Loan Modification Not A Fix-All To Credit Crisis

With credit markets still tight, should the government be doing more to loosen lending? One proposed solution that the government is actively pursuing is loan modification for troubled homeowners. But according to the following post from Blown Mortgage, loan modifications will not get to the heart of the US credit problems.

Last year we say yet another bubble pop, the credit industry. That bubble did not pop alone. A whole lot of burst bubble followed including the mortgage industry, construction, stock market and the banking industry as a whole. Countries do start to get nervous when the banking and credit industry that feeds the whole economy starts to shake. Nerves can help us to react and find solutions but it can also make us overreact and come up with inadequate solutions.

How should we rate loan modifications as a solution for the credit crisis?
The answer to that question depends on who you listen to or which economic model you choose to follow.

If you view the economy as a natural process of offer and demand that is best left alone you will probably think that the government’s efforts to bailout home owners is a travesty of governments role in society. I can easily relate to this view. The credit crisis can easily be viewed as an example of consumer’s greed that can be solved by allowing foreclosures and bankruptcies to do their job of balancing the irregularities unwise “investors and borrowers” created.

Deciding if loan modifications as a management tool of the economy is morally or economically acceptable is only part of the issue. Many would say that loan modifications might help if we were dealing with a mortgage crisis but are not the solution to the credit crisis. It is easy to see that something more deeply ingrained than a bad interest rate is behind the credit crisis we are currently living.

Unfortunately the only thing a loan modification can do is modify a mortgage or home loan it can’t help with numerous credit card debts, car loans and other debt issues.

Many would argue is that the current crisis is the market’s way of teaching a lesson of modifying behaviors, of showing that the current spending and borrowing cultures are not sustainable. An interesting fact that backs this view is that many people who are struggling to pay their mortgage shouldn’t be if one were to look at their incomes. This was a problem the HAMP (Home Affordable Mortgage Program), the Government’s mortgage aid program had to deal with. In an effort to reduce bailouts and loan modification breaks to those who really need it, only home owners that pay more than 31% of their wage towards their mortgage qualified for a sponsored loan modification. HAMP managers have since realized that this requirement limits this program to many who really need a loan modification in order to not foreclose their mortgages. This is because their mortgage is only one of the debts they have to deal with.

For people to reap lasting benefits from a government program we will have to dig deeper into the origins of the current credit crisis and that is not secluded to the type of mortgage home owners have.

This post has been republished from Blown Mortgage, a mortgage news and analysis site.

Consumer Confidence Shows Drastic Improvement

In past recessions consumers may have already started to rush back to the malls, but this time might be different. Instead of going back to the shopping centers, consumers may instead be sending their money to credit card companies to pay back their high levels of debt. So what should we make of consumer confidence increasing the most in six years? Tim Iacono from The Mess That Greenspan Made explains why a sudden improvement in consumer confidence may not be as significant as it first appears.

Reuters reports on the sharpest increase in U.S. consumer confidence in more than six years. But, don't get overly excited (like the stock market currently is), the American shopper is still quite depressed by historical measure.

The Conference Board, an industry group, said on Tuesday its index of consumer attitudes jumped to 54.9 in May from a revised 40.8 in April, the biggest one-month jump since April 2003. Economists had been looking for a much smaller rise to 42.0.

Fewer Americans said jobs were "hard to get," the survey found, with that measure slipping to 44.7 percent from 46.6 percent. Those saying jobs were plentiful climbed to a still meager 5.7 percent, but that was still higher than April's 4.9 percent.

"Consumers are considerably less pessimistic than they were earlier this year," said Lynn Franco, director of The Conference Board's Consumer Research Center.

Once again, less bad is the new good, the "considerably less pessimistic" assessment being cause for some to get out the bubbly and celebrate, at least for a little while.

More details...

The survey offered mixed messages regarding Americans' propensity to spend money. The proportion of those who said they planned on buying a car over the next six months rose to 5.5 percent, its highest in at least a year.

But fewer intended to buy homes -- only 2.3 percent, a tough break for one of the hardest hit sectors in the country's economic crisis. A separate report on Tuesday revealed U.S. home prices dropped 18.7 percent in March compared to a year earlier.

Here's a graphic from the Wall Street Journal showing how the expectations index has surged past the present conditions index in a manner similar to the 2003 bottom. Since confidence had sunk to such historic lows in recent months, like many other economic indicators, comparing recent developments to patterns seen in previous recessions may not provide all that much relevant insight.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Phoenix Real Estate Market Showing Signs Of Life

The Phoenix real estate market was one of the hardest hit when the housing bubble popped, and it looks like it might be one of the first to rebound. Buyers are beginning to show heightened interested in the market, with one of the most attractive features being that buying is basically as cheap as renting. Typically when buying is cheaper than renting, people will buy — if they are able. However, with a tightened lending market, millions out of work and many with tarnished credit, the buyer pool is seemingly shrinking. Despite that, the Phoenix market appears to be on the right track, though, Tim Iacono cautions that this could be a small boom created by artificially low interest rates. Foreclosures are continuing to flood the market, and once interest rates go back up the new quasi-bubble could pop.

Evidence is mounting that when home prices tumble by more than 50 percent and the Fed keeps mortgage rates at freakishly low levels, people will buy houses. This report from the LA Times talks of a resurgence in home buying where prices have fallen the furthest.

After four years of renting because they were priced out of the real estate market, Jamia Jenkins and Scott Renshaw concluded the time had arrived for them to buy.

They saw that home prices had dropped so fast here -- faster than in any other big city in the nation -- that mortgage payments would be less than the $900 they paid in rent. The city is littered with foreclosed houses, so the couple figured they could easily snatch up something in the low $100,000s.

Three months later, they're still looking. They have submitted 13 offers and been overbid each time. "It's just pathetic," said Jenkins, 53. "Investors are going out there and outbidding everyone."

While many now cheer the arrival of a housing market bottom this year - more likely in real estate sales than in prices paid - you have to wonder what's going to happen in another year or two when long-term interest rates are much higher.

For example, at today's artificially low mortgage rates, you can get a 30-year loan of $170,000 for about $900, similar to what the couple above is planning. But at the far more typical rates of seven or eight percent, that payment moves up by one-third to about $1,200.

Stated another way, that same $900 payment only buys $130,000 worth of housing - not the $170,000 as indicated above - absent the freakishly low interest rates, something that is a near certainty in the years ahead.

Naturally, that doesn't stop people from buying, as the 2006 fever seems to have returned...

Phoenix's housing bust has turned into a quasi-boom, a sign that its market may have hit bottom and a sneak preview of what a national housing recovery could look like.

More homes are selling than at any time since 2006. Prices are slowly stabilizing. Buyers are once again finding themselves in frantic bidding wars -- only this time over foreclosed houses selling at deep discounts rather than ranch homes listing for vast sums.

"The free market is at work," said Shannon Hubbard, a real estate agent and blogger here. "Prices got driven down so much that people said, 'I'm going to come out and play.' "
Home prices continue to plummet or tread water in much of the nation, but there have been tentative signs of life. Pending home sales rose 3.2% nationally in April, the second month of increases after a record low in January.

John Burns Real Estate Consulting in February identified Phoenix as "the most unique market in the nation," where affordability was better than at any time since 1981 and buying a house was once again cheaper than renting.

It should be an interesting summer as waves of new foreclosures battle waves of new buying interest from a bargain hunting public that is still fearful of more job losses.

This post can also be found on themessthatgreenspanmade.blogspot.com.

Is The Obama Administration Covering Up What Really Happened In Treasury Meeting?

One watchdog group is accusing President Obama's administration of covering up what really went down during the major Treasury meeting that ended with 9 major banks selling equity stakes in their companies to the government for $250 billion. The Treasury originally stated that it had no documentation from the meeting, however, some documents were later obtained. The watchdog group insists some documents — potentially implicating current Treasury secretary Timothy Geitner — are being withheld. Who knows what is true and not in all this, but it will certainly be interesting to see how it all plays out. For more details about the meeting, along with what the watchdog group thinks happened, read the following article from Money Morning.

Despite promises of open government, the Obama administration tried to “cover up the very existence of smoking-gun documents” prepared for a meeting in which former U.S. Treasury Secretary Henry M. Paulson allegedly coerced major banks to allow the government to take equity stakes, according to conservative watchdog group Judicial Watch.

Judicial Watch said the Treasury initially said it had no records about the meeting. It didn’t release a transcript of discussions between government officials and bankers.

However, documents obtained under a Freedom of Information Act request confirm that Paulson and other Treasury officials gave nine major banks no options other than allowing the government to take $250 billion in equity.

Judicial Watch said on its Web site that after it made inquiries, the Treasury insisted on Feb. 4 it had no documents about the historic meeting.

Furthermore, “the cover-up continues, as the Obama administration protects Timothy Geithner by withholding a key document about his role in this infamous bankers meeting,” Judicial Watch president Tom Fitton said in a statement.

The group says suggested edits of the “talking points” for the meeting by Treasury Secretary Tim Geithner, then President of the New York Federal Reserve are being withheld by the Obama administration.

Saying the nine U.S. banks were “central to any solution” of the credit crisis, Paulson told their leaders in the meeting in Washington on October 13, 2008, to take the government aid voluntarily or be forced to by regulators.

“We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed,” the document said, citing Paulson talking points. “If a capital infusion is not appealing, you should be aware your regulator will require it in any circumstance.”

Within four hours of the start of the meeting the CEOs wrote by hand the names of their institution and multibillion dollar amounts of “preferred shares” to be issued to the government, the documents show.

“These documents show our government exercising unrestrained power over the private sector,” Fitton said in a statement.

The banks were represented by Vikram Pandit of Citigroup Inc. (NYSE: C), Kenneth Lewis of Bank of America Corp. (NYSE: BAC), John Thain of Merrill Lynch & Co., now part of BofA, Jaime Dimon of JP Morgan & Co. (NYSE: JPM), Richard Kovacevich of Wells Fargo (NYSE: WFC), John Mack of Morgan Stanley (NYSE: MS), Lloyd Blankfein of Goldman Sachs Group Inc. (NYSE: GS), Robert Kelly of Bank of New York Mellon Corp (NYSE: BK), and Ronald Logue of State Street Corp. (NYSE: STT).

A spokesman for the Treasury, Andrew Williams, didn’t return calls seeking comment from Bloomberg News.

The Treasury has invested $199.1 billion in the bank-preferred share program, with $1.2 billion since returned by 12 institutions, according to government data, Bloomberg reported.

Despite his heavy-handed nature, Paulson succeeded at stabilizing the financial services industry, J.P. O’Sullivan, an SNL Financial bank analyst in Charlottesville, Va., told Bloomberg.

“It was a calming mechanism,” O’Sullivan said.

This isn’t the first time Paulson has been accused of strong-arming bankers to bend to his will.

As previously reported in Money Morning, Bank of America CEO Kenneth Lewis said in testimony before New York’s attorney general that Paulson and Federal Reserve Chairman Ben S. Bernanke pressured him not only to move ahead with a merger with Merrill Lynch despite reservations, but also to stay quiet about the mounting losses at the crumbling investment bank.

Lewis went on to testify that he felt Paulson threatened him with losing his job if he didn’t go along with completing the Merrill Lynch deal.

“I can’t recall if he said, ‘We would remove the board and management if you called it [off]‘ or if he said ‘we would do it if you intended to.’ I don’t remember which one it was,” Mr. Lewis said.

This article can also be viewed on moneymorning.com.

New York Post Writer Goes Off On Greenspan And NAR

As we talked about a couple of days ago, Greenspan's speech for NAR was obviously biased, and no weight whatsoever should be given to what came out of Greenspan's mouth. That being said, it is disturbing to see the depths that NAR has fallen to — as well as Greenspan. This display was so ugly that a writer from the New York Post had to publicly condem it. Tim Iacono looks at this writer's article — and adds some input of his own — in the blog post below.

John Crudele of the New York Post goes off on both the National Association of Realtors and former Fed chairman Alan Greenspan in this commentary from yesterday.

WHO the hell would be stupid enough to pay to hear Alan Greenspan's opinion of anything!

Notice, that isn't a question because I already know the answer. Rather, it's a statement with one of those exclamation points to show that my voice is being raised in a mix of bewilderment and anger.

The National Association of Realtors, which is probably suffering from combat fatigue, asked the former Federal Reserve chairman and the chief suspect in the destruction of the US economy, to address its Washington conference Tuesday and tell real estate people what they want to hear -- that things are getting better.

So Greenspan did just that.

Did anyone see the video clip of this speech that CNBC had up yesterday? I watched about the first minute or so and began feeling nauseous.

Apparently, so did Mr. Crudele...

"We are finally beginning to see the seeds of a bottoming" in the housing industry, Greenspan told the gathering. Adding, according to Bloomberg News, that the US is "at the edge of a major liquidation" in the stock of unsold houses.

Applause, applause. Here's your check, Alan.

I figured it was worth knowing how much Greenspan gets these days for defending his own indefensible actions at the Fed while also trying to pull the wool over the eyes of would-be homeowners.

So I asked someone named Lucien Salvant, managing director of the NAR's public affairs department.

His answer in an e-mail: "None of your business. How much is the NY Post paying you to ask that question?" Whoa! Calm down, Lucien.

It gets a little ugly from there, the NAR rightly accused of "shoveling crap to the press" which gets passed along to unsuspecting potential home buyers all for the greater good of the real estate profession.

And, of course, there's another litany of errant predictions from the Maestro.

This is just sad in so many ways - like two zombies embracing each other.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

NAR Calling For Expansion Of First-Time Homebuyer Tax Credit

The National Association of Realtors (NAR) is pushing lawmakers — yet again — to expand the first-time homebuyer tax credit. NAR hopes that lawmakers will make the tax credit available to everyone, rather than just first-time homebuyers — among other things. For more on this, read the following article from HousingWire.

NAR today called for expansion of the $8,000 first-time home buyer tax credit to include all home buyers at all income levels.

The push for a broadened tax credit comes after US Department of Housing and Urban Development secretary Shaun Donovan announced home buyers pursuing Federal Housing Administration-insured mortgages may soon use the tax credit as a down payment at the closing table.

An expanded tax credit, combined with HUD’s initiative to make the credit available at the closing table for down payment purposes — called ‘monetization’ of the tax credit in the industry — would make federal assistance available to anyone pursuing a government-insured mortgage.

NAR, from its legislative summit this week, also urged Congress to make the ‘08 loan limit increase formula and loan limit caps permanent, and to “fortify” mortgage giants Fannie Mae (FNM: 0.7867 +2.17%) and Freddie Mac (FRE: 0.8166 +2.08%) to ensure the continued availability of capital for mortgage lenders.

“Housing is the engine of economic growth, and real estate is the road to economic recovery,” says Charles McMillan, NAR president and Dallas-based broker, in a statement today. “With many of the country’s current problems resting on a wobbly foundation of declining home prices, rampant foreclosures and increasing job loss, our members will be asking Congress to pass further legislation that moves the housing market forward.”

This article can also be viewed on housingwire.com.

Could Legalizing Marijuana Help Solve California's Budget Problems?

The budget problems in California are well known across the nation, but one desperate idea to help balance the budget is sure to meet opposition from the rest of the country. California's governor, Arnold Schwarzenegger, has apparently requested a full debate on the legalization of marijuana. The benefit — of course — to California if marijuana is legalized is that they can tax sales of the substance. According to a recent public opinion poll of California voters, a majority favor legalization of marijuana. Perhaps citizens feel that compared to the other budget cuts — and new taxes — on the table to shrink the deficit, legalizing marijuana might not be so bad. For more on the situation in California, read the following blog post from Tim Iacono.

It appears as though we'll be getting out of the Golden State in the nick of time as the fallout from the likely rejection by voters of most May 19th ballot initiatives is set to make things a whole lot worse for California's budget.

The Sacramento Bee reports on the relentless deterioration in the state's finances since the last budget bill was passed a few months back, one that really just forestalled the inevitable.

California's projected budget deficit has grown as large as $21.3 billion through next June because of a sharp economic decline, Gov. Arnold Schwarzenegger disclosed Monday in a letter to legislative leaders.

The latest projection means lawmakers will have to negotiate deep spending cuts in education, corrections and welfare as well as consider borrowing and new fees or taxes.

The announcement comes less than three months after the Legislature and the governor closed $34 billion of a then $40 billion state budget deficit with tax hikes and spending cuts and asked voters to eliminate the rest in next week's special election.

These "new" estimates will probably turn out to be just as overly optimistic as every previous forecast and once again, the state of California is blazing a trail for the rest of the country, this time on the road to insolvency.

There is more than a little irony in the Gubernator being voted into office some six years ago when his predecessor had similar problems that, in retrospect, look like a walk in the park by comparison, unless of course another housing bubble is in the offing.

New plans are being prepared to close the new budget gaps.

The governor did not disclose his solutions Monday. But he warned groups last week he will consider borrowing $2 billion from cities and counties, releasing low-level offenders in state prisons and reducing school funding by $3.6 billion. The state also could eliminate its planned $2 billion reserve.

"It's well beyond triage," said Senate President Pro Tem Darrell Steinberg, D-Sacramento. "We're talking about painful and difficult decisions. You can't just finesse your way through $15 billion or $21 billion."

It's odd how $15 billion or $20 billion really doesn't sound like a lot of money anymore...

Here's one way the state might be able to generate new revenue. After having been talked about for some time now, momentum is building to somehow find a way to tax marijuana (presumably, after legalizing it) as reported by the U.K. Guardian.

Arnold Schwarzenegger has never apologized for smoking pot – and loving it — at the height of his bodybuilding career in the 1970s. Now, as a struggling Republican governor of California reaching a crossroads in his political career, he might yet become America's most visible advocate for legalizing marijuana.

The actor-turned-politician gladdened the heart of every joint-roller and dope fiend across the Golden State earlier this week when he said it was time for a full debate on legalization.

Schwarzenegger was careful not to say too much – he stopped short of saying he was in favor of legalizing cannabis now – but his words broke a long-standing taboo among both Republicans and Democrats who have previously felt obliged to say marijuana must remain illegal, and marijuana users and pushers be subject to criminal prosecution.

The governor spoke in response to a new public opinion poll showing that 56% of registered voters in California favor legalizing and taxing marijuana – in part to help the state out of the worst budget crisis in its history.

If they ever do such a thing, this California trend is likely to meet with some resistance in many other parts of the country.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

European Banks Offer Another Potential Problem

Here in the U.S. we just finished the widely publicized "stress tests," which showed us a great deal of capital shortfalls with the major banks. This was more or less to be expected, but what is getting less press here at home are the potential problems over in Europe. Many people had mistakenly thought Europe was buffered from the financial problems being experienced in the U.S., but the more we look into it the more we see that is not the case. Many European banks were exposed to the same products and other issues that brought down the U.S. financial system, and the struggles these European banks are facing could bring down the global financial system even further. For more on this, read the following article from Money Morning.

Now that the results of the U.S. bank stress tests are finally in the books, the extent of the capital shortfalls are known and – in many cases – are actually being addressed.

But there’s now another problem looming – one that could ultimately weigh down the global financial system.

The problem: Europe’s banks.

As economies slow in other parts of the world, rising joblessness and plunging housing prices and escalating loan losses are putting banks under pressure. That’s especially true in Europe, where consumers and companies are continuing to run into trouble.

Royal Bank of Scotland PLC (NYSE ADR: RBS), now 70% state-owned, fell to a loss in the first quarter and wrote down $3.17 billion in risky assets after its bad debts quadrupled to $4.37 billion.

Bank executives "[expect] a slowdown in financial-market activity compared with the very buoyant conditions seen in Q1," Chief Executive Officer Stephen Hester told Reuters.

In Germany, Commerzbank AG (OTC ADR: CRZBY) had to take a $1.61 billion charge from its investment bank and a $72.38 million charge from commercial real estate initiatives, resulting in a $1.2 billion loss for the quarter.

In late December, the Institute of International Finance released its global economic outlook for 2009, and estimated that banks around the world had collectively lost nearly $1 trillion – $678 billion from U.S. banks and $300 billion from their European counterparts.

That was in December. We know it got worse – a lot worse – for U.S. banks after that point. Thanks to a mix that included lots of government bailout and an injection of new capital from investors, U.S. banks have experienced an improvement in their outlook.

Indeed, U.S. Federal Researve Chairman Ben S. Bernanke stated that the banks tested are all solvent and the results should provide "considerable comfort about the health of the banking system.”

But in the five months since that Institute of International Finance report was issued, it’s likely that European banks have experienced a major decline in their fortunes.

Last week’s release of the bank stress tests results removed significant uncertainty about the U.S. banks, since it created a blueprint of what the troubled institutions needed to do to stabilize their finances. Morgan Stanley (NYSE: MS) and Wells Fargo & Co. (NYSE: WFC) have announced plans to raise an aggregate $15 billion in capital. Bank of America Corp. (NYSE: BAC) plans to sell assets and issue more common stock after being told by the federal government that it must raise $33.9 billion to adequately guard against “more adverse” economic conditions.

Bank of America was one of 10 banks told by the government to raise more capital following the so-called stress test. The government concluded that BofA faces a potential $136.6 billion in losses from troubled loans and investments in 2009 and 2010. The bank’s $34 billion capital shortfall was more than twice that of Wells Fargo, which had the second greatest capital need.
Are we destined to see this all play out now in Europe?

Market Matters

Shifting back to autos, General Motors Corp. (NYSE: GM) lost $6 billion in the first quarter and is shopping Saturn to Renault SA of France as it moves closer to its restructuring deadline (and potential bankruptcy). China’s Geely Automobile Holdings Ltd. (PINK: GELYF) has interest in GM’s Saab unit, and Fiat SpA (OTC ADR: FIATY) may look to complement its Chrysler LLC line with the German Opel (also late of GM). Meanwhile, Ford Motor Co. (NYSE: F) claims to be on track with its restructuring plan and still believes it can manage just fine without any government assistance. On the earnings’ front, The Walt Disney Co. (NYSE: DIS) and Kraft Foods Inc. (NYSE: KFT) bested estimates, while Cisco offered some mixed results as its better than expected numbers actually prompted some profit-taking among techs.

A poorly received 30-year Treasury auction sent bond prices tumbling as fixed income investors focused on the massive programs the government will need to finance over the next few years. Oil prices surged above $58 a barrel for the first time in six months as traders seemingly failed to consider rising inventory levels and instead bought on signs (feeble as they are) of an economic recovery that would lead to enhanced energy demand.

The Standard & Poor’s 500 Index pushed beyond the crucial 900 level and ended the week in positive territory for the year. Techs struggled late as investors realized any economic rebound would not translate into capital expenditures overnight. Still, the Nasdaq Composite Index has outperformed the other indexes on a year-to-date basis. With stress tests out of the way, where will the next leaks come from?

Market/ Index	Year Close (2008)	Qtr Close (03/31/09)	Previous Week (05/01/09)	Current Week (05/08/09)	YTD Change
Dow Jones Industrial	8,776.39	7,608.92	8,212.41	8,574.65	-2.30%
NASDAQ	1,577.03	1,528.59	1,719.20	1,739.00	+10.27%
S&P 500	903.25	797.87	877.52	929.23	+2.88%
Russell 2000	499.45	422.75	486.98	511.82	+2.48%
Fed Funds	0.25%	0.25%	0.25%	0.25%	0 bps
10 yr Treasury (Yield)	2.24%	2.68%	3.17%	3.29%	+105 bps

Economically Speaking

U.S. retailers released same-store sales data for April and the results were actually quite promising. As usual, Wal-Mart Stores Inc. (NYSE: WMT) led the charge with a 5% increase in activity, while Children’s Place Retail Stores Inc. (Nasdaq: PLCE), Stage Stores Inc. (NYSE: SSI), Gap Inc. (NYSE: GPS), and The TJX Cos. Inc. (NYSE: TJX) were among those stores that posted better-than-expected results and beat analysts’ expectations. A late-Easter holiday (April instead of March) helped many retailers as consumers waited until the last minute (as has become the norm) for their related holiday shopping.

