Money

I’m finally starting to see some solid numbers on the overall size and shape of the US’s current economic woes. According to the Economist, banks have written off about $335B dollars, of an estimated $500B of actual bad debt. This is the money that is actually, really, seriously gone from the economy. Mortgages were written, giving that half trillion to people who wouldn’t be able to pay it back.

Once this money is written off, we can settle down a bit. Until then, we’ll keep seeing large-ish financial houses suddenly crumble as their balance sheets settle out $50B lower than they expected, leaving them unable to make payroll or fulfill their obligations. I’m pretty confident that will happen over the summer and sort of wrap up by fall. Banks are pretty damn good with numbers.

— Update — Go ahead and read these slides. They do a good job explaining the mortgage crisis.

Sadly, we’re only starting to see the really bad side of it: Housing values have fallen about 10% nationwide. They are gonna fall a *lot* more. Property should be valued at “what people can afford to pay for it.” The historical data indicates that’s about 2 to 3 times your annual income. If you make $50k a year, you can probably afford the mortgage on a house in the $100k to $150k range. Renting *ought* to be more expensive than buying, since renters have more freedom to pick up and move, and because landlords should be able to optimize their finances and make a profit, even while figuring in damage done by tenants who don’t fix things themselves. Instead, renting vs. buying is out of whack by about a factor of 2 or 3 to 1. That means that if you intend to spend N dollars per month on housing, the place that you can rent for that money is about three times as expensive as the one you can buy.

Looking at the graphs, and at those numbers, the housing market has another 40% to 60% to fall before house prices are “real” again. An existing middle class house “should” (market wise) cost about what a middle class family can afford. You can do the math on this one.

What does that mean? Well, people who used their houses as investment accounts instead of saving are SOL. That extra $150k you thought you had, just for owning a house for 5 years? You don’t. People who ran up large lines of credit against the imaginary value of their houses? You’re in debt now. Realistically, you should default and go rent for a few years while saving like a banshee. The other possibility is to accept that your house is not a financial investment, but a lifestyle investment.

Also, this summer is gonna see the economic crunch really get rolling: A large number of chain stores are going out of business (as, once again, they can’t get the loans they need to cover payroll or to buy inventory this week). This is going to make it very rough on retail employees and (in particular) on young people looking for seasonal work over the summer. Coupled with high gas prices, that’s gonna really sock it to the idea of getting a job to cover the road trip.

It’s also expected to be spectacularly hot.

So expect hordes of unemployed young people roaming the night, on foot, while their drunken parents fight over when to default on the house loan and go rent an apartment.

Yeah. we’re screwed.

There’s a good side though: In theory, all of this should fight inflation. If there are less dollars in the system, then each dollar is worth more, right? Unfortunately, the fed keeps handing out dollars to keep the system bloatedly afloat.

To quote Gandalf: “Fly, you fools!”