According to Bloomberg News, a former advisor the Chinese central bank is calling for leaders Asian nations to get together in cooperate in managing the collapse of the bankrupt United States. "Japan, China and other holders of U.S. government debt must quickly reach an agreement to prevent panic sales leading to a global financial collapse," he said. He also wondered "why are we piling up these IOUs if they may default?" China's "export-growth strategy has run its natural course" since Chinese who worked and saved may end up with nothing in return from Americans who borrowed and spent.
Just imagine the consequences of this for a country where everyone's entire value of life depends on spending 6% more than they take in every year. Today, there was a wild rumor that the Chinese government had ordered Chinese banks to stop lending to U.S. banks, to stop the losses. The next President will have to travel on his knees to places where people save money, and beg for loans, and then to oil producing countries, to beg for oil. This isn't over until we no longer have a federal budget deficit, no longer have a current accounts deficit, and are no longer able to issue no state and local bonds.
Meanwhile, in case you are wondering what those mortgage bonds will be worth, not that the California Association of Realtors reported today that the median existing home sales prices is down 41 percent from a year earlier, and will probably keep falling. The head of an Orange County firm that tracks mortgage fraud told the Orange County Register that there is no way $700 billion will be enough.
“My impression is that no one yet has overestimated the cost of any of this. Merrill Lynch says they’re going to lose $1 billion and they lose $5 billion. No one has ever shot on the high side yet. (Fed chairman Ben) Bernanke said today that this isn’t an expenditure; this is an investment in assets and we may come out on the up side. My opinion is we have so many bad loans on our books and values are decreasing so fast that I don’t think we can cover it.”
So what happened in the OC?
“I asked a friend, a good guy, ‘Have you originated an honest loan in the last five years?’ And he said: ‘The lenders deserve everything I gave them.’ I think that the majority of stated-income loans are fraud. There’s a report by the Mortgage Asset Research Institute on fraud, which said 60 percent of stated-income borrowers inflated their income by more than 50 percent. So that means someone who makes $5,000 says they make $7,500 a month. That means there are people with $5,000-a-month incomes with $2,500-a-month payments. There’s no way they can pay that much.”
Prices will fall back to a reasonble ratio to income. Unfortuantely, lots of people took out second and third loans against the inflated proceeds, and spent it.
“I’d ask what’s the median income in Orange County? I’d say multiply that by three or four and that’s the median home price. That’s about $300,000. Right now, anyone who bought their home since 2003 has lost money. … I’ve been on record that the median is going to return to 1999 or 2000 or worse. That’s about $300,000.”
All this has been out there on the table, for years. Now those of us who didn’t join the White Collar riot are going to pay for it. The Chinese are not amused.