Archive for the ‘Ben Bernanke’ Category

Charlie Rose: Paul Volker On Bear Stearns Bailout

Wednesday, March 19th, 2008

Former Federal Reserve chairman Paul Volker appeared on the Charlie Rose show last evening to discuss the recent actions to bailout Bear Stearns. Volker points out that the actions were unprecedented and he cautions that doing so may be an argument for greater regulation of investment houses like Stearns.

Volker’s remarks were focused on his concern that we are witnessing a transformation in the financial market. As such, he argues that it is time to review the mechanisms we have in place to insure that the economy is being protected from the bad decisions of these newly emerging financial players.

Volker doesn’t believe that the Federal Reserve should play a larger part in the regulatory process; rather he contends that they were forced to step into the void with regards to Bear Stearns. Volker suggests that the regulatory process should originate with our elected representatives.

The problem with that equation (even though I agree with Volker) is that the influence of the players in the financial market is daunting…and nothing provides better evidence of this influence than the recent rewriting of bankruptcy laws making it far more difficult for individuals to walk away from debt. Unfortunately, it appears that our government is on the precipice of bailing out the same financial institutions that sought to limit the options for relief by financially strapped citizens.

Yes, the GOP likes to be seen as opposing handouts and welfare…except when it is directed to those corporations that ante up each election cycle. The welfare reform enacted under the Clinton administration was one of the first steps in this shift towards escalating corporate welfare. If this trend continues, be prepared for further financial calamities of greater proportion…with astronomically more acute consequences.

Cross-posted at Thought Theater

George Bush (Brillant Master Of The Obvious) Says, “In The Long Run, Our Economy Is Going To Be Fine”

Monday, March 17th, 2008

No one ever claimed that George Bush has a powerful intellect. Certainly, you can’t expect more from the man who claimed a while back that we should “not misunderestimate” him. I cannot help but hearken back to that wonderful scene in the classic movie Animal House - where with the hoards roaring at him, the ROTC cadet yelling “all is well, remain calm” while getting flattened by the onrushing mob.

George Bush is so insignificant to the economy except for the inexcusable abuse of his administrations authority to get our country into this situation. His recent one minute speechifying is proof that he is irrelevant at this point in time:

9:40 A.M. EDT

THE PRESIDENT: Mr. Secretary, thank you very much for coming by today to talk about the economic situation — we’ll be meeting later on this afternoon with the President’s Task Force on Financial Markets.

First of all, the Secretary has given me an update. One thing is for certain — we’re in challenging times. But another thing is for certain — that we’ve taken strong and decisive action. The Federal Reserve has moved quickly to bring order to the financial markets. Secretary Paulson has been — is supportive of that action, as am I. And I want to thank you, Mr. Secretary, for working over the weekend. You’ve shown the country and the world that the United States is on top of the situation.

Secondly, you’ve reaffirmed the fact that our financial institutions are strong and that our capital markets are functioning efficiently and effectively. We obviously will continue to monitor the situation and when need be, will act decisively, in a way that continues to bring order to the financial markets.

In the long run, our economy is going to be fine. Right now we’re dealing with a difficult situation and, Mr. Secretary, I want to thank you very much for your steady and strong and consistent leadership.

Thank you very much.

END 9:41 A.M. EDT

So, in the one minute it took George Bush to deliver his comments, has he been able to restore your faith in his leadership to deliver us from the mess he helped cultivate? Right, of course our economy will be fine in the long run. We recovered from the Depression right? It’s what’s happening right now that hurts.

Pretty soon, they are going to foreclose on the undelivered FEMA trailers and then what? Too bad George can’t think past saving his pals in big business. If he was so keen to screw the little guy by routing the Chapter 11 laws, why wouldn’t they have let Bear Sterns sink in it’s own sauce?

When it gets right down to it, we see the President and his staff doing the time honored W, Rove and Co thing, saving their friends asses, screwing the little guy, and then blaming some one else for the economy they delivered.

Q For people who are losing their homes, or losing their jobs, and then they see the government helping engineer this $30 billion line of credit for Bear Stearns, and help for other financial investment firms on Wall Street, how do you reconcile the two?

MS. PERINO: Well, the way I would answer that question is in two parts. One, this isn’t about bailing anyone out. These actions are intended, as I said earlier today, to minimize financial market disruptions. And investors in Bear Stearns are taking large and significant losses in this transaction. And that’s not what happens in a bail-out. They bought into a company, they took a financial risk — and it had paid off quite well for them a while ago, but today they’re looking at a stock that’s only worth $2. And the Fed, what they did last night, is try to provide liquidity to the markets so it would stabilize, and we could have orderliness in the system.

But I would also say that a major market disruption would have very damaging consequences and be very painful for everybody, from the small business owner to the homeowner, for everybody all the way up and down the economic food chain. And the goal here is to prevent a major disruption in financial markets. And the Fed is taking decisive action when necessary, and that is what they saw last night.

In addition to that, homeowners and small business owners and everyone across America needs to know that we’ve acted on multiple fronts, starting back in August — that was when the President recognized that we might be heading into some headwinds in the economy, with several different aspects of it. And if you look back consistently over those past several months, he has said that we needed to take some action. And over time, we proposed legislation, dealing with the housing market. We also worked with the private sector to help homeowners, through HOPE NOW, and then Project Lifeline. We supported legislation that would not penalize people for writing down mortgage debt when they did a refinancing. And that finally became law.

We haven’t had Congress act on one of the most important things they could do, which is Federal Housing Administration — changes in reforms that we’ve asked for. It’s been about seven months since the President first announced that, and Congress is now and again on a two-week recess, and nothing is going to happen.

