Peter Schiff foresaw the housing bust way early

Posted by: Peter Coy on December 31, 2008

Peter Schiff.jpg
Credit where credit is due: Peter Schiff of brokerage Euro Pacific Capital saw this housing bust coming from a mile away. To prove his perspicacity, his brother (and p.r. agent) Andrew Schiff is recirculating some of the pieces that Peter wrote back in 2004, when most of us were just getting excited to be out from under the shadow of the 2001 recession and subsequent jobless recovery.

Here is what Andrew sent me after seeing my recent blog post about March 2004.

—————————————

Wednesday, February, 25 2004

There He Goes Again

In recent months the statements of Fed Chairman Alan Greenspan have become increasingly confusing and self-contradictory. So much so, that an impartial observer must conclude that his motives are somewhat less than honest.

This week, the Chairman was true to form as he continued misleading the public with respect to the enormous risks facing the U.S. economy. Rather than expressing an obvious concern over the increasing use of adjustable rate mortgages (ARM’s) he instead praised them, encouraged greater use, and expressed regret that too many homeowners were wasting money on fixed rate mortgages. In the same speech he declared that the high levels of consumer debt did not concern him because the cost of servicing that debt was so low. Given that reality, one would assume he would hope most borrowers would lock in those low rates. After all, when rates do ultimately rise, higher rates would certainly make the debt load unmanageable. These comments are even more peculiar given the concerns he expressed the following day over the mortgages insured by Fanny Mae and Freddie Mac, as ARM’s have a much greater default risk than do traditional fixed rate mortgages!

Rather than a reflecting the sophistication on the part of savvy American home owners, as Greenspan suggests, the reality is that most homeowners are choosing ARM’s because that it is either the only way they can afford to buy a home, or it is the only way they can afford to make ends meet. The average ARM is 50% larger than the average fixed rate, suggesting that the larger the mortgage the more likely it is that the borrower needs the lower payments to qualify. Also, financially distressed homeowners typically refinance fixed rates mortgages into ARM’s to save money. In so doing, they trade the benefits of lower current payments for the risks of higher future payments. Given the facts that interest rates and domestic savings are at historic lows, the budget and current account deficits are surging, commodities prices are soaring, and the dollar is collapsing, this is perhaps the worst time in history to make such a trade-off.

What Alan Greenspan is in effect saying to homeowners, or potential home buyers, is “go ahead, get that ARM, don’t worry about rising interest rates, I’ve got your back. It’s O.K. to pay $500,000 for that two-bedroom town home that sold for $300,000 two years ago, because you can afford the payments with an ARM. Can’t afford the car payments on that brand new imported SUV? Just refinance your fixed rate mortgage into an ARM. After all, you’re just wasting money with that fixed rate mortgage.”

Is it possible that Greenspan really is this naive? Or does he see the danger posed by ARM’s, but does not want to acknowledge his concerns publicly? I believe that he is so worried about the proliferation of ARMs that his comments were intentionally designed to defuse any legitimate fears that may be developing, particularly among America’s creditors, concerning this issue. Also, I believe Greenspan’s comments are specifically designed to help keep the housing bubble, and by extension the U.S. economy, expanding. Greenspan knows that the only way most home buyers can afford these ridiculously high prices is with ARM’s. Without them, housing prices would collapse. He also knows how important re-fi money is to the U.S. consumer. Since long term interest rates cannot fall low enough to facilitate another wave of fixed rate re-fi’s, he is trying to encourage homeowners to re-finance on last time: fixed to ARM.

Isn’t it odd for Greenspan to even make recommendations concerning which type of mortgage homeowners should choose? After all, he doesn’t comment on what stocks investor should buy, or what bond maturities to favor. He even refuses to comment on the dollar. You would think Greenspan would not want to put himself into a position of having to raise interest rates after encouraging home owners to refinance into ARM’s. Do such comments actually tie his hands in some respect? Do they leave the Fed or the U.S. government vulnerable to legal action from bankrupt ARM borrowers, who relied on the chairman’s comments in their decision to opt for the riskier loan?

The reality is that such absurd comments by Greenspan further reveal that his statements are more propaganda than sincere expressions of opinion. He says whatever he thinks he has to say to sustain the bubble economy, regardless of his personal beliefs. Everything he says is designed to postpone the day of reckoning as long as possible, no matter how much worse that day will become as a result. It is only when viewed from this perspective that Greenspan’s comments make sense.

———————————-

Schiff’s piece looks pretty smart in retrospect, doesn’t it?

Reader Comments

Brad

December 31, 2008 11:45 AM

May have been a little early in his prediction but he was right on a lot of points. Hopefully he is more pestimistic than he is right.