On the global front, the European Central Bank dropped its key lending rate by 25 bps to 1%, and initiated other monetary moves to stabilize its (16-country) economy. Likewise, the Bank of England announced a plan to buy up government and corporate bonds, thus, increasing its money supply.

Speaking of the labor market, the U.S. unemployment rate climbed in April to 8.9%; however, only 539,000 jobs were lost from the economy. The contraction represented the smallest in six months and was below most analysts’ expectations. Still, since December 2007, about 5.7 million domestic jobs have disappeared and businesses continue to be slow to hire until they see additional signs of greater stability in the economy.

Construction spending climbed in March after five consecutive monthly declines, though the gains were attributed to non-residential activity and the housing sector remains sluggish at best. In more promising news, the National Association of Realtors reported a 3.2% increase in pending homes sales, the second straight monthly gain. Because the release is considered a predictive indicator, analysts took it as a favorable sign that sales activity may pick up in the months ahead.

This article can also be found on moneymorning.com.

Job Loss Report Beats Expectations Thanks To Government Jobs

For the first time in a long time, job loss numbers came in better than expected. A large part of this is thanks to a huge run up in government jobs as the country prepares for the upcoming census. That being said we still saw over 500,000 jobs lost in April, and the unemployment rate went up to 8.9 percent for the nation. For more on this, read the following blog post from Tim Iacono.

The Labor Department reported that fewer jobs were lost in April than in any month since last October, but that the unemployment rate continues to rise sharply, an indication that laid off workers are finding it increasingly difficult to find new employment.
Nonfarm payrolls fell 539,000 in April after losses of 681,000 in February and 699,000 in March. Total revisions for the two prior months were -66,000 as the February and March data were revised downward from 651,000 and 663,000, respectively.

Over the last six months, a total of 3.9 million jobs have been lost and, since the recession began in December of 2007, the U.S. economy has shed 5.7 million jobs.

The jobless rate jumped from 8.5 percent in March to 8.9 percent in April, reaching its highest level since the September 1983 mark of 9.2 percent and the total number of unemployed now stands at 13.7 million, up from 13.2 million in March. The post-WWII high for unemployment came in December of 1982 at 10.8 percent.

If laid off workers who have stopped looking for a job are included in the unemployment figure along with those currently employed but settling for part-time work, the jobless rate would have been 15.8 percent, a 15-year high.

While job losses may have peaked with January's decline of 741,000 (though, next year's benchmark revisions to the payrolls data could radically change this), the jobless rate is likely to continue higher until the economy begins to improve and companies are more willing to hire.

One part of the economy that was hiring last month was the government where total payrolls rose by 72,000. This was driven by a the addition of some 140,000 temporary workers that will begin work on the 2010 census. A total of 1.4 million workers will be hired over the next year to conduct the population count that happens every ten years.

Elsewhere, job losses continued, but at a slightly slower pace than in previous months, manufacturing leading the way down with a decline of 149,000 and the trade, transportation, and utilities category not far behind at minus 126,000.
The birth-death model added a total of 226,000 jobs in April, a new high for the year.

Since this data is used to adjust the raw totals prior to seasonal adjustments, you can't just subtract it from the headline seasonally adjusted data to determine its impact, but it is important to note that the entire 65,000 increase in professional and business services payrolls (which was then seasonally adjusted to -122,000) was contributed by the birth death model - it's hard to imagine that there were so many new businesses formed in April.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Obama Pushes For $17 Billion In Budget Cuts...That's It?

In what seems like joke, President Obama has sent lawmakers a proposal that aims to cut over a hundred programs, and save us $17 billion. When you look at the fact our deficit this year will be a projected $1.85 trillion, you can start to see that $17 billion in cuts is next to nothing. It's almost as if Obama is simply trying to appear like he is making an effort to trim spending. The worst part is that it appears Obama will be fought tooth and nail to get these cuts through. If he can't manage to get $17 billion cut off the budget, what hope does this country really have forbalanced budget? For more on this, read the following article from Money Morning.

President Barack Obama sent lawmakers a budget package today (Thursday) that proposes to shrink or eliminate 121 federal programs and save almost $17 billion in the fiscal year that begins Oct. 1. But the budget plan contains cuts that will face vigorous opposition in Congress and fierce resistance from special interest groups.

The package of proposed reductions fills in the fine print of a $3.55 trillion budget outline approved by lawmakers in April that contains Obama’s top agenda items, including a health care overhaul, a push for renewable, clean-energy sources and changes in education funding.

The President wants to cut or end a number of programs that he feels are wasteful or ineffective to take the first toward getting spending under control. But the administration’s attempt at bringing fiscal discipline to Washington has already been met with skepticism by analysts.

“Every government program - no matter how wasteful - will be defended by its recipients and congressional champions,” Brian Riedl, a budget expert at the Heritage Foundation, a Washington-based research group told Bloomberg News. “Unless Obama puts the weight of the White House behind his spending cuts, Congress will ignore them.”

The cuts are miniscule compared to the overall budget package and deficits that will be ushered in the next few years. The $787 billion stimulus package Obama pushed through Congress combined with the $700 billion Troubled Asset Relief Program (TARP) bank bailout will come on top of the $1 trillion deficit the administration inherited when he took office in January.

Total savings from the cuts, even if they were accepted by Congress in their entirety, would represent a paltry 0.4% of the overall budget. The Congressional Budget Office projects the deficit will be $1.85 trillion this year, about four times the previous record, and $1.38 trillion in fiscal 2010.

“Even if you got all of those things, it would be saving pennies, not dollars. And you’re not going to begin to get all of them,” Isabel Sawhill, a Brookings Institution economist who waged her own battles with Congress as a senior official in the Clinton White House budget office, told the Washington Post. “This is a good government exercise without much prospect of putting a significant dent in spending.”

Only about 80 of the proposed cuts are new - the others had been previously revealed. And most of the cuts will be from the “discretionary” budget, avoiding the so-called untouchable “third-rail” entitlement programs of Social Security and Medicare.

Those two programs account for more than 40% of government spending, meaning the more difficult work on deficit reductions has been left for another day.
“More serious efforts at deficit reduction are going to require entitlement and tax reform - that’s where most of the money is.” Marc Goldwein, policy director of the bipartisan Committee for a Responsible Budget, a Washington-based research group, told Bloomberg. “To really get the deficit under control, we’re going to have to start thinking bigger,” he said.

But some in Congress defended the administration’s approach, saying the list of program reductions is just the start of a more comprehensive effort to cut spending and pull the reins on the skyrocketing deficit.

“It depends on what it means over the scope of five and 10 years.” Representative John Larson (D-Conn.) told Bloomberg. It’s a “deep, cavernous hole where we have been left, we’re looking a long way up but it’s a steady climb” using the budget plan agreed to by Obama and Congress, he said.

This post can also be viewed on moneymorning.com.

Economy Rebounding: Truth Or Lies?

We certainly are hearing a lot of positive economic press lately, but is this really the truth, or is the government and media simply putting a positive spin on it? Tim Iacono looks at a recent article that talks about several of the recent positive announcements, and then shows us the opposite end of the spectrum with a satiric piece in his blog post below.

We will find out soon enough - say, by the end of summer - whether headline writers in the mainstream financial media or those working at The Onion are correct in their assessment of the state of the U.S. economy. Here's an example of the former that appeared on the front page of Yahoo! yesterday for a few hours.
That SOLD sign is a compelling image for anyone thinking about the future. prices have been and continue to be at the center of our problems and their is near universal agreement that the economy won't improve until the housing market improves.

Just how does the story behind this compelling image figure that's happening?

Prepare to be underwhelmed.

8 Signs of Hope for the Economy
Are we on the brink of a rebound, or is it a false spring? Fortune looks at the evidence for an imminent recovery.

Is the economy looking up, or at least bottoming out? Lately there has been much talk about "glimmers of hope," in President Obama's words, and "green shoots," a phrase du jour used by the likes of Fed Chairman Ben Bernanke.

Meanwhile, many economists have warned about a false spring, pointing to numbers that are still getting worse, like the unemployment rate. Fortune takes a closer look at the upbeat news to assess whether how strong a case they make for an imminent recovery.

1. Housing Starts
The government reported that the overall number of housing starts fell in March, but those for single-family homes during the month came in unchanged from the February figure of 358,000.

IHS Global Insight noted that this suggests single-family home construction may be stabilizing and is "testing the bottom."

2. The Stock Market
The S&P 500 was up 9.4% in April, its biggest monthly rally since March 2000. The Wilshire 5000 Total Market Index ended the month at 8,962.96, up 849.85, or 10.48%. This is the best monthly return since December 1991, when the index was up 10.72%.

"The initiatives of the federal government and some of the improvements in the credit markets are making investors more confident," said Thomas Cowhey, chief investment strategist at Hirtle Callaghan.

3. Consumer Confidence
Preliminary figures for the Conference Board's Consumer Confidence Index showed a jump of more than 12 points during April, to 39.2. The reading, which measures consumer views on the economy, beat analyst expectations and was the highest so far in 2009.

Lynn Franco, director of the organization's research center, attributed the rise in confidence to "significant improvement in the short-term outlook."

4. Single-Family Home Prices
The S&P/Case-Shiller Home Price Indices showed that while 20-city and 10-city Composite Home Price figures declined through February 2009 (down 18.6% and 18.8%, respectively, from a year ago), for the first time in 16 months the annual decline did not set a new record.

While it signals that the market may be showing some stabilization, or at least what Chairman of the Index Committee David Blitzer called "deceleration in the rate of decline," Blitzer warned that we "need a few more months of data before we can determine if home prices are finally turning around."

Meanwhile, the Pending Home Sales Index rose for the second straight month in March and was up more than 1% over the year-ago figure. The index from the National Association of Realtors (NAR) increased 3.2% during the month, to 84.6%.

"This increase could be the leading edge of first-time buyers responding to very favorable affordability conditions and an $8,000 tax credit," wrote Lawrence Yun, the NAR chief economist.

They go on to talk about earnings, jobless claims, new orders, and credit markets arriving at no real conclusion other than the one stated in the title.

It really is hard to be swayed by stabilization in housing starts at current levels as new home construction is at such freakishly low levels, some 25 percent below the all-time population-adjusted low of 1980.

As for the stock market predicting the recovery, an important related statistic might be something like, during the Great Depression, the stock market predicted 5 of the first zero recoveries (i.e., huge bear market rallies failed to produce an "economic" recovery).

Consumer confidence rebounding from all-time lows going back more than 40 years is a good thing, but by no means sufficient for a sustainable rebound, and annual home price declines that did not set a new record for the first time in 16 months is only an indication that the rate of change in home prices is improving - from an annual rate of -34 percent to -26 percent.

Quoting the Chief Economist at the National Association of Realtors harkens back to 2005.

Haven't we learned anything in the past four years.

No, the nation's leading satirical newspaper probably has it right in their take on things.

Nation Ready To Be Lied To About Economy Again
WASHINGTON—After nearly four months of frank, honest, and open dialogue about the failing economy, a weary U.S. populace announced this week that it is once again ready to be lied to about the current state of the financial system.

Tired of hearing the grim truth about their economic future, Americans demanded that the bald-faced lies resume immediately, particularly whenever politicians feel the need to divulge another terrifying problem with Wall Street, the housing market, or any one of a hundred other ticking time bombs everyone was better off not knowing about.
In addition, citizens are requesting that the phrase, "It will only get worse before it gets better," be permanently replaced with, "Things are going great. Enjoy yourselves."

"I thought I wanted a new era of transparency and accountability, but honestly, I just can't handle it," Ohio resident Nathan Pletcher said. "All I ever hear about now is how my retirement has been pushed back 15 years and how I won't be able to afford my daughter's tuition when she grows up."

"From now on, just tell me the bullshit I want to hear," Pletcher added. "Tell me my savings are okay, everybody has a job, and we're No. 1 again. Please, just lie to my face."

Nathan Pletcher probably speaks for millions of Americans.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Bank Demolishes Foreclosed Homes In Victorville

You know things are bad when it makes more sense for banks to demolish foreclosed homes than to keep them. In the case of the Texas bank who destroyed 16 homes in Victorville California, the homes were not yet finished, but the loss the bank is taking on these has to be outrageous regardless. For more on this, read the following blog post from Tim Iacono.

The story about a Texas bank deciding to demolishing foreclosed homes in California was everywhere yesterday, but it shouldn't be that surprising - they needed a lot of work.

When they start bulldozing finished houses into the ground because they just can't sell them, then that will be real news.

Some details are provided in this report at the Wall Street Journal:

A Texas bank is about done demolishing 16 new and partially built houses acquired in Southern California through foreclosure, figuring it was better to knock them down than to try selling them in the depressed housing market.

Guaranty Bank of Austin is wrecking the structures to provide a "safe environment" for neighbors of the abandoned housing tract in Victorville, a high-desert city about 85 miles northeast of Los Angeles, a bank spokesman said.

Victorville city officials said the bank told them the cost of finishing the development would exceed what they could sell the homes for.

The bank also faced escalating city fines as vandals and squatters took over the sprawling housing project, leaving behind graffiti and drug paraphernalia, city officials said.

"It's unfortunate," said George Duran, the city's code-enforcement manager. "We would have hoped for these houses to be finished. But it's up to the owner to see what is best for them."

We've driven through that area many times on the way from Southern California to Las Vegas, a few times when the bubble was at its peak, and almost every time we wondered why anyone would ever pay $300,000 or more to live in Victorville.

There's also a related story in the LA Times.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Job Loss Numbers May Come In Better Than Expected

Continuing the trend of remotely positive news, it looks like April's job loss numbers could potentially come in a little better than expected. That being said we are still looking at a half a million more people out of work — that number just isn't as bad as prior months. For more on this, read the following post from Kathy Lien.

Speculation that Bank of America may need $34 billion of capital has triggered fresh concern about the results of the stress tests on banks, which are due for release on Thursday. However despite these fears, there is growing evidence that job losses may have tempered with non-farm payrolls likely to see the smallest decline in 6 months. The 4 week moving average of jobless claims have moderated and yesterday, there was an impressive rebound in the employment component of service sector ISM.

This morning, Challenger Gray & Christmas reported the smallest increase in layoffs since September. According to payroll agency ADP, private sector payrolls declined by -491k last month, the smallest increase since October. Although the ADP report has been a poor predictor of non-farm payrolls, it has been relatively reliable directionally and therefore confirms our suspicion that payrolls declined by less than 600k last month.

source: Bloomberg

Yet we still expect the U.S. economy to have lost at least 1/2 million jobs in April and for the unemployment rate to hit a 25 year high. This is indicative of weakness from nearly all perspectives, but it is a start because companies need to slow firing before they can even consider hiring. This is a step in the right direction towards a labor market recovery and why I believe the dollar will trade lower against the higher yielding currencies today.

This post can also be viewed on kathylien.com.

Expectations Of A Dollar Collapse

So far — despite the huge run up in U.S. debt — the U.S. dollar has held strong during the financial crisis, however, Andy Xie expects a major collapse to come. He feels that pressures from China, and an overall loss of faith in the U.S. financial policy, will destroy the greenback. For more on this, read the following blog post from Mark Thoma.

Andy Xie expects the dollar to collapse:

If China loses faith the dollar will collapse, by Andy Xie, Commentary, Financial Times: Emerging economies such as China and Russia are calling for alternatives to the dollar as a reserve currency. The trigger is the Federal Reserve’s liberal policy of expanding the money supply to prop up America’s banking system and its over-indebted households. ...[T]he Fed may be forced into printing dollars massively, which would eventually trigger high inflation or even hyper-inflation and cause great damage to countries that hold dollar assets in their foreign exchange reserves.

The chatter over alternatives to the dollar mainly reflects the unhappiness with US monetary policy among the emerging economies that have amassed nearly $10,000bn in foreign exchange reserves, mostly in dollar assets. ...[T]he US situation is unique: it borrows in its own currency, and the dollar is the world’s dominant reserve currency. The US can disregard its creditors’ concerns for the time being without worrying about a dollar collapse. ...

The faith of the Chinese in America’s power and responsibility, and the petrodollar holdings of the gulf countries that depend on US military protection, are the twin props for the dollar’s global status. Ethnic Chinese ... may account for half of the foreign holdings of dollar assets. ...

The US could repair its balance sheet through asset sales and fiscal transfers instead of just printing money. ... The country’s vast and unexplored natural resource holdings could be auctioned off. Americans may view these ideas as unthinkable. It is hard to imagine that a superpower needs to sell the family silver to stay solvent. Hence, printing money seems a less painful way out. ...

Other currencies are not safe havens either. ... Central banks are punishing savers to redeem the sins of debtors and speculators. Unfortunately, ethnic Chinese are the biggest savers.

Diluting Chinese savings to bail out America’s failing banks and bankrupt households, though highly beneficial to the US national interest in the short term, will destroy the dollar’s global status. Ethnic Chinese demand for the dollar has been waning already. ...

America’s policy is pushing China towards developing an alternative financial system. ... Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote... However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse.

Barry Eichengreen explains why using SDRs as a reserve currency, as has been suggested by the governor of the People's Bank of China, is not as easy as it might seem:

Commercialize the SDR now, by Barry Eichengreen, Commentary, Project Syndicate: Zhou Xiaochuan, the governor of the People’s Bank of China, made a splash prior to the recent G-20 summit by arguing that the International Monetary Fund’s Special Drawing Rights should replace the dollar as the world’s reserve currency. ...

Sympathizers acknowledged the contradictions... Central banks understandably seek more reserves as their economies grow. But if those reserves mainly take the form of dollars, then their rising demand allows the United States to finance its external deficit at an artificially low cost. In turn, this allows unsustainable imbalances to build up, leading to an inevitable crash. ...

But skeptics question whether the SDR could ever replace the dollar as the world’s leading reserve currency, for the simple reason that the SDR is not a currency. It is a composite accounting unit in which the IMF issues credits to its members. Those credits ... cannot be used in the other transactions in which central banks and governments engage. ... This means that the SDR is not an attractive unit for official reserves.

This would not be easy to change. Despite the trials and tribulations of the American economy, dollar securities remain the dominant form of reserves because of the unparalleled depth and liquidity of US markets. Central banks can buy and sell dollar securities without moving those markets. There is also the convenience factor: dollars are widely used in a variety of other transactions. As a result, not even the euro has seriously challenged the dollar as the dominant reserve currency. ...

If China is serious about elevating the SDR to reserve-currency status, it should take steps to create a liquid market in SDR claims. It could issue its own SDR-denominated bonds. ... Of course, an earlier attempt was made to create a commercial market in SDR-denominated claims ... in the 1970’s... But these efforts ultimately went nowhere. The dollar being more liquid, its first-mover advantage proved impossible to surmount.

Overcoming that advantage now would require someone to act as market-maker ... and subsidise the market in its start-up phase. The obvious someone is the IMF. The Fund could stand ready to buy and sell SDR claims to all comers, ... at narrow bid/ask spreads competitive with those for dollars. ...

Transforming the SDR into a true international currency would require surmounting other obstacles. The IMF would have to be able to issue additional SDRs in periods of shortage... The IMF’s management would also have to be empowered to decide on SDR issuance, just as the Fed can decide to offer currency swaps. For the SDR to become a true international currency, in other words, the IMF would have to become more like a global central bank and international lender of last resort.

For worries about inflation, see Inflation Nation by Alan Meltzer (and also see Krugman's response, A History Lesson for Alan Meltzer).

[Note: A lot of people have noted the apparent contradiction in the concern from Krugman over deflation, and from Meltzer over inflation, e.g. Mankiw for one, but here's an example of this from Mankiw's colleague, Martin Feldstein, within the same article. It's simply a short-run, long-run distinction.]

This post can also be found on economistsview.typepad.com.

How Is The Economic Medicine Working?

The government has been injecting trillions of dollars into the economy, but how has it been working so far? James Picerno looks at recent events and attempts to answer that question in his blog post below. In addition Picerno takes a look at what lies ahead for the U.S. economy, and offers some words of wisdom for investors.

In late-March, we asked: Is the medicine working? By medicine we meant the massive injection of liquidity into the economy as a cure for fending off deflation and laying the groundwork for recovery. At the time, we were mildly encouraged, in part due to the rising inflation forecast as derived from the spread between the nominal and inflation-indexed 10-year Treasuries.

More than a month later, there's still reason for optimism, perhaps more so, thanks to the so-called green shoots that suggest better days ahead. Yet the rate spread, which is to say the market's inflation outlook, hasn't changed much since late-March. The current forecast is for inflation of 1.4% for the next 10 years, just barely up from around 1.3% from the end of the first quarter. In both cases, that's a healthy change from expecting flat pricing, as was the case at the end of 2008. Low inflation as far as the eye can see would be nice, but is that a reasonable expectation?

In the months ahead there will be a thin line between a healthy rise in inflation expectations and the potential for burdensome pricing pressures later on. Deflation is a hazard to be avoided for a number of reasons. Although we can't quite shut the book on the danger, the odds look increasingly in favor of mild inflation for the foreseeable future, as the chart above suggests. Behind this reasoning is the growing sentiment that the recession is at or near a bottom. Is it time for the Fed to begin tightening? Or are the green shoots still too tentative?

"We're seeing more indications of perhaps a bottoming in the economy," Bill O'Neill of LOGIC Advisors tells Dow Jones. "So there is an increasing—and it will continue to increase—concern surrounding inflation potential."

Gold, the perennial inflation hedge, seems to be considering the possibility, although this market hasn't quite made up its mind. The price of the metal has been hovering around $900 for much of this year, just below its all-time high of $1,033, set back in March 2008. The 10-year Treasury yield, meanwhile, has been climbing, recently bumping up against 3.2% on renewed worries that inflation may now be the bigger risk. Even so, a 10-year yield of 3.2% is still quite low.

None of the inflation anxiety is worrying the stock market, which has now reversed the selloff in the first quarter. Indeed, the S&P 500 is now marginally up on the year, as of last night's close, on expectations that by the end of this year the economy will be sitting up and prepared to get out of bed.

The big question is whether all the renewed hope that the worst is over is really just the byproduct of a bear market bounce in markets and inflation expectations? Given the extreme waves of selling last year and into March, a rebound was all but assured if the world economy didn't collapse. As we now know, it didn't. There are still lots of problems, but we'll all be here next year and so it was time to reprice assets upwards to reflect a humbled but otherwise enduring economic climate.

Investors have cheered the signs that the U.S. economy no longer seems to be contracting at an accelerating pace. Given the fears of what could have happened, that's certainly a reasonable response. Deciding that you're not going to fall into the abyss is always encouraging. But that's still a long way from arguing that growth is imminent, or that the economy won't tread water for a year or two.

The first phase of the post-apocalyptic visions that prevailed six months ago may be over. If so, now we're faced with the more difficult chore of deciding how to repair and rebuild the economy to foster growth while containing inflation. The hardest days are yet to come. Unless you're expecting a seamless transition, keeping some cash at the ready still makes sense, albeit less so than in past months. Volatility isn't banished, it's only hibernating, which suggests another round of value-oriented pricing opportunities in the major asset classes.

