by Calculated Risk on 1/02/2010 08:18:00 PM

Here is Professor Krugman's presentation to the Allied Social Science Associations this coming Monday: CRISES

Krugman discusses several currency crises and compares them to the current U.S. deleveraging cycle. Here is an excerpt (picking up near the conclusion):

Plunging prices of houses and CDOs ... don’t produce any corresponding macroeconomic silver lining. ... This suggests that we’re unlikely to see a phoenix-like recovery from the current slump. How long should recovery be expected to take?

Well, there aren’t many useful historical models. But the example that comes closest to the situation facing the United States today is that of Japan after its late-80s bubble burst, leaving serious debt problems behind. And a maximum-likelihood estimate of how long it will take to recover, based on the Japanese example, is ... forever. OK, strictly speaking it’s 18 years, since that’s how long it has been since the Japanese bubble burst, and Japan has never really escaped from its deflationary trap.

This line of thought explains why I’m skeptical about the optimism that’s widespread right now about recovery prospects. The main argument behind this optimism seems to be that in the past, big downturns in the world’s major economies have been followed by fast recoveries. But past downturns had very different causes, and there’s no good reason to regard them as good precedents.

Living in a crisis-ridden world

Looking back at U.S. commentary on past currency crises, what’s striking is the combination of moralizing and complacency. Other countries had crises because they did it wrong; we weren’t going to have one because we do it right.

As I’ve stressed, however, crises often – perhaps usually – happen to countries with great press. They’re only reclassified as sinners and deadbeats after things go wrong. And so it has proved for us, too.

And despite the praise being handed out to those who helped us avoid the worst, we are not handling the crisis well: fiscal stimulus has been inadequate, financial support has contained the damage but not restored a healthy banking system. All indications are that we’re going to have seriously depressed output for years to come. It’s what I feared/predicted in that 2001 paper: “[I]ntellectually consistent solutions to a domestic financial crisis of this type, like solutions to a third-generation currency crisis, are likely to seem too radical to be implemented in practice. And partial measures are likely to fail.”

Maybe policymakers will become wiser in the future. Maybe financial reform will reduce the occurrence of crises: major financial crises were much rarer between the end of World War II and the rise of financial deregulation after 1980 than they were before or since. Meanwhile, however, the fact is that the economic world is a surprisingly dangerous place.

by Calculated Risk on 1/02/2010 04:53:00 PM

Lauren Beale asks at the LA Times Money & Company blog: 2010: The year of the real estate auction?

Auctions gained traction in last year's down housing market as a way to sell real estate -- in all price ranges. It's a trend I expect to see more of in 2010, and not just for bank-owned homes.
...
Why I'm expecting to see more auctions in the mainstream: It gives the seller a defined time frame; if the house doesn't meet the "reserved price" the seller had in mind, then it can be always listed later; and the idea is still novel enough that the marketing is an attention-grabber for the house.

Ms. Beale features a high end home in her post (a very high end home!)

I think short sales will be a huge story in 2010 with the recent push by the Obama Administration. And I also expect short sale fraud be to be huge story (related party sales, under the table payments to sellers, and more)

by Calculated Risk on 1/02/2010 11:59:00 AM

From Roger Vincent at the LA Times: Retail space opens up as big chains shrink

Amid a still-tepid economic recovery, big retail chains are expected to continue closing their less productive stores and retrenching on expansion plans. But at the same time, others will be hurtling into the breach to take advantage of falling rents and vacancies in neighborhoods they couldn't get into a few years ago.

"The prediction for next year is more re-sizing and relocating of retailers," said real estate broker Richard Rizika of CB Richard Ellis.

There are almost 100 empty big-box retail stores in Los Angeles County, according to a study by Rizika. They have a combined total of 4.5 million square feet, or about 78 football fields' worth of vacant space for rent or sale. Most of that came from liquidated businesses Circuit City Inc., Mervyns and home furnishings chain Linens 'n Things Inc.

The vacancy rate is expected to rise further in 2010, and this will continue to push down rents - leading to more distressed retail properties - and also less investment in Multimerchandise shopping structures.

Reis is expected to report the U.S. mall vacancy rate for Q4 next week. Reis reported in October that the strip mall vacancy rate hit 10.3% in Q3 2009; the highest vacancy rate since 1992.

"Our outlook for retail properties as a whole is bleak," Victor Calanog, Reis director of research, said. "Until we see stabilization and recovery take root in both consumer spending and business spending and hiring, we do not foresee a recovery in the retail sector until late 2012 at the earliest."

by Calculated Risk on 1/02/2010 08:43:00 AM

Another "Lost Decade" story, this time in the WaPo by Neil Irwin: Aughts were a lost decade for U.S. economy, workers

It was, according to a wide range of data, a lost decade for American workers. ...

There has been zero net job creation since December 1999. ... Middle-income households made less in 2008, when adjusted for inflation, than they did in 1999 ... And the net worth of American households ... has also declined when adjusted for inflation ...

Click on graph for WaPo page in new window.

This graphic from the WaPo shows job growth by decade, change in GDP, and percent change in household wealth for every decade since 1940.

Hopefully the '10s will be much better.

by Calculated Risk on 1/01/2010 09:15:00 PM

From Peter Goodman at the NY Times: U.S. Loan Effort Is Seen as Adding to Housing Woes

The Obama administration’s $75 billion program to protect homeowners from foreclosure has been widely pronounced a disappointment, and some economists and real estate experts now contend it has done more harm than good.

... desperate homeowners have sent payments to banks in often-futile efforts to keep their homes, which some see as wasting dollars they could have saved in preparation for moving to cheaper rental residences. Some borrowers have seen their credit tarnished while falsely assuming that loan modifications involved no negative reports to credit agencies.

The article covers a number of topics, but I think these are key:

For the people that qualify - and aren't deep underwater on their homes - HAMP is a fine modification program. However there is no way this program will "reach up to 3 to 4 million at-risk homeowners". I noted HAMP would probably be a disappointment when it was announced early last year:

This probably leaves the homeowner far underwater (owing more than their home is worth). When these homeowners eventually try to sell, they will probably still face foreclosure - prolonging the housing slump. These are really not homeowners, they are debtowners / renters.

Treasury is terrified of a flood of new foreclosures. I believe that is why the Treasury issued a directive last week extending the trial modification period to at least the end of January.

There are several possible options:

More short sales. Short sale activity is already increasing, and the Treasury introduced the Foreclosure Alternatives Program to help with short sales and Deed-in-Lieu of Foreclosure transactions. However servicers are very afraid of short sale fraud (non-arm length transactions), and short sales are also distressed properties - pushing down prices - something Treasury is desperately trying to avoid.

Encouraging servicers to write down principal. This would be very expensive, and if paid for by taxpayers - it would be very unpopular because it would appear to favor speculators over the prudent. This is what Mark Zandi, chief economist at Moody's economy.com is supporting:

Mr. Zandi argues that the administration needs a new initiative that attacks a primary source of foreclosures: the roughly 15 million American homeowners who are underwater, meaning they owe the bank more than their home is worth.
...
Mr. Zandi proposes that the Treasury Department push banks to write down some loan balances by reimbursing the companies for their losses. ... “We want to overwhelm this problem,” he said. “If we do go back into recession, it will be very difficult to get out.”

Converting homeowners to renters. This is something Dean Baker suggested, and is kind of a Single Family Public Housing program. This would avoid the flood of foreclosures, and the banks could sell the homes over several years.

None of these programs is especially attractive, so I expect more delays and "can kicking" that will keep foreclosures elevated for years.