Replies to post #264462 on $Stock*Shop*Charts*News*Option$

[Stock Lobster]

TofL: Henry Paulson warns US house prices must plunge

Dearbail Jordan
From Times Online
March 26, 2008

The US Treasury Secretary gave warning today that there is more pain ahead in the American housing market after he said prices must be allowed to drop before the economy can stabilise.

Henry Paulson’s remarks to the US Chamber of Commerce sent the Dow Jones industrial average plunging by 130 points to 12,402, as investors forecast more months of turmoil ahead. It recovered a little to close down 109.74 at 12422.86.

Mr Paulson said that policymakers were aware it was a housing downturn that fuelled turmoil in the financial markets, and that a slowing housing market posed the biggest risk to the economy.

Mr Paulson acknowledged that the Government would step in to lessen the impact on the economy, but he was emphatic that the house price cycle must run its course.

“A correction was inevitable, and the sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilise, more buyers return to the housing market and housing will again contribute to economic growth.”

It emerged yesterday that house prices in 20 US cities had declined by 10.7 per cent in the 12 months to January — the worst fall in more than 20 years.

This month US consumer confidence fell to a five-year low.

Mr Paulson also said that regulation governing commercial and investment banks needed to be re-examined and strengthened, after the collapse of Bear Stearns, the Wall Street bank.

He said: “This latest episode has highlighted that the world has changed, as has the role of other non-bank financial institutions and the interconnectedness among all financial institutions.”

Mr Paulson added: “These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.”

http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article3627054.ece

Have your say

Mr Paulson is talking sense that a correction in prices is needed before buyers will return. Hence there should be no need to lower interest rates, just let prices fall to sensible levels and stabilise. Once that has happed economic growth will pick up again, but the Fed *must* avoid making the same mistake of generating another bubble by leaving rates too low.


Paul, Coventry,

Dear Mr. Webber. You are right when you say that the housing market are tied to the supply and demand, the problem is that you don't realise that the market in London is been manipulated. The supply is been held with red tape to keep the prices inflated and the city itself from renovating. London is a city that would rather crumble over itself and become dust then renovate. I don't know why and, at this stage of the game, I couldn't care less.

Fabio C, London, UK

Why should house prices be tied to econonmic growth? They are tied to supply (limited by the green belt in London) and demand (increased through the larger number of two income families and immigration into London from the rest of the UK and Europe).

If these change, house prices will drop.

Gareth Webber, Swanley, Kent

As a UK resident who "invested" his pension lump sum in the Florida realty boom a few years ago I am very interested in any helpful advice.
In just the last year I have lost $1,500,000 and still cannot sell any of the homes or building lots. Investors like me have made things worse, but it is a turkey shoot out there. In the long term the investments are great, but after rental income it costs over 5% of value a year in mortgage, tax, lawn care, pool care, etc. So when I plot 5% costs against potential growth it is clear that it's time to sell realty and buy gold.
Cave emptum



Bruce Lennox, Box, UK

How long will it be before we see this sort of frank and honest comment from the Brown administration?

This is all part of the business cycle - we have been through an irrational boom and now we need to go through a period of contraction - house prices need to fall and some banks and other financial institutions need to fail. The sooner Brown & Co recognise this and define the scope and limitations of government intervention, the sooner this recession can play out and the economy can begin to grow again.

Rob W, London,

The growth of house prices in the US from 1999 to December 2007 over reached the level of economic growth of that period.

Using a base of $100 000 for the price of a home in 1999 the price had increased to $300 000 by the end of 2007 and this takes into account the decline in house price trends during 2007.

If the increase in house prices were correlated with the rate of economic growth from 1999 to 2007 then $100 000 would have increased to about $170 000.

With a slowing rate of economic growth in 2008 to what may be less than 1% for 2008, the market correction could result in a 30-40% decline in the price of homes. It is impossible for the Federal Government to compensate for for this correction as it would have to spend trillions of dollars.

It is also important to remember that an investment in a home is a long term commitment and over the full term will realise its value.

Gregory, Tunbridge Wells, Kent

If you repeat a big enough lie often enough, eventually people believe it...