This post can also be viewed on capitalspectator.com.

Fed Delays Release Of Bank Stress Test Results

The Federal Reserve has decided to delay the release of results from its recent stress test on banks. It appears that the Fed is trying to limit damage to the banks who will appear weak based on the results, and allow them more time to figure out how they will raise the necessary funds. It will no doubt be interesting to see how investors react to the information provided by the stress test. For more on this, read the following article from Money Morning.

The results of the bank stress tests are in, but instead of releasing them today (Monday), the U.S. Federal Reserve is holding them close to its chest until after the markets close Thursday.

The amount of information awaiting disclosure seems to have grown, as have the reasons to postpone the potentially damaging data.

Not only will the government unveil which banks require more capital, it will also disclose potential loss estimates for certain loan categories and the banks’ ability to “absorb those losses” assuming economic conditions worsen through 2010, a government official told The Wall Street Journal.

Negative results could deal a huge blow to both the banks and government, as a sub-par grade may be viewed as an indictment not only of the failed management of the banks, but the government’s decision to loan them billions of taxpayer money. The banks also are concerned that anything but a tactful release of the results will cause internal and investor panic.

Government and banking industry officials told Bloomberg that both sides needed the extra time to debate preliminary results, as well as plans regarding how banks can recover capital.

On April 24, the government showed the tests’ preliminary results to the 19 U.S. firms it reviewed – from behemoth banks like Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C) to the smaller GMAC LLC (NYSE: GMA) and MetLife Inc. (NYSE: MET). The banks involved in the stress tests hold more than half the loans in the U.S. banking system and two-thirds of the assets.

“Everybody understands they’ve got a tiger by the tail here,” Mark Tenhundfeld, a senior vice president at the American Bankers’ Association in Washington, told Bloomberg. “If they don’t let him go gently, there will be a lot of mauling going on.”

Already, reports have leaked that two specific banks need more capital, and reaction hasn’t been pleasant.

After showing Bank of America and Citigroup test results, the government told the banks to raise more capital despite receiving a combined total of $95 billion in bailout loans.

At least three more banks need more capital, either from converting common shares to equity and/or receiving more government cash, sources told Bloomberg.

Sensing blowback from Congress, as well as the public, Federal Reserve chairman Ben S. Bernanke said that banks requiring more capital will have to attempt to raise it on their own before receiving another lifeline loan from the government.

Confusion On Evaluation’s Methodology

Debate over the results isn’t the only reason for the postponement. Disputes and confusion over the Fed’s methodology has also erupted.

According to a Fed’s test criterion, common shareholder equity should be the “dominant” portion of Tier 1 capital. Officials favor tangible common equity of about 4% of a bank’s assets and Tier 1 capital worth hovering around 6%.

But The Wall Street Journal reported last week that some bank executives got mixed signals during a meeting with regulators.

The regulators are asking “a million questions” and it’s “very unclear what they’re aiming at,” a senior executive told The Journal. “We can’t discern a pattern.”

Citigroup officials argued that regulators haven’t given the bank enough credit for its efforts to offload large asset chunks, such as Smith Barney and its Japanese brokerage arm Nikko Cordial Securities.

On Friday, Citigroup agreed to sell Nikko Cordial Securities, its Japanese brokerage arm to Sumitomo Mitsui Financial Group (OTC: SMFJY) for about $5.5 billion. The deal, which is to be completed by Oct. 1, also includes a transfer of about $2 billion in excess cash from Nikko Cordial to Citigroup.

The deal will boost the bank’s Tier-1 capital ratio by approximately 27 basis points.

Individual Result Releases

One insider told Reuters that the government is leaning toward releasing individual results for each bank involved in the stress test – a move away from issuing a summary of results.

The source said the plan “is not very far along,” and that regulators also aim to disclose a lot of confidential supervisory information about the banks.

One analyst says that test results could be so specific to a bank’s portfolio that it’s not wise to use them as a litmus test for the overall health of the banking sector.

“Once you try to take that information and extrapolate it, it gets very complicated and it’s dangerous," Kevin Petrasic, who served at the Office of Thrift Supervision from 1989 to 2008 and is now an attorney at law firm Paul Hastings in Washington, told Reuters.

Whatever the results – or how they are disclosed – Money Morning’s Shah Gilani, a former Wall Street hedge fund manager, said the evaluation process has several flaws.

“What’s missing, unfortunately, is an assumption of how much additional capital would be necessary to facilitate credit expansion – which, in turn, would serve to fuel economic growth. That, after all, should be the ultimate stress-test objective,” he wrote.

And the end result is more stress added to an already stressed banking sector, as too much information and/or misinformation only makes a sound assessment more difficult.

Money Morning’s Stress Test

The government’s pushback of stress test results only made the public more hungry for the their release. But you don’t have to wait until Thursday to know which of the 13 biggest U.S. banks are diamonds or duds.

Last week in “Money Morning’s Bank Stress Test,” Martin Hutchinson highlighted the four secrets that will let you separate the winners from the losers in the U.S. banking system

• Banks that made profits in the very difficult fourth quarter of 2008 and first quarter of 2009 are probably in good shape, especially if their loan-loss provisions exceeded their charge-offs (the amount actually lost.)
• Banks that lost money in the fourth quarter and first quarter may or may not be in terminal trouble; it depends on the amount of those losses and whether the red ink is expected to continue to flow going forward.
• With the run-up in bank stocks in recent weeks, there’s been an accompanying rise in the ratio of share price to book value (stock price per share/book value per share). If that ratio is still below 30% - even after the recent price increases - the market lacks confidence in the bank’s ability to solve its own problems. Unfortunately, the market currently appears to be overly optimistic about some of the banks that still have considerable ongoing problems.
• Management’s dividend policy is less of an indicator than it was just a few short months ago; several banks have sharply cut their dividends in order to repay the Troubled Assets Relief Program (TARP) capital they got in late 2008. Reasonably, profitable banks don’t want the government meddling in their business or compensation structures

Hutchinson also gave an individual analysis of each bank, highlighting their strengths and pulling a curtain on their weaknesses.

This article can also be found on moneymorning.com.

Fed Holds Steady...For Now...

Earlier this week the Fed decided to hold steady with their previous policies, however, it is still likely that they will need to provide additional easing in the months ahead. Mark Thoma looks at an article from Tim Duy, in his blog post below, that talks more about the economy and what's likely in store for Fed policy.

Despite Green Shoots, Odds Favor More Easing, by Tim Duy: The Fed took an interesting risk by holding policy steady on Wednesday.With green shoots all the rage, policymakers are ready to step to the sidelines as they monitor the progress of their many programs. And clearly, they must have known that the 3% level on 10-year Treasuries was dependent on the expectation that policymakers would expand the pace of outright purchases of those assets, but are betting that economic conditions will remain sufficiently weak to prevent a crippling increase in rates. Still, given that policymakers still see the economy in decline, albeit at a slower rate, the odds favor additional easing in the months ahead, especially considering expectations of a widening output gap. Recall that labor markets, and the threat of deflation, kept the Fed easing well past the end of the recession in 2001.

Short of an outbreak of inflation, or a unexpected and unlikely surge of growth, there is little reason to think that the Fed is ready to bring policy to a sustained pause. And an imminent rise in inflation remains an outside risk for the Fed; the focus remains consistently on disinflation or, worse yet, outright deflation. A key paragraph is:

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

Policymakers are counting on a rising output gap (both here and abroad) and lags in the price setting process to keep inflation at bay. Indeed, this must be the case, as some of the current numbers are really not all that comforting. I am not inclined to place too much focus on headline inflation - oil prices appear to have found a bottom around $50 a barrel, and sustained hints of a firming of global economic activity would promise to send prices higher, thus offsetting the strong disinflationary impact of falling energy prices since the middle of 2008. In contrast to low year-over-year headline numbers, the personal income and outlays report for March revealed that core PCE prices gained by 0.2% in each of the past three months, pushing the annualized three month trend back above 2%:

And note that near-term inflation expectations have climbed back up into a normal range:

From this perspective, policymakers have done a good job anchoring inflation expectations against the possibility of deflation. Is this enough, however, to unsettle FOMC members? Despite these inflationary hints, it is simply unlikely that the Fed would ignore the disinflationary implications of the output gap. One way to ignore the gap is to argue that the US will revert to an emerging market inflation dynamic. I think such an argument requires a steady depreciation of the Dollar to hold - which could happen, but a Dollar crisis looks, for the moment, unlikely given relative global weakness. One could also argue that estimates of potential output are optimistic and don't reflect the importance of structural change in the economy. This is the issue that Nick Rowe at the Worthwhile Canadian Initiative attempts to tackle:

Even in the short run a good banking and financial system will be important in re-allocating capital between growing and declining sectors, if there are shifts in relative demand. If people want fewer cars and more restaurant meals, but banks cannot shift loans from car manufacturers to restaurants, the Short Run Aggregate Supply curve may shift left, because the restaurants won't be able to expand to meet demand, and car manufacturers' prices or wages may be sticky downwards.

If you see the financial crisis as causing the recession by shifting the SRAS curve left, then monetary and fiscal policies, which shift the AD curve right, are not the appropriate cure. Even if you see leftward shifts of the SRAS curve as only part of the story, you will see limits on what monetary and fiscal policy can achieve. When expansionary monetary and fiscal policies start to cause excessive inflation, before output and employment have returned fully to normal, you will know that purely AD policies have reached the limit of what can be expected from them.

Nick is slapped down by Brad DeLong:

But if bad banks have shifted the AS curve inward, then right now we should have stagflation: depression and inflation, as output falls and prices rise. We don't. The argument that fiscal and monetary policies won't reduce unemployment to normal levels because we have a supply side problem is completely incoherent in an AS-AD framework.

Brad is correct that in a traditional AS-AD framework, bad banks are demand shocks, not supply shocks. There is still something about Nick's argument that is important - the financial system redirected capital investment into housing and consumption related activities. Presumably, potential output includes the ability to build and sell as many houses the US economy produced at the height of the housing bubble. But what good is that output if we don’t want to build and sell that many houses in the future? How do we redirect capital away from those sectors? And how long does it take? Arguably, the narrowing of the US trade deficit is pushing that adjustment forward, as the US economy can't focus entirely on producing nontradable goods. Recall Brad DeLong from 2005:

There is an alternative scenario, one in which foreigners'--including foreign central banks'--desired holdings of dollar-denominated assets shortly hit the wall, and the asset price shifts that result from desired holdings' hitting the wall reduce, or do not increase, confidence in the dollar.

In this alternative scenario, the U.S. has to move about ten million workers out of currently-favored sectors--construction, home-equity-credit financed consumer expenditures, and so on--into export and import-competing manufactures. How much structural unemployment does such a sectoral shift require, and how long does the structural unemployment last? Other countries have to shift up to forty million workers out of export manufactures into other industries, and to generate demand for the products of those industries (without destabilizing their own monetary systems and asset prices, as Japan appears to have done at the end of the 1980s). The U.S. Federal Reserve would have to cope with whatever inflationary pressures are generated by rising import prices. Foreign central banks would have to cope with whatever stresses on their own asset prices are created by enormous losses of value in the stocks and bonds of their exporting companies.

If structural unemployment is rising - not because banks are currently bad, but engaged in bad behavior in the past - attempts to reduce unemployment back to pre-recession levels will yield higher inflation. This problem is minimized if labor resources can be quickly redirected into other sectors, a process that Nick above is implying is hampered by the existence now of bad banks. But, as Brad suggested in 2005, getting to inflation in the current environment seems to require a Dollar collapse - a story that for now is difficult to tell.

All of which is interesting, but even if you believe that structural unemployment is rising, I don't think anyone believes it is near the 8.5% rate for March (not to mention the underemployment rate of 15.6%). Nor does anyone expect that recent green shoots are sufficient to keep unemployment from rising further. Moreover, note that the Employment Costs Index released today reveals the continued slide in employee compensation costs - consistent with the FOMC's concerns about economic slack. Indeed, the ECI highlights the risks of the Fed's move to hold steady policy: Declining wage growth, coupled with higher interest rates, would play havoc with household efforts to reduce balance sheets and intensify the need to boost saving rates. Hence why the risks still favor additional policy easing - especially if programs such as TALF and PPIP are less successful than imagined.

In short, the shoots are much too green and the output gap much too wide to stimulate much discussion on Constitution Avenue that the end of easing has conclusively been reached. A pause to assess, yes. But Fed officials will be looking for clear and convincing evidence that economic activity is both self sustaining (not likely to fade after the initial burst of federal stimulus moves through the pipeline) and sufficient to substantially reduce the output gap before they sound the all clear signal. An end to the rapid pace of job loss is very different from a return to steady job growth. Again, recall the sustained pattern of easing in the wake of the 2001 recession - we need to go a long way up from -6% GDP growth before the job engine is started. To be sure, there should be some lingering concern that the Fed will act quickly (or at least the markets will act quickly), if there is a perceived need to withdraw monetary accommodation. But the data are well short of what would be necessary to justify such a shift in policy in the near future.

This post can also be viewed on economistsview.typepad.com.

Recession Bottom Near, But Could Last For Awhile

There are a lot of signs pointing to the fact that the bottom of the recession is a least near — if not hear already. Before everyone gets excited, though, it is more than likely that the bottom will last for awhile. For more on this, read the following blog post from James Picerno.

The main point of optimism in yesterday's first reading of Q1 GDP is the jump in consumer spending. But as today's update on personal income and expenditures for March reminds, there's still quite a bit of uncertainty left as to whether consumption is truly on the mend.

Much of what registered as increased consumer spending in this year's first quarter came in January. A convincing follow-through still awaits. As our chart below shows, the bump just ahead of March 2009 was a first-of-the-year rise in both disposable income and personal consumption spending. It was a welcome reprieve from the crushing setback in late 2008. But the trend is fading and last month's consumption dropped relative to February. Disposable income, meanwhile, was flat in March.

The main question is whether the realities of the broader economic climate are finally weighing on American households as they ponder the toxic combination of falling housing values, fewer jobs, higher unemployment and burdensome debt levels built up over the years. The government's massive stimulus efforts over the past year have helped slow the tide, but the correction in consumption and consumer attitudes will roll on.

Adding to the challenge is the recent uptick in the 10-year yield. The Fed has been working overtime in trying to keep long rates low, which is to say below 3%. But now Mr. Market is rebelling. The 10-year closed above 3% for the third day running yesterday. That's the first time it's run above that level since the Fed announced on March 18 that it would buy long-dated Treasuries outright in order to keep rates low. Immediately following the news, the 10-year yield dropped by an extraordinarily steep 50 basis points to around 2.5%. Now the yield's above 3%. And the higher rates come at a time with little or no worries about inflation.

Of course, one could argue that the apparent topping out in new jobless claims suggests that the recession may be at or near a trough. We've suggested as much recently, including here, and our reasoning is here. And today's update on new filings for jobless benefits offers a fresh datapoint to argue that the business cycle may have bottomed.

But we must distinguish between a bottom to the recession and the renewal of economic growth. If we have an "L" recession, the bottom could last quite a bit longer than the crowd expects. All the more so given the depth and magnitude of the current downturn.

In short, there's reason for optimism and its counterpart. Deciding which one has the upper hand will still take more time.

This post can also be viewed on capitalspectator.com.

Are Real Estate Prices Stabilizing?

Real estate prices are still falling across the country, but for the first time in over a year the monthly declined failed to set a new record. This is leading some analysts to believe that the real estate market just might be stabilizing. This is potentially good news, but investors should remember that while prices might be stabilizing, it could still be awhile before prices stop dropping altogether. For more on this, read the following article from HousingWire.

Home prices in major metropolitan areas continued to fall in February; however, for the first time in 16 months, the annual decline did not set a new record, possibly suggesting early signs of market stabilization.

The S&P/Case-Shiller 10-City and 20-City Home Price Indices released Tuesday recorded nationwide, annual declines of 18.8% and 18.6%, respectively. This is a slight improvement from the returns reported for January, which fell by 19.4% and 19.0%.

“While the declines in residential real estate continued into February, we witnessed some deceleration in the rate of decline in some of the markets,” says David M. Blitzer, chairman of the Index Committee at Standard & Poor’s. “All 20 metro areas recorded a monthly decline in February, but 16 of the 20 metro areas saw an improvement in their monthly returns compared to January.”

Still, the indices show an ongoing, broad-based decline in the prices of existing single family homes across the United States, with 10 of the 20 metro areas studied showing record rates of annual decline, and 15 posting declines in excess of 10%.

In terms of annual declines, the three worst performing cities as of February are once again, located in the Sunbelt, each reporting negative returns in excess of 30%. Phoenix was down 35.2%, Las Vegas declined 31.7% and San Francisco fell 31.0%. Dallas, Denver and Boston faired the best, down a significantly lesser 4.5%, 5.7% and 7.2%, respectively. Dallas also holds the distinction of being the best performer for the month, returning -0.3%, according to the report.

As of February 2009, average home prices across the United States are at levels similar to those seen in third-quarter 2003. And despite the deceleration in home price declines seen in February, from the peak in mid 2006, home prices are still down over 30%.

Standard & Poor’s Blitzer says, “we will certainly need a few more months of data before we can determine if home prices are finally turning around.”

This article can also be found on housingwire.com.

Q1 GDP Contracts At A Much Faster Than Expected Pace

Just when investors were starting to feel better about the economy, the GDP report came out — and the news was really bad. According to a Dow Jones Newswire poll of economists, it was expected that the economy would contract at a rate of 4.6 percent in Q1. Naturally the 6.1 percent came as a huge surprise, and one that shows us that we might be getting ahead of ourselves thinking this recession is wrapping up. For more on this, read the following post from Tim Iacono.

The Commerce Department reported that the U.S. economy contracted at a pace much faster than expected during the first quarter as business investment posted a record decline and exports of U.S. goods experienced their biggest drop in more than 40 years.
Following the fourth quarter's 6.3 percent pace of contraction, the U.S. economy shrank at a seasonally adjusted annualized rate of 6.1 percent last quarter, surpassing the consensus estimate of minus 5.0 percent. This was the worst back-to-back performance in 60 years.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

We Need A Root-And-Branch Reorganization Of The Financial System

Some people are open to the government handing over trillions of dollars to the banks, but no taxpayers want the money handed over without proper controls in place that will ensure it goes to good use. This has been one of the biggest issues the public has had with the bailout efforts thus far. For that reason Steve Waldman is calling for a root-and-branch reorganization of the financial system. For more on this, read the following blog post from Mark Thoma.

Steve Waldman says "we need a root-and-branch reorganization of the financial system":

Value for value, Steve Waldman: Would it have been better if Timothy Geithner had had the power to guarantee all bank debt early on? As James Surowiecki reminds us, that was part of the Swedish solution. Justin Fox plausibly suggests that we might have avoided a lot of pain with a fast, full guarantee.

But that's not the point. The question isn't whether we could have avoided this crisis, if only we had cut a big check. We could have, and that was not lost to any of us debating these issues more than a year ago. (See e.g. me or Mark Thoma.) Had we done so, the near-to-medium term fiscal costs might have been less than they probably will be now. So, with 20/20 hindsight, would it have been a good idea?

How you answer that question depends upon how you view the crisis. Is it an aberration, a shock to a basically sound financial system, or is it a painful symptom of an even more dangerous condition? ...

If you think that our financial system just needs some tweaks, some consolidation of regulators' organizational charts and sterner supervision, then you should prefer that we had just cut a check, passed Sarbanes/Oxley Book II, and moved on. But that is not what I, or most proponents of temporary receivership for insolvent banks, believe.

If you believe, as I do, that we need a root-and-branch reorganization of the financial system, which must necessarily involve the dismemberment and intrusive restraint of deeply entrenched institutions, does that mean pain is the only way forward, "the worse the better" in the old revolutionary cliché? It need not mean that. But it does mean that palliative measures, like giving the banks money, would have to be attached to curative measures, like enacting capital requirements and imposing regulatory burdens that would force financial behemoths to break themselves up or become boring narrow banks. For almost two years, policymakers at the Fed and the Treasury, including Secretary Geithner, have offered bail-out after bail-out and asked for nothing serious in return.

Do I regret that Henry Paulson was not empowered to issue a blanket guarantee of bank assets early on, as the Swedes did? No, I don't regret that at all. Why not? Because I think that "Hank the Tank" was a crappy negotiator... He would have offered the financial system sugar without requiring it to make the medicine go down. He may believe, quite sincerely, that a cure would be worse than the disease. He may believe that, but he is wrong. ...

You may believe that we have learned our lesson, that if we can just get some stability and comfort for a while we are prepared to do what must be done. That's a respectable position. But I don't share it, and neither do the majority of Americans who are unwilling to allow their representatives to sign off on any more expensive aspirin. We want value for value, an ironclad commitment of root and branch reform in exchange for the unimaginable sums of money we are being asked to hand over. ... Congress would, because the public would, support large, explicit transfers, if they were attached to reforms sufficiently radical to prevent a recurrence, and suitably punitive towards the people who managed the system that brought us here. Value for value. ...

I ... would be willing to hold my nose and tolerate a Swedish-style guarantee of bank creditors. I'd acquiesce to that even without formal nationalization. Nationalization is ... a means to an end, and the desired end is a world in which too big to fail is too big to exist for any financial institution that originates or holds credit risk in any form. Secretary Geithner could send a bill to Congress today that would put all banks with a balance sheet of over $50B into run-off mode... I'd fax my Congressman and support a $2T on-budget buyout of bank creditors as part of that bill, as long as it had teeth. ("Teeth" would imply making sure that off-balance-sheet and derivative exposures were included in the size cap, etc.)

It's not that us pitchfork-totin' populists are unwilling to pay the bill. It's that we want to know that in exchange for writing a very, very large check, the people that we are paying will actually deliver the goods. Given the behavior of bankers before the crisis and of shifty policymakers during, we have every reason to watch warily and to insist upon every precaution while we hand over suitcase after suitcase of freshly printed Federal Reserve notes.

This post can also be found on economistsview.typepad.com.

Stress Tests Reveal Three Banks In Need Of Additional Funding

The controversial stress tests commissioned by the government on the 19 largest financial institutions have revealed at least 3 in need of additional funding. These stress tests were meant to ensure that banks have enough capital reserves to last through the recession. For more on this, read the following article from Housing Wire.

At least three of the 19 financial institutions with assets in excess of $100bn may face pressure to build up capital reserves after failing to meet desired operational projections through the government-mandated stress tests, unnamed sources told the Wall Street Journal. The identities of the three firms remained confidential at the time this story went to press, but analysts told the Journal they likely include regional banks with commercial real estate exposure in the Midwest and Southeast.

The stress tests aimed to determine whether major US banks retain enough capital to weather even the more adverse economic projections. Federal officials offered three alternatives to banks that lack sufficient reserves: raise private investor funds, receive additional government aid or convert the government’s existing preferred shares into common shares, effectively placing part of the firm in government ownership.

The Federal Reserve, in reporting stress test methods late Friday, say most banks retain enough capital to weather a longer, more severe recession, although deteriorating economic conditions affect the reserve capital held among some banks.

This article can also be found on housingwire.com.

"Historically Low" Fails To Adequately Describe New Home Sales

New home sales were down again last month, but people are under appreciating just how bad these numbers are. Once you factor in population growth into the mix — new home sales have fallen off a cliff compared to past economic downturns. Tim Iacono looks closer at this latest report, and offers some insight, in his blog post below.

