 crashing yuppy on 09.15.08 at 8:39 am

If this doesn’t trigger sharp price declines in Canadian house prices, nothing will. In the next few weeks and months we are going to see some 30’s style panic selling of both stocks and real estate.

Will the americam economy collapse? For the first time it actually seems plausible.

#5 Calgary_rip_off on 09.15.08 at 9:54 am

Hopefully all those rich bastards at those firms suffer. They should all be flipping burgers and creating real value. All those people that have wealth from stocks, houses, etc. its all on paper, they havent actually created something tangible of worth. Once they do that, then they can be respected. Before they do, they are to be respected like the grill at McDonalds.

#6 Stavro Muller on 09.15.08 at 10:14 am

[Dr Phil on 09.15.08 at 7:13 am]
“I take a moment of silence to pay my respects to the poor souls at Lehman as they go into chapter 11.”

Agreed, it’s going to be tough for the admin assistants, the IT support guy, the folks who clean the offices at night…

However I have ZERO sympathy with the 2-M$-house-money-managers who gave everyone the poisonous kool-aid. They are part of the problem.

ALL the money managers have their part in this, perpetuating this grand illusion, either by ignoring the problem or intentionally hiding it.

This is making Black Monday ’87 look like a minor readjustment.

#7 RJT on 09.15.08 at 10:34 am

Interesting day Garth. One for the history books.

#8 karim kanji on 09.15.08 at 10:40 am

Interesting that as this news hit the fan this morning I also received a copy of PROFIT magazine on my desk profiling the fastest growing company in Canada. The winner – MortgageBrokers.com.

Interesting times indeed!

#9 George Popovic on 09.15.08 at 11:02 am

All in all this could be a good thing. These types of events could create a shift in attitude for an entire generation. Perhaps we will transition from decadence to modesty, from spenders to savers, from a world where a 4000 sq ft home and a leased BMW and a Hummer in the driveway becomes uncool and young families live happy lives in 1200 sq ft bungalows with Honda Civics parked outside.

Perhaps I am just dreaming.

One thing is for sure, while the young generation could adjust to these new realities, the aging boomers with large debt loads counting on their houses to fund a comfortable retirement….may the RE market have mercy on you.

#10 Phil in Qatar on 09.15.08 at 11:30 am

Fear of losing and fear of missing out are the two main emotions driving humans when it comes to money. Keep investing regularly to dollar cost average and think long term – don’t worry about day-to-day fluctuation. Doom & gloom reports come and go just like the so-called experts predicting them…

#11 Keith in Calgary on 09.15.08 at 11:53 am

We are always 2 +/- years behind the US in terms of things economic…..either positive or negative.

The truth about our banks is not yet allowed to be told……we are being deliberately lied to as “we are different”….which is patently untrue…..I’d bet if the Canadian banks “marked to market” their assets it would be a different story.

CMHC is currently underwater billions IMHO……anything less than 25% down and/or over 25 years of amortization is a subprime mortgage. No if’s…. and’s…..or but’s.

You have the 3 “C’s” of credit….character, capacity and collateral.

In CMHC’s case, character and collateral were tossed out the window 2 years ago.

When the effects of the worldwide economic downturn and impending US depression wield their full weight you will see 1982 all over again but on a much larger and more disasterous scale.

IMHO we are at the beginning of the greatest depression mankind will ever see.

Glad the bulk of my net worth (90%) is out of the country and in a different denomination…..for when this happens it can be possible that strict currency controls will come into play and you won’t be able to take your money and run. It has happened in other countries before within the last 2 decades….no reason why it won’t here.

Now is the time to be completely debt free, completely liquid and have foreign accounts.

#12 MBS-Economy on 09.15.08 at 12:04 pm

I still think Greenspan is still the culprit here … If they only let the economy go into a slight recession in 2002-2004 then we would not be in this colossal mess. A slight bump in the road definitely better then being swallowed up by a hole when you’re driving along …..

By lowering rates down to 1% is absoloutely asinine.

#13 Noz on 09.15.08 at 12:06 pm

yes I expect Canada and specifically Ontario to dip into a recession but I don’t think we’ll see the kind of meltdown that we saw in the states. An end to the boom for sure, flat lining of prices for the next 5-10 yes for sure. A substantial drop in house prices, possible.

So do you expect your salary to double and triple in the next 5-10 years? Because mine sure as hell didn’t…and I live in the States where it’s pretty much fact that the salaries we can get down here is more than you can get up there. Also, why do you believe what happens in the States won’t happen in your country? Somehow you are different? If you don’t get affected as much, it’ll be in the single digit percentiles.


Personally I think what will happen is that Canadians stretched to max like Americans will simply cut back and hunker down for the next few years and we’ll see a house prices gradually drop.

That’s what EVERYBODY will be doing…not just Canadians.

I like Canada…I like the Canadians I’ve met. But the amount denial, arrogance, and we are “different” attitudes I have experienced between this thread and particularly Rob Chipman’s RE thread is astounding.

You folks are in for a treat…so hang on to your hockey sticks, you may need to them to beat off your neighbours soon.

#14 Noz on 09.15.08 at 12:08 pm

Hopefully all those rich bastards at those firms suffer. They should all be flipping burgers and creating real value. All those people that have wealth from stocks, houses, etc. its all on paper, they havent actually created something tangible of worth. Once they do that, then they can be respected. Before they do, they are to be respected like the grill at McDonalds.

Amen to that brother….I couldn’t agree more. Let them eat shit.

#15 Stoneleigh on 09.15.08 at 12:13 pm

You’re quite right in your assessment Garth, and I wish I lived in your constituency so I could vote for the one politician with both an independent mind and the courage to speak it.

Very few people understand the implications of what we are witnessing. This is the beginning of the Greater Depression – a liquidity crunch of epic proportions. Credit isn’t just going to tighten. For most people it will cease to be available at all, and outstanding debts may well be called in. There is no safe level of debt to be carrying.

Real estate goes illiquid faster than almost any other asset class. Those who are thinking of selling have no time to waste and should be realistic about selling price and price flexibility. The loss of access to credit, and general scarcity of actual money, will bring prices down further than almost anyone currently imagines. My own estimate is 90% on average, with substantial local variation. I would expect this to happen over a period of perhaps five years.

Deflation does not unfold as a slow process, as someone above suggests. Think Enron, as the dynamic is the same. Everything looks robust until near the end, then a sudden collapse takes most completely by surprise.

We are on the brink of what will probably be the first of several market cascades, the the repercussions of the weekend’s events, and probable firesale of Lehman’s assets, ricochet through the derivatives market. All it takes is one firesale to revalue whole asset classes at a stroke, leaving many more financial institutions on life-support.

The credit default swap (CDS) market is valued at approximately $62 trillion, and is extremely vulnerable due to counter-party risk. That vulnerability will be sorely tested in the near future, and we will see how resilient it is. Personally, I expect a meltdown that will make everything that has happened over the last 18 months look trivial.

#16 Stoneleigh on 09.15.08 at 12:18 pm

For extensive coverage of the Lehman debacle see Sunday’s Debt Rattle at The Automatic Earth. Further in-depth coverage will be available on the site early this afternoon.

#17 Real Estate Crash on 09.15.08 at 12:44 pm

Housing prices continue to drop in Canada reports CREA

Calgary down 8% year/year
Vancouver down 5.2% year/year

Mario Toneguzzi
Calgary Herald

Monday, September 15, 2008

CALGARY – The average MLS sale price for a Calgary residential property in August was eight per cent less compared with a year ago – the biggest decline in the country, according to statistics released today by the Canadian Real Estate Association.

The association’s major market survey for August showed Calgary’s average price (for single-family homes and condominiums) was $390,091 during the month. Sales for the month were also off 16.7 per cent (1,990) and new listings dropped by 16.3 per cent (4,103).

The next biggest drop in average sale price was in Greater Vancouver at 5.2 per cent ($557,114), Windsor-Essex at 5.0 per cent ($164,503), Edmonton at 4.8 per cent ($329,207) and Victoria at 1.2 per cent ($452,205).

Nationally, house sales plummeted by 19.3 per cent in August compared with August 2007 while the average sale price dropped by 5.1 per cent to $316,052.

“Price declines in the pricier major markets are pulling down the overall average price,” said Gregory Klump, the association’s chief economist. “Significantly lower sales activity in Greater Vancouver compared to a year ago means that the most expensive market in Canada now has less weight in the overall average price calculation.

“Sales activity is down in a number of resale housing markets in Western Canada that earlier posted hefty price increases. Prices continue rising in other markets where price gains have been more modest.”

Sales in Vancouver were a whopping 53.9 per cent off from a year ago while Victoria saw a 38.2 per cent plunge.
CREA said new listings have eased in many major centres across the country, and now stand at their lowest level this year.

“This trend has been most evident in Calgary and Edmonton,” said CREA.
On a year-to-date basis, until the end of August, the average MLS residential sale price in Calgary is down 0.9 per cent ($411,510) compared with the same time period last year while the national average price is up 1. 5 per cent ($336,225).

But sales activity in Calgary has plunged by 28.8 per cent while new listings have increased by 9.6 per cent. Across the country, sales have slipped by 13.7 per cent so far this year compared with a year ago for the first eight months while new listings have increased by seven per cent.

#18 rope and a box on 09.15.08 at 12:49 pm

reading al these comments make me want to build a box and hang myself come on people… stop being so negative.

#19 Eddie spaghetti on 09.15.08 at 12:54 pm

Noz,

Yeah, my friend, you’re pretty well bang on calling out predictable Canadian smugness. I’m a fairly consistent critic of U.S. foolishness, but it’s a perennial embarrassment to me to listen to my countrymen wax Hobbit-like about their supposed immunity from the rest of the world’s troubles. At least I can optimistically expect that Americans will react to trouble once they recognize it for what it is. Canadians will go on in denial while their limbs are hacked off one at a time….

But in the end, we’ll get ours. I’m even more worried for Canada, because average housing affordability is even tighter at the peak of our bubble than it was in the U.S. at the peak of its bubble. I look at Canadian productivity numbers and all I see is that five years out, we’re looking to be in worse pain while the U.S. is well on its way to recovery (provided it doesn’t launch a land war to defend Southern Oilstickystan from rapacious Russian expansion, cut a $35 trillion cheque to Exxon or do away with all taxes, or someothersuch silliness).