But at the same time, back in January, the President said, when we worked on the stimulus package, that the reason that we’re doing that is because we could see in the future there could be a potential downturn in the economy. And so if things were to get worse, we would have a stimulus package in effect. We called that, remember, an insurance policy, a booster shot, that we said would take effect and have impact later in the summer. And the President and Congress were right to work together on that bipartisan package, because those tax rebates will be going out to people all across the country, including the homeowners that you talk about.

Q But, Dana, how does this square with sort of traditional conservative economic principles of limited government involvement in terms of, sort of, maybe culling the herd a little bit, letting the firms that are going to fail, fail, and thus more can sort of live on the back end?

MS. PERINO: Well, I would point out again that, remember, investors — Bear Stearns basically went from a company that was doing quite well to failure, and at $2 a share, I should think that those investors are seeing — feeling today the consequences of that risk in a marketplace. But I would remind you that what’s right for the markets and stability for the financial system had to be taken into consideration. And that’s what the Fed decided to do, is to act quickly, to act decisively, to make sure that we could provide what’s needed right now, which is stability and liquidity and orderliness.

And the Treasury Department is able to answer lots more of detailed questions, and the Fed certainly on historical questions in this matter.

Q But people who are facing, say, foreclosure, the individuals, the little guys who are facing a foreclosure are looking at the big guys getting government, if not brokered, certainly they’re overseeing deals that are engineered to sort of keep the big picture financial community afloat, and they’re saying, well, where’s my boost of liquidity?

MS. PERINO: They’re going to get that boost of liquidity in the form of a stimulus package and a tax rebate that’s coming to them the second week of May.

Q But that’s not going to save their houses.

MS. PERINO: The other way to help work on the housing issues is to take advantage of some of the programs that we have in place, to talk with HOPE NOW or Project Lifeline, for those who are in more serious dire straits, and also to work — for us to continue from the administration to call on Congress to finally take action on Federal Housing Administration reforms, which we think are necessary to help homeowners across-the-board.

But I would remind you, and remind consumers all across America, that the decisive action taken by the Fed yesterday was precisely to prevent long-term economic harm to everybody in the United States, including, as you said, the little guy.

Right, so they are suggesting the 300 or 800 so dollars you and I get are the equivalent of the multi-billion dollar bail out of the investment industry? Right. When was the last time Reagan applied strategy of “trickle down economics” actually worked to help leverage the little guy up out of an economic hole she or he didn’t create?

Uh Oh!

Saturday, March 15th, 2008

Sure fire way to get the market to tank even further? Add President Bush’s sharp intellect to solving the fiscal woes of our country:

President George W. Bush plans to meet on Monday with top U.S. financial policymakers, the White House said, at a time of increased strains in credit markets and fears of a recession.

What’s that sucking sound? That’s the market drowning in corporate bail outs (read: corporate welfare) for the already rich (Bear Sterns ring a bell any one). Any one taking bets on if Bush will be able to fix this situation like he’s fixed Iraq?

GWB: The Cash In The Cradle & The Silver Spoon - I’m Gonna Be Like Him

Friday, March 14th, 2008

I try to avoid making unequivocal assertions…but if my instincts are correct, I’m not taking much of a risk in predicting that the calamity that will define this Bush presidency will not be the Iraq war. As with his father’s presidency, it will be the economy. Yes, the Iraq war will be factored into the equation that facilitated one of the worst recessions in modern times, but numerous other missteps will receive far more attention.

With the Savings and Loan scandal of the late 80’s as my point of comparison, I expect the magnitude of this recession to be much deeper and far more complex. Frankly, the fact that we survived events like the S & L scandal and the tech bubble have only contributed to the lackadaisical policies that have fostered an air of invincibility. This false confidence has resulted in a deadly conflation of economic poisons that will place a strain on our financial fortitude that hasn’t been witnessed since the Great Depression.

For months, the Bush administration has sought to convince the American public that the economy is sound. Unfortunately, the hollowness of those assurances expands exponentially with each new report. Today’s news is awash with further warnings of economic uncertainty. The President’s remarks, in response to the growing storm clouds, simply highlight the mindset that has typified his inclination to ignore information that doesn’t comport with his rose colored rhetoric.

Unfortunately, I fear this president suffers the misconception that he can tackle this systemic economic malaise in the same manner he addressed the many miscalculations that have plagued the prosecution of the Iraq war. Sadly, brute force has little relevance when it comes to the economy. As with the troop surge, the attempts by the Federal Reserve to pump more money into the economy in order to prop up flailing financial institutions fails to address the dire dynamics that underly the debacle.

Let’s pause to review the observations of others.

From The Wall Street Journal:

It is a very logical progression. Peloton, Carlyle, Focus — hedge funds and other non-deposit-taking financial institutions (NDFIs) are now being hit by the credit crunch, which had so far been mainly confined to mortgage lenders and the banks.

The Federal Reserve has reacted. Its Term Securities Lending Facility aims to encourage investment banks and prime brokers to lend to NDFIs and so relieve those parts of the credit market it cannot reach with its rate cuts and loans to banks.

So far its liquidity injections have got no further than the banks. Now it hopes to reach higher. Unfortunately, it won’t work.

The Fed is like King Canute with a difference — it is trying to halt an ebbing tide rather than a rising one. Its liquidity injection seems huge at $200 billion (with perhaps more to follow), but it is still only equivalent to one-third of the expected losses in the NDFI sector.

Moreover, the Fed’s readiness to accept almost any asset at just below face value as collateral will prevent price discovery. That means the U.S. financial system will remain burdened with uncleansed balance sheets that penalize future lending and economic growth.