The Census Bureau reported that new home sales fell 0.6 percent last month, from a seasonally adjusted annual rate of 358,000 in February to 356,000 in March, still at a level that the phrase "historically low" fails to adequately describe.
Though the current sales level is up from the January low of 331,000, to put the March sales rate in its proper historical context, consider that the pre-2009 all-time low of 338,000 in September of 1981 works out to a population-adjusted rate of about 460,000.

The March total is still a full 23 percent below this pace!

While a bottom may indeed be forming after the relative stability of the last four months, these are the lowest levels of sales in the 46 years since this data series began and an improvement of some 29 percent from the current level is required just to equal the worst reading since JFK was sitting in the White House.

You can almost see the headlines later this year - New home sales surge 20 percent.

What will most likely be omitted from the story is that sales will have to increase by almost another ten percent just to better the level seen at the depths of the economic downturn in Ronal Reagan's first term.

Lower mortgage rates and tax credits for first time home buyers spurred sales in March helping to reduce builder inventory as the months of supply metric fell from 11.2 months to 10.7 months. This is down from a high of 12.5 months in January but still almost triple what would be considered normal.

Still highly distorted by sales incentives and other give-aways by increasingly desperate homebuilders, the median price fell from $208,700 in February to $201,400 in March, down 12.2 percent on a year-over-year basis, and is now at its lowest level since late-2003.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

How Long Will The Recession Last?

Answering that question is nearly impossible — especially given our current precarious economic situation. While no one is going to know for sure when this recession will end, we can look at the data we are provided with and make educated guesses as to when the end may be nearing. James Picerno analyzes the recent initial jobless claims report, and explains how the report has typically related to recession timing in the past, in his blog post below.

It's too soon to declare that the worst of the recession has passed, but it's also premature to dismiss the idea. We are, in short, in a never-never land of waiting and watching, and this game may roll on for many a moon.

To help pass the time, we're watching the data as it comes in, including initial jobless claims. As we've written, this is one of several metrics that may offer clues about when the business cycle reaches a trough. Like any one statistic, it can't be fully trusted, and so we must look to a range of data points. But history suggests that as single measures of broad economic trends go, this one's unusually useful in trying to peer into the future, or so it's been in the past.

With that in mind, we turn to yesterday's update on new filings for jobless benefits. As the chart below shows, the encouraging drop through the week of April 11 has since given way again to the forces of darkness via last week's seasonally adjusted rise of 27,000 new filings. But the hope that we've seen a top isn't lost yet.

History suggests that initial claims will top out concurrently or perhaps even slightly ahead of the recession's formal bottoming. Yes, we must look to other signals for context before we make any definitive conclusions. For the moment, the jury's still out, but the good news is that it's not yet clear that the recession's getting worse, or so the trend in initial jobless claims suggests.

The question is whether we're due for another surge in bad news for the labor market? The economy is still too precarious to rule out the possibility. On the positive side, despite the robust rise in claims last week, the trend in the chart above still doesn't preclude the possibility that we've seen a peak. Deciding if in fact that's true will take another month or two of data. Meanwhile, evidence that we're not peaking requires only one weekly surge skyward.

This post can also be viewed on capitalspectator.com.

Don't Fall For Housing Recovery Talk, More Pain Is On The Way

More and more people are jumping on the housing recovery bandwagon, but the excitement is a little premature. There are many signs pointing to the fact that the bottom is still far off in the distance. For more on this, read the following blog post from Tim Iacono.

This report by Ben Rooney at CNN/Money takes a few rather ambivalent comments by impartial analysts and combines them with more drivel from a National Association of Realtors shill, interpreting it all as a hopeful sign for the housing market.

Despite last month's decline, existing home sales appear to be stabilizing, according to Ian Shepherdson, economist at High Frequency Economics.

"Sales are volatile month-to-month, but the trend appears to be flattening off," Shepherdson said in a research note.

Yes, and they flattened out last year too before falling off a cliff (see chart from previous post), back when distressed sales accounted for a much smaller portion of overall sales.

By the way, what's with the characterization of distressed sales accounting for "just over half of all transactions in March" in the latest report? In the past, the NAR has cited percentages or a range of percentages, last month putting that figure at between 40 and 45 percent.

The phrase "just over half" could be anywhere between 51 and 60 percent, perhaps higher....

Here's the comment from the realtors' trade group:

First-time buyers made up 53% of existing home sales in March. Charles McMillan, NAR's president, said first-time buyers are "crucial" to a recovery in the overall housing market.

"The housing market always heals from the bottom up, and with large numbers of first-time buyers entering the market it will become a little easier for sellers to trade up or down," McMillan said in a statement.

Between this sort of optimism and word of bidding wars on foreclosed properties (discussed here yesterday and reported again in the Wall Street Journal today), this is probably a very good indication that there is much more pain to come in the housing market.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Geithner's New PPIP Plan Looks Too Much Like Failed TALF Program

Hopefully Geithners new PPIP plan that was created to deal with toxic assets works out better than the TALF failure, but unfortunately it looks eerily familiar. For more on this, read the following blog post from Mark Thoma.

The TALF program intended to increase auto loans, student loans, and credit card lending has a lot in common with the Geithner public private investment plan to remove toxic assets from bank balance sheets, including the valuable non-recourse loan feature. The fact that the TALF program is not living up to expectations - not even close - leads to questions about whether the Geithner plan will encounter similar problems:

Federal Program to Boost Private Lending Struggles to Get Money to Consumers, by Neil Irwin, Washington Post: In its first two months, the government's signature initiative to support consumer lending has fallen well short of expectations, deploying only a fraction of the amount officials had hoped to extend to stimulate auto loans, student loans and credit card lending. ...

Under [the Term Asset-Backed Securities Loan Facility, or] TALF, private investors ... put up a relatively small amount of money to be matched with a larger loan from the Federal Reserve. The combined funds are then used to purchase newly created, highly rated securities, which in turn fund a wide range of consumer and business lending.

If the securities become more valuable, the private investors stand to repay their government loans and make a healthy profit; if the securities plummet in value, the investors can lose only what they put up originally...

Officials envisioned TALF supporting tens of billions of dollars a month in new lending, saying it could eventually total $1 trillion. But in March, when it was launched, it backed only $4.7 billion in auto loans and credit cards. For April, it logged only $1.7 billion.

Sources involved in the program said private investors have been reluctant to work with the government, which they view as an unreliable business partner. ... There are restrictions on the business activities of participants in the program. ... But perhaps more significant ... is a fear that the government could retroactively change the terms, exacting new limits on what investors can pay their executives, for example, or trying to claw back profits that firms make in the program. ...

Federal Reserve officials have privately urged President Obama and congressional leaders to publicly state that the government views investors in voluntary programs such as TALF differently than it does companies that need a federal bailout.

Investors are not the only ones who need comforting, though. The Fed relies on primary dealers, or brokerage houses, to play a key role as intermediaries in TALF...

But the primary dealers have been extremely cautious..., hobbling the program's progress... Lawyers at the New York Fed ... have been working to help the brokers and investors work through the issues, and government officials are hopeful about the program's future. ...

The Public-Private Investment Program, designed to buy loans and securities from banks, is structured similarly to TALF. ...

And the differences between the PPIP and TALF programs that I can think of, e.g. that the PPIP has toxic assets as part of the bargain, and some of the banks will need a bailout so the reassurances about executive pay, etc. can't be made in these cases, are additional factors working against the PPIP's success.

This post can also be viewed on economistsview.typepad.com.

U.K. Budget Met With Fierce Opposition

If we thought things were bad over here in the U.S., at least we might be able to take some comfort in the fact it is looking as bad or worse in the U.K. Alistair Darlings just released the 2009 budget for the U.K., and while it does not look pretty, the IMF thinks he is being way too optimistic in his projects. From the looks of things the U.K. is going to be adding an incredible amount of debt to their already enormous deficit, and growth is unlikely to come for a few more years. For more on this, read the following blog post from Tim Iacono.

The new U.K. budget announced a short time ago is being greeted with boos and catcalls as taxes are being raised and debts continue to mount - they sound a bit like the state of California with the important distinction that the Golden State doesn't own a printing press.

This report in the Telegraph provides the details:

Alistair Darling has pledged to hit Britain’s richest workers and savers with a smattering of new taxes to help support the UK through its worst recession since the 1930s.

In what is likely to go down in history as the most downbeat and depressed Budget in peacetime history, the Chancellor pledged to raise the income tax rate for those earning over £150,000 to 50pc, hearkening back to the high tax rates imposed by Governments in the 1960s and 1970s.

He also confirmed that the Government will be forced to borrow £175bn this year and £173bn the next, and would have to increase the size of the national debt from recent levels of below 40pc to almost 80pc within the next five years.

It seems that almost every developed nation in the world is now in the process of turning Japanese in that national debt relative to GDP is rapidly approaching parity. In the U.S., we'll reach that point before you know it.

There's a complete summary of the new U.K. budget here.

If this video clip is any indication, it's getting a bit testy across the pond.

Darling has already downgraded his economic forecasts from just a few months ago which, as is the case for nearly all government projections, were overly optimistic for 2009. He now pegs economic growth at minus 3.5 percent this year with a rosier outlook for 2010.

In something of an embarrassment for U.K. government economists, the IMF cast a bit of cold water on their updated forecast for next year, predicting another period of contraction according to this report in the Guardian.

Britain will be stuck in recession for another year as consumers reeling from the housing crash cut back their spending, the International Monetary Fund warns today – undermining Alistair Darling's budget claim that growth will resume at the end of the year.

In its twice-yearly World Economic Outlook, the IMF predicts that recession in the UK will be "quite severe", with the economy shrinking by 4.1% this year, and continuing to contract, by 0.4%, in 2010. In the budget, Darling forecast 1.25% growth in 2010.

Somehow, given the way things have deteriorated over the last six months, it wouldn't be surprising to see even the IMF forecast prove to be too optimistic.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Deflation Taking Hold In Europe

We have been hearing a lot about deflation here in the U.S., but so far we have been able to hold it off for the most part. It appears that Europe is not having as much luck though. Deflation can be an economic killer as we saw during the Great Depression and more recently with Japan's Lost Decade. For more on this, read the following blog post from Tim Iacono.

Spain, the U.K., Luxembourg, Portugal, Ireland - who's next to succumb to the scourge of deflation? Yesterday, the New York Times reported that Spanish merchants have been slashing prices with abandon, auguring in the possibility of a dreaded "deflation death spiral".

Prices dipped everywhere, from restaurants and fashion retailers to pharmacies and supermarkets in March.
...
With the combination of rising unemployment and falling prices, economists fear Spain may be in the early grip of deflation, a hallmark of both the Great Depression and Japan’s lost decade of the 1990s, and a major concern since the financial crisis went global last year.

Deflation can result in a downward spiral that can be difficult to reverse. As unemployment rises sharply and consumers cut spending, companies cut prices. But if sales do not pick up, then revenue can decline further, forcing more cuts in workers or wages.

Once again, falling prices are characterized as the potential source of much bigger problems ahead, as if the world had something even remotely close to "sound money" where currency maintained its value over long periods of time as it did in the U.S. prior to the creation of the Federal Reserve in 1913.

To review -- in the hundred years prior to the Fed, inflation rounded to zero, whereas, in the nearly hundred years since 1913, the U.S. dollar has lost 96 percent of its value.

Policies that have resulted in this loss of value, now accepted as conventional wisdom by central bankers around the world, make real deflation (the minus 10 to 15 percent per year variety, not the -0.1 percent Spanish version) a near impossibility today.

But, that doesn't stop dimwitted dismal scientists from looking there instead of at the bursting of the biggest asset bubble in the history of Mankind when identifying villains in the current economic and financial market maelstrom.

“It doesn’t mean it will spread here to the U.S., but we need to look closely at Spain and other places to understand the dynamic,” says Simon Johnson, a professor at the Sloan School of Management at the Massachusetts Institute of Technology and a former chief economist for the International Monetary Fund. “It’s like the front line of a new virus outbreak.”

If only economists would spend more time examining how they failed the world so miserably over the last few years instead of at a 19th century phenomenon, we'd all be better off.

In the U.K. too there is much gnashing of teeth where annual deflation is running at a whopping four times the rate now experienced to the south - minus 0.4 percent.

The funniest thing about English deflation is that it is, in large part, directly caused by central bank actions. The broadest measure of consumer prices includes mortgage costs, the vast majority of which are variable rate loans, and, as short-term rates have been slashed, these consumer costs have tumbled as detailed in this report in the Telegraph.

The Retail Prices Index (RPI) measure of inflation fell to -0.4pc in March, indicating that prices paid by consumers last month were lower than a year ago - a trend not seen since March 1960.

RPI inflation, which includes housing and mortgage costs, has been driven down by the the series of aggressive interest rate cuts from the Bank of England which have triggered lower variable rate mortgage repayments .
...
The economy is expected to remain in deflationary territory for many months, which will mean pensioners will receive the lowest possible increase of 2.5pc next year, adding just £2.40 to the full weekly pension, an amount criticized as "derisory and pathetic" by campaigners.

If health care costs in the U.K. are anything like those in the U.S., there are probably a lot of irate senior citizens.

A related story explains why we should all be fearful about deflation beginning with the moronic example of how, after television prices have been falling for the last 20 years, additional price declines will cause consumers to think twice. Really!?

1. It causes consumers and businesses to feel concerned about spending. Why buy that £400 television this week when you are confident it will be cut in price to £350 next month? The same applies to businesses – why invest in new machinery, or software when you think it will fall in price? Deflation can, if it becomes entrenched, cause the whole economy to grind to a halt.

2. Deflation causes wage cuts. Employers can argue that they do not need to give their staff a pay rise, because their staff can buy more goods with the same salary. Many companies are freezing pay and started cutting wages in some cases.

3. In theory, falling wages should not matter if the price of goods and services fall as well. But in practice it is very damaging psychologically. People paid £30,000 one year do not like being paid £29,000 the following year even if they can buy the same amount of goods. Everyone feels less wealthy, especially home owners whose main asset is falling in price. And when they feel less wealthy, they spend less, causing a vicious downward spiral in the economy.

4. Deflation causes the value of people's debts to mount. A £100,000 mortgage might cost £4,000 to service each year, but the value of the house could fall by £4,000 or more – a dispiriting experience, but you will still need to keep on servicing the debt.

Wage cuts, tumbling asset prices, and making debt service more expensive are all legitimate arguments but falling consumer prices really don't belong in this discussion unless it's something more than volatile energy prices and, in the case of the U.K.-style deflation, lower interest rates caused by the central banks that, ironically, are desperately trying to avoid seeing consumer prices move lower.

For a more complete discussion on this subject, see Seven key points on deflation or the many other items categorized under "deflation" at this blog.

This post can also be viewed in themessthatgreenspanmade.blogspot.com.

Moscow's Property Market Set For A Hard Fall

Somewhat surprisingly to many real estate observers, Moscow has become one of the most expensive cities in the world. While Moscow's real estate market held off longer than most, it appears that the gloom is catching up to the city now, and the aftermath isn't going to be pretty. Overseas Property Mall takes a closer look at the situation brewing in Moscow, Russia in their blog post below.

Moscow investors and banks are playing a deadly game of Russian roulette in a stand-off to see who flinches first as the city’s once booming property market falls to ruins around them.

Billions of rubles are tied up in commercial and residential property portfolios.

Homes, offices and shops are standing empty as rents are unaffordable, new build projects are being canceled, investors can’t refinance and the banks are sitting on a pile of yet to be realized toxic debt.

Russia’s fledgling property market has never seen a recession – since democracy and privatization prices have only gone one way – up.

Fueled by oil and gas profits, Russia is lagging a few months behind the rest of the world’s recession problems.

But the property market has the same intrinsic problems as those in the US, UK and other European countries:

• Oversupply of commercial and top-end residential accommodation
• Rents outstripping earnings
• Real estate prices starting to adjust downwards

According to the Moscow News, a professional couple with 75,000 rubles (£1,500) a month to spend on rent can only afford a two-roomed apartment.

Even at that price, which is quite low for a Moscow apartment in a reasonable area, there seems to be plenty of availability and some agents are struggling to move property, or are closing down.

In commercial markets, over the past few months, vacant office space has rocketed from 7.5% to 17.5%, says the Moscow Times .

Prestigious commercial projects have been canceled. Rents have fallen from £1,400 per square foot to £500 per square foot in the same period. Property prices have plummeted by at least 50%.

One Moscow property observer, Andre Bar’yudin says the market adjustment was a disaster waiting to happen because Russians are too naive in property dealing.

Under communism, a worker was allocated a property according to his job.

After the collapse of the Soviet Union, state-owned real estate was given away. Families were given the flats in which they lived. This created a large population of new homeowners with little of no knowledge of how a free market works.

Rather than buying and selling residential property, families swap and offer cash compensation to make up any unfairness in the pricing. About 80% of Russian residential deals are struck this way rather than through estate agent sales like in the UK.

The conclusion is outgoings outstrip yield and incomes, so the market adjustment was inevitable.

The bubble is about to burst as predicted, and this evidenced by Russia’s richest woman, billionairess Yelena Baturina reportedly going cap in hand to the government for cash aid as her property empire starts to disintegrate.

Ms Baturina won contracts worth billions of rubles from the Moscow authorities – coincidentally led by her husband, who is the mayor.

Her construction company has applied for a £570 million loan guarantee to stave off the creditors.

This post can also be viewed on overseaspropertymall.com.

Roubini Says Financial Gloom Not Going Anywhere

There has been a lot of positive momentum lately in the markets, and people are starting to think that the end is near for the financial crisis. However, Nouriel Roubini warns that this optimism is not based on facts. The facts say that we still have much longer to go with this recession, and getting one's hopes up that the end has arrived will just lead to disappointment, and likely a loss of capital. For more on this, read the following blog post from Mark Thoma that looks at Roubini's latest article.

Nouriel Roubini cautions not to get your hopes up too high:

End of economic gloom?, by Nouriel Roubini, Project Syndicate: Mild signs that the rate of economic contraction is slowing in the United States, China and other parts of the world have led many economists to forecast that positive growth will return to the US in the second half of the year, and that a similar recovery will occur in other advanced economies. ...

Investors are talking of 'green shoots' of recovery... As a result, stock markets have started to rally... This consensus optimism is, I believe, not supported by the facts. Indeed, I expect that while the rate of US contraction will slow ... in the last two quarters, US growth will still be negative .... in the second half of the year... Moreover, growth next year will be so weak ... and unemployment so high ... that it will still feel like a recession.

In the euro zone and Japan, the outlook for 2009 and 2010 is even worse... Given this weak outlook for the major economies, losses by banks and other financial institutions will continue to grow. My latest estimates are $3.6 trillion in losses for loans and securities issued by US institutions, and $1 trillion for the rest of the world. ...

By this standard, many US and foreign banks are effectively insolvent and will have to be taken over by governments. The credit crunch will last much longer if we keep zombie banks alive despite their massive and continuing losses. ... So, while this latest bear-market rally may continue for a bit longer, renewed downward pressure on stocks and other risky assets is inevitable.

To be sure, much more aggressive policy action (massive and unconventional monetary easing, larger fiscal-stimulus packages, bailouts of financial firms, individual mortgage-debt relief, and increased financial support for troubled emerging markets) in many countries in the last few months has reduced the risk of a near depression. That outcome seemed highly likely six months ago, when global financial markets nearly collapsed.

Still, this global recession will continue for a longer period than the consensus suggests. There may be light at the end of the tunnel -- no depression and financial meltdown. But economic recovery everywhere will be weaker and will take longer than expected. ...

Let's hope the end is near, but if you are a monetary or fiscal policymaker, it's far to soon to let down your guard and declare victory. You have to assume it won't be over for some time yet, and plan accordingly. If things turn out better than expected the plans can stay on the self, and existing programs can be scaled back accordingly, but that can't happen until we are certain that recovery is around the corner and we are nowhere near that point yet.

[Also see the commentary surrounding the IMF's World Economic Outlook from Yves Smith, Dani Rodrik, and Real time Economics.]

This post can also be viewed on economistsview.typepad.com.

What Will The Government Do With Goldman Sachs?

Storied investment banking firm, Goldman Sachs, is preparing to pay the government back around $5 billion in borrowed TARP funds, but whether or not the government will allow it to happen is the real story. Goldman no longer wants to be burdened with the rules and regulations being imposed on them by the government, and thanks to a $12 billion windfall from the AIG bailout the firm is in a position to return the funds. If they are allowed to return the funds, though, there is worry that it will put the other bailed out banks in a precarious position. For more on this, read the following article from Money Morning's Shah Gilani.

Not a fan of socialism? Me either. But, if the federal government has to backstop free market excesses with taxpayer dollars, how will it eventually unravel the veil, or tarp of intervention? Or should it? The answers are about to unfold before our eyes.

In the case of the government and Goldman Sachs Group Inc. (GS), a decision on whether Goldman can repay government bailout money and be freed to pay its employees whatever it wants, may determine the winners and losers coming out of this financial collapse, and what kind of government Americans will end up with.

In her extraordinary 1999 book, “Goldman Sachs the Culture of Success,” Lisa Endlich vividly chronicles the “history, mystique and remarkable success of the world’s premier investment bank.” That same year, the storied partnership structure of Goldman was junked in a wildly successful initial public offering (IPO).

I still keep three pages of notes distilled from Endlich’s book on how to create and foster a culture of success, a la the Goldman model. They now seem quaint in light of the winner-take-all at the expense of the shareholders mentality that eviscerated the old-school standards.

That’s not to say that Goldman isn’t still wildly successful. On Monday, Goldman pre-announced first quarter net income of $1.81 billion. Record net revenue of $6.56 billion from trading fixed income, currencies and commodities was offset by losses in stock trading, real estate, investment banking and money management. Nonetheless, earnings were almost twice analysts’ expectations.

Yesterday (Tuesday), on the heels of its good performance, Goldman announced that it had priced a public offering of 40,650,407 shares of common stock at $123 per share. Goldman will be its own sole underwriter and total gross proceeds are expected to yield approximately $5 billion.

Ironically, $5 billion is what Goldman needs to pay back the U.S. government in order to escape the salary and bonus caps imposed on bailout recipients.

A brief history.

On the remarkable day of September 15, 2008 Lehman Brothers Holding Inc. announced its intention to file a Chapter 11 bankruptcy petition. On the same day, venerable investment bank Merrill Lynch disappeared into the waiting arms of Bank of America Corp. (BAC). Six short days later, on a Sunday afternoon, the U.S. Federal Reserve announced approval of expedited applications by Goldman Sachs and Morgan Stanley (MS) to change their status from investment banks to bank holding companies. The rapid approval of their applications would, the Fed said, “provide increased funding support” allowing both banks to borrow directly and permanently from the Fed’s Discount Window and its other capital liquidity enhancing facilities.

But that wouldn’t be enough. As the crisis mounted, on Sept. 23, Goldman raised $5 billion from billionaire investor Warren Buffet’s Berkshire Hathaway Inc. (BRK.A, BRK.B). And with the storied investor now onboard, Goldman rushed to raise another $5.75 billion in a common stock offering.

On Oct. 14, with the mushrooming cloud of the crisis enveloping seemingly every major bank in the country, then-Treasury Secretary Henry M Paulson (formerly Goldman Sachs’ Chairman and CEO) and Federal Reserve Chairman Ben S. Bernanke summoned the nine largest bank chief executives to Washington where they were told that they would each take a piece of government capital. Only Wells Fargo & Co. (WFC) is on record as saying it didn’t need the money, but the handout was forced on it too. Goldman itself took $10 billion.