Good luck down there, and by the way, how do you recommend fending off my spendthrift neighbours with a stick? Do you prefer spearing, cross-checking or slashing?

#20 mattbg on 09.15.08 at 1:04 pm

There are rumours now that interest rates in the US may be cut by 25-50 points tomorrow… taking rates near their lows set in 2001, if that happens.

Also, I don’t agree with another commenter that this problem started in 2000. The decisions made in 2000 simply accelerated an existing problem and led to the illusion that had been building for a couple of decades becoming untenable.

#21 Observer on 09.15.08 at 1:29 pm

“Things are different here”

“Everyone want’s to live here, they’ll always be a buyer”

“They won’t let it happen again”

“Our banks are regulated differently, we’re ok”
It’s only a blip, now is the time to buy because it’s going up in the spring”

Unbelievable how people hear what they want. Garth, or anyone who knows, it’s my understanding that the financial institutions in the US can only go after the home is the event of default on payments. But in Canada, they can go after all your personal assets including wages, is this true?

#22 i'm debt free on 09.15.08 at 1:47 pm

But in Canada, they can go after all your personal assets including wages, is this true?

they go to court to get your other assets. you are on the hook for the debt…read your mortgage agreement terms and conditions.

declaring personal bankruptcy is an option.

#23 999 on 09.15.08 at 2:17 pm

Every banking institution in Canada garantees $100,000. So, if your money is spread (up to 100,000) into in different institutions, you should be OK.

What if a bank calls in a mortgage and there is no collateral? A bank that reposses a house in a downward market is better to let the owner stay in the house. market will prove to be a lot of problems for banks.

Difficult times are coming. This is only the beginning.

#24 The Tallyman on 09.15.08 at 2:20 pm

To #18 rope and a box

I hear Home Depot is going to have a helluva sale on rope
in mid Oct.

#25 Downsized and Delighted on 09.15.08 at 2:26 pm

At the peak of the U.S. real estate market, my house was worth 20% less than a comparable property in Naples Florida. Less than two years later I sold my property for 20% MORE than the peak Naples price (and 45% percent more than the bottomed out Naples price)

So I don’t believe any statistics that say that the Canadian market is not overheated. Naples Florida was the most overheated market in the U.S. and our Toronto market right now is priced higher than that peak market. So do I believe their prices will come back up to ours? Maybe…after ours drop by at least 20%.

#26 The Tallyman on 09.15.08 at 2:28 pm

Hey maybe as an inducement to keep the drunken sailor party in full swing…
banks should give out rope… in trendy designer colors to match the over priced shacks as a gift when people open new accounts.

Gives a whole new meaning to hanging around the house.

#27 The Tallyman on 09.15.08 at 2:40 pm

Another less talked about area of concern is where mortgage renewal rates will be in a few years.

If I bought more house than I could afford and living the pig at the trough lifestyle, I’d be getting restless right about now.

Even an increase of a few percentage points will bring the house of cards crashing down for those already maxxed out.

Aw what’s the use… Where’d I put that rope

#28 BBC on 09.15.08 at 2:41 pm

You reap what you sow…..denial is a deeper issue, we canadians are in trouble.

#29 David on 09.15.08 at 2:41 pm

These events have been in the rumour mill for several weeks. It is shocking to see the pillars of capitalism tumble into ruins. Capitalism without capital sounds like a really new economic frontier. Lehman and Merrill Lynch were always considered as the failure proof bastions of investment banking and Anglo-American institutional capital. Is Goldman Sachs next?
These were very old white shoe established firms that wound up meeting their end due to raising debt levels associated with the housing bubble. These firms were over leveraged and leverage has an equally powerful reverse gear. Lehman has something like $128 billion in long term debt much of it of now dubious quality.
Sounds like the Bubble Polyanna’s out there will have to learn to get over themselves.

#30 So what on 09.15.08 at 2:43 pm

Okay.. so what to do from here.
Just sell my house, pay the car and bank the rest.

I don’t think it is either a good time to leave a permanent job and take up a contract..right?

#31 Ron on 09.15.08 at 2:53 pm

$200,000 or $800,000? What’s it gonna be?

You pay 200k for this home in Ontario or you pay 800k for the same dump in affluent area BC. How do you figure? Some buyers are completely delusional. The collapse is self-imposed.

http://www.mls.ca/PropertyResults.aspx?Page=3&Mode=0&vs=Residential&ret=300&sts=0-0&beds=0-0&baths=0-0&bt=1&atsg=3&ci=barrie&pro=2&mp=200000-250000-0&mrt=0-0-4&trt=2&of=1&ps=10&o=A

#32 cmh on 09.15.08 at 3:32 pm

Stoneleigh #13,
You are so wise!!! I have been saying and thinking all along that we are heading for another depression! Everything to date is telling me that this is about to happen – and nothing at this stage will sway my belief.

#33 $fromA$ia on 09.15.08 at 3:51 pm

rope and a box,

We are trying to inform the population that there is trouble comming. The need to get smegma free.

You get it now, sope on a rope?

#34 MBS-Economy on 09.15.08 at 3:51 pm

#20 mattbg – If they do lower rates by 50 bps then people really have to question the competency of the Feds. Best method at this point is to stay put until you ride out the storm … lowering rates will further intensify the inflation risk which imo is already out of control.

#35 dotava on 09.15.08 at 3:56 pm

Painting our glasses to black unfortunately will not help. If our biggest customer (roughly 75% of our trade) is going down – sound that we are in trouble. I am not sure how “dark” those glasses have to be to not to see; or we have other option (what we should do about 6 years ago) – try to find other “solvent” customer/s.
My grandma teach me not to hold all the eggs in same basket.

#36 Real Estate Crash on 09.15.08 at 3:59 pm

Average home price drops 5 per cent

LORI MCLEOD

Globe and Mail Update

September 15, 2008 at 12:48 PM EDT

A declining number of home sales in Canada’s most expensive cities dragged down the average price of an existing home across the country by five per cent in August, to $316,052.

The drop in prices was led by a dramatic slowdown in Vancouver, where unit sales slumped 54 per cent and prices fell by 5.2 per cent to an average $557,114 from the year before, according to data released Monday by the Canadian Real Estate Association (CREA).

Lower sales activity means the country’s priciest market, Vancouver, now has less weight in the overall calculation of the country’s national home price average, CREA said.

A slump also continued in the Calgary market, the third-most expensive after Vancouver and Victoria, where sales were down 16.7 per cent and the average price of a home listed on the Multiple Listing Service (MLS) fell by 8 per cent from the year before.

Edmonton and Victoria were also on the list of cities where home prices have run up dramatically in previous years and are now in decline, down by 5 per cent and 1 per cent respectively.

Windsor-Essex, the fifth market experiencing a price drop, has been hard-hit by the slowdown in the manufacturing sector, and prices there were down 5 per cent year-over-year.

Average prices rose in the other 20 of 25 major markets included in the report, led by Regina (up 36 per cent), Newfoundland & Labrador (up 21 per cent), and Saint John (up 15 per cent).

Overall unit sales in Canada dropped by 19.3 per cent to 23,129 in August. In addition to Vancouver, markets with notable sales declines included Victoria (down 38 per cent), Saskatoon (down 43 per cent), Regina (down 35 per cent), and the country’s largest market, Toronto (down 22 per cent).

Unit sales were up in just three markets, led by Edmonton where they rose by 20 per cent from the year before. Sales levels were also up in Québec City, gaining 2 per cent, and Thunder Bay, rising 8 per cent.

In a sign the market is stabilizing, however, the level of new listings cooled from the record levels hit in the four previous months.

In August there were 44,377 new listings in the country’s major markets, compared with 50,341 in July. Listings for all of Canada, including smaller markets, soared to a record 80,147 in July, the first time resale units available on the MLS cracked the 80,000-mark.

Data for all Canadian markets in August, including smaller centres, will be released by CREA shortly.

http://www.reportonbusiness.com/servlet/story/RTGAM.20080915.wmls0915/BNStory/Business/home

#37 Real Estate Crash on 09.15.08 at 4:00 pm

Steeper drop in Canada’s existing home prices

Garry Marr, Financial Post
Published: Monday, September 15, 2008

TORONTO — The Canadian housing market continued its downward spiral in August with a third straight month of falling prices in the country’s 25 largest markets, the Canadian Real Estate Association said.

The average price of a home sold fell 5.1% from a year ago to $316,052. The numbers indicate the decline is getting steeper, as year over year prices were off 3.6% in July and just 0.4% the month before that.

The latest statistics also shows activity slowing rapidly with 22 out of the 25 markets surveyed with sales down from a year ago. Some of the sales declines are massive with Vancouver activity off 53.9% from a year ago.

The Ottawa-based group put on a brave face, pointing out that 2007 is a difficult year to compare with because the market was so strong.

“When comparing statistics, remember 2007 was a record year for real estate sales in Canada, said Calvin Lindberg, president of CREA. “In light of that fact, our current market can certainly be characterized as stable.”

Mr. Lindberg insisted market fundamentals in Canada are solid with mortgage rates at near record low levels. “The challenge is for sellers to price their home to meet the local market realities and for buyers to realize there is no real estate bubble that will burst and send prices to new lows.”

Despite that assertion, five of the major markets saw prices declines. In Vancouver prices dropped 5.2% in August from year ago to an average of $557,114. Calgary prices were down 8% during the same period to $390,091.

In Toronto, home prices are no longer keeping pace with inflation with the average price of home up just 0.8% in August from a year ago.

Financial Post

http://www.financialpost.com/reports/property/story.html?id=792278

#38 Real Estate Crash on 09.15.08 at 4:01 pm

Didn’t CREA at the beginning of the year say house prices were going to be up 5% nationally in Canada?

#39 TrueGritCalgary on 09.15.08 at 4:04 pm

mattbg, I am confused. If credit is tightening, does that not mean that credit should become more expensive since the supply of credit is decreasing? How and why would the Fed continue to cut interest rates? Is it just me, or is modern day economics no longer making any sense?