Creating a lot of liquidity does not resolve an issue of solvency, which is now the driver of credit contraction. All the Fed will achieve is a dollar that will be further debased and inflation that will be higher. It cannot stop the process of deleveraging and asset price decline.

The credit crisis is unfolding as we expected, but more slowly than anticipated, because of the actions taken by central banks (mainly the Fed) and the U.S. government to allay its effects. The wholesale socialization of credit has meant that government and central bank measures account for 70% of new credit since last summer.

But these policy measures will not prevent asset-price deflation or credit contraction, which are functions of risk appetite and general readiness to maintain current levels of gearing throughout the economy. The non-bank sector has the potential to inflict more damage on the system than banks, because it has a much smaller capital cushion for a much more volatile and risky balance sheet.

Credit contraction translates through the financial system into a reduction in available credit for the non-financial corporate sector, and thus into reduced investment and growth in the real economy. The size of that contraction can be estimated from the leverage ratios of the financial sector and their impact on real GDP growth.

We estimate that nonfinancial corporate debt ultimately will have to shrink by 11%-12%. This will generate a decline of five percentage points of real U.S. GDP growth and push the U.S. into recession. Europe’s real GDP growth will contract by two percentage points.

Essentially, the point being made by the author is that the Federal Reserve’s efforts to lower interest rates is inadequate to address the fundamental problem - the value of the assets that underly much of the existing debt is in a period of contraction…largely as a result of the collapsing housing industry.

As such, the ability of lenders to lend is limited. They lack the capital needed to make loans; let alone the capital required to support declining equity positions and the increasing default risks that are associated with these loans. Hence, the Fed’s efforts to infuse the economy with the capital needed to spur growth isn’t going to be sufficient. Even worse, should this contraction lead to lender insolvency, the likelihood of the need for a huge government bail out advances. If this happens, I believe it will be far larger than the one witnessed during the S & L scandal.

From The New York Times:

The Fed’s economic power rests on the fact that it’s the only institution with the right to add to the “monetary base”: pieces of green paper bearing portraits of dead presidents, plus deposits that private banks hold at the Fed and can convert into green paper at will.

When the Fed is worried about the state of the economy, it basically responds by printing more of that green paper, and using it to buy bonds from banks. The banks then use the green paper to make more loans, which causes businesses and households to spend more, and the economy expands.

This process can be almost magical in its effects: a committee in Washington gives some technical instructions to a trading desk in New York, and just like that, the economy creates millions of jobs.

But sometimes the magic doesn’t work. And this is one of those times.

Instead of following its usual practice of buying only safe U.S. government debt, the Fed announced this week that it would put $400 billion — almost half its available funds — into other stuff, including bonds backed by, yes, home mortgages. The hope is that this will stabilize markets and end the panic.

Officially, the Fed won’t be buying mortgage-backed securities outright: it’s only accepting them as collateral in return for loans. But it’s definitely taking on some mortgage risk. Is this, to some extent, a bailout for banks? Yes.

Still, that’s not what has me worried. I’m more concerned that despite the extraordinary scale of Mr. Bernanke’s action — to my knowledge, no advanced-country’s central bank has ever exposed itself to this much market risk — the Fed still won’t manage to get a grip on the economy. You see, $400 billion sounds like a lot, but it’s still small compared with the problem.

Krugman offers a look into the risks being taken by the Federal Reserve to avert the looming collapse of financial institutions. The fact that the government is taking unprecedented risk signals the seriousness of the situation. The fact that the government has committed half of its available funds to this risk intensive effort suggests that the ultimate solution will require the government to appropriate additional funds…hence the bailout begins. The price tag of the S & L scandal would likely pale in comparison.

The impact to the overall economy could be mind-boggling since it would be apt to affect consumer spending. Falling home values would strip millions of Americans of the bulk of their accumulated wealth which would no doubt restrict their ability and willingness to spend money. The direct correlation of this intertwined cause and effect spiral could have disastrous consequences.

We haven’t even factored in the disproportionate numbers of baby boomers moving towards retirement. A worst case scenario could place the financial stability of many of these individuals in jeopardy at a time when the safety net of Social Security is also approaching insolvency.

From CNBC:

The United States has entered a recession that could be “substantially more severe” than recent ones, former National Bureau of Economic Research President Martin Feldstein said Friday.

“The situation is very bad, the situation is getting worse, and the risks are that it could get very bad,” Feldstein said in a speech at the Futures Industry Association meeting in Boca Raton, Florida.

“There isn’t much traction in monetary policy these days, I’m afraid, because of a lack of liquidity in the credit markets,” he said.

The Fed’s new credit facility, announced on Tuesday, “can help in a rather small way … but the underlying risks will remain with the institutions that borrow from the Fed, and this does nothing to change their capital,” Feldstein noted.

I simply don’t see the mechanism by which this strained liquidity can be alleviated in the near term. Pumping more cash into the system could have short term benefits but the risk to the already tenuous value of the dollar would likely outweigh them. Relying upon the standard bearers…the consumer…to spend us out of this mess seems unlikely. Rarely have prior recessionary periods been accompanied by such significant declines in home values.

Were we to see the emergence of sustained inflation, the picture becomes even more disconcerting. Many of the measures designed to address the liquidity crunch have the potential to do just that. Toss in our trade imbalance, the amount of debt held by the Chinese, and an international shift away from the dollar as the preferred reserve currency and one begins to see the growing alignment of negatives.

The fact that the American image has been tarnished during the current administration makes it difficult to imagine the kind of international cooperation we might have otherwise received during such a slowdown. In fact, don’t be surprised if a number of nations stand idly by as the perceived bully endures its comeuppance.