On Wall Street, and nowhere more so than at Goldman, it’s about compensation. But recipients of bailout money are now facing the full disclosure of their executive compensation deals, as well as having to obtain nonbinding shareholder voting on compensation issues.

The Treasury is advocating a salary ceiling for recipient senior executives of $500,000 and any additional compensation to be paid in restricted stock that vests only when government funds have been entirely repaid. And there are restrictions on golden parachutes and threats that Congress will impose a 90% bonus tax.

It’s enough to make Wall Street quake in its canyon.

With the public backlash against the taxpayer-funded bonuses paid to executives and traders at crippled firms, banks are desperate to return government bailout money so they can be freed from government salary and bonus oversight.

But unfortunately for many of these banks, oversight is mandated for any recipient of “exceptional assistance,” which is defined as assistance of more than $5 billion.

No wonder Goldman wants to pay back $5 billion of the $10 billion it got.

I have nothing against the free market setting compensation benchmarks, or private companies paying successful executives whatever their shareholders vote to be acceptable. And I’m not singling out Goldman Sachs. But, nowhere else in the U.S. economy - or at the highest levels of government - is there anything like Goldman’s visible and invisible hands at work. And they’re working in the open and more insidiously, behind the scenes and through lobbyists, to make themselves a lot of money.

There is simply not enough space in any book, let alone any article, to list the power, placement and influence of current and former Goldman Sachs alumni pulling the levers of hedge funds, corporations, politicians and governments. If you want to enlighten yourself about what you don’t know about these players, simply Google: “List Goldman Sachs alumni.”

Goldman, as much as any investment bank, got its hands dirty in the subprime securities business and the credit default swap business. As to its influence and its claim to premier bank status, the first question that comes to my mind is: Would Goldman even exist today if Hank Paulson hadn’t had Goldman’s current CEO Lloyd Blankenfein in on meetings about saving American International Group Inc. (AIG)?

Out of the $185 billion that AIG received from taxpayers, Goldman got $12.5 billion for exposure it had to credit default swaps written by AIG. I’ve been told by some of my hedge fund and investment banking friends that Goldman deserved that money and that the entire counterparty structure related to almost every credit default swap was a risk.

But I like to point out that Goldman is only smarter than its peers because its trading desks are lighter on their feet. I remind them that Goldman stuffed the pipelines with toxic structured collateralized debt obligations (CDOs), and then was nimble enough to cover themselves better by buying credit default swaps to hedge their exposure to their own toxic slime and institutions that are too-big-to-fail, exactly like AIG.

What happens now with Goldman Sachs will set the precedent for everything else that the government will do or allow in the future with bailout recipients and industries. Will Goldman be freed up to overpay its risk takers and to make greater wagers as it also seeks to become too-big-to-fail? Will impositions be made on the corporate level, industry level, systemic level? Will free markets be free to leverage taxpayers indefinitely?

The argument, most recently made in yesterday’s Wall Street Journal op-ed page by Jonathan Macey, a law professor at Yale, that “demonetizing executive pay will also drive the best managers out of private companies and into hedge funds and other boutique investment firms” implies that there is a limited amount of talent available in America, which is a supposition that I find myopic, at best.

Besides, aren’t these the same people that got us into this mess?

And while letting public companies be run by shareholders - as Macey suggests - is supposed to work in principle, shareholders have been marginalized by the same Wall Street system that protects the institutions whose stocks and bonds they sell, trade and profit from.

All eyes should be on the curious relationship between government and Goldman for clues as to what shape the landscape will take when we eventually exit this calamity.

I don’t want our companies, our institutions or our economy socialized any more than Adam Smith would. But I do want to see the public tail wagging the dogs of Wall Street and government.

This post can also be viewed on moneymorning.com.

From Money Morning:

"I'd rather have this than gold." That's what one well-known fund manager recently told Barrons. Why? This special group of investments is set to pay out $4,201 guaranteed cash next month. And they pay out juicy cash sums all year long. But they're not income trusts, corporate bonds, or foreign bonds. In fact, only Martin Hutchinson is talking about them. Read his full report here...

Depression Looms Without More Stimulus

Do we really need more economic stimulus? We have already spent trillions of dollars attacking this financial crisis, and unfortunately we also have seen billions apparently wasted by poor policy decisions and implementation. All that aside, according to famed economist Robert Shiller, we need more economic stimulus or else we are likely facing another depression. For more on this, read the following blog post from Mark Thoma.

Robert Shiller says we need to continue with the monetary and fiscal policies we are pursuing, but both efforts need to be larger:

Depression Lurks Unless There’s More Stimulus, by Robert Shiller, Commentary, Bloomberg: In the Great Depression ... the U.S. government had a great deal of trouble maintaining its commitment to economic stimulus. “Pump- priming” was talked about and tried, but not consistently. The Depression could have been mostly prevented, but wasn’t. ...

In the face of a similar Depression-era psychology today, we are in need of massive pump-priming again. We appear to be in a much better situation due to the stronger efforts to date. Still, there is a danger that, because of a combination of faulty economic theory and inadequate appreciation of human psychology, as well as deep public anger, we will not continue with such stimulus on a high enough level. ...

In our analysis of the current economic crisis, we conclude that the government should have two targets. One would be a joint fiscal-monetary policy target. The same kind of expansionary policies embodied in the government expenditure stimulus and tax cuts that are already being tried have to be done on a big enough scale and for a long enough time in the future. ...

The government should also have a credit target. Once again, we are calling for more of the same kinds of existing policies... Achieving this requires new approaches, like those announced by the Bernanke Fed and the Obama administration, but on a continuing and even larger scale. ...

In this crisis, acceptance of these measures is being replaced with outrage. It is increasing the blood pressure of the public, and that can’t continue without damage to our system. ... It is time to face up to what needs to be done. The sticker shock involved will be large, but the costs in terms of lost output of not meeting either the credit target or the aggregate demand target will be yet larger.

It would be a shame if we are so overwhelmed by anger at the unfairness of it all that we do not take the positive measures needed to restore us to full employment. That would not just be unfair to the U.S. taxpayer. That would be unfair to those who are living in Hoovervilles...; it would be unfair to those who are being evicted from their homes, and can’t find new ones because they can’t find jobs. That would be unfair to those who have to drop out of school because they, or their parents, can’t find jobs.

It is now time to keep our eye on the ball and set clear targets to fix a system that broke when our animal spirits got out of bounds.

This post can also be viewed on economistsview.typepad.com.

Treasury Yield: What Does The Future Have In Store?

A lot of people have been turning to Treasuries as the investment of choice in these unpredictable and rough economic times, but will it ultimately prove to be a good move? While widely considered "risk free" investments, that is far from the truth. There are many things that perspective Treasury investors need to keep in mind when weighing their investment options. The following blog post from James Picerno offers some insight into what is going on right now in the Treasury market, and hopefully will help investors make an a better informed decision.

It's hard to dismiss the ongoing news about China's anxiety over its massive holdings of American debt. What's worrisome for China is ultimately a concern for the U.S., with fallout that may come sooner than we think.

“We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried," Chinese prime minister, Wen Jiabao, said last month. It was a rare public admission of apprehension by a high-ranking Chinese official on the delicate and increasingly precarious lender-borrower relationship that describes the U.S. and China.

Yesterday came word that China's purchases of U.S. bonds slowed in the first two months of this year, according to new data from China's central bank, The New York Times reports. "Chinese reserves fell a record $32.6 billion in January and $1.4 billion more in February before rising $41.7 billion in March, according to figures released by the People’s Bank over the weekend," the Times notes. The trend may now be reversing, although the notion that a pivotal point in the U.S.-China financial relationship may be near remains intact.

The fear is that China will slow (cease?) buying new Treasuries, a decision that's likely to force up interest rates in the U.S. For the moment, there's no reason to dismiss that scenario, at least when it comes to the recent trend in the yield on the benchmark 10-year Treasury Note. As the chart below shows, the march upward to the 3% mark is alive and well.

What makes the rising yield in the 10-year so striking is that it comes in the wake of the Federal Reserve's announcement last month that it would directly target lowering rates on long Treasuries. The market's initial reaction was to buy Treasuries, which resulted in one of the biggest one-day drops in interest rates on record. For a time it looked like Bernanke and company had struck gold. But confidence that the central bank has complete control over the long end of the curve has been evaporating in recent weeks.

As the above chart shows, the 10-year yield collapsed by around 50 basis points on March 18, down to around 2.5%. As of April 9, the 10-year's yield had climbed by to roughly 2.9%, just under the level where when the Fed made its bombshell announcement last month.

High interest rates in the U.S. necessarily make the dollar more attractive, at least for a time. No wonder, then, that the buck's value is rising in forex markets in recent weeks, in sympathy with higher interest rates on the 10-year. The U.S. Dollar Index is just about at the highest level since the Fed's March 18 disclosure, a news event that had initially sent the buck tumbling. Meanwhile, commodity prices generally have been inching higher as well, as per the CRB Index. Commodities are generally priced in dollars, so it's no surprise that a strong dollar equates with higher commodity prices.

Higher interest rates are almost surely the path of least resistance in the years ahead, in part because the U.S. deficits are sure to be large in the wake of all the monetary and fiscal stimulus of late. The problem is that the arrival higher interest rates now, this week, next month, next quarter come at an especially inopportune time: before the economy has sufficiently recovered. The Fed surely seeks to keep long rates below 3% for the rest of the year, or so one might speculate. But it's not clear that the markets are willing to go along for the ride.

In the old days, the Fed's powers were such that it had more control over keeping interest rates low and thereby providing the economy with ample monetary stimulus until the forces of growth rose anew. Engineering that scenario this time may be tougher, much tougher. One reason is that much of the control over future rates has been transferred to foreigners, courtesy of holding large quantities of U.S. debt. That may not be fate that rates will rise. Indeed, China surely wants to keep U.S. rates low in order to boost growth here, which will promote imports of Chinese goods. But no one really knows how these forces will play out.

Perhaps the cycle will be salvaged if the economy rebounds quicker than the crowd expects. Alternatively, the Chinese and other foreigners decide to buy large quantities of Treasuries in the months and quarters ahead. There are solutions to the current dilemma, but no one should expect that they're a forgone conclusion.

This post can also be viewed on capitalspectator.com.

Retail Sales Down More Than Expected

Amidst all the increasingly positive reports, it appears that we might have become a little too optimistic. The latest retail sales report came in significantly worse than analysts had anticipated. For more on this, read the following blog post from Tim Iacono.

To the surprise of most analysts, the Commerce Department reported retail sales fell 1.1 percent in March following an upwardly revised gain of 0.3 percent in February, the most recent decline paced by tumbling sales of electronics, appliances, and automobiles.
On a year-over-year basis, retail sales were down 9.4 percent, an improvement from the December low of minus 10.5 percent, but worse than February's 7.9 percent annual decline.

Excluding automobiles, retail sales fell 0.9 percent in March after a gain of 1.0 percent in February and, from year ago levels, retail sales ex-autos are now down 6.0 percent.

The higher jobless rate was blamed for the most recent downturn, lower prices and other incentives at clothing stores and auto dealers failing to spur buying interest from the public, however, a relatively late Easter holiday may have also had an impact.

Sales at electronics and appliance stores tumbled 5.9 percent, automobile dealers saw a 2.5 percent reduction in overall sales, and spending at clothing stores fell 1.8 percent.

With the exception of modest increases at food and beverage stores and for health and personal care items, receipts for every other retail category declined. The 1.4 percent drop in spending at food services and drinking places was the sharpest decline in three years.

The effect of the long, slow decline in housing continues to be felt in the home furnishings industry as sales fell 1.7 percent in March and are now 13.1 percent lower than a year ago.
The year-over-year decline in furniture sales is exceeded only by the 34 percent decline in gasoline station sales (mostly due to lower prices) and the 26 percent decline in automobile sales (mostly due to fewer sales).

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Protectionism And The Global Economy

Coordinating a global response to the financial crisis is proving increasingly difficult, and the growth of protectionism is not helping. The global economy is set to shrink for the first time since 1945, and shockingly enough 200 million additional people could be facing poverty. It is clear something needs to be done, but with so many voices, and so many agendas, what hope do we have? For more on this, read the following post from Mark Thoma.

Lots of worry about the global economy, the lack of an internationally coordinated policy response to the downturn, and about the imposition of protectionist measures. First, Joseph Stiglitz:

A globally coordinated stimulus package needed, by Joseph E Stiglitz, Project Syndicate: This year is likely to be the worst for the global economy since World War II... Unless something is done, the crisis will throw as many as 200mn additional people into poverty.

This global crisis requires a ... globally coordinated stimulus package... [W]hile it is recognized that almost all countries need to undertake stimulus measures (we’re all Keynesians now), many developing countries do not have the resources to do so. Nor do existing international lending institutions.

But if we are to avoid winding up in another debt crisis, some, perhaps much, of the money will have to be given in grants. And, in the past, assistance has been accompanied by extensive “conditions,” some of which enforced contractionary monetary and fiscal policies – just the opposite of what is needed now – and imposed financial deregulation, which was among the root causes of the crisis.

In many parts of the world, there is a strong stigma associated with going to the International Monetary Fund, for obvious reasons. ... It is thus imperative that assistance be provided through a variety of channels, in addition to, or instead of, the IMF...

At their November 2008 summit the G-20 leaders strongly condemned protectionism... Unfortunately,... 17 of the 20 countries have actually undertaken new protectionist measures, most notably the US with the “buy American” provision included in its stimulus package.

But it has long been recognised that subsidies can be just as destructive as tariffs – and even less fair, since rich countries can better afford them. If there was ever a level playing field in the global economy, it no longer exists: the massive subsidies and bailouts provided by the US have changed everything, perhaps irreversibly.

Indeed, even firms in advanced industrial countries that have not received a subsidy are at an unfair advantage. They can undertake risks that others cannot, knowing that if they fail, they may be bailed out. While one can understand the domestic political imperatives that have led to subsidies and guarantees, developed countries need to recognize the global consequences, and provide compensatory assistance to developing countries. ...

And the US dollar reserve-currency system – the backbone of the current global financial system – is fraying. China has expressed concerns, and the head of its central bank has joined the UN Commission in calling for a new global reserve system. ...

Such reforms will not occur overnight. But they will not occur ever unless work on them is begun now.

Next, Charles Wyplosz argues that, in general, quantitative easing is a "beggar-thy-neighbor" policy:

One fiscal initiative not worth emulating, by Charles Wyplosz, Project Syndicate: When the Swiss National Bank (SNB) recently brought its interest rate down to 0.25 percent, it announced that it would engage in “quantitative easing,”... More surprising was the simultaneous announcement that it was intervening on the foreign-exchange market with the aim of reversing the appreciation of the franc. Will this be the first salvo in a war of competitive devaluations? ...

Like most other central banks confronted with the recession, the SNB has reduced its policy interest rate all the way to the zero lower-bound. Once there, traditional monetary policy is impotent...

This is why central banks are now searching for new instruments. Quantitative easing represents one such attempt. ... However, an important issue is rarely mentioned: In small, open economies — a description that applies to almost every country except the US — the main channel of monetary policy is the exchange rate.

This channel is ignored for one good reason: Exchange-rate policies are fundamentally of the beggar-thy-neighbor variety. Unconventional policies that aim at weakening the exchange rate are technically possible even at zero interest rates, and they are quite likely to be effective ... by switching demand toward domestically produced goods and services.

The risk is that countries that suffer from the switch may retaliate and depreciate their currencies. That could easily trigger a return to the much-feared competitive depreciations that contributed to the Great Depression.

The first casualty would be whatever small scope remains for international policy coordination. The second would be the world international monetary system. In fact, one key reason for the creation of the IMF was to monitor exchange-rate developments with the explicit aim of preventing beggar-thy-neighbor policies. ...

Alternatively, it may be that the SNB mostly wishes to talk the franc down to break the safe-haven effect. Having promptly achieved depreciation, it may have succeeded. In that case, the franc will not move much more in any direction, and there will be no need for further interventions. ...

Other central banks have not expressed any view, which may suggest that they do not intend to retaliate, at least at this stage. ... It may also be that notice has been taken of the precedent, and that those authorities that intend to use it to justify future moves are loath to criticize it. In that case, the generalized silence could indicate that all other central banks entertain the possibility of using that option, which would be most worrisome.

And:

The worst of all worlds, by Joseph S. Nye, Project Syndicate: The world economy will shrink this year for the first time since 1945, and some economists worry that the current crisis could spell the beginning of the end of globalization. Hard economic times are correlated with protectionism... In the 1930s, such “beggar-thy-neighbor” policies worsened the situation. Unless political leaders resist such responses, the past could become the future.

Ironically, however, such a grim prospect would not mean the end of globalization, defined as the increase in worldwide networks of interdependence. Globalization has several dimensions, and though economists all too often portray it and the world economy as being one and the same, other forms of globalization also have significant effects — not all of them benign — on our daily lives.

The oldest form of globalization is environmental. For example,... Bubonic plague, or the Black Death, originated in Asia, but its spread killed a quarter to a third of Europe’s population in the 14th century. ... The spread of foreign species of flora and fauna to new areas has wiped out native species, and may result in economic losses of several hundred billion dollars per year. Global climate change will affect the lives of people everywhere. ... The rate at which the sea level rose in the last century was 10 times faster than the average rate over the last three millennia.

Then there is military globalization, consisting of networks of interdependence in which force, or the threat of force, is employed. ... Finally, social globalization consists in the spread of peoples, cultures, images and ideas. Migration is a concrete example. ...

The danger today is that shortsighted protectionist reactions to the economic crisis could help to choke off the economic globalization that has spread growth and raised hundreds of millions of people out of poverty over the past half century. But protectionism will not curb the other forms of globalization. ...

This post can also be viewed on economistsview.typepad.com.

Longing For The Days Of Boring Banking

When the financial industry gets too creative, bad things tend to happen. The current financial crisis was not the first example of this either. If you look all the way back to before the Great Depression, whenever the financial industry was loosely regulated, and overly creative, things would eventually blow up. Paul Krugman is calling for us to return to the days of boring banking, but wonders if that is going to happen anytime soon. For more on this, read the following blog post from Mark Thoma.

Does congress have the will to pursue serious financial reform?:

Making Banking Boring, by Paul Krugman, Commentary, NY Times: Thirty-plus years ago, when I was a graduate student in economics, only the least ambitious of my classmates sought careers in the financial world. Even then, investment banks paid more than teaching or public service — but not that much more, and anyway, everyone knew that banking was, well, boring.

In the years that followed, of course, banking became anything but boring. Wheeling and dealing flourished, and pay scales in finance shot up... And we were assured that our supersized financial sector was the key to prosperity. Instead, however, finance turned into the monster that ate the world economy. ...

Thomas Philippon and Ariell Reshef ... show that banking in America has gone through three eras over the past century. Before 1930, banking was an exciting industry featuring a number of larger-than-life figures, who built giant financial empires (some ... based on fraud). This highflying finance sector presided over a rapid increase in debt: Household debt as a percentage of G.D.P. almost doubled between World War I and 1929.

During this first era of high finance, bankers were, on average, paid much more than their counterparts in other industries. But finance lost its glamour when the banking system collapsed during the Great Depression.

The banking industry that emerged from that collapse was tightly regulated, far less colorful than it had been before the Depression, and far less lucrative.... Banking became boring, partly because bankers were so conservative about lending: Household debt ... stayed far below pre-1930s levels.

Strange to say, this era of boring banking was also an era of spectacular economic progress for most Americans.

After 1980, however, as the political winds shifted, many of the regulations on banks were lifted — and banking became exciting again. Debt began rising rapidly, eventually reaching just about the same level relative to G.D.P. as in 1929. And the financial industry exploded in size. By the middle of this decade, it accounted for a third of corporate profits.

As these changes took place, finance again became a high-paying career... Indeed, soaring incomes in finance played a large role in creating America’s second Gilded Age. Needless to say, the new superstars believed that they had earned their wealth. ... And many economists agreed.

Only a few people warned that this supercharged financial system might come to a bad end. Perhaps the most notable Cassandra was Raghuram Rajan... But other[s]..., including Lawrence Summers..., ridiculed Mr. Rajan’s concerns.

And the meltdown came.

Much of the seeming success of the financial industry has now been revealed as an illusion. ... Worse yet, the collapse of the financial house of cards has wreaked havoc with the rest of the economy, with world trade and industrial output actually falling faster than they did in the Great Depression. And the catastrophe has led to calls for much more regulation of the financial industry.

But my sense is that policy makers are still thinking mainly about rearranging the boxes on the bank supervisory organization chart. They’re not at all ready to do what needs to be done — which is to make banking boring again.

Part of the problem is that boring banking would mean poorer bankers, and the financial industry still has a lot of friends in high places. But it’s also a matter of ideology: Despite everything that has happened, most people in positions of power still associate fancy finance with economic progress.

Can they be persuaded otherwise? Will we find the will to pursue serious financial reform? If not, the current crisis won’t be a one-time event; it will be the shape of things to come.

This post can also be viewed on economistsview.typepad.com.

Why Dropping "Mark to Market" Rules Won't Solve Anything

In an effort to shore up the balance sheets of banks the government decided to drop the "mark to market" rules that have been causing so much trouble in the financial industry. As Peter Schiff points out in his article, though, this won't solve anything. The rule was created in order to give investors a better idea of the true value of bank assets — basing the valuations on market activity rather than arbitrary assessments by the bank's accountants. Letting the banks decide how much their assets are worth, rather than the market, is a recipe for deception and ultimate failure. Read about what Schiff has to say in the article below from Money Morning.

When elementary school kids want to escape the confines of their circumstances, they pretend to be pirates, princesses and Jedi knights. Now, with the relaxation of "mark to market" valuation rules announced by the accounting trade’s self-regulatory body, our bankrupt financial institutions can escape their own reality by pretending to be solvent.

The unraveling of our fairytale economy over the last few months has not yet convinced us that the time has come to put away childish things. The applause that greeted the Financial Accounting Standards Board’s (FASB) ruling on Wall Street is a clear sign that we still have some growing up to do.

The imaginative conceit that lies behind the accounting change is that the toxic assets polluting bank balance sheets are not really toxic at all. They are in fact highly valuable assets that for some irrational reason no one wants to buy.

Using the "mark to market" accounting method, mortgage-backed securities were valued relative to the latest prices fetched by the sale of similar assets on the open market. Currently, those bonds are being sold at deep discounts to their original value. By "marking" their unsold bonds down to those prices, the insolvency of our financial institutions had been laid bare. But the new accounting changes will allow the nervous owners to assign more "appropriate" (i.e. higher) values. Problem solved.

It is important to note that the FASB made its rule modifications only after both Washington and Wall Street applied intense pressure. In their heart of hearts, I can’t imagine that there are too many bean counters happy with the outcome.

The banks and the government have argued that the assets should be valued based solely on current cash flow. Most mortgages, after all, are not delinquent. Therefore, a few bad apples should not spoil the whole bunch, and those that are not yet delinquent should be valued at par. This method assumes we have no ability to look into the future and make assumptions about what is likely to happen, which is presumably what the market is already doing by valuing the assets lower than the banks wish.

All kinds of bonds (corporate, government and municipal, etc.) that are not in default frequently trade at discounts. In fact, the reason agencies such as Moody’s Corp. (MCO) and Standard & Poor’s rate bonds is to assess the probability of default. The higher that probability, the lower the value placed on the bonds, regardless of their current cash flow.