#40 Adil Burney on 09.15.08 at 4:33 pm

http://canadahousingcrash.blogspot.com/

Watch Harper spin: “My own belief is if we were going to have some kind of big crash or recession, we probably would have had it by now.”

Yeah, that’s a great logic: It hasn’t happened yet (although clearly the US is in recession as are we probably) so it won’t….

CREA put out its spin today as the average house fell 5% YoY in August…

#41 lgre on 09.15.08 at 5:01 pm

“reading al these comments make me want to build a box and hang myself come on people… stop being so negative.”

Do you need help?

#42 Mark on 09.15.08 at 5:05 pm

Observer, only *purchase-money* *first* mortgages (not refinances) in *certain* US states are “non-recourse”. The rest have full recourse to one’s assets.

It is a complete myth that in the US, one can ‘walk away’ from a house and not face consequences unless one happens to fit the very narrow criteria of a non-recourse mortgage. Personal bankruptcy is the outcome for most who ‘walk away’.

#43 EJ on 09.15.08 at 5:10 pm

From cnn.com: HP to slash 24600 jobs. 7.5% of combined HP/EDS workforce. No further details at this time.

#44 Noz on 09.15.08 at 5:52 pm

Eddie Spaghetti,

Now you’re a guy I can sit and have a beer with!

As far as defending yourself…I’d say spear em….it’s most effective and the kill ratio is high…lol.

No but in all seriousness…I’m watching Canada’s situation like a hawk. Reason? Because my wife and I would like to move to BC in the next year or so.

We have a limited timeframe to do it in due to immigration laws but we have a little bit of time…perhaps this will all work in our favor….not sure…but I’d like to end up there as overall, BC is a nice place to live IMO. No place is perfect…and Europe would’ve been my first choice, but going back there is TOUGH immigration-wise and getting a job is very very difficult.

Perhaps early retirement…we’ll see…but one step at a time. First thing first…get the hell out of LA.

#45 Jinxy on 09.15.08 at 6:44 pm

“In a sign the market is stabilizing,…”

Stabilizing? Where? Thunder Bay? Certainly not true of Calgary.

#46 Calgary rip off on 09.15.08 at 7:38 pm

#17 Real Estate crash.

In Calgary? I dont think so. Where is the crash? These homes in Calgary are still worth double their real value. So even if you drop $100,000 off a $400,000 home which is worth $180,000, you still are above baseline, by a lot. So unless you bought this home just during the most recent ridiculous speculative bubble, you arent in immediate dire straits.

Whats all the fuss? I along with many tentative buyers dont see what the big deal is about. It’s a buyer’s market I’m told. I dont think so. Its still a seller’s market, UNLESS you bought foolishly during the boom and now are panic selling. Only when values are in line with pre boom prices which is unlikely(about like winning the lottery) would I consider buying. I like many others will ride this out.

Part of the problem is I know what I am looking at, even though at 36 I have not seen the bust of the 1980’s. I know what a $400,000 home is supposed to look at. Much of what is offered in Calgary is worth half that. And the homes arent even of sound construction. Are they highly fire resistant? Unlikely. Is their more than 8 feet between you and your neighbour? Nope. Cram them thar shacks in as much as possible. For evidence of crappy building codes, drive past Citadel area, headed west on country hills blvd and look to your right to visualize the torched homes due to kids playing with matches. Q-u-a-l-i-t-y homes. Torched in a second. I dont know what I would do if I was the neighbour on the right of the home that was toasted.

The point being is that Mario and the pimps at the Herald and the CREB need to induce disaster signs so that panic selling occurs. These stupid market values in Calgary are the biggest joke and delusion I have seen in my measly 36 years that I have seen.

#47 dotava on 09.15.08 at 7:42 pm

#30 So what on 09.15.08 at 2:43 pm

Looks that you have two options – stay still or as “rope and a box” said -> rope and a box. :-)

#48 rjag2034 on 09.15.08 at 7:45 pm

This article dates back to last June. My broker sent it to me as part of his explanation why most of my accounts are in cash.

Needless to say, its quite prophetic.

Thank God I dont have a mortgage, have a good business and like where I live!!!

#49 dd on 09.15.08 at 7:48 pm

#11 Keith in Calgary

Do you really think different paper will save you? Your paper is linked to the US. Almost all paper is linked to the US.

#50 It's Coming on 09.15.08 at 8:37 pm

It is no longer coming its already here! and it’s only the beginning. Alot of people are gonna be in deep poopoo very soon http://www.financialpost.com/story.html?id=792278

#51 It's Coming on 09.15.08 at 8:38 pm

its here http://www.financialpost.com/story.html?id=792278

#52 Downsized and Delighted on 09.15.08 at 8:59 pm

4l Mark: Lots of banks are letting homeowners out of their financial obligations through “short sales”. (selling the property for less than the mortgage with the bank’s ok on the deal and agreement not to sue for the balance owing). In fact, at one point there was some discussion in the media about whether this forgiven debt would become a taxable benefit to the poor homeowner. I never heard of “short sales” before this market.

#53 Jim_s on 09.15.08 at 9:59 pm

Serves all the prics right that used their homes as ATM machines to finance exotic holidays, hummers, RV’s, marble flooring, and any other luxury item one can think of.

I have no hard feelings watching the highly leveraged businesses or individuals suffer, as both clearly have self-image issues and a problem with greed.

Nature always reverts back to balance. Housing, especially where I am in Alberta, is completely out of balance.

I will watch intently as others lose jobs, wealth, retirement savings, and hope. The irresponsibility of the greedy will now affect those that simply had investments in the market in anticipation of retirement. This is appalling.

We all go quiet when prices and values shoot up. It’s like we as humans believe we are entitled to have more money, not really understanding that money is a tool, not a God. Hopefully this will set things straight and cause generations from here forward to value the simple, honest things in life.

It’s about time we revamp the REALTARD™®™©®™ industry too.

->

#54 Jinxy on 09.15.08 at 10:11 pm

I agree with you, Calgary rip off. We were fortunate enough to get our ducks in a row and purchase our property in 2005. I guess it depends on each individuals interpretation of what “stabilization” means. I fear the worst for families who purchased at the peak. When all those mortgages come up for renewal,and housing values have dropped dramatically (or say “significantly”), won’t those purchasers have to pay a large part of the difference before they can renew?

#55 Rjag on 09.15.08 at 10:39 pm

http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/06/18/cnrbs118.xml

Forgot to post the link!!!
This is from last June.

#56 David on 09.15.08 at 11:34 pm

Today was an historic day and not necessarily in a good sense. The great brokerage house of Lehman has no less than $600 billion in total international liabilities and its market cap dropped a whopping 95%. Time for an autopsy and epitaph at this point.
Pretty bad when the margin call gets directed at the investment bankers and they are over leveraged.

http://www.guardian.co.uk/commentisfree/2008/sep/15/creditcrunch.economy

#57 dd on 09.15.08 at 11:38 pm

Quotes of the day:

“Yesterday and over the weekend, the Fed injected as much as $70-billion into the banking system to keep short-term interest rates from rising, while lowering the standards for financial institutions seeking loans”

The best Mr. Paulson could offer was a prediction that the end of the crisis is likely months, rather than years, away.

“The root of the problem lies in this housing correction, and until we stem the housing correction, until the biggest part of that is behind us and we have more stability in housing prices, we’re going to continue to have turmoil in the financial markets,” Mr. Paulson told reporters.

#58 David on 09.15.08 at 11:41 pm

Today was an historic day and not necessarily in a good sense. The great brokerage house of Lehman has no less than $600 billion in total international liabilities and its market cap dropped a whopping 95%. Time for an autopsy and epitaph at this point.
Pretty bad when the margin call gets directed at the investment bankers and they are over leveraged.

#59 David on 09.15.08 at 11:43 pm

Good article here.

http://www.guardian.co.uk/commentisfree/2008/sep/15/creditcrunch.economy

#60 Blacksheep on 09.16.08 at 1:21 am

Post #18, Rope & Box strategy,

This is a repost fom sept/13/08

It may help you undestand why people alarmed.

Western societies largely have consumer driven

economies,when credit contracts, people stop spending.

Global assets/investments are going through a rapid

depreciation cycle, due to massive deleveraging of

credit and people running for the cash sidline.

The US fed is bailing out Stearns,Fred & Fann,Lehman,

with some economists calling for a 100+ institutional

failures to come.

Holders of US dollars/paper are going to pay with

intrest for the trillions spent in the bailouts through a

weakening, then finally collasping dollar.

Housing in the US has yet to bottom, the CORRECTION

IN CANADIAN R.E. JUST GETTING STARTED.

Most peolpe are not getting that this is a much bigger

problem than some over priced houses.

Gold and silver are on sale big time.

There is an economic storm coming, prudence says,

prepare for the worst, hope for the best.

BS

post# 999,

I checked with my credit union in regards to a timetable for monetary compensation in case of union default.

There is no fixed time frame for compesation to the customer.

BS

#61 Jose on 09.16.08 at 2:33 am

Prices will go through a valley. Canadian banks don’t even compare to thier US counterparts. We can’t predict house price declines, since the market will dictate it (e.g. who can you predict the TSX in the next year?) You have to live somehwere, so that means rents will increase to accomate the influx of renters and overall the inflationary cost of owning a home. Either way, the homeowner will just hang tight, re-invest in his/her home until the valley starts to rise in time. BTW, Garth if you’re looking to rent, I would like you as a tenant, but you might have to wait in line ;)

#62 Stephen from Toronto, Ontario ,Canada on 09.16.08 at 5:41 am

Garth:

Do you remember where you were on October 19, 1987(Black Monday)? I do. I was finishing a third year class in university and did not find out what happened till I arrived home and a family member said that the stock market had lost over 500 points in New York and Toronto. The losses were just as bad worldwide wiping out an estimated $2 trillion in wealth that day.

During the next day, Tuesday October 20, 2007 few people knew that the investment banks faced a margin call and were in danger of bankruptcy. Allan Greenspan of the Federal Reserve Board made a statement during a press conference that it would provide liquidity to financial institutions that needed it (to the tune of over $5billion). Economist and financial experts feared that if investment banks defaulted on that call it would result in a worldwide financial meltdown. It could have led to the collapse of the bond market, a possible Treasury default and a dramatic rise in interest rates resulting in a severe recession or a mini-depression.