Returning to the Bush legacy, I recall the deteriorating situation faced by his father prior to the 1992 election. When the senior Bush expressed his amazement with the scanning technology found in grocery stores, his appeal and his connection to the average American is thought to have suffered. When the Clinton campaign added, “It’s the economy, stupid”, the stain became permanent.

The fact that the current president expressed surprise when a member of the press mentioned the prospects of $4.00 per gallon gas seems eerily similar to the last days of his father’s presidency…and it may also assist in cementing the economy as his legacy’s leading albatross.

George W. Bush’s seeming shortage of empathy for the plight of the average American shone through in his mishandling of Katrina, his passage of tax cuts for the wealthiest, his inept energy policy, and his willingness to sink trillions of dollars into the execution of a virtual vendetta in Iraq. These events will forever be tethered to his tenure and his successors are apt to spend years trying to repair the damage done.

They say the writing of one’s legacy is rarely finished since the past undoubtedly shapes the future. In the case of George Bush, I suspect he’d be best to hope that his influence on the future be less indelible than his unabashed attempts to color the present.

Gertrude Stein stated that a “rose is a rose is a rose”. Ernest Hemmingway responded with “a rose is a rose is an onion”. In thinking of the Bush legacy, I’m inclined to argue that a silver spoon may beget rose colored rhetoric…but a silver spoon full of rose petals rarely helps us swallow the thorns. When the bow breaks, the Bush legacy will fall.

Cross-posted at Thought Theater

All About The Onion: 63,000 Jobs & An Economy Without A Core

Friday, March 7th, 2008

It’s difficult to find anything to smile about in the latest jobs report. Despite the assurances from the Bush administration that the economy remains strong, each new report brings evidence that we’re in a recession. It looks like the administration is either in denial or simply employing the same “head in the sand” mindset that spent the last five years telling Americans that the situation in Iraq is improving. Despite the president’s rosy rhetoric, I choose to believe that the data doesn’t lie.

The current economic uncertainty reminds me of a metaphor shared by a friend many years ago. While discussing borderline personality disorder, a psychological condition prone to sociopathic behaviors, she described it as being akin to comparing an apple to an onion. The normal personality is like an apple, in that it has a core; whereas with the onion, you peel away layer after layer to find that no core exists.

It’s not a perfect analogy, but it underscores my belief that this latest period of economic expansion has lacked the essential fundamentals to insure economic stability. When one strips away the facade of inflated home values…driven by artificially low interest rates…all that remains is a tenuous economy in the throes of adjusting to the instability and uncertainty of globalization.

The economy shed 63,000 jobs in February, the government said on Friday, the fastest falloff in five years and the strongest evidence yet that the nation is headed toward — or may already be in — a recession.

“I haven’t seen a job report this recessionary since the last recession,” said Jared Bernstein, an economist at the Economic Policy Institute in Washington. “This is a picture of a labor market becoming clearly infected by the contagion from the rest of the economy.”

The loss in February was the second consecutive monthly decline in the labor market; economists had predicted a slight increase. The government also revised down its estimate for January to a loss of 22,000 jobs — the first decline in four years — and cut in half its estimate for job growth in December.

Wages stayed stagnant in February, further depressing the outlook for consumer spending over the next few months. Among rank-and-file workers — more than 80 percent of the work force — average pay grew just 0.3 percent to $17.20 an hour. Wages are effectively running flat when adjusted for inflation.

These job losses are only one segment of the current economic downturn. Truth be told, the housing crisis and its impact on financial markets looks to be an unprecedented debacle that has yet to fully unfold. The efforts of the Federal Reserve to reduce interest rates and make huge amounts of capital available to struggling financial institutions is a testament to the severity and complexity of this crisis.

I suspect the powers that be are hesitant to offer a candid assessment for fear it will trigger even more caution on the part of consumers. To a degree, that is prudent. Unfortunately, this snowball is already rolling and I see little reason to offer false assurances that it won’t continue to expand. I look for the government to make added admissions in much the same manner found in a criminal investigation…as more evidence is unearthed, the administration will find itself unable to continue with the denials.

Look no further than a comparison to the Saving & Loan scandal of the late 80’s to understand how the government will attempt to downplay the gravity of the situation. Sadly, I’m concerned this fiasco may be far more pervasive. While the S&L scandal was primarily isolated to commercial real estate, the current crisis involves residential real estate and millions of homeowners. That alone suggests a greater magnitude; one that will strike a blow to a core source of economic growth…consumer confidence and spending.

I don’t want to be an alarmist, but I see a unique and troubling confluence of conditions that have the potential to challenge our existing economic constructs. The growth of multi-national corporations with GDP’s that rival those of many nations serves to undermine the assumption that all Americans share similar economic objectives with consistent measures of success. It simply isn’t true in this day and age of global investments and the outsourcing it facilitates in order to increase the bottom line. When the goals of a huge corporation no longer comport with the goals of their nation of origin, the established economic models have become outdated and virtually irrelevant.

I realize I’m painting a gloomy picture. At the same time, I’m convinced that the American public must demand an honest assessment and an open dialogue with regard to these dramatic developments. If we allow our politicians to plot the course…in conjunction with their corporate benefactors…we may find ourselves in a conflict with the United Empire of ExxonMobil…a conflict that we can neither overcome or endure.

On that dark note, I think the following video from The Onion captures much of the essence of this shifting economic construct. It made me laugh…but as with all comedy…it also underscores an undeniable truth that requires our consideration.