For example, General Motors Corp.’s (GM) 10-year bonds currently trade for only 8 to 10 cents on the dollar, despite the fact that GM is current on all interest payments. The 90% discount reflects investor awareness that GM will likely default long before the bonds mature. By the new logic, financial institutions with GM bonds on their balance sheets should be able to ignore the market and value these bonds at par.

Some argue that the comparison is invalid because GM’s bonds are liquid while mortgage-backed securities are not. However, if sellers of GM bonds were holding out for 70 or 80 cents on the dollar, those bonds would be illiquid too. The reason GM bonds are trading is that sellers are realistic.

The same should apply to bonds backed by mortgages. To assume that a 30-year, $500,000 mortgage on a house that has declined in value to $300,000 has a high probability of remaining current to maturity is ridiculous. The borrower could lose his job, his adjustable-rate mortgage (ARM) might reset higher, or he may simply tire of paying an expensive mortgage for a house that is unlikely to be sold at a profit.

Any bond investor with half a brain will factor in these probabilities and look for deep discounts. The only way to accurately assess a real present value is to let the market discover the price.

Despite the pleas from bankers and politicians, mortgages are not plagued by a lack of liquidity but a lack of value. If sellers would be more negotiable, there would be plenty of liquidity. Who knows, at the right price I might even buy a few. The problem is that putting a market price on these assets would render most financial institutions insolvent, which is precisely why they do not want to let that happen.

Simply pretending that all these mortgages will be repaid does not solve the underlying problems. It may keep some banks alive longer, but when they ultimately do fail, the losses will be that much greater. In the meantime, solvent institutions are deprived of capital as more funds are funneled into insolvent "too big to fail" institutions - hiding their toxic assets behind rosy assumptions and phony marks.

Going from the sublime to the completely ridiculous, in a speech at the just-concluded Group 20 summit in London, President Barack Obama urged Americans not to let their fears crimp their spending. It would be unwise, he argued, for Americans to let the fear of job loss, lack of savings, unpaid bills, credit card debt or student loans deter them from making major purchases.

According to the president, "we must spend now as an investment for the future." So in this land of imagination (where subprime mortgages are valued at par), instead of saving for the future, we must spend for the future.

I guess Ben Franklin had it wrong too – apparently a penny spent is a penny earned.

This post can also be viewed on moneymorning.com.

Banks Believed To Be Holding Around 600,000 Foreclosure Properties Off Market

RealtyTrac believes that banks are keeping around 600,000 foreclosure properties nationwide off the market. This number would represent a huge portion of the available housing stock, and it is believed that banks could be strategically withholding these properties in order to prevent the housing market from collapsing even further. For more on this, read the following blog post from Tim Iacono.

If ever there were a "squishy" data set, one that is quite difficult to get a good handle on due to the paucity of reliable, publicly available data, it is the inventory of foreclosed homes that have yet to make it onto the resale market.

A report by Carolyn Said in the San Francisco Chronicle provided the first graphic on the subject that I've seen, an image that was splashed across the front page of yesterday's paper.
With bank repossessions and notices of default set to pick up dramatically in some parts of the country as detailed by Mr. Mortgage the other day, all the prognosticators with rosy housing outlooks for 2009 may be in for a wake up call come summer time.

If the Alt-A and Option ARM loans begin to sour in large numbers (as many predict) at about the same time that banks look to unload some of their inventory after all the recent optimism, there could be another big leg down in home prices.

Some details from the SF Gate story:

A vast "shadow inventory" of foreclosed homes that banks are holding off the market could wreak havoc with the already battered real estate sector, industry observers say.

Lenders nationwide are sitting on hundreds of thousands of foreclosed homes that they have not resold or listed for sale, according to numerous data sources. And foreclosures, which banks unload at fire-sale prices, are a major factor driving home values down.

"We believe there are in the neighborhood of 600,000 properties nationwide that banks have repossessed but not put on the market," said Rick Sharga, vice president of RealtyTrac, which compiles nationwide statistics on foreclosures. "California probably represents 80,000 of those homes. It could be disastrous if the banks suddenly flooded the market with those distressed properties. You'd have further depreciation and carnage."

In a recent study, RealtyTrac compared its database of bank-repossessed homes to MLS listings of for-sale homes in four states, including California. It found a significant disparity - only 30 percent of the foreclosures were listed for sale in the Multiple Listing Service. The remainder is known in the industry as "shadow inventory."

You have to wonder about a bank like BofA, after having acquired Countrywide and their stable of bank owned properties, as to exactly how these properties are being valued in light of changing mark-to-market rules and critical earnings announcements.

Everyone seems to be sooooo anxious for the banking sector to show some stability so we can all get on with our stock investing lives again but, if it is coming via the accounting "sleight of hand" that some believe is the real reason for holding back these properties (i.e., valuing them much higher than today's market would), we may all be in for a big letdown.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Bahrain's Economy Is Holding Up Well

Not many Americans have even heard of Bahrain, let alone thought about investing in the country, but while Dubai has been faltering badly, Bahrain is holding up well. Investors interested in the Middle East might want to give Bahrain a closer look, especially if they are considering investing in Dubai. For more on this, read the following article from Overseas Property Mall.

Bahrain has long been the forgotten little brother of glittery Dubai in the housing investment industry. For years we have been told countless stories on why we had to buy property in Dubai and all the while Bahrain has quietly sneaked up in the housing stakes.

Since reports of a falling Dubai have become stronger every month, Bahrain has only suffered “small damage”. After having spent many years in its bigger brothers shadow, Bahrain is ready to raise the stakes and claim back some of its past status as a strong and reliable financial business center in the Arabian world.

The Bahrain Economic Development Board’s chief operating officer Kamal Ahmed said:

“In tough times, people want to be in the most stable place. Of course, nobody is immune to the crisis, but we have certainly shown we are less exposed.”

The CBB (Central Bank of Bahrain) has established itself as one of the better regulators if we are to believe the latest news reports from the Middle East due to the lack of available finance overall. Some even say that Dubai’s loss has resulted into being Bahrain’s gain but clearly it is early days at the moment. Signs are positive though and industry watchers are positive that Bahrain might attract more investors in the next year due to its stable economy despite the global crisis elsewhere.

Ahmed further stated that it wasn’t the banks fault that Bahrain has lacked the attention it supposedly deserves but more so the lack of media attention overall.

The World Bank also helped to establish Bahrain as a strong business center by ranking it 18th in the world for doing business with last year. Another encouraging sign of a stable economy is the number of new lending institutions licensed in 2008. There were a total of 44 new start ups compared to 38 start ups in 2007.

Bahrain’s financial specialty if one could say that is Islamic finance. The launch of the Bahrain Financial Exchange in 2010 will also see the position of this small emirate strengthened overall.

But even so Bahrain’s economy is relative stable, the emirate has experienced plenty of heartache in the banking sector too. Profit margins of banks declined by 17.6 percent in 2008. During the same time, retail banks saw a surge of 112 percent in loan to deposit ratios.

Some financial organizations are also being scrutinized by the Bahrain government. With over 400 institutions in the country, there are too many right now to satisfy the lack of demand while showing healthy growth over time so eventually some of them will take the fall for sure.

This post can also be viewed on overseaspropertymall.com.

The Debt Lessons We Hopefully Have Learned

It is no secret that millions of Americans have put themselves in an unmanageable debt situation thanks to easy credit over the past few years, and while it is unfortunate, hopefully we all can learn from this. Tim Iacono talks about some of the lessons we should have learned, and offers additional insight in his blog post below.

Since credit cards were first issued and automobiles were first financed, bankers and car salesman have been more than happy to assist individuals in realizing their full borrowing potential. Realizing their full potential, that is, by borrowing more money than they really should.

For young adults, perhaps living independently and with their first full-time job, this could lead to important life lessons about managing debt and living within their means. After many months or years of credit card and automobile payments, the initial thrill having long since worn off leaving only the payments, valuable lessons about borrowing too much money have often been learned - lessons that are not quickly forgotten.

When purchasing homes, on the other hand, it used to be quite difficult to take on more debt than would seem reasonable - there, the bar was set higher. Years ago, couples would walk out of their mortgage broker's office disappointed and dejected because their dreams had been thwarted by a loan officer without a heart.

These too were valuable lessons about debt.

Maybe it seemed unfair, but someone who was presumably older and wiser had determined that the dream home so coveted by the young couple was simply beyond their means. Maybe when the couple later reflected on their denied attempt to purchase their dream home, they realized that the lender probably knew best.

But, the financing of real estate purchases has changed dramatically in recent years. Now that home financing has become as easy as getting a credit card or buying a car, valuable lessons about debt learned early on, are being unlearned later in life - this is probably not a good thing.

Credit Cards

Everyone has stories of their first credit cards or a friend’s initial experience with credit cards. It is probably still fairly common for young adults to get a new VISA or MasterCard with a $1000 credit limit, immediately go out and spend the $1000, then begin paying $20 per month to service this debt. Of course the debt never seems to get paid down - but, initially at least, it is easily serviced.

After a while a new credit card would be acquired - You're Pre-Approved!

The process would then be repeated. Another $1000 in debt and another $20 debt service. Many young adults have ended up going back to their parents when this process had been repeated many more times - when the debt service rose much more rapidly than their income and the funds to service the debt began coming up short at the end of the month.

The debt service payment had been multiplying along with the number of credit cards, and was now in the hundreds of dollars per month. Then an emergency arose, and it was game-over - back to the parents, a little groveling, some stern warnings, a few promises, and problem solved.

A valuable lesson was learned.

Automobiles

The purchase of a first automobile can result in a similar learning experience. This one, however can be much more personal - the memory of the car salesman may accompany the monthly payments. Many years ago, a roommate car salesman would occasionally come home and announce, "We buried this guy!” This was invariably a reference to some poor schmuck that came in off the street, and despite his best effort to resist, ended up driving off the lot with a car that he really couldn't afford.

Apparently, there is something both magical and legal about driving the vehicle off the dealer's lot - even if the paperwork was not quite right or the loan wasn't quite approved, you just bought a car - one way or another. You've just made a multi-year commitment to repay many thousands of dollars in both principle and interest in return for that shiny new car that maybe you really can't afford.

Missing too many car payments carries serious consequences - this could be an excellent learning experience if a new car owner needs to be taught this lesson. However, most borrowers who buy more car than they should just live with the strain of seemingly never ending monthly payments until the loan is paid in full. Then they can look back and reconsider the decision that was made on that fateful day. Was it a good decision? Was it worth it?

Another lesson was learned.

[Unfortunately, automobile leases today have given many people the impression that it is completely normal to make car payments forever. Individuals who will never experience the joy of owning automobiles outright and not having any car payments - these people do not know what they are missing.]

Houses

That brings us to today's wild world of home mortgage finance and housing appreciation. If either of the above two lessons about debt were learned earlier in life, it is understandable how they may be quickly forgotten when confronted with a force as powerful as today's global real estate boom.

With lending standards relaxed and home prices rising, debt has taken on an entirely new character - monthly payments now have a much friendlier air about them. Much friendlier in that the underlying asset seems to rise in value at a rate many times the debt service payment.

That never happened with credit cards or automobiles!

If you pay $2000 per month in debt service, and the home value rises by $5000 or $10,000 during that month, and this gets repeated month after month, and you also get a nice place to live in - this seems like an excellent kind of debt.

What lessons are there to learn here? Maybe the lesson is that more debt would be better.

But we are reminded that these are not normal times. We are living in what The Economist magazine calls "the biggest financial bubble in history" - the global real estate bubble. What happens if current trends do not continue? What happens when real estate appreciation regresses to the mean - slowly with stagnating prices or quickly with price declines?

Would there perhaps be some valuable lesson about debt to be learned at that time?

Is the entire Anglo Saxon world about to be taught a valuable lesson about debt?

[This was originally written and published almost four years ago...]

This post can also be viewed at themessthatgreenspanmade.blogspot.com.

Why March's Rally Does Not Mean We Already Hit Bottom

March was certainly an interesting month. The stock market rally was of historic porportion, and investors seem to have a new since of optimism. Once reality sets in, though, that optimism may soon be lost. Tim Iacono points out why March's rally probably doesn't signify a market bottom in his bog post below.

It has been quite a month.

The newspapers were full of stories last week about how March was the best month for stock markets in six years and that the last four weeks were the best stretch for equities since either 1933 or 1938, depending upon the source.

The distinction is unimportant as investors have gotten the message - stocks are on a tear.
Broad indexes have risen between 20 and 30 percent over the last month and recent reports have shown a deceleration in the rate of decline for some economic indicators and tentative signs of a bottom for others, leading many to believe that the worst is now behind us.

The move up in equity markets since the early-March low has officially entered "bull market" territory after a flurry of government actions, pronouncements of profitability from Wall Street firms, and optimism that global leaders at the G20 meeting are taking steps to tackle the financial crisis. All of this has convinced more than a few investors and traders that this is the time to buy riskier assets with the potential for a greater return and stock prices have been bid higher.

The important question becomes, "Is this a sucker rally with lower lows ahead or is this an enduring new bull market?"

That is the question that some people have been asking over the last few weeks, however, with each passing day of stock market gains, fewer and fewer people seem to wonder about it, opting instead to go with the flow, to add to the momentum.

In my view, recent lows for U.S. stocks are likely to be retested again this year, probably making new lows in the process, and equity markets around the world will likely move down with them.

It really boils down to two factors - the U.S. economy and corporate earnings.

The question of decoupling - the idea that emerging markets can ignore recessions in developed economies such as the U.S., Europe, and Japan - will be addressed in a subsequent update as it is deserving of its own lengthy consideration. There is more and more promise that growth in China, Brazil, India, and elsewhere can continue despite continuing troubles in developed nations and this is a critical factor in anyone's investment approach.

For now, the discussion will be limited to the United States.

The U.S. Economy

As has been the case for most of this decade, the future of the U.S. economy is dependent on housing. While financial markets and commerce may be dependent on the banking system and credit flows, the U.S. economy is soundly based on consumer spending and consumer spending, today, is driven in large part by the value of peoples' homes. Until home prices stabilize, consumers will not reemerge in big numbers to borrow and spend and, despite all the recent government initiatives, home prices are going to continue to fall this year. There is simply too much inventory in the pipeline.

As noted last week when discussing the latest report on existing home sales, it is a straightforward predicament, "the red curve and the blue bars in the nearby chart must draw much closer to each other before the downward pressure on prices abates".
Despite what the NAR (National Association of Realtors) might say or what the talking heads on CNBC might offer, that is not likely to happen anytime soon as foreclosure rates continue to break records, more and more homeowners throwing in the towel, walking away from homes where they owe more than the homes are now worth. Banks continue to struggle with their growing inventory of properties and, importantly, the bulk of these bank owned properties have not yet been listed for sale.

In the most recent data from both the NAR and the S&P Case-Shiller Home Price Index, home price declines continue to accelerate, largely driven by distressed property sales which, in many areas, account for more than half of all sales.

The foreclosure market is the market in many areas and defaults are now increasing fastest among prime loans made to borrowers with strong credit. The next wave of mortgage defaults will be the Alt-A and Option ARM loans where borrowers bought property with little or no documentation of income or assets, often times making only minimum payments that did not even cover all the monthly interest due. In contrast to the subprime debacle in 2007 and 2008, many of the Alt-A and Option ARM loans were used to purchase higher priced homes, a good example of this being the area where my wife and are I moving to next month - Bend, Oregon.

This is an area that, for years, has been regarded as overpriced since buyers from Portland and Seattle bid up home values earlier in the decade when the second-home buying frenzy was in full swing. In Bend, during the first quarter, notices of default almost tripled from the level of a year ago. This is in contrast to other parts of the country where foreclosure rates have leveled out at historically high levels over the last year as many of the low-priced homes with subprime mortgages have already been repossessed. Real estate prices in New York City are now starting to tumble and defaults are moving up the socio-economic ladder.

Interestingly, the expected increase in distressed sales at higher prices may have a big impact on some of the median home price statistics to be reported this year. Remember that the median price is highly dependent on the "mix" of home sales and that the sale of more higher priced homes will push up the median price even if these sales occur at steep discounts to what was paid for the same house a year or two ago. This will likely be misinterpreted as a sign of recovery.

With loan modifications souring quickly as job losses mount, housing is in no position to begin a recovery this year. While new and existing home sales may make a bottom by year-end, prices will continue to tumble and, absent any wholesale move by the government to buy up tracts of houses and bulldoze them into the ground, the supply/demand picture will not normalize until prices are much lower, probably sometime in 2010, perhaps not until 2011. Clear signs of this stabilization in prices are a prerequisite for the economy to reach a bottom and we have yet to see that.

Corporate Earnings

Reports last week indicated delinquencies increased to record highs in almost all consumer loan categories as falling home prices have now combined with job losses to create a vicious cycle downward. This only adds to the distress in the consumer sector and while both retail sales and automobile sales have shown signs of stabilizing, they remain at very low levels. Simply stabilizing at these depressed levels is not enough to support an economic rebound.

Commercial real estate defaults are now beginning to appear in large numbers, delinquent loans increasing some 41 percent from $46 billion in the fourth quarter of last year to $65 billion in the first quarter of 2009. In Los Angeles alone there are now almost $8 billion in distressed properties, nearly triple the level of late last year, and Las Vegas recently saw a 54 percent increase to $6 billion.

All of this will weigh on equity markets in the weeks and months ahead as first quarter earnings are announced.

Based on the number of warnings that have been issued thus far, bottom lines for the first quarter are likely to be almost as bad as the abysmal results seen in the fourth quarter when operating earnings for the S&P 500 overall were in the red. Importantly, there may be some big improvements in the banking sector due to "mark-to-market" changes approved last week which allow "significant" judgment in valuing assets, including mortgage-backed securities.

Total operating earnings for the S&P500 are expected to be down almost 40 percent from a year ago but it is the outlook for the future that is more important for stock prices than last quarter's results.

It will be comments by company officials about business conditions and projections of future earnings that investors will look to in order to value their shares.

Since stock prices are "forward looking" - taking into account both estimated future earnings and the health of the economy from which those earnings derive - it will be the prospects for the economy later in the year that will most influence stock prices in the near-term.

Conventional wisdom over the last fifty years or so is that, during recessions, stocks make a bottom at around the same time that monthly job losses peak and, in some cases during the second half of the 20th century, stocks put in their lows in advance of the worst of the labor market downturn.
If past is precedent and if the recent January decline in nonfarm payrolls of 741,000 turns out to be the peak for this cycle, then it is reasonable to believe that the March low in equity markets could be a lasting bottom.

However, if either of those are untrue - that this downturn will be different than previous recessions or that job losses have not yet reached their peak - then we are more likely to see new lows sometime later this year. In my view, that is the most likely scenario - one of those two conditions will not be met.

It wouldn't be the first time that stock market investors came too early to the party.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Mark-To-Market Rule Change Controversy

The new mark-to-market rule changes are very controversial. On one hand they have the potential to help stem some of the mounting losses being reported by financial institutions, but on the other hand there is the potential for some ambiguity in relation to the use of “judgment”. For more on this, read the following post from Mark Thoma.

John Berry likes the recent changes in the rules for valuing distressed assets:

Mark-to-Market Rule Gives More Clarity, Not Less, by John M. Berry, Commentary, Bloomberg: Mark-to-market accounting rules are being brought a little closer to economic reality -- accompanied by misplaced howls of outrage. ...[T]he standards have forced many financial institutions to overstate losses on trillions of dollars worth of assets, intensifying the global financial crisis.

Defenders of the rules say they protect bank investors and changing them will allow institutions to hide future losses. To the contrary, they have helped drive down the value of bank stocks, made shorting the shares much easier and caused bank stockholders to lose hundreds of billions of dollars in such companies as Citigroup Inc. and Bank of America Corp. ...

The problem with mark-to-market accounting is that it officially has presumed there’s a functioning market in whatever asset is being valued -- and that means a deal between a willing buyer and seller that isn’t being forced to sell. Actually, no such market exists for many mortgage-backed securities.

Nevertheless,... accountants have required many banks to calculate values based on distressed sale prices. That has meant large writedowns even on mortgage-backed securities that the institutions intend to hold to maturity.

Take the case of the Federal Home Loan Bank of Atlanta. Following the mark-to-market rules, it wrote down the value of its portfolio of mortgage-backed securities by $87.4 million in last year’s third quarter. Its actual projected loss on the securities: $44,000. For the fourth quarter the bank recorded a further $98.7 million loss on the securities.

That result makes no sense when the bank doesn’t trade such assets. ... A writedown might still be required under the changes FASB approved yesterday. Yet auditors can now use “significant professional judgment” when valuing illiquid securities. That’s what they should have been allowed to do all along. ...

The key points in this example are that almost all the mortgages involved are still performing and the bank plans to hold the securities to maturity -- and yet large writedowns were required. ...

Now accountants are supposed to use their judgment... That’s a big improvement over just using the last transaction price, as many auditors have been doing. ...

Here's an opposing view.

This post can also be viewed on economistsview.typepad.com.

More Economists Predicting A Depression

According to a couple economists our present financial crisis looks like a recipe for a depression. The main difference they see between a normal recession and a depression, is that a depression originates in consumer debt. If these economists are correct in their theory, the recent positive market movement will only be a suckers rally. Tim Iacono looks closer at the recent article published by these economists, and adds some of his own thoughts, in his blog post below.

In this commentary in today's Wall Street Journal, economists Steven Gjerstad and Vernon Smith offer a theory about why we could again be going from a bubble into a depression.

Over the years, there have been quite a few bubbles, but not all of them cause the sort of economy-wide damage that was seen in the 1930s or over the last year or so. Why?

Why does one crash cause minimal damage to the financial system, so that the economy can pick itself up quickly, while another crash leaves a devastated financial sector in the wreckage? The hypothesis we propose is that a financial crisis that originates in consumer debt, especially consumer debt concentrated at the low end of the wealth and income distribution, can be transmitted quickly and forcefully into the financial system. It appears that we're witnessing the second great consumer debt crash, the end of a massive consumption binge.

Most people forget that it wasn't just a stock market bubble in 1929 that led to America's last lost decade. There was an enormous housing and credit bubble in the mid-1920s during which Groucho Marx and others lost a good deal of money on Florida swampland.

As has been the case thoughout history, you can't get a really good bubble going until you get broad participation from the public - preferably lots of people at the lower end of the socio-economic scale levered up courtesy of a banking system that is gushing with easy money.

That pretty much described the situation in the 1920s and in the 2000s.

The entire piece is worth a look as they go through the recent history of financial bubbles in the U.S., a sequence that really accelerated about 20 years ago when you-know-who started sitting in the big chair at the Federal Reserve boardroom.

Interestingly, they touch on one of my all-time favorite subjects since this blog began a few years ago - how owners' equivalent rent duped the Fed.

During the 1976-79 and 1986-89 housing price bubbles, the effective federal-funds interest rate was rising while housing prices rose: The Federal Reserve, "leaning against the wind," helped mitigate the bubbles. In January 2001, however, after four years with average inflation-adjusted house price increases of 7.2% per year (about 6% above trend for the past 80 years), the Fed started to decrease the fed-funds rate. By December 2001, the rate had been reduced to its lowest level since 1962. In 2002 the average fed-funds rate was lower than in any year since the 1958 recession. In 2003 and 2004 the average fed-funds rates were lower than in any year since 1955 when the rate series began.