How did we get in this situation in 1987 and again in 2001 and 2007-08? It all started during the Reagan Revolution when Arthur Laffer sold David Stockman, Jack Kemp, Phill Graham, Paul Craig Roberts and Larry Kudlow the laffer curve during the 1980 Republican Convention in Detroit Michigan. The Regan-Bush Campaign Team unveiled its supply-side economics to the electorate and won in November.

However, it was an impossible policy to administer. The laffer curve theory suggest that you cut tax rates to a point to stimulate the economy and the economic growth would generate revenue to offset any debt. Stockman, who was director of the OMB (Office of Management and Budget) for President Ronald Regan
found out that real GNP growth plus inflation=Gross National Product or “Money GNP” The supply siders at the Treasury Department wanted the biggest possible numbers for real growth of between 5-7%(The Triumph of Politics, 1987, pp102)

Historically the US economy grew by about 3% as well as the velocity of the money supply (3%). As I understand it, if you have high inflation, bracket tax creep would bring in a lot of revenue even if you hold domestic spending growth at zero. If you dramatically cut inflation, bracket tax creep is reduced and money GNP drops so you have to cut spending accordingly to prevent small deficits from spiraling out of control.

In the end an economist Murray Weidenbaum struck a deal with Stockman on February 7, 1981 where they finalized a “Rosy Scenario” plan that kept real growth high and any inflation numbers that was acceptable (4%). Weidenbaum forecasted $700 billion in money GNP from 1982-86 and within it $200 billion in phantom revenues. the 1982 forecast suggested that the economy would have a real growth of 5.2% with 7.7% inflation resulting in a 13.3% money GNP growth(Stockman, 1987, pp106). The Federal Reserve Board under Paul Volker saw the forecast and hiked interest rates. In 1982 the economy did not grow by 5% but contracted by -1.5% and inflation dropped to 4.4%. The forecasted money GNP never materialized because the growth rate was about 3%. Money GNP was $335 billion lower than forecasted, resulting in an $85 billion loss of tax revenues. Money GNP were way too high based on the supply side economics theory and monetary policy as well as real growth numbers. The inflated revenue projections and deflated spending reductions led to a $200 billion structural deficit(Stockman, 1987, 107).

To make matters worse Stockman made a error on the proposed Defense Budget. In a meeting with Secretary Casper Weinberger, he offered a 7% real growth of the budget. When the forecast was completed the OMB was shocked to learn that the cost of the defense build up was $1.46 trillion dollars starting at $146 in 1980 to $368 billion in 1986 a 160% increase. Few people knew that President Jimmy Carter had asked Congress for a 9% increase for the budget. When the Regan Administration program was added it resulted in a 15% real increase. It took a $222 billion budget and compounded it 7% a year for five years(or a steady annual increase of 10%). Once again the military-industrial complex got the defence build up it always wanted, but the cost would be permanent deficits and a
dramatic increase in the national government debt to $2.3 trillion in 1987.

Stockman reduced the impact of the military build up by drastically cutting domestic spending by $74 billion by 1984 with a further $44 billion in promised future savings. He was able to get Congress to cut the Defense budget by $50 billion to get it substantially below the $300 billion target. The National Debt,1988, pp238)

He also had to fight a Washington establishment that was obsessed with entiltlements for their states. Lastly the Tax Reform Act of 1986 eliminated bracket creep and reduced money GNP growth-see part 2 tomorrow

#63 rope and a box on 09.16.08 at 8:00 am

to writer #41 Igre.. i need help putting my head in the rope LOL!!!

#64 Al on 09.16.08 at 8:38 am

#39, TGC

You’ve hit upon a very good point. Interest rates (which are effectively the price of money) should be set by market forces, just the same as every other price. We have non-market forces at work (central banks) that have pushed the price lower and supply higher than the market rate. Since demand increases with low prices, we set a false equilibrium with high volume and low price. This caused lenders to overextend themselves giving loans and borrowers to overextend themselves borrowing.

Currently supply is dropping as lenders drop. Continuing to force interest rates lower will not induce new supply to become available from alternate sources. The credit crunch will continue until interest rates rise to whatever the market dictates. The deals between Sovereign Wealth Funds and US banks, as well as lending rates by hedge funds, give us a partial picture of where the market rate for money should be.

#65 Future Expatriate on 09.16.08 at 8:42 am

Wow… the NEXT time Garth goes awol for a bit and promises a killer post upon return, SELL SELL SELL and RUN FOR THE HILLS!!!

The gallows humour here is really amazing too.

And you know when you see “smegma-free” on a real estate blog (#33), history is truly being made.

As far as gold… something’s funny there still, prices barely crawling upward and NO SUPPLY WHATSOEVER… if the goldbugs are right and the powers that be can’t artificially keep the price down much longer by dumping worthless gold paper (which truth be told they never actually had anything real in their vaults to back up) and forcing their clients to do the same, to the moon Alice!

#66 Calgary_rip_off on 09.16.08 at 10:50 am

Jinxy: There is a clause I believe in which a bank can make it difficult for a person to renew their mortgage, but I cannot comment on this, I have never purchased any type of property. There are reasons why I havent bought: 1) I havent been in a position to put a good sized down payment on a 25 year loan, and 2) I moved around a bit when I was younger.

I wouldnt wish any problems on those persons who purchased at the peak. A person cant blame them for wanting to not throw their finances away on rent. However, they shouldve have realized that they cant take it with them when they are dead. The only real thing is mortality. Until I can buy immortality, Im not too worried with purchasing those overpriced shacks. Ive had three jobs in the past while my wife worked and I was in school and I cared for our daughter in the morning. Its no big deal. I dont have to go find water, shoot deer to eat, and harvest berries along with getting ready for winter. My life is pretty easy. So I dont really understand all the panic about “buy now”. Or what? You’ll freeze to death? Unlikely. Unless the sky falls and I have to revert to hunting for food and gathering, along with knitting my clothes and canning food and boiling stream water, and riding a horse to and fro, I dont believe the problems are really all that significant. I have folded laundry and delivered newspapers for a living so all this stress and posturing that goes on in Calgary is a bunch of garbage. Still, I wouldnt wish the individuals needing to update their loans to lose their homes, people are entitled to a place to live so they have peace of mind.

#67 Trekie2 on 09.16.08 at 10:53 am

OK, so the question begs to be asked…if one has some US Mutual funds and wants to minimize his exposure to this fallout…were does one invest them…foreign funds? Gold? Europe?

#68 smwhite on 09.16.08 at 11:13 am

So we’ve made it back to 2005 levels for the FTSE, NIKKEI & DOW. The HANG SENG and TSX are still about 20% each above the 2005 mark…

Oil has slid under $100 and yet gold still is building up resistance at $750 to $800 and like Future Expatriate says in #62, no supply.

Any interest rate move lower by the Fed will shoot gold back to $900! Should be an interesting ride into the spring of 2009, can’t wait for those 4th quarter financial results!

Oh, and did I read a 5% decline in Canadian housing prices YOY in August?

What’s bothersome is that Harper is sounding like the typical bull on Fox’s Bull & Bears talking about the US economy, using the term “resilient” to downplay what is happening in their economy; the Liberals had a free ticket into parliament, all Dion had to do was play the economy card and not “scare” the herd with the thought of a new tax…

Good luck Garth on your re-election bid.

#69 rant in Calgary on 09.16.08 at 11:26 am

Come on people, it’s different in Canada! We have our invisible economic force field protecting us.

We need to turn to our realtor for advise and guidance through these tough times. Because they got me this nice house with Granite and Hardwood with no money down. I’m sure they will have a plan, on how to keep up the payments. I’m waiting for my realtor to call back to me, he was going to explain why my house is now $65k less.
He must be busy helping others buy a house before prices jump back up.

#70 The Tallyman on 09.16.08 at 11:39 am

To #58 Jose

I believe rents are going to fall drastically.

As people start to bail on their monster mortgages,
money lenders will either sell off the property at giveaway prices or rent them at very low rates just to get a body in there to pay the utilities.

Renters are going to do very well.
Why would anyone buy a 400 t0 600k overpriced house
when they’ll be able to rent one for $600 in a years time.

A whole new carnival of clowns & performers are coming soon to get those shacks rented.
Don’t you just love the money grubbing circus?
I wonder if there’s going to be face painting?

As for predicting the stock market for next year…
I can do that too, you see I have special powers…

I’m the 7th chump of a 7th chump!

#71 Bruce on 09.16.08 at 11:52 am

I agree, Garth. This thing is only getting started. It’s funny how only a year ago, these very same clowns(so called “experts” and “analysts”) were saying that the credit crisis would be “contained”, that the financial system was inherently “sound”, and the damage to the overall global economy would be “minimal”. Well I beg to differ. Obviously these individuals are all bold-faced liars, or they really ARE dumber than I thought. Anyone who believes for one minute that we’re nearing an end to this must have you-know-what for brains. We’re talking TRILLIONS and TRILLIONS of dollars of “funny money” here. A global rout of fiat currency all backed and guaranteed with NOTHING except empty promises and massive debt. 1929 will look like Shangri-La by the time this is all over. Nearing an end? Yeah, sure. And there’s a bridge up for sale in Brooklyn in case anyone’s interested. Frankly, I think we’re long overdue for a taste of our own medicine…

#72 Brad on 09.16.08 at 11:58 am

So, I wonder how much longer till we all start singing Nearer My God to Thee…

Nice article Garth.

#73 David on 09.16.08 at 1:28 pm

Here is verbatim a great little essay from the 15 September 2008 Guardian newspaper writen by Jeremy Seabrook.

How extraordinary it is, that representatives of the great names in global finance that have recently bitten the dust were lately paraded on television as the supreme experts on the global economy. Until today, few serious programmes on TV about the financial outlook were complete without some hireling from Bear Stearns, Lehman Brothers or Merrill Lynch pontificating on what governments should do, on how to ease the tax burden, on ensuring the health of the economy, on the fundamental soundness of the system, and so on.