The Onion: Outsourcing Child Care Overseas

Cross-posted at Thought Theater

Pearls Of Wisdom: The World Is No Longer Our Economic Oyster

Thursday, March 6th, 2008

Economists attempt to measure the health of the economy in a variety of ways. I’m of the opinion that two news reports (here and here) shed some ominous light on its status and may well signal the need to sound the alarm bells. For many years real estate, and in particular home ownership, has been the single greatest source of wealth accumulation for the average American. As such, it has served as the foundation for much of our confidence to spend money.

Having the safety and security of growing home equity has given consumers confidence to make purchases they might otherwise forego. It has also been the source of the capital needed to make large ticket purchases that wages may not always enable. The buying, selling, and refinancing of homes has pumped countless dollars into our economy and in recent years it has helped to offset the shifting dynamics of growth.

Following the recessionary period at the beginning of this decade, much of the growth we’ve experienced hasn’t translated to better jobs or higher wages. In fact, for a large majority of Americans, the latest period of economic growth has been accompanied by a decline in the standard of living…except for those in the top tier of incomes.

Here’s where the housing bubble comes into play. In this same period of time, we’ve seen an unprecedented increase in home values and therefore some means for consumers to offset the lack of measurable benefits from this latest period of economic expansion. Unfortunately, that offset appears headed towards a screeching stop…and likely a virtual reversal of fortune.

Let’s first look at the foreclosure picture since the bubble has already burst for these individuals.

WASHINGTON - Home foreclosures soared to an all-time high in the final quarter of last year and are likely to keep on rising, underscoring the suffering of distressed homeowners and the growing danger the housing meltdown poses for the economy.

The Mortgage Bankers Association, in a quarterly snapshot of the mortgage market released Thursday, said the proportion of all mortgages nationwide that fell into foreclosure shot up to a record high of 0.83 percent in the October-to-December quarter. That surpassed the previous high of 0.78 percent set in the prior quarter.

More homeowners — at the same time — fell behind on their monthly payments.

The delinquency rate for all mortgages climbed to 5.82 percent in the fourth quarter. That was up from the 5.59 percent in the third quarter and was the highest since 1985. Payments are considered delinquent if they are 30 or more days past due.

The percentage of subprime adjustable-rate mortgages that entered the foreclosure process soared to a record of 5.29 percent in the fourth quarter. That was up from 4.72 percent in the prior quarter, which had marked the previous high. Late payments skyrocketed to a record high of 20.02 percent in the fourth quarter, up from 18.81 percent — the previous high — in the third quarter.

Take note of four key numbers. One, we’re approaching the point at which one percent of all mortgages are in foreclosure. Two, over five percent of ALL mortgages were considered delinquent. Three, over five percent of all subprime adjustable rate mortgages are in foreclosure. Four, over twenty percent of the remaining subprime loans are delinquent.

It doesn’t take a math wizard to realize that we’re on the front end of this crisis and it’s clearly going to get worse before it gets better. Why? Two reasons. First, the interest rates on more loans are going to adjust upward. Second, home values are going to continue to decline which will mean more borrowers will be unable to refinance. So what does this mean? It means there is currently nothing on the horizon that will blunt the increase in foreclosures…or the increase in borrowers who won’t be able to refinance out of unfavorable loans.

Now let’s look another key piece of the problem…the decline in homeowner equity.

NEW YORK - Americans’ percentage of equity in their homes fell below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday.

Homeowners’ portion of equity slipped to downwardly revised 49.6 percent in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter — the third straight quarter it was under 50 percent.

That marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945.

The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.

Home equity, which is equal to the percentage of a home’s market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing.

Economists expect this figure to drop even further as declining home prices eat into the value of most Americans’ single largest asset.

Moody’s Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be “upside down” if prices fall 20 percent from their peak.

The latest Standard & Poor’s/Case-Shiller index showed U.S. home prices plunging 8.9 percent in the final quarter of 2007 compared with a year ago, the steepest decline in the 20-year history of the index.

I would argue that this data may be even more troubling than the rising foreclosure and delinquency rates because it undoubtedly predicts more declines in consumer confidence and spending and thus growing recessionary pressure.

Take particular note of the connection between the housing bubble and the latest economic expansion. When home values soared at the beginning of this decade, homeowners borrowed more money. They did so because the economic growth didn’t translate into better jobs and higher wages. Hence, more Americans dipped into rising home equity to keep apace with rising costs….and we haven’t even touched on rising credit card debt.

What this tells us is that the latest expansionary period was primarily manufactured through the implementation of artificially low interest rates which enabled homeowners to bolster spending through debt. Lower interest rates meant people could afford more expensive homes. Once this rollover process began, it set in motion rising home prices that were unsustainable. Even worse, it gave homeowners and borrowers a false sense of security. People began to believe their home values would continue to rise and they became less averse to pulling out and spending a higher percentage of their paper equity.

While one can fault these individuals for taking greater risk, one must also consider the incompetence of those who enabled this housing bubble…complete with shoddy monetary policy, suspect lending practices, and inadequate oversight. Not since the Savings & Loan scandal of the late 80’s have we seen such shortsighted and lax practices…complete with the now infamous non-qualifying assumption loans.

Well, just over twenty years later, we’ve done it again. I have two favorite examples of the current debacle. First, the 125% loan…a loan that simply allowed homeowners to borrow 25% more than a home was worth. Second, what the industry initially called “stated income” loans (NINA’s - no income, no asset verifications), which are now being called “liar loans”. Essentially, the borrower was allowed to state an annual income and place a value on assets held without the requirement of any substantiation.

What remains to be seen is how long it will take our government to fully embrace the magnitude of the current crisis. Sadly, the hope that reducing interest rates or rolling out programs like “Project Lifeline” will solve this problem is more of the same. A quick look at the value of the dollar informs us of the consequences that accompany these efforts to avoid the inevitable.

