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That crash came in 1873 and lasted more than four years. It looks much more like our current crisis.
The problems had emerged around 1870, starting in Europe. In the Austro-Hungarian Empire, formed in 1867, in the states unified by Prussia into the German empire, and in France, the emperors supported a flowering of new lending institutions that issued mortgages for municipal and residential construction, especially in the capitals of Vienna, Berlin, and Paris. Mortgages were easier to obtain than before, and a building boom commenced. Land values seemed to climb and climb; borrowers ravenously assumed more and more credit using unbuilt or half-built houses as collateral. The most marvelous spots for sightseers in the three cities today are the magisterial buildings erected in the so-called founder period.
But the economic fundamentals were shaky. Wheat exporters from Russia and Central Europe faced a new international competitor who drastically undersold them. The 19th-century version of containers manufactured in China and bound for Wal-Mart consisted of produce from farmers in the American Midwest. They used grain elevators, conveyer belts, and massive steam ships to export trainloads of wheat to abroad. Britain, the biggest importer of wheat, shifted to the cheap stuff quite suddenly around 1871. By 1872 kerosene and manufactured food were rocketing out of America's heartland, undermining rapeseed, flour, and beef prices. The crash came in Central Europe in May 1873, as it became clear that the region's assumptions about continual economic growth were too optimistic. Europeans faced what they came to call the American Commercial Invasion. A new industrial superpower had arrived, one whose low costs threatened European trade and a European way of life.
As continental banks tumbled, British banks held back their capital, unsure of which institutions were most involved in the mortgage crisis. The cost to borrow money from another bank — the interbank lending rate — reached impossibly high rates. This banking crisis hit the United States in the fall of 1873. Railroad companies tumbled first. They had crafted complex financial instruments that promised a fixed return, though few understood the underlying object that was guaranteed to investors in case of default. (Answer: nothing).
The bonds had sold well at first, but they had tumbled after 1871 as investors began to doubt their value, prices weakened, and many railroads took on short-term bank loans to continue laying track. Then, as short-term lending rates skyrocketed across the Atlantic in 1873, the railroads were in trouble. When the railroad financier Jay Cooke proved unable to pay off his debts, the stock market crashed in September, closing hundreds of banks over the next three years. The panic continued for more than four years in the United States and for nearly six years in Europe.
The long-term effects of the Panic of 1873 were perverse. For the largest manufacturing companies in the United States — those with guaranteed contracts and the ability to make rebate deals with the railroads — the Panic years were golden. Andrew Carnegie, Cyrus McCormick, and John D. Rockefeller had enough capital reserves to finance their own continuing growth. For smaller industrial firms that relied on seasonal demand and outside capital, the situation was dire. As capital reserves dried up, so did their industries. Carnegie and Rockefeller bought out their competitors at fire-sale prices. The Gilded Age in the United States, as far as industrial concentration was concerned, had begun.
As the panic deepened, ordinary Americans suffered terribly. A cigar maker named Samuel Gompers who was young in 1873 later recalled that with the panic, "economic organization crumbled with some primeval upheaval." Between 1873 and 1877, as many smaller factories and workshops shuttered their doors, tens of thousands of workers — many former Civil War soldiers — became transients. The terms "tramp" and "bum," both indirect references to former soldiers, became commonplace American terms. Relief rolls exploded in major cities, with 25-percent unemployment (100,000 workers) in New York City alone. Unemployed workers demonstrated in Boston, Chicago, and New York in the winter of 1873-74 demanding public work. In New York's Tompkins Square in 1874, police entered the crowd with clubs and beat up thousands of men and women.
The most violent strikes in American history followed the panic, including by the secret labor group known as the Molly Maguires in Pennsylvania's coal fields in 1875, when masked workmen exchanged gunfire with the "Coal and Iron Police," a private force commissioned by the state. A nationwide railroad strike followed in 1877, in which mobs destroyed railway hubs in Pittsburgh, Chicago, and Cumberland, Md.