Free markets, the Washington consensus, liberalisation – ideas that have resounded around the world – are suddenly shredded, although the fortunes made in their benign shadow have no doubt been carefully stashed away in unreachable “havens”. Where governments had been pleased to acknowledge their relative unwisdom in the presence of the superior knowledge of the markets, they are now being bidden to “step in”, to re-regulate, to tame the beast they were so proud to unleash, and in the presence of whose “performance” they were only too willing to efface themselves.

It seemed to the fallen experts and discredited knowalls that government had become an obstacle to the further creation of wealth. Guilty of imposing stealth taxes, inhibiting the free play of market forces, governments were spoilsports, shackling enterprise and undermining business. Obligingly, governments sought to withdraw with becoming modesty, avowing themselves powerless in the presence of such mighty forces, in order that the financial system should work smoothly and effortlessly for the benefit of everyone, including the poorest, who would be wafted to plenty on the coat-tails of the super-rich. The daily plebiscite of free choice in the marketplace seemed a reasonable substitute for a democracy in which quarrels over how to run the economy had been laid to rest.

What a beautifully simple and plausible story it was, the rich miraculously transformed from grinder-down of the poor into their philanthropic rescuers – a metamorphosis that coincided with the rehabilitation of capitalism and its own mutation into something called “the economy”. Wealth itself became the oracle, and people listened avidly to fairytales of win-win, economic miracles, market magic and the supremely precious life of geese that laid golden eggs.

Attempts to assimilate the workings of capitalism to the equivalent of a natural phenomenon have been so successful that even the words used to describe the present “downturn borrow a lustre from primeval nature: we hear of mortgage famine, credit drought, floods of bankruptcies, contagious insolvencies, epidemics of repossessions: the language evokes biblical plagues and last days. Is not nature red in tooth and claw? Or was that capitalism?

Perhaps even more telling, images are also taken from the realm of nuclear warfare – there is economic meltdown, a chain reaction of business failures, consumer confidence at a critical level, while the fallout is incalculable. It would be difficult to evoke a more apocalyptic scenario.

All this is of course, calculated to ensure that debate is securely contained within the fraying parameters of a capitalism to which no alternatives now exist. It would not do for people to become too inquisitive about the nature of a system which has been so closely identified in recent years with human nature itself. The fiction must be maintained, at all costs, that there is no other way of ordering our affairs. We are like medieval cartographers, beyond the boundaries of whose known world lay only monsters and dragons.

To forestall any such unpleasantness, the friendly first person plural is employed. This places the responsibility of what has happened on a collective that is absent when profits are being taken and the money made. It is “we” who have allowed the wheelers and dealers, the shady operators in the world of sub-prime loans, derivatives, futures and options, to get away with it. We have not held our governments to account sufficiently to curb the markets’ excesses. We have been remiss. In other words, we are to blame; and if our nest-egg is annihilated and our savings are turned to dust, we were always warned in the small print that investments can go down as well as up.

This is puzzling to those who cannot read the hieroglyphs of economic discourse. We have been told that the markets know best. You can’t buck the markets. You can play them, appease them, measure their sentiment, coax them out of volatility or nervousness. But all the financiers and experts, the no-nonsense acuity of the personnel of now-defunct institutions were doing was within the sacred space of what the markets would bear.

The same people (at least those who have not gone under with their venerable institution) who were soothing us with the wisdom of deregulation are now sagaciously offering up their analyses that more stringent oversight of financial transactions is required. A “rules-based” system must be observed. The operations of investment banks must once more be separated from those of high street banks, to avoid their high-risk investment with our money. Regulation, restraint and watchfulness are the new remedy. At least until the next time.

Capitalism, which had coyly hidden itself beneath the voluminous drapery of prosperity and luxury, now thrusts out itsface from the faded finery to look once more on a “real world” it has laid waste – on lives ruined, security trashed and hope trampled. A generation brought up to believe that affluence represents some existential truth about our lives will, inevitably, be disoriented and angry. If the coming impoverishment brings about an increase in violence, crime, racism and breakdown, who will bear those costs, who will bail out a bankrupt society? Certainly not the makers of fortunes whose activities we were until recently expected to admire as the acts of heroes and demi-gods

#74 dotava on 09.16.08 at 1:39 pm

#58 Jose on 09.16.08 at 2:33 am

Keep denying (will not help). In my neighborhood (Ottawa) you can find plenty signs for rent almost as for sale – telling me that there is more houses than buyers and renters combined. Also recently rented for my Son in TO – same story and BTW rent are going down too – on spring price was higher for basement apartment than this one on second floor (same area).

#75 Marcus Aurelius on 09.16.08 at 1:45 pm

DEAR MR. LINDBERG……

Quoted above, today’s National Post story about declining prices across Canada:

“When comparing statistics, remember 2007 was a record year for real estate sales in Canada, said Calvin Lindberg, president of CREA. “In light of that fact, our current market can certainly be characterized as stable.”

Mr. Lindberg insisted market fundamentals in Canada are solid with mortgage rates at near record low levels. “The challenge is for sellers to price their home to meet the local market realities and for buyers to realize there is no real estate bubble that will burst and send prices to new lows.”

Yes buyers, stock market indexes haven’t fallen hundreds of points this week, Ontario is not in recession, and residential property prices were not pumped by agents out of all proportion to affordability. Builders are buying up Toronto lots like wildfire, half-built infill houses in Toronto are not being marketed now as ‘finish it yourself and flip for huge profit!’ , and thousands of jobs are not being lost in major urban markets.

And Mr. Lindberg does not wear a clown suit to work, nor is he contemplating suicide because he has to go home to his children and admit that his pimping for that Last Fool in the Pool sparks only chuckles and pity from his friends, family, and these poor readers. Let’s have some genuine empathy for a guy with so little self-esteem.

#76 Shifty on 09.16.08 at 2:27 pm

Well if you think things are bad now, well they are going to get a lot worse. Cheep oil is a thing of the past and to make things even worse there isn’t enough to go around. Energy is the next ugly gorilla in your back yard, it will effect every corner of our lives.

#77 Rob on 09.16.08 at 2:41 pm

Hmm… no US Fed rate cut today even though the market ‘experts’ were bullying for it — looks like this junkie’s going to rehab …

#78 Dawn in Calgary on 09.16.08 at 3:07 pm

#67 “I believe rents are going to fall drastically.

As people start to bail on their monster mortgages,
money lenders will either sell off the property at giveaway prices or rent them at very low rates just to get a body in there to pay the utilities.”

Not only the lenders, but the builders are dropping prices. In NW Calgary, this place was for sale last summer at $695,000. We toured it, it’s nice, but maybe worth $280k.

Now you can rent it (smokers and pets allowed, we’re not picky, it’s brand new!) for $2k/month.

http://www.rentfaster.ca/listingview.php?listingID=18674

The Saturday HOMES section in Calgary is full of builder ads — IMMEDIATE POSSESSION AVAILABLE — in other words, we built too many and they’re sitting empty.

I’m glad we couldn’t afford to buy here when we moved in ’06. More than glad — thankful. We’ve owned, and renting is much easier on my psyche. No worries. Hakuna Matata.

#79 Dr Phil, you can call me Uncle on 09.16.08 at 3:10 pm

FP article: Steeper drop in Canada’s existing home prices

http://www.financialpost.com/story.html?id=792278

SPIN BABY SPIN…………….

>Ottawa-based CREA was more optimistic and pointed out this year’s market has the task of being compared with 2007.

>”When comparing statistics, remember 2007 was a record year for real estate sales in Canada,” said Calvin Lindberg, president of CREA. “In light of that fact, our

>current market can certainly be characterized as stable.”

So 2007 was a record hot market and now 2008 a much slower declining one (with a price drop in Aug by 5.1%, sales dwindling and active listings exploding) makes the market stable, in comparison? Does he mean, if you average the two together (2007 + 2008) /2 = Stable? If so,…. interesting comparison but utterly useless as far as providing any insight or direction.

>Mr. Lindberg believes market fundamentals in Canada are solid with mortgage rates at near record low levels. “The challenge is for sellers to price their home to meet the local market realities and for buyers to realize there is no real estate bubble that will burst and send prices to new lows.”

IMHO this translates to: Sellers you need to get with reality and reduce your asking price! Greater Fools err…. I mean Buyers. Get over it! There is no bubble to burst here buy buy buy!… despite the current economic turmoil!

All This from the President of the CREA, he must be a very credible guy!?!

#80 Jinxy on 09.16.08 at 3:57 pm

#63 Calgary rip off…you and I could be friends :-)

You hit it…priorities. You and I are definitely not the norm. My bank account nor my portfolio have ever defined me. “Something for nothing is the greatest hope of all”…a sentiment too many people are caught up in, especially in this fair city.

I was fortunate enough to have a father who taught me “true measure”. Our generation is about to see the magnitude of horrific financial loss. Almost everyone we knew refinanced their homes based on the “bubble” market value in Calgary. We, however, did not. I still drive the same car, walk on the same carpet and watch the same television.

I fear for those who are about to find out that none of it was ever “real”…

hmmmmm….”real” estate.

#66 rant in calgary… nail, head, hit.

#81 Keith in Calgary on 09.16.08 at 4:16 pm

#63 Calgary_rip_off said…….

A person can’t blame them for wanting to not throw their finances away on rent.

——————————————————

Riggghhttt……uuuhhhh uuuhhhh…..

Think It’d be much wiser to throw almost twice as much money away (for the first 18 or so out of 25 years) each month to the bank thru the interest portion on said mortgage payment ?

#82 Dr Phil, you can call me Uncle on 09.16.08 at 6:22 pm

Wheeeew what a relief, so the big guys at Merrill won’t have to flip burgers if they get demoted, let go or just plain up and leave from the combined BOA-Merrill company.

It nice to see that not everyone from these banks are going to suffer during these troubled times…….

Merrill’s Thain, Aides May Get $200 Million for Year

http://www.bloomberg.com/apps/news?pid=20601109&sid=aKXe2Xgflk4c&refer=home

Sept. 16 (Bloomberg) — Merrill Lynch & Co. Chief Executive Officer John Thain and two former Goldman Sachs Group Inc. colleagues he recruited may reap almost $200 million for their year running Merrill if they leave or are given lesser roles after Bank of America Corp. buys the brokerage.

