Is there a light at the end of the tunnel?

[7:57] ..." into this -- a question number 2 well the story begins and housing market. And you could see the boom the bachelor and the bust in the housing market here. This is a very good measure national house prices this is the national. Five -- case Shiller index. Encompasses. About 70%"...

[13:10] ..." notified had to reset their first reset in -- seven that's when interest rates were still hot with the merger lower rates. To the increase in monthly payments was recent stint about 350 bucks a months"...

[19:59] ..." said oh my goodness this this is -- release quite serious in stock market Kate and keep skating. The panic. And what has agreed to some degree we're pass through the worst of it -- say"...

[27:46] ..." that. Person she does every morning is read the Op Ed page New York Times which is okay. Because she cuts -- one of the now -- environment that's being an actor read them for a go to sleep which is you know quite painful. But in the last three to four weeks she's now turned her attention to the business page into three New York Times business page first as opposed to -- she read the Boston Globe first but. She's in your country here. Which. It's a"...

[29:35] ..." lead retailing by six months of what was going on in the housing market. Six months ago saying something about retailing today in what's going on housing market today is giving you forecasts for retailing the next six months. You can see the implicit forecast is. A bit disturbing one"...

[1:47]" You asked about my book. To find out. But I'll tell you what year but August 15 just keep that in mind okay how bad is it. Well it's bad we're in net in recession deep recessions concede yet. Clearly in the job market we've been losing jobs since the beginning of the year the shows the monthly change in payroll employment from January -- seven through October of 8. We've lost one point two million jobs since the beginning of the year in my judgment we've been recession since late 7. Think when the -- the recession you'll probably be October November of -- 2007 so. Rarity a year into this economic downturn which. Just as point interest that's the average length of the post World War II recessions -- we're already there. The job losses are very broad based across lots of different industries it's now easier to list industries that are still hiring. And that would include health care. Broadly defined. Most of educational services job growth is slowing but still positive and educational services but K through twelve a lot of that of course is demographically driven. A little bit of defense. Some technology. -- energy. Which reflects the previously high commodity prices. But that's it. Every every other industry now is playing off and increasingly more aggressively into the last two months. Job losses have been well over 200000 and initial claims for unemployment insurance. At least through early November suggest. That we will see another couple 300000 jobs lost in November. Maybe even may even be higher than that so the losses are intensifying. One of the hallmarks of this recession. Is how broad based it is not only across industries and it also occupations. But across country this is our assessment of which states are in recession. That are red. Thirty states in all -- recession. It's is. Our judgment based on looking at a plethora of economic data jobs in. Measure industrial production and income retail sales various measures -- activity. Series veteran orange they're at risk of recession not quite there yet some moral. And in recession the skirted. It's not states North Dakota Wyoming maybe Texas that would be that's the strongest economy in the country what state is still expanding. Alaska. An axis of course the effect. Lingering effect of the previously I. Energy purchased -- that. You concede to very broad based on Internet. Post news I think one of the reasons why consumer confidence is so low in previous recessions the the recession through very regionally concentrated. And people could move by the you go from. Where they were losing jobs to where there were job opportunities. So for example in the last recession earlier in this decade. California was a mess that people could moved to Phoenix or Tucson or Portland organ. But there -- those options today it really is no place -- and I think people understand that and that's. Psychologically very very disconcerting very good the rotating. But the other hallmarks of this recession is. That. Itself being led by over leveraged consumers. Past recessions. Have been precipitated. By over leveraged businesses businesses took on too much debt in the good times. When conditions turned. That he had to lay off workers and cut investment that. Led to the bombs self reinforcing negative cycle characterized as a downturn. That's not the case this -- around most non financial businesses -- Had had pretty good balance sheets. Coming into all of us. The problem is really consumers. And you can see that consumers are also are under significant amount of financial stress this is. Data based on credit files but take a randomized sample -- files in the country has maintained by bureau Equifax at the end of every month. The lasted -- couple years were the last week of October sues the very timely data very accurate data. It shows that 860. Billion dollars worth of household liabilities were in delinquency or default as of the last week of October. In this data set that's approximately seven and half percent of all liabilities and loses. This is everything's his first mortgages second liens. Credit cards vehicle loans student loans consumer finance -- it's a very broad based. It's it's it's though is that well like -- liability side of