In Central and Eastern Europe, times were even harder. Many political analysts blamed the crisis on a combination of foreign banks and Jews. Nationalistic political leaders (or agents of the Russian czar) embraced a new, sophisticated brand of anti-Semitism that proved appealing to thousands who had lost their livelihoods in the panic. Anti-Jewish pogroms followed in the 1880s, particularly in Russia and Ukraine. Heartland communities large and small had found a scapegoat: aliens in their own midst.
The echoes of the past in the current problems with residential mortgages trouble me. Loans after about 2001 were issued to first-time homebuyers who signed up for adjustablerate mortgages they could likely never pay off, even in the best of times. Real-estate speculators, hoping to flip properties, overextended themselves, assuming that home prices would keep climbing. Those debts were wrapped in complex securities that mortgage companies and other entrepreneurial banks then sold to other banks; concerned about the stability of those securities, banks then bought a kind of insurance policy called a credit-derivative swap, which risk managers imagined would protect their investments.
More than two million foreclosure filings — default notices, auction-sale notices, and bank repossessions — were reported in 2007. By then trillions of dollars were already invested in this credit-derivative market. Were those new financial instruments resilient enough to cover all the risk? (Answer: no.)
As in 1873, a complex financial pyramid rested on a pinhead. Banks are hoarding cash. Banks that hoard cash do not make short-term loans. Businesses large and small now face a potential dearth of short-term credit to buy raw materials, ship their products, and keep goods on shelves.
If there are lessons from 1873, they are different from those of 1929. Most important, when banks fall on Wall Street, they stop all the traffic on Main Street — for a very long time. The protracted reconstruction of banks in the United States and Europe created widespread unemployment. Unions (previously illegal in much of the world) flourished but were then destroyed by corporate institutions that learned to operate on the edge of the law. In Europe, politicians found their scapegoats in Jews, on the fringes of the economy. (Americans, on the other hand, mostly blamed themselves; many began to embrace what would later be called fundamentalist religion.)
The post-panic winners, even after the bailout, might be those firms — financial and otherwise — that have substantial cash reserves. A widespread consolidation of industries may be on the horizon, along with a nationalistic response of high tariff barriers, a decline in international trade, and scapegoating of immigrant competitors for scarce jobs. The failure in July of the World Trade Organization talks begun in Doha seven years ago suggests a new wave of protectionism may be on the way.
Pinnacle Mine Cuts Coal Production -290
Pratt and Whitney -500
Intuit Real Estate Solutions -40
Buckhorn Group -58
Bristol Metals -37
FedEx Services in Akron -74
Maine maritime Academy -9
Viking Yacht Tally -800
Marana Schools -133
CB and I -250
Johnson and Johnson -900
Sailboat Maker Beneteau -600
Evraz Steel Mill -250
GE Healthcare Milwaukee -179
Finning International -170
Crowd Of 10,000 Overwhelms N.H. Job Fair
Traffic Gets Backed Up For Miles, And Organizers Forced To Shut Down Early
More at Link...
The Real Estate Bust Is Far From Over
For those thinking that the real-estate bust is all over with — think again. The residential market has hit the ditch and continues to sink lower, but now the commercial property market is rolling over and will take many lenders down the drain with it. America's small and regional bankers are pointing their fingers at the big banks, claiming the big money center banks "have tarred and feathered us," City National Bank chief executive Bill McQuillan told the Wall Street Journal during the Independent Community Bankers of America convention in Phoenix. But banks — large and small — all over the country are loaded with commercial real-estate loans, and that collateral is heading south according to a Deutsche Bank report.
The folks at Deutsche Bank see price declines of 35 to 45 percent and maybe more in commercial property, due to the large number of loans coming due between now and 2012 that will not be able to be refinanced. Not only are loan delinquency rates up and rents down, but the go-go years of aggressive loan underwriting are gone. The interest-only, high low-to-value loans that drove capitalization (cap) rates to the five-percent range are history. Property buyers who are required to put more money down will offer significantly less for the same net operating income to achieve the required return on investment. Thus, cap rates for properties in Las Vegas, for instance, are closing in on 9 percent according to a local appraiser and may be on their way to 10 percent.