Thain, who got a $15 million bonus when hired in December, stands to get an additional $11 million in accelerated stock payouts if he doesn’t stay after the deal, compensation consultant Graef Crystal said. Trading chief Thomas Montag, who joined in August, may get $76 million including bonus and accelerated awards. Strategy head Peter Kraus was given $95 million including bonus and stock awards to replace a Goldman package he had to forfeit, people familiar with the matter said.

… There is always a golden parachute err…. I mean silver lining…. in all these financial industry meltdown stories.

#83 y3maxx on 09.16.08 at 6:35 pm

Be honest…you are all renters on this blog site…or are recently sold, now renting… and are here bashing as to your hearts delight, hoping for that huge price drop in real estate.

…fyi, july/august have always been considered slow months for home sales.

However, an AIG demise could effect Canadian Mutual Funds and/or Insurance Companies like Manu.

Let us all hope the U.S. stabilizes otherwise they may simply “conquer” Canada.

Best wishes to all Canadians

#84 Pugnacious Serf on 09.16.08 at 7:34 pm

http://www.canada.com/calgaryherald/news/story.html?id=acaeeffa-e763-45e6-a603-0620583528e1

#85 Jinxy on 09.16.08 at 8:07 pm

#80 y3maxx

***”Be honest…you are all renters on this blog site…”

No. Purchased primary residence in 2005 and 2 multi-family units prior to that (as rentals).

***”hoping for that huge price drop in real estate.”

No. Simply “concerned” for the “average” family who “panic” purchased at the peak IF a huge price drop does indeed occur.

“…fyi, july/august have always been considered slow months for home sales.”

***True, but how about the housing start stats?

“Best wishes to all Canadians”

***Assuming your tone was genuine, Thank You.

#86 Jinxy on 09.16.08 at 8:26 pm

“Harper said while Canada’s construction industry is softening, it remains in “good health.” He also said the economic slowdown hasn’t had an impact on government revenue, which may exceed projections.”

Full article below:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aQ298.ad.liM

#87 eat your hearts out people on 09.16.08 at 8:35 pm

Hurray!! AIG is getting help from the FEDS for 85 billion bucks the end of the housing crash in the usa, the us dollar will rise and the metals will tank and the canadian real estate market will have a near miss of a crash!!!
the canadian market will survive…..

#88 My_view on 09.16.08 at 8:51 pm

I think this is far from over, is it coincidence that the Canadian election is happening? Or perfect timing for the Conservatives to get the majority? Carbon tax is a hard sale, Liberals got their work cut out for them. Never the less, the shit is rolling down hill fast into a prick wall and major legislation will have to be passed with leaders. Like Garth, let business men do business……….

#89 lgre on 09.16.08 at 9:04 pm

y3maxx – you are probably right about most ppl on here being renters, but mostly by choice I presume not what you are insinuating.

you are probably an owner with debt upto your eyeballs that can’t afford losing even $5k off his prescious cardboard box. What do think about them apples?

Most people on here realize that the market is way over priced and it gets a little frustrating when pea brains come on here to promote an overpriced market. Everyone that overpaid will get there’s believe me.

I was talking to my father today and he was telling me about 2 of his co-workers who have to sell because they cant afford the mortgage, does that sound familiar?

#90 POL-CAN on 09.16.08 at 9:18 pm

# 81 Pugnacious Serf

The 5K that Harper is promising for first time buyers will go a long way when the average house price in Canada is again at 180 K or so…. Ofcourse the unemployment will be at 15 % or so by then, and the economy will be in the crapper…… Well worth the vote imo :)

Garth… Wish I still lived in Halton… would have voted for you for sure…. Instead I live in Miller land waiting for this house market to implode. It should happen soon since our US friends are busy pushing the entire planet into the greater depression…..

#91 JO on 09.16.08 at 9:30 pm

Garth,

Great commentary on your last post about the stupidity of cutting consumption taxes and not income taxes as well as some other comments. As the world is witnessing a truly historic but frightening crisis, I applaud an independant politician who sees through the nonsense that is most policies that governments try to implement to deal with economic crisises. If you were running in my district, you would have my vote. I was chatting with a mortgage underwriting assistant today and he explained how pathetic the volumes have been and he is hearing this from other underwriters at the majors (GTA area). Most of the volume has been refi and not purchase and number of declined apps (C and D paper) has increased markedly. We are on the edge and heading full steam over the edge. Even an 8 % undemployment rate will cause spectacular damage. Please continue to voice your opinions on the finance committe. Tell these policymakers that recessions are a necessary part of the cycle and that there is little any government can do to deal with the cycles of pessimissim and optimism that govern markets..of course, no politician in power wants to hear this truth but the of the many reasons we are in for a very challenign recession worldwide is precisely because of government manipulation and failure to regulate properly the world over..with the goal of avoiding hard but necessary economic adjustments. I encourage you to recommend strongly the government consider the following to deal with this: Cut income taxes in the lower/middle income tax brackets significantly, cut small business and corp income tax rates aggressively, look at phasing in cuts in government spending over 2-3 years to help finance personal income corporate/small business income taxes (yes, cutting gov spending is not even considered but most in power until the end phases when things are really bade but it needs to be done..we need smaller government not bigger), and consider removing the responsibililty for the interest rate and currency away from the BofC onto a currency board that will manage the currency based in relevance to the price of gold and use the management of base money to accomplish this, not rates, change the CDIC and similar bodies (CUCO for CU s ) to cover only chequing accounts and no other items, make CMHC insurance more expensive and harder to get, and implement a very gradual plan to increase reserve requirments on all lending FI s to move away from the ponzi scheme that is fractional reserve banking. Yes, some of these propsosals will create laughter from the majority of committee members and especially from the government advisers (most of whom are trained in the mainstream neo-Keyneisan / neo-mercantilist economic theory..the world is about to find out the truth about these economic philosophies and it won’t be pretty). But make no mistake, these type of policies are exactly what history has shown as our best bet to keep recessions mild and get on recovery as fast as possible. In fact, in most cases, cutting income taxes (personal and corp/small bus) usually generates more tax revenue for the government, whereas most tax increases usually decrease the amount of tax revenue (or at best leave it the same while hindering economic recovery).
Good luck on October 14
JO

#92 Calgary rip off on 09.16.08 at 9:52 pm

y3 maxx: What is your point anyway?
That the common person wants a shot at home ownership? Uh, duh.

The problem is that to buy a decent home in Calgary your income needs to be around $110,000 per year. That’s really unreasonable. Still home ownership is a privilege.

Let me reframe that: Living is a privilege. In fact, I believe I live like a King. I rent a house, the best I have ever lived in, in fact, and I have the best job I have ever had. All I have to do is turn a knob and I have water. I get inside my box with wheels and it drives me to work. For the most part, aside from sports injuries, Im healthy. I dont get chest pain, and Im not about to die. I dont freeze to death in the winter. I dont have to knit my clothing. I dont have to go on a rampage hunt to obtain meat(or berries for that matter). I dont have to worry for the most part about getting murdered. And I have time for leisurely activities such as over the top keyboard and electric guitar shredding in my very large basement ala Yngwie Malmsteen. Funny thing is, you cant buy music chops, those have to be earned through sweat and tears. I have a wife that doesnt screw around on me, so my worry about getting AIDS or Herpes is next to nil(and no, I dont even look at other women-crucial parts would end up in the blender). So all in all, life’s good.

The problem is, once life is in perspective, the ridiculousness of the cost to live in Calgary is nuts. I like Calgary and I like my job. However, the greed is nuts here. Something like that $267,000 house in Airdrie would be great, but problem is, I cant make it to callbacks at the hospital from Airdrie in 45 minutes. The person on the table could die from their heart attack. And there is no greater privilege than helping a person survive a heart attack. So that housing option doesnt work.

So, realtors and idiots, price your homes so that people can afford them…if you dont, you may be quite pleased when you are forced to take them off the market to wait, or worse, you have to drop them to what they are really worth. Wait and see. And enough crap about the renting droppage of price…yes you cant take the house with you when you are dead…but who wants to rent forever?

#93 Wesley Moxam on 09.16.08 at 9:56 pm

@Ron (#31)

$200k homes in Barrie vs. $800k homes in Victoria(http://tinyurl.com/6pjguh) is hardly a balanced comparison.

How about Barrie(http://tinyurl.com/5hcwon) vs. Kelowna(http://tinyurl.com/69c93a) instead?

Or Oakville (http://tinyurl.com/62cjaw) vs. Victoria(http://tinyurl.com/6pjguh)?

#94 Brittanny on 09.16.08 at 10:17 pm

y3maxx – Hoping for huge price drops in real estate?

We are there now.

#95 $fromA$ia on 09.16.08 at 10:52 pm

Article to #81

“We know with recent price increases, affordability is a question,” said John Hrynkow, president of the Canadian Home Builders Association. “Any type of help a first-time buyer can get can make the difference between them either making the purchase or just not being there.”

What a pile of crap. If the buyers just arent there, than thats good. Let the market correct already.

Harper, your a JACKASS.

#96 The Tallyman on 09.16.08 at 11:45 pm

#75 Dawn said:

“Not only the lenders, but the builders are dropping prices. In NW Calgary, this place was for sale last summer at $695,000. We toured it, it’s nice, but maybe worth $280k.
Now you can rent it (smokers and pets allowed, we’re not picky, it’s brand new!) for $2k/month.”

Dawn, I notice a lot of rental ads with the pets welcome sign.
Hope landlords of these brand new properties realize what they are in for!
Replacing carpet/flooring… is costly and in many cases
you can never get the stench out.

The wife & I went to see a 3 yr old condo last Saturday and didn’t even make it inside the front door.
The cat urine odor was unbelievable, we did an about face and got out of there pronto.
(OK you guys, I know what you’re gonna say about the stench… but I swear I still had my shoes on (LOL)

Hope anybody considering renting in the hard times ahead think hard about protecting their investment.

One of these pristine houses or condos can be ruined in just a few days in the wrong hands or paws.