that of the household balance sheet. You'll know then everything is jumping. No sign of any stabilization. Thirty day delinquency 169120. -- rising. Very rapidly. In its -- all product lines credit cards. You clones of course first mortgages and secondly it's nothing is they're partners no sign of any stability here. -- losing to that is. Credit quality or is eroding. Again everywhere across the country either the in all the MSAs. That we look at. 380 -- cross country not a single one is experiencing better credit conditions. There if you were stable. Is mark in North Dakota San Antonio Texas -- But that's every every NSA is experiencing big increases in on delinquency. How bad is it it's. It's it's very difficult situation that the economy's. Deeply in recession. How we get into this -- a question number 2 well the story begins and housing market. And you could see the boom the bachelor and the bust in the housing market here. This is a very good measure national house prices this is the national. Five -- case Shiller index. Encompasses. About 70% of the nation's housing stock. You can see it is an index so it's equal to 100 at the start of the decade. House prices stood doubled essentially the first half of the decade peaking in the first quarter 2006. There are many reasons for the the boom in the bubble so many that one could write a book and as I said I did. And that's last time -- the book a promise. -- I tend the last word in in July it was immediately out of date so that new material. At a couple chapters. -- still -- the reasons and just down to three. Just for brevity sake. Reason number Ryan the process of mortgage securitization. Is fundamentally flawed broken. That's the process of taking global investor dollars turning them into mortgages for US homeowners. But no one in the process was responsible for making sure that. Loans that were being made good loans. And that includes everyone in the process -- the lenders mortgage lenders. The investment banks the package the loans the rating agencies that rated the securities. The regulators. And the investors themselves who didn't do either due due diligence Nolan nature. Was was it empowered with the responsibility of making sure that the long -- good ones and so millions of bad loans from eight. Second reason lack of regulatory oversight. This was that that the -- part of this decade. This is the apex of deregulation. Which began in the Reagan administration. Which at that time probably was a very good thing and -- system is arguably over regulated. The stifling -- litigation is leading to higher cost for financial products. Minority groups and -- inch groups couldn't get access to credit. And whose whose could that the system is being deregulated. But by the -- part of this decade at the bubble the pendulum had swung too far in there was very little if any regulatory oversight. In lenders for setting up corporate structures so that they could avoid any kind of regulation and as a result. The engaged in very gracious kind of lending activities and of course resulting in the mortgage problems are experts right now. Through reason. I Hoover's you know out of -- without ever confidence. Prices house price is rising strongly. Beginning early in the decade. To get to three years of very strong house price growth people start forecasting with the ruler. Expecting strong price gains ad infinitum into the future. Which you buy into that kind of forecast and you do silly things you flip homes you don't. Great properly you don't regulate you know you to do things. So Hoover certainly as part of this that's how we got the bubble. We're now the best at prices are down there over 20% from their peak and you can see that they're back to where they were. In 2000 force and anybody who bought a home and didn't put any money down. Or put very little down is now under water meaning that the a value of their home is less than the mortgage debt they -- on their home. Which is a necessary condition Ford default notice fishing conditioning needs some kind of pursuit pertaining event lost job on it and it increased unexpected increase. Expenses. But it it's a necessary condition and we now have. Millions of homeowners out there that. Our underwater. Are the best and housing values has precipitated -- hate -- mortgage crisis. Which you can see here of first mortgage loan defaults have gone skyward. This again is based on credit file data. I don't think they got yet to regaining -- know. As of October there were two point nine million loans. In default which is the first step in the foreclosure process. 30609120. -- notice of default. That's what this data showing in the foreclosure process starts which varies quite a bit across country. Outrage when a foreclosure was only six that was early payment to -- those are the folks that we're flipping. When the market turned in a six they realize it could make note a block the that is literally turned to keep back to land without making -- a mortgage payment so the defaults. Came on unexpectedly quickly very surprising. 