But bankers are in a state of denial, according to real-estate pro Andy Miller, who spoke at Doug Casey's Crisis & Investment Summit in Las Vegas recently. Miller's been in the business for 30 years and hasn't seen a property financing market this tight. But the current note holders are saying "don't worry, be happy." Miller told the capacity Casey crowd that bankers show him the door when he rains on their parade.
More at Link...
Double blow for US pensions as values crash
The collapse in value of US state and local government pension plans is a disastrous double blow for them: they are being forced to sell off assets at huge discounts to pay out pensions, and are at the same time seeing their funding levels plummet to dangerous new lows.
In the past year the funds, whose collective $2,000bn-plus in assets make them key investors in every asset class, have lost about 40 per cent of their value through investment losses.
The 2,600 pension plans provide retirement savings for 22m public employees in towns and cities across the US, and range in size from the giant Calpers, with $120bn (€91bn, £81bn) in assets, to tiny small town funds which pay pensions for local garbage collectors and police.
Phillip Silitschanu, a senior analyst at Aite Group, a consultancy, says the pensions “could face a cash flow collapse, they are liquidating assets to meet their monthly cash flow needs . . . instead of selling positions that are down 10 per cent, they are being forced to liquidate positions down 40 per cent. It is a firesale liquidation of assets to have the cash on hand to meet obligations”.
Bill Atwood, the executive director of the Illinois State Board of Investments, says: “Right now it’s very bad. For the full year 2009 (ending in June) we will have $270m negative cash flow on $8.5bn in assets.”
State pension benefits are protected by law, and must be paid even if the fund is making a loss. Calpers, the largest fund, has lost $70bn in value in the past eight months, but still has to pay $11bn in benefits this year. Unless the fund starts recouping its losses soon, the California state government, which is already mired in a huge deficit, will have to lift contributions to Calpers starting from next year.
Bad as the cashflow crisis is, the accompanying collapse in funding levels – an issue largely outside the control of the pension managers – is considered by most in the industry to be of greater significance.
US pension plans are in generally worse shape than those in Europe. They were more underfunded, meaning they did not have the money to meet future pension commitments, even before the financial crisis hit, and their losses over the past year have been greater because they had larger allocations to equities. Funding has now fallen to about 50 per cent, according to industry estimates.
Mr Silitschanu said: “As terrible a predicament that everyone thought these pension funds were in three or four years ago, they are much worse now.”
Originally posted by Tentickles
Where as a normal/sane leader would lower spending and cut departments of the government to save money, Obama has increased spending (by how ever many fold it is... like 10 times?) and made the government bigger.
Originally posted by Bhadhidar
However, If Chrysler were to bankrupt, I fear that it might make a GM filing more likely as well. The financial blow to Chrysler's suppliers, most of whom also supply GM, would force many of them to fold as well. Without suppliers on board, I don't see how GM will be able to form a reliably workable recovery plan.
Originally posted by Vitchilo
I'm in Canada and bankrupt means that the company is dead... so when will we know that GM or Chrysler are dead for real?
Yes we had two more banks fail today… one the FDIC could not sell and simply told depositors to take their money and move it to other banks. The reality, of course, is that the FDIC does not actually possess any money to guarantee anything. All of that money must be fabricated. But bank failures are NOTHING in comparison to what’s happening to our government’s budget.
I’ve been YELLING about the relationship of rising government expenditures coupled with falling income/revenue. It’s been a disaster and now it’s just unfathomable. Read and think about the following numbers carefully:
Budget deficit triples to $957 billion for year
March deficit hits $192 billion has receipts drop 28%, outlays rise 41%
By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) -- The U.S. federal budget deficit rose to a record $956.8 billion in the first six months of the fiscal year after the government stepped up spending to cope with a recession that has depressed tax receipts, the Treasury Department reported Friday.
