Liquidate, Liquidate, Liquidate!

At the onset of the Great Depression, then treasury secretary Andrew Mellon became a very unpopular public servant by advising president Hoover to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

Popular interpretation, particularly among Keynesians and other conventional economists, will have you believe that Mellon’s advice was tantamount to disaster, ushering in the worst dynamics of the depression years.

Yet, we all fully accept that the "roaring 20s" brought many rotten excesses not the least of which was over-indebtedness and excessive stock speculation.

Similarly, today it’s generally accepted that we have become unsustainably indebted (households, firms, the state) while simultaneously participating in two of the largest speculative bubbles in human history in the form of internet stocks and housing.

We acknowledge that the “rottenness” is a direct result of many years of easy money, financialization and speculative behavior… we all know that the cost of living, particularly as a consequence of housing prices, is too high… we have a hunch that people don’t work very hard yet the government has seen fit only to prop in an Keynesian effort to not repeat the “mistakes” of Mellon and the response of the early 1930s.

So, how can government propping present a better path through these troubling economic times?

Would it not be absurd for today’s administration to suggest “prop labor, prop stocks, prop business, prop real estate… it will preserve the excesses and rottenness of the system. High costs of living and high living will be safeguarded…”?

In any event, however slowly, the excesses will continue to purge.

On that note, the latest read of business bankruptcies indicates that chapter 7 (total liquidation) filings are up significantly on an annual basis and now sit at a level not seen since the late 1980s.

In the second quarter of 2009 there were over 10,600 chapter 7 filings, nearly double the average seen throughout the 2000s and even significantly higher than the filing spike seen as a result of the 2005 legislative changes.

The Almost Daily 2¢ - Nouvell Monstre

Longish-time Paper Economy readers will recall that I have, with great interest, covered various events and details surrounding the Nouvelle at Natick, an unusual “luxury” condo-retail hybrid development attached to the new Natick Mall in Natick Massachusetts (read here, here, here and here).

My fascination with the project might be a tad bit overkill but I suspect in time my initial sense will be borne out and all will judge the Nouvelle project as a crescendo of sorts… a final and lofty heave into the realm of delusional consumerism and pop-marketed luxury lifestyle and faux culture and elegance that will, in all likeliness, stand as testament to and a cautionary lesson on the risks inherent when mob-fantasy meets market speculation.

But rather than criticize the project yet again, today I bring you grim news that all is not well with its builder, General Growth Properties (NYSE:GGP), leading Natick town officials, concerned with tax revenues, “mall mitigation money” and ultimately the fate of the mall project itself, to believe that bankruptcy is in the offing.

Without digressing too far into the dirty details let it suffice to say that GGPs stock has lost 99% of its value in the last 12 months as investors, concerned over its enormous debt burdens and clear solvency issues, capitulated to its consistently collapsing share price.

But what does this failure say of the larger economy?

Although the specter of a GGP bankruptcy is obviously very unlikely to spur on any kind Washington bailout scheme, its collapse is no less systemically important in the sense that it both reflects the epic changes taking place in our rapidly decelerating culture of over-consumption and represents the plight of so many corporate entities that, after having spent the last eight years bounding far out on the limb of ultra-leveraged hyper-speculation, now face the harsh reality of being severed from the trunk with no means of escape.

GGPs predicament allows one a peek into one of the least recognized yet most destructive elements of our current predicament… the debilitating impairments that resulted from the prior era of speculative delusion which simply cannot be remedied.

You see, GGP is not a young company… it has been in continuous operation for over 50 years and effectively under the control of members of one single family.

Up until the year 2000 it would have looked just like any other consistent, dividend paying commercial REIT … safe and sound, not too high flying but income yielding and family run to boot… what more could one ask for?

But in the era of “easy money” GGP apparently found itself awash in possibilities, not for sound steady income, but for aggressive growth competing for the fruits of phony prosperity and the attention of “aspirational” nitwits.

Traditional malls and retail commercial real estate were no longer enough… in the era of competitive affluence and aspiration-through-consumption you must think BIG… you must build residential… you must marry residential and retail… living and shopping… luxury, exclusivity, consumption and lifestyle packaged into a conspicuous and smarmy convergent stew peppered with top-shelf retail brand identity, stainless steel appliances and granite countertops.

Or so it seemed.

The Nouvelle at Natick is a Frankenstein of its age.

A mad creation built in the likeness of the ideals of its time yet larger and more menacing and bearing all the telltale defects of a restless and overreaching mania.

Now though, the monster (along with other comparably atrocious projects) has turned on its maker and no amount of pleading or back-peddling can prevent the inevitable.

Question(s) of The Day - No Way Out?

Aren’t millions of American households simply trapped by historic levels of debt and a quickly eroding and unsteady employment outlook?

How do they get out of this mess?

Is there a way out of this mess other than bankruptcy and foreclosure?

Countrywide Tapped Out!

Bloomberg today reports that in order for Countrywide Financial (NYSE:CFC) to continue its loan operations it has had to tap $11.5 billion of what it states is a $185 billion (CORRECTION: apparently at some point today it was reported that the $11.5 billion was Countrywide's ENTIRE credit line... so the $185 figure is false) in available credit lines.

To put the company’s current predicament into perspective a bit, for the month of July Countrywide reported that it had an average daily loan activity of $2.7 billion, so they have effectively bought themselves 4.25 days of operations at that level.

To be fair, this would assume that the company is completely stalled and that the $11.5 billion would be used to fund 100% of their daily loan production which is likely not the case.

In any event, it seems paltry to me and given that it was reported that they used 40 different banks for the sources of the funds, it’s quite possible the $11.5 billion was all they could get at the moment.

As the Bloomberg article points out… look for Countrywide to ask the Fed for a handout in the near future… although that relationship may possibly have been damaged by the company’s recent conversion to a savings and loan in order to get out from under the Federal Reserve’s regulation.