Peter P, litchfield, UK

In other words, we will bail out the Wall Street banks who caused the problem in the first place by cynically inflating the housing bubble, but clueless (and powerless) homeowners can go hang!

dan, London, UK

Compare Paulson's open and honest appraisal with the weasel words of Alistair Darling during his budget speech and the metronomic repetition that we get from Gordon Brown of how well the economy is doing in the UK, when nothing could be further from the truth.

figurewizard, petersfield, hampshire

[Stock Lobster]

Guardian: Now super-rich face a backlash as credit crunch hits home in America

With news last week of a Wall Street trader earning $3.7bn from the mortgage crisis, even the wealthy are starting to question the morals of money, reports Joanna Walters in New York

Joanna Walters
The Observer, Sunday April 20 2008
This article appeared in the Observer on Sunday April 20 2008 on p30 of the World news section. It was last updated at 00:00 on April 20 2008.

The 'American dream' of unashamed wealth and the opportunity for all to acquire it has reached a crisis point before: in the Depression, the oil shock, in the 'greed is good' Eighties and the madness of the dotcom bubble.

But America's relationship with wealth - uncomfortable as it has sometimes been - has always been built on the same foundation. Even as charted in the salutary tales of Fitzgerald, Steinbeck or Wolfe over the decades, or in the endless fascination with Howard Hughes and the fictional Ewings of Dallas, the aspiring masses never quite lost their admiration for blatant enrichment, nor the elite their pride in it. Now, however, all that appears to be changing.

Confronted by the revelation that Wall Street's biggest earners are pulling down figures that the chancelleries of many small countries would be happy to have banked, and in the midst of an election cycle that has focused on the impoverishment of ordinary Americans, a cultural backlash is under way. It is not only from those impoverished US householders, or from the usual suspects on the left, either. Even those who might normally be considered filthy rich are declaring themselves offended by the obscene levels of remuneration of the country's uber-wealthy. The latest backlash - which has seen even the Republican nominee for President John McCain (married to an heiress) weigh in - has been prompted by the news last week that Wall Street's biggest ever pay packet topped $3.7bn (almost £2bn) in 2007 for one hedge fund manager for a fortune he made from gambling on the collapse in the mortgage market that has caused millions to lose their homes.

And as the financial crisis spawned in the US spreads globally, there is even unprecedented talk of 'shame' in the ranks of the super-rich. 'There is something really obscene going on. This is an era of ridiculous excess. We have not seen the worst of it and there is going to be real anger,' said David Rothkopf, author of a new book, Superclass

The man with history's biggest annual pay packet is hedge fund manager John Paulson of Paulson & Company. But he is not alone, as the 'Alpha 25 list' of the super-rich published by Alpha financial magazine last week made clear. Up with Paulson were global markets gambler George Soros and rival dealer James Simons, who made $3bn apiece. Meanwhile ordinary Americans are being squeezed harder by inflation and the credit crunch, a stagnant economy, falling house values and rising unemployment - and, in a tax system rigged against them by successive conservative administrations, often pay proportionately twice as much tax as Paulson, Soros and their cohorts.

The widening gap that these trends are producing in US society is shaking traditional values to their roots. There are growing signs that the majority are losing faith in the remains of the American dream, while the chief beneficiaries of it feel guilty as never before. 'It's unprecedented that the superwealthy would express so much shame in public', said Robert Frank, author of the book Richistan, which chronicles the rise of America's new super-wealthy to a point where they live in a separate world of rarefied exclusivity. 'It is not just people like Bill Gates and Warren Buffett standing up and saying "it's not fair". I spoke to 100 people earning over $10m who would not even admit to being rich: they feel ashamed about the inequality.'

When even the aptly named multi-billionaire money manager Bill Gross, known as 'the Bond King', pens a blog headlined 'Enough is enough', you know something has shifted. He was widely quoted as saying after Alpha published a list of last year's top earner that 'It's not illegal, but it is ugly'. Even to rank in the top 50 of the Alpha list you had to have made more than $210m last year. Five years ago, a paltry $30m would have got you into the top 25. Eight UK fund managers made the list, the highest earner being David Slager, who made $450m at Atticus Capital.

Meanwhile a recent survey by Pew Research found that between 1983 and 2004, the median net worth for upper-income US families - defined as those who earn 150 per cent of the national average - grew by 123 per cent, while the typical net worth for middle-income families grew by just 29 per cent. In addition, poverty increased and the collapse in the mortgage market caused two million homes to be repossessed in the US last year. 'The middle class and the upper middle class are struggling and feel more depressed by their prospects now and resentful of what appears to be prosperity at the top but not in their own life,' said economist Gary Burtless of think tank the Brookings Institution in Washington DC.