The deficit is well on its way to the $1.75 trillion -- or 12.3% of gross domestic product -- that the White House has estimated for the full fiscal year, which ends in September.
The deficit through the first six months is more than three times higher than it was at this time last year. The government has borrowed $1 trillion from the public so far this fiscal year.
In March, the deficit widened to $192.3 billion from $48.2 billion in March 2008. Outlays rose 41% to $321.2 billion from $227 billion, while receipts dropped 28% to $129 billion from $178.8 billion.
Receipts from individual income taxes fell 27% in March, versus year-earlier figures. Individual refunds are up 14% so far this year. Compared with a year earlier, corporate income tax receipts fell 90% to $3.4 billion.
Much of the increase in outlays in March came from extraordinary investments by the government in banks and Fannie Mae and Freddie Mac, loans to credit unions, and increased spending from the stimulus package for unemployment insurance and Medicaid. Some of those investments should be repaid over time, but the government is booking them as cash expenses for now.
In March, Fannie Mae received $15.2 billion, Freddie Mac received $30.8 billion, and unemployment benefits totaled $10.6 billion.
Through the first six months of the fiscal year, outlays are up 33% to $1.95 trillion. Receipts are down 14% to $989.8 billion. Corporate income taxes are down 57% to $56.2 billion, while individual income taxes are down 15% to $429.7 billion. Payroll taxes are up 0.3% to $430 billion.
This is truly an EPIC collapse of government receipts, and maybe one of the most important stories of this time. Failing banks are one thing, failing governments are another.
Remember, deficit spending leads to debt. The only way to service debt is with income. Thus, in the long run what matters is debt to income. But if you really want to create a crisis in the here and now, the best way to do it is to run out of cash! How does one do that? Simply by taking in less cash than you pay out. Right now we’re talking about outflows that are 2.5 TIMES income for the U.S. Government!
Outlays = $321 billion in March
Receipts = $129 billion
Shortfall = $192 billion for the MONTH
Annualized, that shortfall adds up to $2.3 TRILLION
Forget about GDP comparisons, they are meaningless. We simply are piling debt on top of debt and we do not have the cash to pay our current bills much less those of the past. And none of our government’s budgets use the same GAAP accounting rules that they mandate you and your company use, they do not count future obligations as deficits – thus the term “CURRENT account deficit.” Check the BIG RED NUMBERS at the bottom of this blog. That number is VASTLY understated. Heck, they won’t even dream of adding Fannie Mae and Freddie Mac debt to their own balance sheet – I mean OUR own balance sheet – because the amount of debt is staggering.
April 9, 2009
The Real US Bottom Line:
This week, the US Congressional Budget Office (CBO) projected that the US budget deficit will balloon to $US 1.8 TRILLION or 13.1 per cent of GDP this year. The Obama budget is $US 3.55 TRILLION. That means that more than half (50.7 percent) of the budget will be borrowed.
The Global Bottom Line:
All of the rest of the world sees this bottom line clearly. If the US budget were to be funded solely out of incoming tax revenues and therefore brought into balance, about $US 1.8 TRILLION in artificial "stimulus" would be withdrawn. The US economic and financial house of cards would instantly cave in. Were the US budget to be honestly funded by US taxes actually paid, then US spending would instantly be cut in half ( by $US 1.8 TRILLION). That would be like taking the US economy out and shooting it.
The Obama administration is in a position where it cannot raise taxes and cannot cut spending. It can only borrow, Borrow and BORROW and spend the borrowed money to stave off a debacle.
The rest of the world now knows this. They are no longer prepared to go along and to pay the costs.
This week, the US Congressional Budget Office (CBO) projected that the US budget deficit will balloon to $US 1.8 TRILLION or 13.1 per cent of GDP this year.