Harsh as this may sound, I find myself in general agreement with the following thoughts of Robert Samuelson from a recent Washington Post column.

Gloom. Doom. Calamity. Home prices are tumbling. We’re bombarded by somber reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last.

Samuelson isn’t keen on aggressive measures to assist those who are in foreclosure or upside down; arguing that it only postpones the necessary adjustment. While this may sound heartless, the point he’s making is that we must cease our efforts to bolster a weakened and changing economic structure by creating artificial housing prices. The sooner we strip away this facade, the sooner we can begin to address the deficiencies of our underlying economy.

The longer we tinker with the primary means of accumulating wealth (homeownership), the more likely it won’t be available to more and more Americans. In this time of job loss to globalization, we can ill-afford to damage one of the last bastions of the American Dream…especially for an increasingly challenged middle class.

We must demand that our politicians implement the measures necessary to insure a sound and sustainable economy without resorting to politically expedient manipulations meant to mask the manifestations of a world economy. While the world used to be our oyster, I suspect our share of the pearls is destined to decline. Knowing this, I would suggest our leaders start by setting a better example with regards to fiscal responsibility. Lest we be buried by the shifting tides, it’s time for a sea-change.

Cross-posted at Thought Theater

Stimulus Checks: Building A Bridge To Nowhere?

Monday, March 3rd, 2008

If you want to understand the degree to which politicians make shortsighted decisions intended to win favor with the voters at home, look no further than the passage of the $168 billion dollar economic stimulus package.

If you want to see how ill-advised such decisions may be, take a moment to look at a new report by Pew Research. The report grades each of the states on the management and maintenance of their infrastructure…and the results aren’t encouraging.

WASHINGTON (Reuters) - Almost half of the states in the United States are falling behind in their infrastructure maintenance and fiscal systems, according to a report released Monday by the Pew Center on the States and Governing Magazine.

The groups gave 23 states grades for infrastructure that were below the national average in their study called “Grading the States.” Using a scale similar to those found in U.S. schools, where an A is excellent and an F failure, they decided 23 states had grades below C+.

In the money category, which encompassed budget balancing, contracting, and other fiscal categories, 20 states received C+ and below, while 19 states garnered grades of B and above. The average among 50 states was B-.

It’s clear that our infrastructure has been in need of a capital infusion for a number of years. It’s also clear that our economy has been kept afloat by a housing bubble driven by artificially low interest rates rather than by sustainable economic growth that creates a stable increase in jobs and the kind of expansion that is cumulative in nature.

Politicians and voters have become accustomed to stop gap measures designed to dispel consumer doubt and forestall recessionary pressures. Unfortunately, while such measures may provide a temporary economic boost, they also promote a boom and bust mindset and the hills and valleys that accompany it.

In truth, it’s a form of bait and switch. Politicians choose to offer voters a few hundred dollars, and thus the ability to buy a new television set, rather than making the difficult decisions to enact measures that would provide long term stability. In our consumption is king construct, we’ve adopted the pathology that comes with the need for instant gratification.

The political calculations that flow from our short election cycles simply promote more of the same. We’re not only raiding the cookie jar; our elected officials are handing out cookies without considering the need to manage and maintain the bakery.

Prior to the millennium, numerous politicians mouthed the metaphor of building a bridge to the 21st century. As it turns out, we not only refuse to fund the bridges needed to take us there, we’ve taken a shine to building bridges to nowhere.

I struggle to find the silver lining in rolling out billions of dollars in refund checks while the wheels are falling off the wagon. Then again, perhaps our politicians want to be sure we can watch the news coverage of the next bridge collapse…on our shiny new high definition televisions.

Cross-posted at Thought Theater

How Many Revised Economic Forecasts Before The Fed Says The “R” Word?

Wednesday, February 20th, 2008

stimuluspackage.jpg

Just how many revised economic forecasts does it take to finally conclude that the U.S. is in a recession? Former Fed Chairman Alan Greenspan likes to up his odds we’re heading into a recession by approximately 20 percentage points every quarter. Current Fed Chairman Ben Bernanke seems to prefer a different approach. His modus operandi is to lower GDP a few tenths of a percent with each revised outlook.

As an outside observer, this measured slide towards using the “R” word feels like being in my car at a red stoplight with my favorite backseat driver seated beside me. As we wait for the lights to change (because we know they will), my trusted traffic manager sits there predicting the seconds until the opposing green light will turn yellow…never getting it quite right…but jubilant each time he announces…after the fact…that “The light just turned yellow”. This process continues until our red light turns green and we can proceed to the next intersection…to start all over again.

While I realize my analogy isn’t an actual equivalent, the frustrations are much the same. Yes, predicting the twists and turns of the economy isn’t an exact science…but I do find our willingness to grant these prognosticators a free pass each time they err to be a rather absurd practice. The fact that the nation holds its breath each time a new report is scheduled for release merely supports my contention.

WASHINGTON (AP) — The Federal Reserve on Wednesday lowered its projection for economic growth this year, citing damage from the double blows of a housing slump and credit crunch. It said it also expects higher unemployment and inflation.

Under its new economic forecast, the Fed said that it now believes the gross domestic product will grow between 1.3 percent and 2 percent this year. That’s lower than a previous Fed forecast for growth, which at that time was estimated to be between 1.8 percent and 2.5 percent.

With economic growth slowing, the Fed projected that the national jobless rate will rise to between 5.2 percent to 5.3 percent this year. That is higher than the central bank’s old forecast for the rate to climb to as high as 4.9 percent. Last year, the unemployment rate averaged 4.6 percent.