Monetary policy, mortgage finance, relaxed lending standards, and tax-free capital gains provided astonishing economic stimulus: Mortgage loan originations increased an average of 56% per year for three years -- from $1.05 trillion in 2000 to $3.95 trillion in 2003!

By the time the Federal Reserve began to slowly raise the fed-funds rate in May 2004, the Case-Shiller 20-city composite index had increased 15.4% during the previous 12 months. Yet the housing portion of the CPI for those same 12 months rose only 2.4%.How could this happen? In 1983, the Bureau of Labor Statistics began to use rental equivalence for homeowner-occupied units instead of direct home-ownership costs. Between 1983 and 1996, the price-to-rental ratio increased from 19.0 to 20.2, so the change had little effect on measured inflation: The CPI underestimated inflation by about 0.1 percentage point per year during this period. Between 1999 and 2006, the price-to-rent ratio shot up from 20.8 to 32.3.

With home price increases out of the CPI and the price-to-rent ratio rapidly increasing, an important component of inflation remained outside the index. In 2004 alone, the price-rent ratio increased 12.3%. Inflation for that year was underestimated by 2.9 percentage points (since "owners' equivalent rent" is about 23% of the CPI). If home-ownership costs were included in the CPI, inflation would have been 6.2% instead of 3.3%.

Yes, "an important component of inflation remained outside the index" - that sort of thing almost always ends badly as noted here on many occasions before.

After years of writing on this subject, yours truly still comes out high in a simple Google search on the phrase owners' equivalent rent - right there in second place, behind the Bureau of Labor Statistics with "How owners' equivalent rent duped the Fed" and then again in fifth place with the memorable "The complete and utter failure of owners' equivalent rent".

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

China Is Trapped In The Dollar

There has been a lot of talk lately about China's desire to diversify out of the dollar, however, unfortunately for them they are trapped. The worst part for China is that this entrapment was self-inflicted as Paul Krugman points out in his recent New York Times article. For more on this, read the following blog post from Mark Thoma.

It's time "to face up to new realities":

China’s Dollar Trap, by Paul Krugman, Commentary, NY Times: ...The big news last week was a speech by Zhou Xiaochuan, the governor of China’s central bank, calling for a new “super-sovereign reserve currency.”

The paranoid wing of the Republican Party promptly warned of a dastardly plot to make America give up the dollar. But Mr. Zhou’s speech was actually an admission of weakness. In effect, he was saying that China had driven itself into a dollar trap, and that it can neither get itself out nor change the policies that put it in into that trap in the first place.

Some background: In the early years of this decade, China began running large trade surpluses and also began attracting substantial inflows of foreign capital. If China had had a floating exchange rate — like, say, Canada — this would have led to a rise in the value of its currency, which, in turn, would have slowed the growth of China’s exports.

But China chose instead to keep the value of the yuan in terms of the dollar more or less fixed. To do this, it had to buy up dollars as they came flooding in. As the years went by, those trade surpluses just kept growing — and so did China’s hoard of foreign assets. ...

Aside from a late, ill-considered plunge into equities (at the very top of the market), the Chinese mainly accumulated very safe assets,... U.S. Treasury bills... T-bills are as safe from default as anything on the planet... But ... any future fall in the dollar would mean a big capital loss for China. Hence Mr. Zhou’s proposal to move to a new reserve currency along the lines of the S.D.R.’s, or special drawing rights, in which the International Monetary Fund keeps its accounts. ...

S.D.R.’s aren’t real money. They’re accounting units whose value is set by a basket of dollars, euros, Japanese yen and British pounds. And there’s nothing to keep China from diversifying its reserves away from the dollar, indeed from holding a reserve basket matching the composition of the S.D.R.’s — nothing, that is, except for the fact that China now owns so many dollars that it can’t sell them off without driving the dollar down and triggering the very capital loss its leaders fear.

So what Mr. Zhou’s proposal actually amounts to is a plea that someone rescue China from the consequences of its own investment mistakes. That’s not going to happen.

And the call for some magical solution to the problem of China’s excess of dollars suggests something else:... China’s leaders haven’t come to grips with the fact that the rules of the game have changed in a fundamental way.

Two years ago,... China could save much more than it invested and dispose of the excess savings in America. That world is gone.

Yet the day after his new-reserve-currency speech, Mr. Zhou gave another speech in which he seemed to assert that China’s extremely high savings rate is immutable, a result of Confucianism, which values “anti-extravagance.” Meanwhile, “it is not the right time” for the United States to save more. In other words, let’s go on as we were.

That’s also not going to happen.

The bottom line is that China hasn’t yet faced up to the wrenching changes that will be needed to deal with this global crisis. The same could, of course, be said of the Japanese, the Europeans — and us.

And that failure to face up to new realities is the main reason that, despite some glimmers of good news — the G-20 summit accomplished more than I thought it would — this crisis probably still has years to run.

This post can also be viewed on economistsview.typepad.com.

Unemployment Rate Rises To 8.5 Percent

The latest job loss information was reported this morning, and the news was not good. Most were expecting the numbers to be bad, though, considering that the recent ADP job loss report showed over 740,000. With that in mind it is possible that the Labor Department's report could later be revised, and end up with even worse numbers. For more on the job loss report, read the following blog post from Tim Iacono.

The Labor Department reported a net job loss of 663,000 during the month of March and an increase in the unemployment rate from 8.1 percent to 8.5 percent.
In a break from previous monthly reports, downward revisions to prior data were limited to an 86,000 decline in the January payrolls, from -655,000 to -741,000, making January the worst month for job losses since October of 1949.

Adjusted for the size of the workforce, the January decline was the worst since 1974.

At 8.5 percent, the unemployment rate reached its highest level since 1983 as the total number of unemployed people rose to 13.2 million. If those working part-time for "economic reasons" and those too discouraged to continue looking for work are included, the unemployment rate would have been 15.6 percent in March, the highest since this data series began in 1994.

Job loss was widespread in March, only the stalwart education and health services category able to muster a modest net gain of 8,000 new jobs. Employment in manufacturing declined by 161,000, professional and business services payrolls fell 133,000, and construction lost 126,000 jobs. Temporary help declined by 72,000, an indication that employers are still slashing jobs aggressively.
Total job loss since the beginning of the current recession that began in late-2007 now stands at 5.1 million, a full 3.3 million of this decline coming in just the last five months.

Remember that employment is a lagging indicator. While the last recession ended in late-2001, net job loss continued for almost two more years, the "official" end to the recession following shortly after the worst of the monthly declines in nonfarm payrolls.

It remains to be seen whether or not the worst of the job losses in the current recession are already behind us.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

An Alarming Number Of Americans Receiving Food Stamps

One in ten Americans are now receiving food stamps, and that number is set to increase. This should be shocking, but in reality it probably isn't considering the state of the economy. It is somewhat comforting to know that these people in need are getting food, but the problem is scary nonetheless. For more on this, read the following blog post from Tim Iacono.

Wow, where do you go from here? Fifteen percent?

The Associated Press reports that more than 32 million Americans now sheepishly pull food stamps out of their purse or wallet in the checkout line and the bad news is that things are likely to get worse from here.

Given that labor markets are a lagging indicator, likely to get much worse before any net job creation begins, the number of food stamp recipients may go much higher this year.

Food stamps are the major U.S. antihunger program and help poor people buy groceries. The average benefit was $112.82 per person in January.

The January figure marks the third time in five months that enrollment set a record.

"A weakened economy means that many more individuals are turning to SNAP/Food Stamps," said the Food Research and Action Center, an antihunger group, using the acronym for the renamed food stamp program, Supplemental Nutrition Assistance Program.

Well, if the government can't do anything about the underlying causes of families not being able to put food on the table, at least they have a new "snappy" acronym.

Tomorrow's labor report is likely to provide a pretty good indication of whether they'll have to add another shift for the food stamp printing presses. If economic reports so far this week are any indication - new highs for weekly jobless claims and new lows for the ADP employment report - they might want to start placing some help wanted ads.

Food stamp enrollment rose in all but four of the 50 states during January, said Agriculture Department figures. Vermont, Alaska and South Dakota had increases of more than 5 percent. Texas had the largest enrollment, 2.984 million, down 65,000, followed by California at 2.545 million, up 43,000, and New York with 2.211 million, up 37,000.
Food stamp benefits get a temporary 13 percent increase, beginning with this month, under the economic stimulus law signed by President Barack Obama. The increase equals $80 a month for a household of four.

If those statistics and my math are both correct, benefits for a family of four go from a little over $600 a month to almost $700 a month.

You can actually buy a lot of groceries for that amount of money, particularly the high-calorie, processed variety.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Geithner's Bank Bailout Plan: Privatizing Gains And Socializing Losses

There is no shortage of opposition to Treasury Secretary Timothy Geithner's new bank bailout plan, and while some arguments are unfounded, Joseph Stiglitz does make a good point. According to Stiglitz the worst part about the bailout plan is that it will privatize gains while socializing losses. With this in mind it makes it an overall losing proposition for taxpayers. In addition to this argument Stiglitz makes several others against the bailout plan in his article below as presented by Mark Thoma.

Joseph Stiglitz is not a fan of the Geithner bank bailout plan:

Obama’s Ersatz Capitalism, by Joseph E. Stiglitz, Commentary, NY Times: The Obama administration’s $500 billion or more proposal to deal with America’s ailing banks ... is based on letting the market determine the prices of the banks’ “toxic assets”... The reality, though, is that the market will not be pricing the toxic assets themselves, but options on those assets.

The two have little to do with each other. The government plan in effect involves insuring almost all losses. ... This is exactly the same as being given an option. ...

Under the plan by Treasury Secretary Timothy Geithner, the government would provide about 92 percent of the money to buy the asset but would stand to receive only 50 percent of any gains, and would absorb almost all of the losses. Some partnership! ...

But Americans are likely to lose even more ... because of an effect called adverse selection. The banks get to choose the loans and securities that they want to sell. They will want to sell the worst assets, and especially the assets ... the market ... is willing to pay too much for...But the market is likely to recognize this, which will drive down the price... Only the government’s picking up enough of the losses overcomes this “adverse selection” effect. ...

The main problem is not a lack of liquidity. ... The real issue is that the banks made bad loans... They have lost their capital, and this capital has to be replaced.

Paying fair market values for the assets will not work. Only by overpaying for the assets will the banks be adequately recapitalized. But overpaying for the assets simply shifts the losses to the government. In other words, the Geithner plan works only if and when the taxpayer loses big time.

Some Americans are afraid that the government might temporarily “nationalize” the banks... What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. ...

So what is the appeal of a proposal like this? Perhaps it’s the kind of Rube Goldberg device that Wall Street loves — clever, complex and nontransparent, allowing huge transfers of wealth to the financial markets. It has allowed the administration to avoid going back to Congress to ask for the money needed to fix our banks, and it provided a way to avoid nationalization.

But we are already suffering from a crisis of confidence. When the high costs of the administration’s plan become apparent, confidence will be eroded further. At that point the task of recreating a vibrant financial sector, and resuscitating the economy, will be even harder.

This post can also be viewed on economistsview.typepad.com.

The Fundamental Problem Behind The Housing Crash

To understand why we got into this housing mess, there is no need to look further than the recent findings from the "Future of Finance Initiative." It took awhile for these geniuses to figure it out, but they found that in order to avoid mass foreclosures — lenders to make sure borrowers can actually pay back the loans. Wow, just think, if they could have figured that out sooner we never would have ended up in the situation we have today. I guess we know for next time, right? Tim Iacono looks closer at the report and adds some insight in his blog post below.

There's a special 14-page report in today's Wall Street Journal presenting the findings of last week's Future of Finance Initiative, a gathering of 100 of the "brightest minds in finance" tasked with the job of charting a path forward from our precarious current position.

No, former Fed chief Alan Greenspan was not included.

Astonishingly, not once, not twice, but at least three times, the fixing of one of the most fundamental errors of the last six or seven years is prominently featured in the many recommendation sections, what would have undoubtedly stopped the global credit bubble in its tracks years ago if someone other than "crazy housing bubble bloggers" and a few rogue economists would have brought attention to it and been able to do something about it.

This recommendation appears in Principles for Change, an interview with Peter Fisher of BlackRock Inc., it is a key element of Princeton Economic Professor Alan S. Blinder's recommendations enumerated in The Future of Banking, and it is featured as number one in a list of of almost two dozen "principles for rebuilding the financial system" in a summary section (no link found).

It's pretty simple - borrowers must be able to repay loans from income.

Gussied up a little bit for the paper it looks like this:

Minimum Underwriting Standards. Bank management and bank examiners must enforce the banks' minimum underwriting standards, focused on the borrowers' ability to repay debt from income. The bank supervisors' authority must extend beyond banks to all bank agents, such as mortgage brokers.

Maybe it's just me, but, to some of us who could see this all developing back in the first half of the decade - when Fannie and Freddie first starting having problems in 2002 and 2003, then when Wall Street got involved in a big way in 2004 and 2005, and then in 2006 when everyone laughed about "all you have to do to get a home loan is to fog a mirror" - this is just about the most ridiculous example of how maybe these guys aren't all the bright after all.

What were they saying five years ago and why did it take them so long to have this epiphany?

Alan Blinder was singing the praises of the former Fed chairman up until the housing bubble had unquestionably burst, and now he's charged with charting the new course for banking?

In just about every interview that I ever did back around the time that the housing bubble was peaking and popping, I'd always say something like the following:

All anyone has to do is spend some time in a mortgage loan office and you'll quickly see that there's no way these people are going to pay this money back. When the median home price is ten times the median income, the only way that money is getting paid back is if they sell the house at a profit and that will only work so long as home prices keep going up.

What does it say about policymakers that they couldn't see this simple truth?

When the former and current Federal Reserve Chairmen - the position that was once considered to be the second most powerful in the world behind only the U.S. president - dismiss out of hand the possibility of home prices ever declining, what hope do we have that they'll not do something equally as stupid next time?

Were they all so deluded by the apparent prosperity of our late, great asset-based economy that these wizards of the financial world were unable to see something so simple, only now realizing just how huge this simple error was?

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Profiting From Reflation: A Bet On Economic Recovery

I read an interesting article in the Wall Street Journal this morning that I thought I should share. There are a lot of people who have been making a great deal of money during this economic crisis by shorting the economy, or specifically betting that it would get worse. Many of these same traders are now making a different bet. They are betting that not only are these exorbitant stimulus measures going to stimulate the economy, but they are also going to lead to high inflation.

Right now the Federal Reserve is so concerned with preventing the dreaded D words (Deflation and Depression), that they are basically ignoring the threat of inflation. Once the economy gets going again, though, they are going to have to react incredibly fast in order to prevent a massive run up in inflation. Chances are the government will be slow to react, and if anything they prefer to error on the side of inflation — opposed to prolonging the recession.

What this means is that as the economy starts to recover those investments which typically do well in inflationary environments, stand to do very well. Commodities specifically have proven to be the investment of choice for many successful investors.

To read the full Wall Street Journal article click here.

America's Tarnished Reputation Threatens Global Response To Financial Crisis

One of the biggest casualties from the financial crisis — and our handling of it — has been the loss of America's reputation on financial matters. As far as most of the world can tell we are the ones who started this financial mess — which is enveloping much of the world — and even worse we have appeared incompetent to fix it. Why then would the rest of the world listen to us when we try to piece together an effective global response? As Paul Krugman points out in his recent article, America quite possibly could have lost one of its most valuable assets — its reputation — right when they — and the world — need it most. For more on this, read the following blog post from Mark Thoma.

The financial crisis has damaged our global authority, credibility, and leadership, and that will make it much harder for the world to accomplish the essential task of coordinating a common response:

America the Tarnished, by Paul Krugman, Commentary, NY Times: Ten years ago the cover of Time magazine featured Robert Rubin,... Alan Greenspan,... and Lawrence Summers... Time dubbed the three “the committee to save the world,” crediting them with leading the global financial system through a crisis..., although it was a small blip compared with what we’re going through now.

All the men on that cover were Americans, but nobody considered that odd. After all, in 1999 the United States was the unquestioned leader of the global crisis response. ... The United States, everyone thought, was the country that knew how to do finance right.

How times have changed..., ... our claims of financial soundness — claims often invoked as we lectured other countries on the need to change their ways — have proved hollow.

Indeed, these days America is looking like the Bernie Madoff of economies: for many years it was held in respect, even awe, but it turns out to have been a fraud all along. ...

Simon Johnson..., who served as the chief economist at the IMF..., declares that America’s current difficulties are “shockingly reminiscent” of crises in places like Russia and Argentina — including the key role played by crony capitalists.

In America as in the third world, he writes, “elite business interests — financiers, in the case of the U.S. — played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive.”

It’s no wonder, then, that an article in yesterday’s Times about the response President Obama will receive in Europe was titled “English-Speaking Capitalism on Trial.”

Now, in fairness ... the United States was far from being the only nation in which banks ran wild. Many European leaders are still in denial about the continent’s economic and financial troubles, which arguably run as deep as our own... Still, it’s a fact that the crisis has cost America much of its credibility, and with it much of its ability to lead.

And that’s a very bad thing... I’ve been revisiting the Great Depression,... one thing that stands out ... is the extent to which the world’s response to crisis was crippled by the inability of the world’s major economies to cooperate.

The details of our current crisis are very different, but the need for cooperation is no less. President Obama got it exactly right last week when he declared: “All of us are going to have to take steps in order to lift the economy. We don’t want a situation in which some countries are making extraordinary efforts and other countries aren’t.”

Yet that is exactly the situation we’re in. I don’t believe that even America’s economic efforts are adequate, but they’re far more than most other wealthy countries have been willing to undertake. And by rights this week’s G-20 summit ought to be an occasion for Mr. Obama to chide and chivy European leaders, in particular, into pulling their weight.

But these days foreign leaders are in no mood to be lectured by American officials, even when — as in this case — the Americans are right.

The financial crisis has had many costs. And one of those costs is the damage to America’s reputation, an asset we’ve lost just when we, and the world, need it most.

This post can also be viewed on economistsview.typepad.com.

The Mess That Is The State Of California

California is an absolute mess right now — there really is not any other way to put it. Unemployment is incredibly high — and getting higher — the real estate market has fallen off a cliff, and of course their government is completely inept — to put it nicely. If you thought there was a lot of doom and gloom going around in regards to the U.S. economy as a whole, it is even worse in the state of California. The truth is the U.S. badly needs California to get better — and soon. The state owns the largest economy in the union, and so goes California so goes the country. Tim Iacono looks at a recent Forbes article that details out some of the issues facing California in his blog post below.

This report in the current issue of Forbes Magazine is chock full of aphorisms about the tarnish now building up on the Golden State. Importantly, more than just the weather moves eastward from California - economic and social trends head that way as well.

There has been many a time in California's history when it seemed to outsiders to be barreling toward a cliff and to insiders as a place for unbounded optimism. A favorite Silicon Valley bumper sticker says, "Dear God, one more bubble before I die."

Is it just me or is it fast becoming conventional wisdom that we need a new bubble to take up the slack created by the bursting of the last two?

Despite the rhetorical flair of the new President on the subject of future bubbles, it seems clear to me that, given the deleterious effects of the current bubble's demise, the entire nation would jump headlong into a new bubble of any kind if some asset prices somewhere would start to rise and if job losses would ebb.

Anyway, back to the troubles in California.

Tent cities of displaced homeowners have sprung up in the state's Central Valley--even in the capital, Sacramento. Anthony Sanders, a professor of real estate finance at Arizona State, terms the huddles Mozilovilles, after the former Countrywide Financial chief executive. "Fresno is a nuclear wasteland. I wish there were a nicer way to say it," says Patrick Lashinsky, chief executive of ZipRealty in Emeryville.
The squatters living in abandoned homes are a greater threat to the economy than unemployment and crashing housing, Lashinsky says. "The damage done to the homes makes the ultimate resolution of foreclosed properties even more expensive to investors and banks." In Riverside suburb Lake Elsinore, families of bobcats have taken up residence in vacant homes. The cats miss just as many mortgage payments, but at least they don't steal copper pipes.

Not all businesses are struggling. Bank Repo Bus Tour, whose red-topped buses cruise the Central Valley's foreclosed-home cul-de-sacs, is doing a land-office business selling tickets to people looking for speculative buys. Thanks to sales of statuettes of Saint Joseph, the patron saint of home sellers, revenue from California customers is up 25% from a year ago at Catholic Supply, a firm in St. Louis, Mo.

Santa Cruz, along with larger cities like Los Angeles, San Diego and San Francisco, helped lead the screwball state to its worst performance ever in our annual rankings of Best Places for Business and Careers. Without Flint, Mich. competing, California would have had a stranglehold on the bottom six positions on our list. High business costs, negative job-growth projections, high unemployment and high crime make this a scary place. California has 36 million people and 480 incorporated cities and as recently as two years ago fielded four metro areas in the top 100. This year only Riverside cracked the top half.

"If I even mention California, they throw me out of the office," says Ronald Pollina, president of relocation firm Pollina Corporate Real Estate in Park Ridge, Ill. "Every company hates California."

The airwaves are full of advertisements urging residents to make that automobile purchase before next Wednesday when the sales tax goes up by a full percentage point - in some parts of the state, the tax will top 10 percent.

If all goes well, we'll be leaving California on a permanent basis in exactly two months.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

New Home Construction Starting To Pick Up

Yet another piece of good news relating to the housing sector was released this week. This time we learned that housing starts were up considerably last month. Again it is way to soon to call an end to the housing crisis, but the sliver of good news is welcomed by the real estate industry. For more on the report, read the following post from OverseasPropertyMall.com.

Latest reports from the US show a renewed sense of hope in the housing starts department as figures showed a 22 percent rise in February from the month of January. New work on some 583,000 homes is seen to be a positive sign and indication that maybe the worst of the US housing slump is over.

While the warmer weather is partially responsible for the jump in new construction, analysts do not believe this new rate will be sustained in the future. Most of the new housing starts are apartments and condominiums.

Plus, there still are hundreds of thousands of unsold properties on the market, keeping the recession tight. Despite the non shifting property market, economists think that “the worst of the contraction may have passed.”

Another indication that the US decline has come to a slowdown are the increased retail figures for the month of February.

Narimah Behravesh, chief economist at IHS Global Insight was saying: “You get the sense from a lot of the data coming out now that we’re beginning to get to a bottom. We’re not quite there yet.”

However, despite these positive signs, future construction might not be taking off like a rocket as new building permits weren’t increasing as much as the new starts. They rose by 3 percent.

Projected figures indicate that starts are thought to be around the 450,000 houses annually.

The Northeast is Leading the Pack

A powerful 89 percent surge was seen in the US Northeast in new housing starts, giving them the run of the pack for sure. With low interest rates and plans to further reduce mortgage cost to help resurrect the US property market, the Obama administration is working hard on putting systems in place to make this happen in the near future.

As long as US banks can keep the credit flowing there might be hope. Since the recession start there were some 4.4 million job losses in the country.

Obama’s pledge of a $275 billion rescue plan is supposed to help current home owners keep their houses in order to avoid foreclosures.

In February alone foreclosures increased by a whopping 30 percent from the year previous. Since foreclosures are cheap properties to attain by investors, property developers are finding it hard to raise their capital for new development.

This post can also be viewed on overseaspropertymall.com.

The Big Difference Between Our Recession And Japan's Lost Decade

There has been a lot of talk about how we are heading down the same path Japan did with their "lost decade." Before anyone gets to excited about that proclamation, though, they should understand there is one major difference. Tim Iacono looks at a report in his blog post below that details this dissimilarity.

