What happened in Vegas, this time, didn’t stay in Vegas. There, 2 out 3 houses are upside down: they owe more than their homes are worth.


the number of borrowers who are underwater climbed to 20.4 million at the end of the first quarter from 16.3 million at the end of the fourth quarter. The latest figure represents 21.9% of all homeowners, according to Zillow, up from 17.6% in the fourth quarter and 14.3% in the third quarter.

Blockbuster is getting ready to go belly-up. According to auditor’s assessment, the company might not be generating enough cash to fund its operations:

Even if the amended credit facility is funded upon the terms contemplated, we may not have sufficient liquidity to finance the ongoing obligations of our business, which raises substantial doubt about our ability to continue as a going concern.

In other words: even if they get some loans and refinance existing ones, they simply are not making enough money to pay their bills.

One of the culprits is Red Box and their kiosk-style movie rental structure. Cheaper to maintain than college kids.

The Federal Reserve Bank of Philadelphia produces a state-level coincident index combining four indicators: nonfarm payroll employment, average hours worked in manufacturing, the unemployment rate, and wage and salary disbursements deflated by the consumer price index (U.S. city average). This index has been around since 1979.

And since 1979 (thanks to Calculated Risk for pointing out), throughout four recessions, there was a never a moment when indexes for consecutive months were negative for all 50 states… until now.

Number of states with positive growth

Number of states with positive growth

Recession is widespread, no state is spared:

Red states

Red states

Wasn't me.

Wasn't me.

It all began with the “conundrum”: the disconnect between Fed-based short-term rates and long-term mortgage rates when the latter failed to respond as expected to the Fed tightening in mid-2004. In theory, long rates are the geometric average of expected future short rates plus the risk that increases with duration of the instrument. So tightening short-term rates should be followed by an increase in long-term rates, say the 10-year Treasury notes.

During previous monetary policy tightening cycles (88–89, 94–95 and 99–00), the 10-year Treasury yield (green line) responded to increases in the federal funds rate (purple line):

Short x Long

Short x Long

But during 04-05, there was no response. Fed rates went up but long term rates remained. Something different was happening then.

Back in 2005, before the Senate Committee on Banking, Housing, and Urban Affairs, Greenspan admitted his disbelief:

Long-term interest rates have trended lower in recent months even as the Federal Reserve has raised the level of the target federal funds rate by 150 basis points. This development contrasts with most experience, which suggests that, other things being equal, increasing short-term interest rates are normally accompanied by a rise in longer-term yields. […] For the moment, the broadly unanticipated behavior of world bond markets remains a conundrum. Bond price movements may be a short-term aberration, but it will be some time before we are able to better judge the forces underlying recent experience.

Now, in a long Wall Street Journal piece, Alan Greenspan tries to convince us the Fed didn’t cause the housing bubble. He blames it on the global decline on long term rates rates (and thus mortgage rates as well) spawning the speculative euphoria. And the cause of this global decline? The fall of Communism and consequent rise of China:

U.S. mortgage rates’ linkage to short-term U.S. rates had been close for decades. Between 1971 and 2002, the fed-funds rate and the mortgage rate moved in lockstep. The correlation between them was a tight 0.85. Between 2002 and 2005, however, the correlation diminished to insignificance.

The presumptive cause of the world-wide decline in long-term rates was the tectonic shift in the early 1990s by much of the developing world from heavy emphasis on central planning to increasingly dynamic, export-led market competition. The result was a surge in growth in China and a large number of other emerging market economies that led to an excess of global intended savings relative to intended capital investment. That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

That decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble.

From 2002 until late 2004, foreign officials purchased millions in Treasury securities. More specifically, Asian central banks had consistently increased their holdings of foreign reserves while boosting exports, mainly to the U.S. An incredible economic growth led to record-high trade surpluses, that were in turn invested in U.S. and European Treasury bonds, compensating the usual effect of short-term rate hikes.

Foreign Purchases x 10-Year Treasury Yield

Foreign Purchases x 10-Year Treasury Yield

Truth came out at last: it wasn’t about Democrats x Republicans, much less about principles. It turned out that,

[…] on average, lawmakers who voted in favor of the bailout bill have received 51 percent more in campaign contributions from sources in the finance, insurance and real estate industries over their congressional careers than those who opposed the emergency legislation.

In this election cycle only, House Democrats who voted for the bailout bill got 78% more from those industries than the Democrats who opposed it. House Republicans who voted for the bailout bill got an average of 23% more than Republicans who voted against it.

If there was any question, now we know for sure: we do live in a Plutocracy.

And given those interesting reports coming from behind the Bamboo Curtain, North Korea might be currently under a thanatocratic regime.