And, with energy prices marching upward, the Fed also raised its projection for inflation. The Fed now expects inflation to be between 2.1 percent and 2.4 percent this year. That’s higher than its old forecast for inflation, which was estimated to come in at around 1.8 percent to 2.1 percent.

The Fed said its revised forecasts reflected a number of factors including “a further intensification of the housing market correction, tighter credit conditions …. ongoing turmoil in financial markets and higher oil prices.”

In truth, I suspect that the average American has just as good a sense of where the economy is headed as those who get paid to inform us. If the last number in our checkbook is negative, we conclude we have a problem. Why wouldn’t the same math hold true for our national economy?

No, we allow our political leaders to sell us on the notion that a tax rebate of $300.00 to $1,200.00 is all that matters and all that is needed to jump start the economy…even as they continue to predict further economic contraction. Excuse me, but isn’t that on par with each of us taking a cash advance on an already debt heavy credit card and thinking we’re suddenly in the black?

Look, I understand the notion of spending an economy out of a downturn. However, the rest of that equation posits that the increased spending will result in new jobs, greater investment and productivity, and increasing revenues for the individual, the corporation, and the government.

Unfortunately, this equation may no longer be valid…especially since the jobs are often created in other nations, the investments are frequently targeted for countries with cheap labor such that productivity is less relevant, and the only increased revenues find their way into the pockets of formerly impoverished third world individuals and the corporations and their CEO’s that benefit from the enhanced bottom line that ensues.

So what does the average American get? A stimulus package that provides a single check that won’t overcome the unfavorable wage-inflation ratios, the higher costs of fuel, the expanding credit card debt, the skyrocketing health care costs, and the ever shrinking job opportunities.

At the same time, some of our political leaders clamor for making the tax cuts for the wealthiest Americans permanent and lowering the corporate tax rate from 35 to 25 percent. I don’t know about anyone else, but these refund checks remind me of the dynamics underlying “the world’s oldest profession”…the one where one party gets poked for a few bucks by the fat cat who realizes that money can buy him anything he wants.

In the end, getting the powers that be to speak the “R” word is an exercise in relabeling. After all, once the deed has been done and the hush money has been paid, does it really matter what we call an old fashioned screwing? I think not.

Cross-posted at Thought Theater

When Greed Isn’t Good

Sunday, January 27th, 2008

I’m not sure whether to be worried or not, but I found myself agreeing with Mike Huckabee this week. For a man who thinks the planet was created last week, he’s remarkably astute about the stimulus package both parties are currently flogging.

The Huckster hit the nail on the head when he said that we’ll go hat-in-hand to China and borrow the money to fund the tax rebates. The folks who qualify for the rebates will then spend it on something frivolous, like food or clothing. They’ll run down to the local Walmart and buy Chinese-made underwear or toxin-laced tomatoes.

Simply Stimulating
The plan has other “stimulating” facets too. While the bipartisan boneheads are throwing a sop to the lower income segment, they’re also making sure corporations get a big chunk of the pie. These would be the same corporations that loaned money to people using oxygen for collateral, or that have moved all their production to China, or both.

The mortgage meltdown was obvious to anyone who ever balanced a checkbook long before the astronomically paid investment bankers and their equally greased clientele woke up to it. Somehow they missed the Economics 101 lecture about the inadvisability of loaning money to people who can’t pay it back. And while the saga unfolded, the C-student from Yale stood by not only insisting that things were just fine, but refusing to regulate a market completely unwilling to regulate itself. At least Alan Greenspan, had the good manners to call the equally unregulated Clinton markets “irrationally exuberant”.

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Bush-Whacked Economy-More Fuzzy Math

Saturday, January 19th, 2008

The “economic stimulus” plan being hammered out by Bush, Bernanke, and the Democrat controlled Congress is a farce and a scam, and a slap in the face of every American citizen-except maybe the top 1%. Worse, once passed, it will add another $145 billion debt on the backs of our children and grandchildren so that people can get a one time cash infusion of $500 - $800 a piece.

Hey, I’d like to have some extra greenbacks in my wallet too, but at what cost? At to what real benefit? And why are those people most likely to really feel some benefit from the money excluded completely from the plan?

Let’s look at the cost-$145 billion. Last time I checked we were running a deficit budget, so where is this money going to come from? The government wants to send every taxpayer a check for up to $800. That’s not a tax credit that would just decrease this years tax receipts, that’s cash out of the treasury, cash that isn’t there to spend. How will the government finance this? More borrowing from our foreign friends? The answer is simple- future generations of Americans- our children and their children- will bear the burden of this ultimately futile give-away. The government will get the money from somewhere-hell, they may just print some more currency and inject it into the system (which of course would make the dollar worth even less, making the “stimulus” part of the plan null and void at the gate)-and our progeny will have to pay. It’s just another play now, pay never kind of scheme that politicians love to pull out, because everyone feels good today and they get to say they did something helpful. The ‘pay never’ part means that they (the politicians) and the benefactors (today’s taxpayers) will be dead long before the debt borrowed for the “stimulus” is paid off.

To recap so far- THE GOVERNMENT DOESN’T HAVE $145 BILLION TO GIVE YOU. DO YOU REALLY WANT THEM TO SHACKLE YOUR KIDS’ FUTURE EARNINGS SO THAT YOU CAN HAVE AN EXTRA $800 RIGHT NOW? DON’T YOU LOVE YOUR KIDS???