Frank

December 31, 2008 3:08 PM

Peter Schiff was right. How many times must it be said before people will take his current predictions seriously? His most salient recent statement is: Stimulus=Inflation. Gold will be at $2000 in a year to 18 months. The dollar is going to tank.

Ben Straub

December 31, 2008 4:14 PM

Peter Schiff has always been a good predictor on the economy. He advised Ron Paul who said in 2002 that Fannie and Freddie would go bust. I don't think anyone is laughing more.

Peter

December 31, 2008 7:02 PM

Unfortunately for Peter, his doomsday scenario did not turn out the way he expected. He was hoping/expecting that the U.S. would experience hyperinflation and his clients would profit from being invested outside the U.S. in his Euro-Pacific fund. Now he is down just like everybody else. But you have to give him credit for predicting this crisis and sometimes even being humiliated by other overzealous 'bulls' but eventually to see his ship come in and be vindicated.

Shannon

December 31, 2008 9:33 PM

For real. I was really skeptical about Peter even after reading his book but the more I see his "predictions" (he actually bases his projections on what the government does) come true, the more I think he might be right about it all.

Dave

January 1, 2009 3:26 AM

Thank you for recognizing Schiff. He and the Austrian school of free market economics really deserve credit. I am so sick of hearing Keynesian schills everywhere I turn in the media.

Adam Smith

January 1, 2009 3:50 AM

A Specific Application of Employment, Interest and Money

Abstract:

This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric quantitative easing will get us out of depression.

It shows that Adam Smith, John Maynard Keynes, Karl Marx and Alan Greenspan don't contradict each other but that they each bring a meaningful contribution to a same framework for understanding macro economy.

It proposes a credit free, free market economy as a solution that would correct all of those dysfunctions.

In This Age of Turbulence People Want an Exit Strategy out of Credit, an Adventure in a New World Economic Order.

Read It.
http://edsk.org/

Ballbuster

January 1, 2009 5:28 PM

Peter Schiff makes BW's economist Mandel looks stupid. Where was Mandel's voice of reason when the fake economy grew beyond its infancy? When Schiff was warning us about the imminent collapse of the housing bubble, the toxic mortgage papers, the doomed financials, and the debasing of the dollar, where was mighty Mandel? Not only is Schiff a better writer and economist than Mandel, Schiff also has the audacity,eloquence, and perseverance to speak-out against the fake economy and insane government policies. Since 2002, Schiff's voice of reason demonstrated his courage, confidence, and prescience repeatedly in various TV business programs, news media and symposium around the country while Mandel tip-toes and mousing around BW webpages writing nonsense or promotion his stupid economic book 101. Mandel is disgusting to say the least.
If BW had any business sense, it would have given the real economist, Peter Schiff, a BW column instead of MickeyMouse-Goofy economist Mandel -- It is still not too late to salvage this faux paus.

LRockwellReader

January 1, 2009 6:32 PM

Foreclosures, skyrocketing interest rates also predicted by Schiff here, 9/20/02: http://www.europac.net/externalframeset.asp?id=78

...same stuff here, on 1/1/01: http://www.europac.net/externalframeset.asp?id=1623.

That's as far back as his archives go. Has he ever predicted anything different? If so, when?

Shalom Patrick Hamou

January 2, 2009 11:22 AM

Quantitative Easing Won't Work

In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.

Hence, the Keynesian paradigm I = S is not verified.

The purpose of Quantitative Easing being to lower the yield on long-term savings doesn't create $1 of investment.

It does diminish the yield on long-term Treasury Bonds but lowers marginally, if at all, the asked yield on savings.

This and other issues are explored in my tract:

A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order


Abstract:

This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.

It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.

It solves most of the puzzles of macro economy: among which Business Cycles, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...

It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.

A Credit Free, Free Market Economy will correct all of those dysfunctions.


The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.

A Specific Application of Employment, Interest and Money
http://www.17-76.net/interest.html

Viking

January 2, 2009 4:32 PM

Yes,Peter Schiff has been spot on in his predictions about our financial future going back as far as 2004.That is why we should pay close attention to what he is saying now,namely that all the government bailouts and borrowing will not solve our problems,but rather make them worse.How can a clear thinking person believe that substituting public borrowing for private borrowing will solve our problems?We need less borrowing and we need to start living within our means and yes,that process will be painful,but government trying to "help" us,will only prolong the recovery period.

James Mason

January 2, 2009 5:10 PM

I was always puzzled by the tendency of some people, including some who should have known much better, to treat Alan Greenspan as if he was the Second Coming. He was not. Now I wonder when there will be an ongoing discussion of whether he triggered the destruction of the American empire, rather like the debates still raging among historians about who and what caused the collapse of the Roman and British Empires.