7 was the second wave that was the sub prime reset. Who five sub prime loans. These are 228 loans two year fixed. Than. Turning into six month -- were adjustable rate mortgages. So all the loans originally notified had to reset their first reset in -- seven that's when interest rates were still hot with the merger lower rates. To the increase in monthly payments was recent stint about 350 bucks a months that they -- 1200 bucks months and 1550. Bucks a month. That was too much financially untenable. Resulted in in default. Course Rachel and now people are hitting resets that that really isn't as big an issue the real issue now. Is wait three which began at the start this year and that is the negative equity all the homeowners that are the millions of homeowners that are under water. Combined with rising unemployment. Which is precipitating -- the necessary condition in underwater homeowners and eight a series of fishing conditions for default and rising unemployment. And you can see it's the very significant foreclosure problem. This is. Undermine the financial system. The losses. On these mortgage loans. It's undermining the system's capital base. You see here my expectations for losses as he needs some is going to have to digest. On NASA's that it originated from 2004. Q one through 2007 Q forms in billions of dollars. A broken down DO Los estimates in two banks. That's the first bar. It's everyone from JPMorgan to. Two it suntrust -- financial would be hedge funds pension funds insurance companies government that would be female a Freddie Mac in the FHA he took the bars -- believed to about one point three trillion dollars. This feels low. There are few other folks that do these estimates the IMF World Bank. Couple recommendations. And their -- now higher than my estimates that but some burnout ranging up to two trillion dollars -- losses. I just you context there's 27 trillion dollars in credit market entrants outstanding so. I get a sense of the magnitude of some of the losses. -- the -- probably represents losses on residential mortgage assets its loans and securities. You can see I like it there in the back of the envelope calculation in the chart. Estimating that there were roughly fifteen million sketchy loans made. A during the boom and bubble d.s are loans that are high risk of default 3% those who go through the entire foreclosure process. -- defaulting goes through to foreclosure sale so that six million moms. That the foreclosure sale of the mortgage owner will lose roughly half the mortgage balance so. Most the the average mortgage balance origination was say 200000 dollars. We'll get back -- K in the foreclosure sale. After -- all the expenses involved in recorder. You can see the total losses. Are roughly 600 billion. The good news is that the right doesn't financial system. Are just about 600 doing a little overs of the system has done a pretty good job marking its residential assets in my view to. A reasonable estimate of expected loss. Unfortunately. Other Rosser -- in the system has yet to fully write down. Of those assets. And you can see. The include consumer loans that's vehicle loans and credit -- primarily. Commercial mortgage loans which now is causing all kinds of -- system. Some -- some commercial mortgages are already defaulting very rapidly. That's on everything from apartment buildings to retail space to hotels. Office space corporate debt that would be junk bonds and corporate bonds yellows. Seen island so treatment. But it's hard to pinpoint exactly when the financial crisis which began really in the -- said in. Turned into a financial crisis a financial panic. I think. Panic describes. What we've been in since early September there's an element of the fear panic irrationality to a if I had to identify the event he would be the day that the Treasury Department nationalize Fannie Mae and Freddie Mac. -- now arguably that was a reasonable thing to do. There. Sure which treasury in effect got into the balance of these institutions to look they thought they were barreling towards insolvency. So but when that when they when they did it I think -- crystallize in the minds of all investors that no financial institution was state. That every institution was in play in in in in fact the very next day after the nationalization nationalization occurred. Over weekend on that Monday Lehman Brothers was implied that the broker dealer. In Lehman's problem really wasn't liquidity the could avail themselves of facilities credit facilities -- established after the collapse of Bear Stearns. Really lose. They're probably was that there -- there counter parties didn't want to do business with them and if if they did business with them they wanted significant more significantly more collateral. So for example JPMorgan Chase required Lehman put up another five billion collateral to sperling indeed traipse through. Through JPMorgan. Course that was too much that. Push them towards bankruptcy. By the treasury decided this point 92. Save Lehman from bankruptcies that this was there -- line in the proverbial that the proverbial line in the sand they. You figured they couldn't be -- everybody in this would be pleased to. Make that point. Which at the time again might have been reasonable thing to do. But unfortunately there's collateral damage in most significant damage was to a mighty big money market fund that held Lehman paper. A ready market and the value that paper when they did they broke the buck that means that the value their assets the problem with the of their investors. And that I think it was psychologically too much for mom and pop investor who thought. Who think that it and I think that money market funds are one step removed from the mattress and you're telling them they're not. Induces. Focuses on it now and saw tremendous redemptions from money market funds almost immediately. And this is where the financial crisis and it. Jumped to the real economy. Because money market funds are key buyers commercial paper they own about 40% of all. A CP outstanding and commercial papers. A short term I use that big companies issued to finance themselves short run they needed to. And its inventory net exporters some music to make payroll. If they can't issue CP then -- can quickly. Bond and operational difficulties -- have to shut plants shut facilities. Those operations. Equity investors said oh my goodness this this is -- release quite serious in stock