Secondly, who really benefits from this “stimulus” package anyway? Well, ostensibly, every taxpayer will get a check from the government. Then there are tax breaks for businesses, so they can

“make major investments in their enterprises this year. Giving them an incentive to invest now will encourage business owners to expand their operations, create new jobs, and inject new energy into our economy in the process. ” -Bush, 1-18-08

The Democrats want an extension on unemployment benefits too. So far, both parties are embracing the worst element of the plan, the cash give-away. They are using the tax breaks for businesses and the social program extensions as bargaining chips so that each side can claim they did more. So at first glance, it seems that the beneficiaries of the “stimulus” plan would be Americans who pay taxes, maybe businesses, and maybe the unemployed somehow. While this may look good- after all every one benefits, right?-it is really just smoke and mirrors. The whole point of an economic stimulus plan is to stimulate the economy, but we don’t need stimulus. We need reform. The game of borrowing, shifting, bribing, and pandeirng is what got us to where we are- well, that and a bunch of spend-thrift dunces running the show-and this plan seeks to solve the problem using the same tried and failed strategies. “Give ‘em a bunch of cash and they’ll forget how bad things are for a bit,” seems to be the political strategy of the day.

So who are the real benefactors of this “stimulus” plan? Well, Fed Chief Ben Bernanke gives it all away.

Federal Reserve Chairman Ben Bernanke entered the stimulus debate Thursday, appearing before the House Budget Committee to endorse the idea of putting money — as soon as possible — into the hands of those who would spend it quickly and boost the flagging economy.

Especially important is making sure a plan can put cash into the hands of poor people and the middle class, who are most likely to spend it right away, he said, though the Fed chairman added that research shows affluent people also spend some of their rebates. -AP

Gee Ben, why don’t you just have the government send all that money directly to the business community and cut the middle man out altogether? I mean, how can $800 really help anyone, except for the Chinese who make all the crap that they hope you will buy at Wal-Mart, or the oil barons and shieks if we use the money as the president contends, “to help meet their monthly bills, cover higher costs at the gas pump, or pay for other basic necessities.” Sure you could rush out and spend the cash on things you don’t need, or you could pay off a bill, maybe two, or maybe your $800 will help cover the overdue mortgage for one more month, thus forestalling the foreclosure man for another day. But beyond that first month, what kind of stimulus benefit does this really create? None at all. And if you believe that it will you should have your head examined. You’ve fallen for more of Bush’s fuzzy math.

Recap so far-THE GOVERNMENT DOESN’T HAVE THE MONEY TO GIVE AWAY. IF YOU LIKE THIS PLAN, YOU DON’T LOVE YOUR KIDS. $800 WON’T MAKE A REAL DIFFERENCE IN THE LIVES OF MOST PEOPLE ANYWAY-AT BEST IT WILL PAY OFF SOME CREDITOR OR END UP IN THE WAL-MART SAVINGS ACCOUNT. IF YOU THINK THIS PLAN WILL HELP OUR ECONOMY MUST BE A POLITICIAN.

Finally, since these “economic stimuli” are all aimed at taxpayers, the working poor and others at the lowest rungs of economic society get no “stimulus” at all, and these are the folks whose lives would most greatly be impacted by a cash infusion. $800 could rent a warm room, or maybe get a little extra food into the kids’ bellies for a change. It could provide comfort for a short time to someone who really needed it. But, nah, those people, many who are employed full time at several part-time minimum wage jobs and thus have no federal income tax bill don’t need help, right? They don’t pay taxes anyhow, right?

Final recap- THE GOVERNMENT DOESN’T HAVE $145 BILLION TO BEGIN WITH. YOUR KIDS MEAN LESS TO YOU THAN A NEW FLATSCREEN TV. THE $800 IS REALLY JUST A BRIBE TO YOU AND A GIFT TO BUSINESSES WHO ALREADY HAVE ALL THE MONEY. YOU LOVE POLITICIANS WHO WILL SELL YOUR CHILDREN INTO BONDAGE. STIMULUS IS THE BIGGEST WORD GEORGE BUSH KNOWS. ANYONE WHO LIKES THIS PLAN HATES THE POOR AS MUCH AS THEY HATE THEIR OWN KIDS.

So there you are happy campers. The economic “stimulus” plan that promises to keep things as they are, that is, in the shadows and out of control. A plan that does nothing to address the reasons why our economy is a shambles and does nothing to change the status quo. It is less than a band-aid on a machete wound. It is pandering to the public. And it a a complete bipartisan failure. I’ll leave with a few quotes…

“What he believes is that we’ve got to do something that is robust. It’s going to be temporary and get money into the economy quickly,” Treasury Secretary Henry Paulson said Friday on CBS’s “The Early Show.” “It’s going to be focused on consumers, individuals, families — putting money in their pocket. And it’s going to be focused on giving businesses the incentive to hire people, to create jobs.”

Government must “spend the money, invest the resources, give the tax relief in a way that again injects demand into the economy, puts it in the hands of those who need it most and into the middle class … so that we can create jobs.” -Nancy Pelosi, Speaker of the House of Representatives

“Putting money into the hands of households and firms that would spend it in the near term” is a priority. -Ben Bernanke, Chariman of the Federal Reserve

Here’s $800 bucks. Go create a job for someone this week-someone in China that is.

“By passing an effective growth package quickly, we can provide a shot in the arm to keep a fundamentally strong economy healthy.” George W. Bush, President of the U.S.A.

Fundamentally strong economy? Healthy? Shot in the arm? Can anyone say “delusional?”

All this will come to pass though, and the underlying problems will be papered over like yesterdays fish. And the hole will get bigger my friends, the hole will get bigger. Without fundamental reform and political restraint there will be no economic reform, only more economic tomfoolery. Without individual restraint and without a solid employment base, there will be no economic growth for the vast majority of Americans.

Enjoy your rebate, brought to you by Fuzzy Math Incorporated.

(cross posted at Common Sense)


Fish.Travel