Eric

January 4, 2009 12:33 AM

Schiff is brilliant. Why are we consulting him as to what we should do? He saw this coming therefore he understands something the people who didn't see it coming can't understand.

Elivley

January 4, 2009 1:57 PM

No comments yet?
It's been days since this post. No "I told you so"s.
Well, here is the first. Peter Schiff was not really all that prescient but he was, at least, still living in the real world while nearly everyone else flew off to Never-never Land with Al.
Greenspan's comments were clearly politically motivated lies. February 2004? No urgency there, except a Presidential Election that needed a strong economy to reelect Bush. Supply side economics, how many times are people going to fall for that one?
I'm just an average citizen and I knew what was going on. The US needs gutsy, tough Journalists on and off of the internet to do their job. Tell us the truth, not just what you think will sell. I keep reading about the demise of newspapers, that they are irrelevant because people read their news on the internet. I think they are dying because people don't trust the news. Shock jocks rule the air and fluff and puff are all we get from our newspapers.

Hal

January 5, 2009 12:06 PM

Yeah, he does look smart in retrospect. I've been trying to read and listen to him every chance I get right now. Of course, just because he was right then doesn't guarantee him now. But his analysis of things currently seem reasonable given the debt load America is carrying. One thing I question is whether he's right on gold. He said he thinks there's a good chance it'll hit $2,000 an ounce this year. But this morning all the news seems to be the strength of the dollar which, checking out ExactPrice ( http://www.learcapital.com/exactprice )right now shows gold suffering at $850.20. Which is a $35 drop from yesterday.

So I still wonder if his forecasts are going to hold. I think a lot will tell once we're six to eight months into the year and all that bailout money has make it's way into and through our economy.

Happy Canada

January 7, 2009 8:49 AM

Peter Rocks! I picked up his first book! Said to myself this makes senses adjusted my entire portolfio...up 7% for the year 2008...did not miss a beat. Beat that! The big lesson I learned during this period is to invest in "what will happen" not what " I want to happen"...Greed grabbed the planet and the reason Peter was sidelined for the past few years is that he spoke to points the investor did NOT want to hear. Here in lies the real issue to many investors lossess....this was not a Greenspan/Feb/Hedge Fund problem...they took advantage of the real problem...Greed on a massive level.
The Bubble Chasers deserve what they get...next bubble bonds then gold...now that is a bubble I am looking forward to.

Keep it up Peter..your makin me rich!

russell Lowry

January 8, 2009 9:21 AM

The Bible had it right. Neither a borrower nor a lender be. As a former banker , I also predicted our current situation. Easy money is solely to blame for the mess we are in. When credit is unrestricted, realestate has only one direction to go and that is strait up. Too much money chasing too few goods. Low interest rates ( lowest in recorded history) discourage savings and encourage borrowing. Saving money and living within our means is a moral responsibility that takes self discipline , something sadly that is gone in our I want it all now, entitlelment society.

Bob Tallon

January 8, 2009 8:19 PM

A lot people knew something was wrong the past 4 or 5 years. All the folks buying these 600 thousand to 900 thousand dollar mcmansions. How could there be so many rich people it did not make sense. Us old foggies would talk about this in our local deli dinner in the mornings. None of us knew what it was but we sensed something was very unusual.
Then you started hearing about these no interest mortgages in 2004 and 2005 and the ponzi scheme started to become apparent.

mike

January 9, 2009 1:45 AM

check out this hot new Schiff video: http://www.youtube.com/watch?v=uTkAnp1-dK4

Robert j Hoffman

January 14, 2009 11:31 PM

Okay, he was sort of right. He said we were gonna hit an iceberg AFTER we hit it.

Here is the guy that predicted oil to 34, the housing crash (exact date), the stock crash on sept 18th, and many more things.

Of course, he is not on tv, but he is 100% correct with dates and numbers.

And gold? He says 100 to 200 by april.

This is the guy you should read. And his site is ad free and not selling books or stocks.

So there you go!

Robert j Hoffman

January 14, 2009 11:32 PM

The article is here by the way
http://www.politicalgateway.com/news/read/173348

Mike

January 19, 2009 3:24 AM

Peter Schiff is one of the few analysts who actually contributes thought and analysis to the financial industry.

The rest are parroting destructive big government views.

Venkat

January 26, 2009 5:42 AM

Everybody knew that Iraq war was for petroleum economics and not for terror or against al Queda.Everybody knew that the second Run of Bush as President will bring down America.He tried like the British Fox to woo Pakistan and Ditch later but failed because the hirsuite Taliban has outwitted him.

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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