'From the Second World War to the Seventies prosperity was more broadly spread in the US and fewer people were left behind. But feeling you can make tons of money or achieve distinction and not be held back by your circumstances is now perhaps more under threat here than in countries that Americans have always thought of as snobby, like the UK or Scandinavia,' he added.

The financial crisis has certainly had its high-profile victims, such as Bear Stearns bank. But David Rothkopf pointed out that when multi-billionaires lose, they are rarely broke, or even poor. 'I know a guy who lost a billion and was left with only $400m. That's the pattern,' he said. If the names at the top shuffle, the system itself does not topple. And that is the key to the current problem that means it is unsustainable both economically and psychologically, according to experts.

Talk of the wealth gap is no longer confined to developing world dictatorships. 'It is market fundamentalism and it's nuts. Inequality has grown everywhere in the world as a result of this,' said Rothkopf. But the world of hedge and bond funds and the securities derivatives markets is not only complex and obscure, it is also very lightly regulated and taxed. Top earners such as Paulson and Soros often pay only 15 per cent in capital gains tax on their fortunes, while white-collar workers in the US pay 35 per cent. That prompted Warren Buffett to say it was unfair that he paid less tax than his secretary. 'Even Bill Gates is saying the inequality gap is the biggest problem in the world,' said Robert Frank.

The last time America saw wealth inequality like this was 1928, the eve of the Depression, according to Jared Bernstein, a senior fellow at the Economic Policy institute in Washington. 'Equality of opportunity is at the heart of our economic and social tradition and it is starting to become clear to people that the principle is being violated because those at the top are erecting barriers to those below,' he said.

The now Democrat-led Congress in the US made noises about higher taxes on the most wealthy in recent months, reversing cuts made under President Bush, but then backed down. The issue will come up again in the autumn legislative round, but no one is expecting Congress, or even a Hillary Clinton or Barack Obama White House to decimate the fortunes of the uber-rich and spend it all on mortgage safety nets or public schooling for the masses.

But how does that square with the new age of conspicuous philanthropy, where tycoons such as Gates and Buffett make much of giving billions to good causes, in a tradition spawned by Scottish immigrant and steel magnate Andrew Carnegie? 'Gates and Buffett are the exception. What they have done is truly wonderful but they are the truly aberrant,' said Rothkopf. 'Most of the super-rich don't give much away at all and even then it is what we call "conspicuous conscience" - it's money they would have given anyway but they give it on stage and often with strings attached. It's mostly hypocritical.'

It does not seem to have changed the inequality gap in America, nor taken away fears that the equality of opportunity that is the essence of the American dream is being fatally undermined. And a lot of the concern freshly expressed by the rich for the poor, the environment - even the less rich - stems from self-interest anyway, says Robert Frank. In the big picture of Rothkopf's global 'superclass' and the Richistan that sustains the mega-billionaires in their excess, recession or no, Frank concludes: 'It's business as usual.'

Precious wisdom
Warren Buffett, chairman of investment firm Berkshire Hathaway, world's richest man in 2008, according to Forbes, with net worth of $62bn.

'If past history was all there was to the game, the richest people would be librarians.'

Bill Gates, chairman of Microsoft:

'It's fine to celebrate success, but it is more important to heed the lessons of failure.'

John Paulson, founder of Paulson & Company hedge fund, who made a Wall Street record $3.7bn last year.

'Where is the bubble we can short? I've never been involved in a trade that had such unlimited upside with a very limited downside.'

George Soros, speculator

'Markets are constantly in a state of uncertainty and flux, and money is made by discounting the obvious and betting on the unexpected.'
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US housing and sub-prime crisis · US economy · Global economy · Credit crunch
ObserverPrintable version Send to a friend Share Clip Contact us Article history About this articleClose This article appeared in the Observer on Sunday April 20 2008 on p30 of the World news section. It was last updated at 00:00 on April 20 2008. ShareClose Digg reddit Google Bookmarks Yahoo! My Web del.icio.us StumbleUpon Newsvine livejournal Facebook BlinkList EmailClose Recipient's email address Your name Add a note (optional)

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http://www.guardian.co.uk/world/2008/apr/20/usa.subprimecrisis