#97 kc on 09.16.08 at 11:50 pm

garth, can you ask for answers about this nagging “hidden” signing of this agreement? you are still running, and I feel strongly that this article needs to come up in main stream political election talks.

thanks

full article http://www.canada.com/topics/news/story.html?id=403d90d6-7a61-41ac-8cef-902a1d14879d

Canada, U.S. agree to use each other’s troops in civil emergencies
David Pugliese , Canwest News Service
Published: Friday, February 22, 2008

Canada and the U.S. have signed an agreement that paves the way for the militaries from either nation to send troops across each other’s borders during an emergency, but some are questioning why the Harper government has kept silent on the deal.

Neither the Canadian government nor the Canadian Forces announced the new agreement, which was signed Feb. 14 in Texas.

The U.S. military’s Northern Command, however, publicized the agreement with a statement outlining how its top officer, Gen. Gene Renuart, and Canadian Lt.-Gen. Marc Dumais, head of Canada Command, signed the plan, which allows the military from one nation to support the armed forces of the other nation during a civil emergency.

#98 The Tallyman on 09.17.08 at 1:19 am

#63 Calgary_rip_off said:

“I wouldnt wish any problems on those persons who purchased at the peak. A person cant blame them for wanting to not throw their finances away on rent.”

Totally agree with you,
I know I’ve shot my mouth off in moments of anger and misplaced the blame on young buyers, but I have to admit I’m wrong on this.

Many of these buyers really had no choice.
In Calgary for example, many had their rents tripled or quadrupled.
Having rents go $600 to beyond $2000 a month during a time of little vacancy left buying an overpriced dwelling the only option.

Calgary’s failure to control rent either forced people into the R/E feeding frenzy or onto the street.

Calgary’s response to renters in dire straits was to only allow landlords to increase rents once per year…
But no limit on what that increase might be.
And this useless rule came too late in the game.

Funny how the inventors of this real estate fiasco still believe that all we need is for people to keep buying.
Even today Harper throws out a tax break to sucker in new buyers.

So yes,
many bought at peak but many of those bodies were exploited, manipulated & used to fan the flames of the insane real estate market.

Many only bought because they needed a place to live where they could have control over the portion of the paycheck that goes to housing cost.

So to anyone I prejudged or offended especially
young people I apologize for shooting off the mouth.
These are ugly times to be caught in.

If anything these last couple of days have increased the need for re examination.

#99 Silvia on 09.17.08 at 1:56 am

In the new home market, the rate of price growth in July/08,rose by 0.1 per cent on a monthly basis, according to a report by Statistics Canada.

The Greater Toronto Area (GTA) average price increased one per cent, to $364,886 when compared to last August’s figure of $361,890. Compared to the $338,192 figure recorded two years ago though, the average GTA has increased eight per cent.Toronto Real Estate Board President Maureen O’Neill reported at 4th Sept/08.

Look at the best growth over 35%-48% from Jan/2005 to May/2008 in GTA West for Detached Houses:
Oakville W-21(avg.price $718,421) Aug/2008,
Bolton,Caledon-W28(avg.price $563,321) May/2008, Burlington W-25 (avg.price $506,692) Aug/2008,
Georgetown W-27(avg.price $419,137) May/2008,

So I can’t see any problem in GTA(West) RE Market! Nobody likes to live in Toronto anymore, but GTA West has potential for 20% growth in the near future.
And even now when is the worst period in RE Market still we can see over 2% avg.growth in GTA West.

#100 Muhamed on 09.17.08 at 2:23 am

The Toronto stock market is very close to hit the bottom
about 11,500 points. Than will see recovery and again high volumes on the stock market.
About RE Market in Canada,I think we can see further decrease of prices between 5% to 10%. Because Central Bank of Canada for sure will drop interest rates for 0.25% in October/08.

#101 Noz on 09.17.08 at 3:05 am

Be honest…you are all renters on this blog site…or are recently sold, now renting… and are here bashing as to your hearts delight, hoping for that huge price drop in real estate.

Why not? Do you think sellers watching their homes make them magic money were sitting around with bleeding hearts for the next idiot who’d come along and make them rich?

Besides…why should I shed a tear for any A) dumbass who got shafted by a broker/realtor/loan agent or B) any crook who knew what he or she was doing and tried to make fast money or C) these idiots who are totally screwed now because they took stupid risks and now feel entitled to walk away?

I feel good about saying payback is a bitch…and I hope they get whats coming to them.

Let me make one thing clear…I have no problem whatsoever seeing good, heard working, honest people get ahead in life.

But when hard working, responsible people like myself do the right thing, and then get screwed by a bunch of greedy fraks who think buying a selling RE is a game, to hell with them. They need to hit the ground chin first and then have their teeth ground down for the next 5-10 years.

No remorse. And to add insult to injury, we have to bail these pieces of shit out now?

May the bashing continue…

#102 mike on 09.17.08 at 5:36 am

Lets be clear folks… Nobody with even a modest amount of credentials believes that the turmoil on wall street is over… Poor US taxpayers got scammed again with the loan to AIG…. Whats the point of a free market system if companies can’t fail. Nontheless this is mere shoring up of the levis till the election in US is over. Canada and world will feel this shortly… As early as january… Maybe sooner

Toronto RE is busting at the seams with listings.. I get 6 -12 per day from my agent. Prices…. Still very high but stuff is not selling. Condos are busting in volume too although I am not in that market. The SFH should come down in price dramatically by years end. Spring will see the biggest price drops as those that did not sell fall/winter stay on the market.

#103 Stephen from Toronto, Ontario ,Canada on 09.18.08 at 5:35 am

Part 2:

At this point we now know how the US Government incurred its first $ 2 trillion dollar debt. By 1987 the bull market led to a real estate bubble in Japan that threaten to implode. The growing US trade and budget deficits caused foreign investors to be concerned that the Washington would have difficulty in paying back what it owed. So they stopped buying US T-bills unless a better interest rate was offered. Short term deposits or “Hot Money” fled by going to better investments.

On January 5, 1987, The OMB presented Congress with the first trillion dollar US budget. And the government debt stood at $2,218,428,901,299.50(National Debt, 1987, pp35) The total national indebtedness (includes 2.3 trillion in govt debt, 1.5 trillion by corporations, 1.8 trillion in mortgages, 600 billion in credits and 300 billion in uncollected third world debt) is $7, 871,700,000,000.00(National Debt, 1987, p25) As of September 2008 it stands at $88 trillion.

From January-September 1987, foreign governments bought $70 billion. They became upset over taking more IOU’s resulting in inflation due to too much money in the economy and raised interest rates. The Federal Reserve Board followed suit. In early October the US Government threaten to drop rates to punish Germany’s Bundesbank decision to raise its interest rate. The concern of a fall in the price of the dollar led to a panic on October 19, 2007( National Debt, 1987,pp14-15)

Speculation about the cause of the crash dominated government, media and academic circles. President Reagan set up the Brady Commission to investigate the event. The 1988 report led the Reagan Administration to implement mechanisms to strengthen the SEC, and allow stock exchanges to shut down to prevent crashes.

By 1989 the new president, George Bush had to deal with the $600 billion Savings and loan Crisis, growing inequality in the country and a slowing economy.

In 1990 the Tokyo Nikkei-Dow crashed causing a 50% drop of real estate values with an estimated value of between $16-20 trillion. The economy never really recovered since it has experienced a 17 year depression. With trillions locked up in the Japanese Post office, the government has borrowed that money (at a central bank rate of 0%)to maintain full employment through infrastructure projects and retail-office development.

The economy slowed in 1990 due to the Japanese stock market crash, the S&L crisis, declining productivity and high interest rates the 1991-92 Recession was referred to by media and academic experts as someting close to a “mini-depression”. The 1991 Gulf War in Iraq probably allowed the economy to recover faster than normal.

The election of President Clinton in 1992 and in 1996 resulted in a deregulation of the financial markets that may have set the stage for the current crisis. Many Americans believe that the Clinton Administration left the government with a $500 billion budget surplus. New information by the US Congressional Budget Office suggest that the savings were projected if the government stayed the course after November 1999.

In the last year of the Clinton Administration, Senator Phill Graham of Texas (R) help spearhead a bill called (i’m not sure of the
exact name?) the Commodity Futures Modernization Act that essentially deregulated the gigantic derivative market. When lawmakers tried to slap on tighter regulations and enforcement such have having annuties to back these new financial products, lobbyist pressured the government that it would restrict activities and hurt profits. Secondly the Glass-Stegal Act of 1933 was repealed allowing commercial banks, investment banks and insurance firms to buy shares in these businesses.

In the year 2000 the dot com bubble burst resulting in internet firms declairing bankruptcy, huge financial losses in technology stocks. The Dow-Jones plunged thousands of points between January 2000-March 2002. The attack on the WTC I&II in New York City on September 11, 2001 accelerated the decline in confidence in the economy. The Federal Reserve Board under Allan Greenspan dropped interest rates 11 times to inject liquidity in the economy to compensate for the loss of $8 trillion in wealth.

With the recovery taking effect by 2003, the liquidity injected by the Federal Reserve led to a growing real estate bubble. On an interesting note, the total amount of derivatives in this period was estimated to be about $85 trillion when the world economic output was $53 trillion.

During the same time the US was rapidly becoming a consumption economy. Manufacturing was being decimated by foreign competition who can produce cheap products with cheap labour. There was little interest by the Bush Administration to invest in cities, infrastructure, health care, housing, alternative energy and restructuring the economy for a post industrial high technology era.

The companies that are in trouble or have gone bankrupt in the last 6 months (Bear-Sterns, Bank of America, JP Morgan-Chase Manhattan, Countrywide, Citycorp, Wahmu, Wacovia, Fannie Mae and Freddy Mack, Merril Lynch, Lehman Brothers, Goldman Saccs, Morgan Stanley and AIG) were involved in the subprime morgage mess by lending poor Americans, adjustible rate mortgage (ARM), but most importantly packaging credit default swaps (CDS), structured investment vehicles (SIV) and collateralized debt obligations (CDO). Its like taking your house and breaking it into 1000 pieces, package it with AAA, BBB and CCC mortgage debt, corporate debt and other investments. Then you sell it to rich investors, institutions, banks and hedge funds. If a small amount of these mortgages default you are ok especially if you have a CDS. However, if too many homeowners fail to pay their mortgages the leveraged investment begins to fail because the payments do not cover the principal. All these firms did was to take say $30 billion and leverage (issue securities) it 20x to have $600 billion. You insure the initial $30 billion and issue CDS (insurance) for the rest. In a growing real estate market the risk of default is small so you may never have to pay out a CDS.

