Yesterday I listened to the News hour on PBS. I like doing that but often do not get a chance. I tuned in right in time to listen to the part about the economic crisis. I figured hey, we are going to blame this all on housing but why not listen?
Well it was interesting and there were 3 areas they pointed to. I am listing the areas and talking about them here.
1 The first was housing and they talked about slipping prices. We all know about this. Everything from the Lincoln Assassination to the rising price of milk has been blamed on housing. From an economic standpoint this price slip may make it harder for the more recent buyers who have to relocate to get out without being upside down. But all in all we have done the housing leg of the stool that holds up the economy to death here so NUF said!
2 The second issue was the price of oil.Well this was interesting as the price of fuel certainly effects our market. Heck it effects us when we are taking folks around !. The volatility in the market is starting to cause nervousness. When that happens people spend less. Fuel effects the size of homes people want to buy as well. It can effect choice on where to live(cold versus warmer areas). So the price of fuel and our wonderful governments handling of this situation is a real problem effecting Housing and the economy in general. I am not going to get into what I think we should be doing as people and a government about this issue as that is a blog in itself.
3 The third issue was the "Credit" crunch. This led Citi Group to go for liquidity and sell 5 % of it self to an Abu Dhabi group. This issue is less understood than the other 2. So let me talk about it a little. I am a financial institution and I have 1million dollars. That is a liability on my books so I lend it out. Now I don't have 1m dollars but I now have assets of 1m dollars. Suppose I lend it to another bank and they lend it out. Now the 2 banks have 2 million dollars in combined assets, BUT there is only really one million dollars and neither have it. Does your head hurt yet? Now lets say that ultimately the money loaned went into mortgage securities. The first guy needs money so he goes to the second guy and so on until we get to the guy who has a non performing asset and cannot pay. Everybody is in trouble. Not just the last guy.
You can see here that with a bunch of loans a whole lot of folks can be effected as the money moves from place to place and everybody calls it an asset. What the credit crunch is today is all the financial institutions report assets in different ways. So when Merrill Lynch says we got 20 billion in assets but need some cash , Citi group suddenly becomes concerned about lending. We saw Merrill revise upward significantly their exposure. Because the institutions don't knw what the assets are of the folks they want to lend to.
So what we have is a system right now that is nervous. It is nervous because the way they always do business takes a million dollars moves it around and gives abunch of institutions a million in assets on their books when there is only really one million to start. This system is fine unless somebody doensn't pay. When that happens the market scrambles for liquidity. The somebody in this case was the housing mortgage market. But this market is paying a bunch and is not the total problem. Remember there were banks all over the world effected by our crunch. Remember the million dollars every time it got passed it became an asset for everybody!
So what we have is a pretty serious situation. The mortgage problem created a situation where as Jerry McGuire would say " Show me the money" But while everybody has the asset nobody has the actual money to show.
Our housing problem will play itself out and October starts may be a sign that we are bottoming. But oil prices and the credit crunch don't get better with better housing numbers . These issues will effect us and be with us for a while.
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