If you want to tell people the truth, make them laugh, otherwise they'll kill you.
-- Oscar Wilde
As previously reported (January 22nd “Double-Dipping), there is renewed interest in what we have been writing about. Actually, what has currently been written about is tame by comparison to what is going to happen. The median drop in housing prices across the country is roughly 30% off the peak. In reality, many areas have experienced reductions in housing prices of nearly 60%.
In the Hamptons, property values have dropped an average of 50% from the peak in 2006, with the exception of certain, very limited “trophy” properties. Essentially, this means that the “fool and his money are soon parted,” theory is alive and well. Investors are still on the sidelines and starting to drink heavily. Commercial property continues to drop.
While prices of condos have maintained their “value” in Manhattan, renting is the new buying. Prices have temporarily stabilized on sales but have suffered from lack of financing. Neither is the case in the outer boroughs.
The Trump SoHo property, a condo-hotel, is entering foreclosure and suffers from a multitude of lawsuits from buyers who claim they were misled and want their money back. This particular development is an indication of the overzealous fantasies about real estate and its imperviousness.
Of course, all of the above is really too optimistic. Few discuss the real El Grande problem, such as the Depression lurking around the bend.
If we limit discussions to housing and property values, the truth is that we will soon be experiencing a tsunami of foreclosures all across the country.
As a result of the “robo-signer” controversy which, basically, caught the banks with their pants down as they inspected the “irregularities” (translated=Fraud) in their foreclosure process. And, what was also exposed along with this problem is the fact that they may never have owned the properties in the first place. Establishing accurate title between the SIV’s (securitized investment vehicles) and the CDO’s (mortgage bonds) is next to impossible. Not even the bank’s foreclosure attorneys are sure that their clients own the properties that they seek to recover.
The next problem, aside from the fact that no recovery will take place until banks start to lend again, is the fact that municipal bonds may go the way of Free Speech in America. Down the toilet. It is not only in Russia that the government tries to silence journalists. Mainstream media is in severe jeopardy for all sides. Besides the Internet threat, the severe drop in advertising and pressure from the government to curtail criticism of its policies – have dovetailed to make publishers vulnerable.
The bonds that packed the toxic mortgage debt into CDO’s (which the prescient banks insured themselves against with CDS’s) are still held by Villages, Counties, States and Counties across America. And, these same municipal entities issued bonds in order to raise money for their bloated budgets – which counted on tax proceeds and transfer taxes for pay for everything from Police to Tax Assessors. Pensions are likely to be one of the targets eyed by bleary-eyed accountant/administrators. In the Hamptons, as in Suffolk County, retirement benefits are often a rigged game. For example, if you have 20 years of employment in civil service, the monthly retirement check is based upon the last year’s salary. Overtime can change the salary base dramatically. So, a job that paid a $75,000 salary for 19 years, can suddenly become a $150,000 a year job for the last year of service. The last year is used to calculate the retirement benefit. Police Departments use this ploy since emergencies often occur and overtime is arranged based upon seniority and political connections -- but politicians, as well, are among the most cynical players in making these arrangements for themselves.
Obviously, this is tantamount to fraud and is intended to rape the taxpayers. During these horrendous economic times, while people are scrounging for food, a retirement based upon $150,000 per year when the regular salary for 95% of the employ tenure is $75,000, is stealing.
As municipalities start to file Chapter 9, many unpopular decisions will have to be made. One of them is how many, not whether, employees have to be dropped. Pensions will need to be cut and in some cases eliminated.
While this inevitability may have been behind the supposed slowdown creating snowstorm problems in Manhattan (employee reductions), there simply is no choice. The Feds can print more money, the States cannot. And, if the international community rejects the dollar as the Reserve Currency all bets are off. Prices would skyrocket immediately.
At present, all of our imports are paid for in dollars. We do not have to exchange our currency into the currency of the exporting country– everything is dollar denominated. Were the Reserve Currency to be another denomination, we would first have to buy that currency and then pay the bill. Right now, if we are short on cash we just print more. Other countries are on to that and cannot do anything about since we issue the Reserve Currency. That would all change immediately if the dollar were rejected as the World’s medium of exchange.
Until the foreclosure mess plays out and housing bottoms, municipalities deal with budget reality, pensions are reformed and expectations are lowered by everyone – the recessionary spiral will end in a Depression. It will be a Depression that has many wealthy people associated with major corporations and Wall Street. But, for those of us on Main Street it will be another 5 to 10 years before this is over.
Be prepared for Code Enforcement, Police and Prosecutors to fine, arrest, indict, imprison and confiscate everything and everyone that they can get their hands on – simply to justify their employment. In this environment you justify your job by bringing home the bacon.
And, this includes the massive seizure laws that have made police departments and political coffers a thing of amazing beauty.
But, the game is over. Every penny counts as we head into another major downtrend.