This is the kind of nonsense that led to the Bear-Sterns and Lehman Brothers bankruptcy. In the last two days, the media has accurately reported that the Lehman insolvency is a $800 billion-1 trillion default of which most of the money is owed to Asian and European banks. AIG is different in some ways because it operates in 130 countries, employs 1116,000, and underwrites insurance in almost every industry around the world. It has $1 trillion in assets, but issued trillions in derivatives and credit default swaps it simply cannot cover. If it paid out losses in mortgage backed securities it would be too weak to cover additional loses in other industries. The $85 billion loan is at 8% so it will lead to AIG liquidating assets to pay it back. With $25 billion in real estate it will be a tough sell. The biggest concern by some Wall Street analysts is that all these companies are selling assets of declining value and reducing liquidity at a time when credit is contracting and banks are not lending to each other-See Part 3 (final) tomorrow

#104 Stephen from Toronto, Ontario ,Canada on 09.19.08 at 6:17 am

Part 3:

So what has been happening in the US economy over the last 27 years and why has the credit crisis brought the global financial system to the brink of collapse over the last 5 days?

In October 2007 an investment group, McAlvany.com hosted a seminar on the state of the US economy. The video hosted on YouTube, paints a very gloomy picture for the future:

1. Overproduction in China which is flooding the world markets with as many cheap products as it can afford.

2. Two billion low wage workers in China and India are entering the global economy. This is driving down the cost of labour overall.

3.US factories have to move overseas to take advantage of the low wage labour. They simply cannot pay high wages to its domestic workers and stay competitive.

4.US middle class is being eliminated. High paying white and blue collar jobs are being replaced with low paying retail/service position in places like wallmart and McDonalds.

5.Business input cost are going up while prices for products are dropping due to global competition and the internet.

6. Massive US consumption is keeping the economy afloat.

7. US Government and Federal Reserve have injected massive amounts of liquidity(increasing it by 50%) resulting in a stock and real estate bubble that could collapse.

8. Foreign dollar holders are getting nervous due to a US government budget deficit of $700 billion and a trade deficit of $880 billion for a total of $1.5 trillion. They are also concerned with a low interest rate, weakening stock market and economy.

9. In order for the US government to maintain consumer consumption and prevent the collapse of the world economy, the Federal Reserve has injected trillions of dollars of liquidity in the system.

How much is the US is indebted. According to http://www.McAlvany.com, total government and private debt is $44 trillion. When you add unfunded liabilities the number increases to $88 trillion. It took 180 years for the US government to reach it first trillion debt by 1980. It took 27 years for the national debt to grow from $1 trillion to $8.8 trillion (an 880% increase).
US housing and mortgage debt grew from $4 trillion to $8.7 trillion. When you add this figure to commercial real estate it grows to $13.5 trillion (an increase of 5 trillion, four years ago). Household and credit debt is at $12 trillion and growing 10x faster than household income. Approximately 1 million adjustable rate mortgages in 2007 and 1.7 million more will reset in a-bout 30 days from today. In 2007 1.82 million people declared bankruptcy due to mortgage default. On average 1.6 million people have declared bankruptcy over the last 3-4 years. Real estate defaults and foreclosures will continue for the next 3-5 years.

David Walker, who was formally chief accountant at the US General Accounting Office (GAO) in 2007 indicated that total us indebtedness was estimated to be $58 trillion. The addition of unfunded liabilities in social security and particularly health care with emphasis on the 2005 prescription drug bill pushed the cost to $46 trillion to the year 2040. To cover this part of the bill you need $8 trillion invested in treasury bills at market rates right now. Presently there are no funds invested at the moment. The cost is about $411,000 per household. Lastly, inflation is averaging 8-10% and unemployment is about 9% with 600,000 jobs lost in 2008 so far.

The financial crisis in the us capital markets was a result of excessive deregulation, the rise of esoteric financial instruments such as junk bonds, derivatives, credit default swaps and a economy that relied on debt to fuel consumption as opposed to savings to invest in industry, social welfare and new technology.

The collapse of Lehman Brothers last weekend and its bankruptcy on Monday led to a trillion dollar default, causing loses in Asian and European commercial banks. The purchase of Merryl Lynch by Bank of America was an attempt by the corporation to expand underwriting operations to India and China. The last two independent firms, Morgan Stanley and Goldman Sachs have experienced declines in stock prices resulting in speculations about their survival.The downsizing of employees at both firms total 56,000. Wall Street has lost at least 154,000 jobs in finance this year.

On Tuesday September 16, 2008, the loss of Lehman Brothers caused stock prices in commercial banks and insurance companies to fall. AIG was teetering on the verge of insolvency as well as Washington Mutual (Wahmu) the largest mortgage bank in the country.
Jim Cramer of MSNBC Mad Money went on the show Word on the Street in New York and in his most serious and concerned tone stated that “AIG CANNOT BE ALLOWED TO FAIL”. He stated that AIG underwrites insurances in 130 countries around the world, has $1 trillion in assets and has complicated links to financial institutions around the world. An AIG insolvency could have triggered a real stock market crash and caused a meltdown of the global financial system in the trillions.
Later that evening the US Treasury Dept and the Federal Reserve arranged an $85 billion loan package for AIG.

On Wednesday September 17, 2008 the Dow Jones fell 450 points and the Toronto Stock Exchange dropped 500 points due to the nationalization of an insurance company and a loss of value of its share price. Once again commercial and investment banks and industries across the board faced declining stock values, loss of confidence and a flight to hard assets.

There were fears from traders and investors that more institutions could fail because the credit crisis has stopped banks from lending from each other, the inability of financial institutions to get rid of level 3 assets and the reluctance of investors to buy them.

The situation was so serious that the Federal Reserve Board injected $180 billion at 3am Wednesday morning, $50 billion at 8am and another $50 at noon hour totaling a whopping $280 billion. Add to that fact that central banks around the world probably pumped in over $700 billion to keep the economic system afloat to Thursday Morning.

At present the Federal Reserve board has spent $900 billion bailing out these financial institutions. It is almost out of money. The US Treasury Department is now floating T-bills to raise funds to give to the FRB. The interest of the Bonds were so awful that the interest rate on 3month paper was .01% We could see a treasury default in the near future as the dollar will be
lose value. Since there are fewer players in the government debt market, taxpayers will have to pay higher interest to borrow money to pay T-bills

There are fears that between 1000-3500 banks would close in the next 4-12 months. The Federal Deposit insurance Corporation, (FDIC) only has $45 billion to cover $7 trillion of deposits for 300 million persons plus foreign investors. Approximately 36% of deposits fall under FDIC rules. They are obligated to cover $4.5 trillion of deposits, but are badly underfunded. For example to prevent a run on Wahmu it would have to tap its $70 billion Treasury line, all of its assets to cover a 143 billion run on the bank. Even then it would be $28 billion short..

Right now (Friday morning at 5:10am) Democratic and Republican law makers are working closely with Secretary Paulson of the Treasury and FRB Chairman Ben Bernake are working on a legislative package to fix the financial system. It may be similiar to the Resolution Trust Corporation that cleaned up the $600 billion S&L crisis in 1989 during the Bush Administration.
It could involve trillions of dollars and may include a rescue package for Wahmu bank and possibly Bank of America. The assets collected would be repackaged and sold. This would also prevent the drop of values in mutual funds around the world.

A more radical approach is to lessen the impact of the $62 trillion credit default swaps (CDS). A bank of international Settlements is being set up to contain the CSS. Once contained it could be declared bankrupt and sold at maybe 10% of its value. The US government through the SEC could put strict rules on how these financial instruments are sold and funded by annuities. If this does not work we could experience hyperinflation if the US govt and the Federal Reserve Board tries to monitize the debt by printing huge sums of money or allow a massive deflationary cycle that could last a decade . For example, the Federal Reserve Board has stopped publishing M3 and when Bear-Sterns became insolvent around March 11, 2008 it stood at 13.5 trillion notes in circulation.

In Canada, the main stream media is trying to convince people that we are safe and wont experience what the US is going through during the credit crisis. According to Eoin Callan of the Financial Post, his article (that was posted on Wednesday Sept 17, 2008) indicates that the near insolvency of AIG has Canadian banks exposed to CDS to the tune of $800 billion. The numbers for each of these banks are staggering. Royal Bank-$300 billion; Toronto Dominion Bank-$197; Bank of Montreal-$118 billion; Scotiabank-$110 billion and CIBC-$86 billion. They form the financial guarantees that provide insurance if value of position fails.

Canadians who have read through this blog are aware that the credit crisis that Garth warned about in his book Greater Fool is starting to affect us. We have a slowing economy in Ontario with a loss of 400,00 manufacturing jobs over a the last 5 years. A real estate downturn is affecting property values in Edmonton and Calgary. Overpriced homes (with some in the millions) are going unsold in Vancouver. There is a growing inventory of 60-80,000 homes nationwide on the market to be sold. Homes and condominiums in the GTA are overpriced by 50%. It has become harder to borrow money, obtain a line of credit and get a business loan across the country. Private sector firms have slowed their hiring while the public sector is increasing to create stable long lasting jobs in urban centres. The average wage in the country is $35,000 and has not grown in a decade. Canada has a 0% net savings rate. If you think the credit crisis is not going to affect Canada feel free to ignore the warning sign at your own peril.

If Garth Turner’s forecast are right and that we are 11 months in to the credit crisis, if banks start to fail because they have to cover the CDS, will the Bank of Canada come to their rescue? Maybe we should ask the Prime Minister Stephen Harper if the Conservative government has a plan? I dont think he or the other political leaders have one.That means that we are on our own and must prepare now for the approaching financial crisis!