Rich Toscano and John Simon of Pacific Capital Associates filed this report about changes in Japan's money supply during the 1990s and how the U.S. compares as we enter what some are also calling a lost decade.

Here's the chart that gets directly to the bottom line.
We appear to be trying a lot harder than they ever did.

The entire piece is well worth a look. A few excerpts...

In our prior article on the government's willingess and ability to create inflation, we noted that Japan is often held up as an example of a country that was unable to inflate despite having a fully paper-based monetary system. But while the crash of Japan's credit-fueled stock and real estate bubbles resembles our own situation, the monetary policy responses in each case have been markedly different.

It's true that the Japanese authorities did not create any enduring price inflation after their credit crash. But a quick look at the data shows that this is because they opted not to do the one thing that can reliably create eventual inflation: rapidly grow the supply of money in circulation.
...
It is widely understood and agreed upon that substantially increasing the amount of money in the economy will eventually lead to inflation. Yet the Japanese authorities did not take this course. Did they not think to even try it? Did it just never come up at any Bank of Japan meeting for an entire decade?

We think a more plausible explanation stems from the fact that Japan was a nation of savers. Forcing up inflation via broad currency debasement would have harmed Japanese voters by undermining the purchasing power of their savings. As a result, accepting the mild (if lengthy) deflation was likely a more politically viable option than flooding the economy with money.

While bad for savers, inflation is good for debtors because it reduces the purchasing power-adjusted burden of debt. Here in the United States, the authorities face exactly the opposite constraints as those faced in Japan in the 1990s. Our nation is highly indebted and has a low savings rate. In this situation, deflation is a lot more painful than inflation. Politics demanded that Japan avoid inflation - and politics now demand that the United States embrace it.

Whatever the reason, it's very clear that the policy response being pursued by the US is vastly different from what took place after Japan's credit bust. Those predicting a repeat of the Japanese experience should take note.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

More Good Economic News: Is The Crisis Finally Winding Down?

We are finally starting to see some positive economic reports — and it is very tempting to say that the economic crisis is winding down — but is it to soon to call an end to this mess? James Picerno from The Capital Spectator looks at some of the recent news and offers his opinion in the blog post below.

The first order of business in repairing the economy is reestablishing a stable rate of inflation, ideally a small dose just above zero. There's inherent danger in targeting higher inflation, but it's a necessary evil at the moment, and there are signs that the effort is working.

Exhibit A is the yield spread between the nominal and inflation-indexed 10-year Treasuries. The spread is considered the market's inflation forecast. Although no one should confuse this outlook with perfection, it does reflect market sentiment to a degree and it's also monitored by the folks at the Federal Reserve, among countless other statistics.

As our chart below shows, this spread continues to exhibit an upside bias, and in the current climate that's encouraging. As of last night's close, the Treasury market is forecasting a 1.3% inflation rate for the next 10 years—up from virtually zero late last year. Certainly the extreme lows of last November and December appear to be history, at least for the moment. That's heartening because it suggests that the market's modestly encouraged that deflation's threat is passing.

Insuring that deflation doesn't take root has and remains the priority for stabilizing the economy and laying the foundation for recovery, as we've been discussing in recent months, including here and here. The good news is that progress in this battle continues to accumulate, and the above chart is but one example.

A more general measure of the improvement in the reflationary war is suggested by today's update on new orders for durable goods, which posted a healthy seasonally adjusted rise of 3.4% last month—the first monthly rise since last July.

The jump in new orders, although not consistently positive across the board, was broad enough to suggest that the gain wasn't a statistical fluke. A few examples: new orders for machinery advanced more than 13% last month while new orders for computers and electronic products climbed nearly 6%. Excluding defense department-related items, new orders increased 3.9% in February.

No one should read too much into this report, of course, as one month could easily be statistical noise. After six months of declines, durable goods were due for a pop even if the recession roars on. Deciding if it's the start of stability vs. a pause in the ongoing contraction will take time and a fair amount of corroboration from other economic and financial measures. But one implication is that businesses are starting to react to lower prices by taking advantage of the bargains.

In other words, we can't dismiss the prospect that the massive liquidity injections engineered by the Fed and Congress are starting to work. Once there's more confidence on that front, it's time to adjust monetary policy and begin soaking up all the excess dollars floating about. Timing is always a gray area of course, but it's certainly prudent to go on heightened alert at this point.

Consider the latest new from Britain, which reported that inflation took a surprising jump higher last month. Consumer prices climbed 3.2% for the year through February, raising fresh questions about whether monetary policy in England is too loose. Alas, it's unclear if the inflation news is a sign of things to come or just a "hiccup along the way" to more falling prices generally, as one economist tells Bloomberg News. Of course, with many economists forecasting more economic weakness for Britain, the inflation report raises the specter of stagflation.

In short, there's still plenty of volatility harassing the global economy. The idea that the worst is behind us is tempting, but it's not yet convincing. Stay tuned.

This post can also be viewed on capitalspectator.com.

The Circle Of Blame For The Housing Crisis

There are a lot of people who deserve blame for the housing crisis, but who are these people exactly? Dateline recently took it upon themselves to expose the key individuals that they feel are behind the mess. Some are easy to see, while others are a little more abstract in their involvement. Scott Wilson looks closer at the Dateline piece, and adds some of his own input in his blog post below from Your Mortgage or Your Life.

Sunday March 22, 2009, Dateline NBC aired a piece called “Inside the Financial Fiasco,” in which Chris Hanson finally takes a break from exposing sexual predators to take a closer look at the current housing mess.

NBC attempts to assign blame for the mortgage meltdown, and also tries to make it seem like they have finally identified the handful people who were the “only ones who knew” what lay in store for the economy when Wall Street embarked on the derivatives end-run that fueled the crisis.

So let’s go down the list of people that are prime candidates in the vicious circle of blame, and what their role where in the making of this fiasco.

Let’s start at the top. Back in the mid ‘90’s, The Government loosened credit guidelines and required lenders to make mortgages available to more to minority buyers.

By doing this, they gave the lenders an open check book to write questionable loans, all the while knowing that they would be able to sell them on the secondary market (Wall Street).

This was the creation of the infamous “Subprime” loans which later morphed into Alt-A and Expanded Approval loans.

Next, let’s look at the Product Managers who wrote the underwriting guidelines for the toxic loans known as SISA’s and NINA’s, which required little or no documentation of income and assets. The SISA loans are highlighted in the Dateline piece.

Do you think that these product managers had no idea that these types of loans may be misused, or did they only see the underlying profit that was possible from billions of dollars of loan fees collected by creating millions of loans that were virtually just ticking time bombs?

Yes, there are some cases where these loans were appropriate, such as for the business owner who had a lot of write offs, or the borrower whose spouse may not have the best of credit, but will nonetheless contribute towards the monthly mortgage payments.

But the types of borrowers who where actually put into these loans were completely unqualified, as mentioned in the NBC piece.

People like Delores Parker Jackson, who took out multiple loans on four condos totaling over $1.3 million with a negative (-$6000) shown on her tax returns.

Mrs. Jackson, who claims to have run a profitable daycare, and says that she is not to blame, but is actually the victim of predatory lending.

REALLY? She took out multiple mortgages on four different properties totaling over a million dollars with a payment of more than $10k a month, and she claims she had no idea that she could not afford the terms. Now she wants to pretend that she is not culpable, and that the mortgage company committed fraud?

Come on, do seem we that stupid?

Thirdly, let’s look at another “innocent” party: The CEO’s of all the banks and mortgage companies.

These people should have overseen the product managers and acted as the final line of defense by looking out for the company’s long term interests by saying “Hey, stop! These loans may be too risky.”

But the CEO’s saw only a “pot of gold” in the form of billions in loan fees, and where slaves to the corporate bottom line.

Do you think that Angelo Mozilo, the former CEO of Countrywide who earned over $400 million during his last five years at the company, had absolutely no idea that SISA and NINA loans with zero money down would backfire?

Chris Hansen attempts to talk to Mr. Mozilo, but to no avail.

Since he quit Countrywide and the mortgage mess started to blow up, Mozilo has been hiding out at his palatial estate in Southern California, ala Howard Hughes. Chris tried to get the guard at Mr. Mozilo’s gate outside his house to let him in, but was turned away.

Also to blame are the former CEO’s at places like Bear Stern’s and Lehman Brothers, who ended up driving their companies into the ground by buying up these toxic securities. And none of these guys saw the writing on the wall?

I think they did, but also saw big dollar signs in the racket, and choose to ignore the hazards.

Next up for their heaping of blame are The Borrowers. I was an LO for 15 yrs, and used Countrywide as a purchaser for many of my loans.

I knew that some of my borrowers were “less than qualified,” but the underwriting said to “make the loan.”

Like when I would be working for a builder, and a borrower would come to me and asked what loan amount they qualified for, my reply often was, “How much can you afford?”

I told them that I could tell them all day how much they can and cannot get approved for, but only they could tell me how much they really afford.

I could tell them on paper or with calculator that you could qualify to pay, but only the borrower could tell me if they could actually maintain that payment.

I cannot tell you how many times I was told by borrowers, “Don’t worry about me affording it. You just write that mortgage.”

This is where I move on to include the next culprit in this mess, The Loan Officers.

How many LO’s wrote loans for people that they knew would end up in foreclosure?

Many borrowers who I turned down for a mortgage would come back to me later to say, “See, I knew I could get approved. Thanks for nothing.”

At the height of the bubble, there were so countless mortgage brokers who were willing to do anything to write a loan and collect a fee.

They would falsify the numbers to make them work if they had to.

In the Dateline piece, they showcase a woman who was employed as a personal trainer, and who claimed to of told the LO at People’s Choice that she only made $1600/mo.

She was approved for a $259k loan.

Even after she was told that the payment would be over $2100/mo, she figured that she would just have her sister move in and help with the payment.

Do you think that the LO at People’s Choice had any idea that she may NOT be able to make the payment on this house? When Chris Hansen looked at the original paperwork, it stated that she made $7300/mo, which surprised the woman.

She claims she never provided that figure to the LO.

How many LO’s committed fraud because the commissions that they were going to make on each loan they closed could be well into the tens-of-thousands of dollars?

Even though my job was commissioned based, I only made loans if I had some degree of certainty that the borrower had both the ability to pay the mortgage payment and that they completely understood why I was giving them a SISA or NINA loan product.

I did not want a former borrower hunting me down in the parking lot some night after work because I put them in a loan that that left them flat broke.

Next in line is a major player, one who no one seems to put much blame on or even mention much, The Appraiser’s. I believe these guys had a huge impact on the housing explosion, and no one seems to want to bring them up.

As the appraisers continued to inflate the values of the properties, the mortgage companies continued to write mortgages to cover the obscene appraisals.

I knew that if a borrower told me that they were short on funds to close, I could call the appraiser and ask him to “bump up” the value of the property a bit, so that I could give the borrower the money cover closing costs.

This was considered a legitimate practice because real estate only increases in value, remember? But in reality, the value of that house did not go up $5k in the 2-3 weeks since they had done the actual appraisal.

I also found out the hard way how much of an “opinion” an appraisal really was.

Prior to working for the builder, I worked for a short time as a mortgage broker. I only did one loan at the place. , and it was for a gentleman who was doing some renovations on his house, but did not have enough money to finish the project.

Less than a year earlier, the value of the house came in at $85k. When he wanted to do another cash-out refinance a year later, but the new appraisal came in again at $85k. So when I went to my boss and told him that I did not have the value to support the loan, he handed me a business card and said, “Call him.”

Two weeks later, I had an appraisal for $115k, enough to cover the loan.

Was there that much movement in the values of the house? Did it really go up $20k in three weeks, or did the new appraiser just want more business?

What do you think? I know when I worked for one of the big mortgage companies and did a ton of refi’s, every time I had to put an initial value of a home on an application (which typically came from the borrower) nine times out of ten, the appraisal came back with the exact same value.

Curious.

Another big part of the mess, the people who were supposed to catch any fraud or mistakes, were The Underwriters.

They were the final check points in the mortgage process, and when they were presented with a SISA loan that showed that a “house cleaner” made $12k/mo, they should have sounded the alarm.

Like the appraisers, the underwriters are merely mentioned in the piece on Dateline.

Ilene Lanacano, who worked for “People’s Choice,” says that when she brought up some of these problems with the questionable loans, she was often overruled by the CEO of the company.

She states that she was often offered “incentives” by loan officers (money, jewelry, even a car) to approve loans. Ilene says that she never took any of these incentives.

She also claimed that there was harassment and intimidation if you did not approve loans, such as flattened tires and physical threats.

Ilene finally left “People’s Choice” for a consulting firm whose business was to analyze the loans to be pooled in Mortgage Backed Securities (MBS’s). When she raised some flags, she ended up getting in trouble by management.

Next, let’s look to good old Wall Street. You would think that one of the supposed guru’s of Wall Street could have seen the possibility that at least some of these loans were destine fail. But they too, only saw the bottom line, and they sold these MBS to everyone: investors, pension funds, municipalities and other countries.

And then there is China, who bought up trillions of dollars in MBS in an attempt to control the US. By owning all these MBS, China has a huge stake in our mortgage meltdown.

They were only briefly mentioned in the “Dateline” piece, and no real repsonsibility was levied on them. If China had not been so greedy, there wouldn’t have such a demand for MBS, which would have cut down the toxic loans being written.

And the Chinese are smart, shouldn’t they have seen some of the signs?

Next ones to heap some blame on are the Bond Rating Agencies, such as Standard and Poors, who was also briefly mentioned in NBC’s piece.

As Dateline explained, they were hired to give credit ratings to these MBS, which are supposed to indicate their level of risk to investors. “AAA” was the highest rating that they could give a security, and 80% of MBS received that top stamp of approval.

They suggested that most MBS would perform well, despite the fact that the agencies did not have any historical data to back the ratings up. Richard Gufliota of S&P, stated that they were so over inundated with securities to rate that most were not examined to the extent that they should have been.

It should also be mentioned that they made their money in volume too. More quantity over quality.

Finally, a lesser acknowledged culprit of this financial fiasco is The Media itself.

If it wasn’t for the greed of the media (TV, Radio and Newsprint), rolling out with advertisement after advertisement for these mortgage companies and their products, borrowers would not have been so encouraged to accept some of these toxic loan.

In years leading up to this mess, there wasn’t a commercial break that did not produce a mortgage ad.

Often advertised were the No Closing Cost, Stated Income, No Income Verified, and so forth.

There wasn’t a Radio host in the nation who didn’t have at least one mortgage company in their back pocket paying them to be their spokesperson.

Did any of them look into the products that they were pitching to their listeners? Nope. I think they just laughed all the way to the bank.

And what is strange about the media’s role, is that I have yet to see anyone try to add them into the equation. Now, all you hear out of radio talk show hosts spewed crap about how everyone else is to blame. None have come forward to say, “Hey, I guess I had a hand in it too.”

All in all, it is going to be a vicious circle of blame.

There is plenty of blame to go around, and I think when it comes down to it, we can sum it all up with one little word: “GREED;” the Greed of the Government, the greed of the Product Managers, the greed of the CEO’s, the greed of the borrowers, the greed of the Loan officers, the greed of the Appraisers, the greed of the Underwriters, the greed of Wall Street, the greed of China, the greed of the Bond Raters, and greed of the media.

This post can also be viewed on yourmortgageoryourlife.wordpress.com.

Existing Home Sales Up: NAR Says Buy Now

Existing home sales rose in February giving another possible sign the housing market is nearing bottom. The National Association of Realtors (NAR) has also undertaken an ambitious marketing push to convince Americans that now is the time to buy. Naturally the NAR is going to take this data and use it to further their message, but what can we believe? On one hand the NAR has made some valid points, but then again they are obviously a biased source. Tim Iacono advises us to be weary of what the NAR is telling you, and looks closer at the recent data release in his blog post below.

The National Association of Realtors reported that existing home sales rose from a seasonally adjusted annualized rate of 4.49 million units in January to 4.72 million units in February, almost half of the sales being either foreclosures or short sales.
Though not too much should be made of any of the housing data during the winter months since sales are just a fraction of what they are during the summer months, the inventory of unsold homes remains quite high, rising 5.2 percent in February to 3.8 million units, representing 9.7 months of supply at the current sales rate.

This is about double the normal inventory and, excluding distressed sales from the calculation, this would be about four times typical levels.

Lawrence Yun, NAR chief economist, noted the following:

Because entry level buyers are shopping for bargains, distressed sales accounted for 40 to 45 percent of transactions in February. Our analysis shows that distressed homes typically are selling for 20 percent less than the normal market price, and this naturally is drawing down the overall median price.

The median price for an existing home fell to $165,400 in February, down 15.5 percent on a year-over-year basis and Mr.Yun attempts to dismiss this decline:

Given the downward distortion in price comparisons due to distressed sales, it’s important for owners to keep in mind that this doesn’t equate to a similar loss of value for traditional homes in good condition.

The national data in the most recent report(.pdf) on the Case-Shiller Home Price Index showed an annual home price decline of 18.2 percent, so Mr. Yun is probably seeing things through glasses that might be a bit rosy here.

What a surprise!

It's probably a great time to buy a home...

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

The Toxic Asset Problem: In Layman's Terms

More and more people are starting to pay attention to the economy, and specifically the actions the government is taking to rectify it. One problem that many people are running into, though, is that things in the financial world are getting pretty complicated. We have these things called toxic assets that are destroying banks, but how did they get to be toxic? Furthermore why are they causing so many problems? When most Americans hear about the plans to fix the toxic asset problem, their heads are probably spinning. Economics professor Mark Thoma to the rescue. In his blog post below, Thoma does a great job of breaking the problem — and several of the proposed solutions — down into layman's terms using a car analogy.

Imagine a car lot that has 100 cars on it. However, some of these cars have problems. Half of them will have engine troubles that total the cars - the engines blow up and the cars are then worthless - and this will happen just after purchase. The other half are perfectly fine. Unfortunately, there is no way to tell prior to purchase which type of car you will get no matter how hard you try. Thus, half of the assets on the car dealer's "balance sheet" - the cars on its lot - are toxic, and lack of transparency makes it impossible to tell which ones are bad prior to purchase.

If all the cars were in perfect shape, they would sell for $20,000 each. Thus, there are (50)*($20,000) = $1,000,000 in assets on the books according to one way of doing the accounting, but that doesn't necessarily represent the true value of the cars on the lot.

The town where this dealership is located relies upon this business for jobs, it is essential, but, unfortunately, business has fallen off to nothing. Nobody is willing to risk losing $20,000 by purchasing a car that might die just after purchase, so the price has fallen. The expected value of a car is $10,000, but it's an all or nothing proposition, the car runs or it dies, and since people are risk averse nobody is wiling to pay the $10,000 expected value. In fact, the highest price they are willing to pay, $6,000, is lower than the minimum price the dealer is willing to accept (I've assumed a reservation price of $7,500 for illustration, and a horizontal supply curve to make the illustration easier):

So how could the government fix the problem?

1. Government purchases of toxic cars

The government could buy the cars itself, say at $7,500 per car, or $750,000 total for the lot, drive them around a bit (stress test them), wait for the bad ones to blow up, then sell the 50 good cars back to the public (who will no longer be fearful since the bad cars are out of the mix). If they can get anything more than $15,000 for each good car, they will make money on the deal (well, there would be overhead and other costs to cover, but let's abstract from minor details). But if cars end up selling for less than $15,000, they will take a loss.

(In the graph, the government intervention shifts the demand curve outward until it intersects at the kink in the supply curve at Q=100).

The problem with this option is knowing what price to offer for the cars. There is no market, and the firm's reservation price may be too high, i.e. paying the reservation price will eventually lead to a loss. And it's worse. In this example the percentage of bad cars is known, but the percentage of bad cars would also be unknown in a more realistic example, so there's no way to know how many good cars there are for sure, and what price they will sell for after the defective cars have been culled out of the herd. If the government pays $7,500 per car, and more than 62.5% of them go bad (not that much more than the 50% estimate), then taxpayers will lose money even if they sell for $20,000. With the percentage unknown, there's no way to know for sure what the breakeven price will be.

This is, in essence, the original Paulson plan. The only twist is that the price - the $7,500 in the example above, would be determined by an auction among many dealers with the government accepting the lowest bid (which could be $7,500 in this example since that is the price the firm is willing to accept). As you can see by thinking this through, there are questions about what price such an auction would reveal.

One danger in this plan is that if you overpay for the cars, e.g. give $7,500 when the breakeven price was, say, actually $5,000, then you have given the owner of the car lot $250,000 more than the cars were actually worth (this will be the loss to taxpayers). The dealer may need this money to stay solvent and stay in business, but, nevertheless, it is a windfall.

There are a lot of uncertainties here, and lots of ways to lose money. But it's possible to make money too.

2. Subsidies and Public-Private partnerships

Here, the government offers a subsidy to private sector buyers. Suppose that the demand curve intersects the vertical line in the graph (at Q=100) at a price of $4,000. Then in order to sell 100 cars, the government must subsidize buyers by $3,500 so that the $4,000 offer is raised to the $7,500 the firm is willing to accept (notice that the buyer willing to pay $6,000 gets a $2,000 windfall, so, except at the margin, this plan gives surplus to people purchasing the assets - as with the first plan, this shifts the demand curve out until it intersects at the kink in the supply curve).

However, once again, the government will not know if it is getting this right or not. Suppose it offers a $1,000 subsidy thinking that is generous enough. In this example, that won't bridge the gap between the highest offer of $6,000, and the reservation price of $7,500. Thus, the subsidy would be too small to restart the market and the plan would fail. So the answer is to make the subsidy large enough to encourage buyers, but the problem is that if it is too large, the government will be giving money away unnecessarily.

And there's another problem. If there's a large gap between what people are willing to pay and what dealers are willing to accept(the gap between $6,000 and $7,500 in the example), this would be problematic politically since it would require subsidies that are unacceptably large.

And I should note that it doesn't have to be a subsidy. That's one way to do this - as a giveaway - but another way is through a no recourse loan (what is being called a partnership). Suppose that the government gives (up to) a $3,500 loan to a private sector buyer to purchase the car for $7,500. If it's a good car and the value rises above $7,500, say to $15,000, then government will get paid back (with interest) since the asset can be sold profitably (another option is for the government to demand a share of this profit through warrants or other means). But if it's a bad car, the price falls to zero and the loan is forgiven - it does not need to be repaid. So the private sector agents only have to put up a fraction of the price to control the asset, and their losses are limited to the amount they put up while the gains are potentially large.

This is, in essence, the Geithner Plan. If many of the loans are not repaid, or if the subsidy is too large, it could lose a lot of money, but it could also make money too.

3. Nationalization

Now for the Saab story. Another option is for the government to simply take over the car dealership. The dealership is essential to the economy of the town, without it people will struggle, and the government - for that reason - might consider temporarily taking over the dealership to prevent failure. In doing so, it would make an evaluation of the company's assets, pay off the people who loaned the business money up to this amount, which may require having them take a haircut, i.e. accept some percentage of what they are owed on the bad loans they made, and the owner would simply be wiped out (which is a benefit since the business is insolvent and this allows the owner to escape the loans that cannot be paid through liquidation).

After taking over, the government would stress test the cars it now owns, put the bad ones in the junk pile, and sell the rest back to the public. So long as it didn't pay the creditors too much when it took over, i.e. the haircut is sufficiently large, it ought to make money on the deal. But it could lose money here too.

The Point

But, and I want to stress this, the point of these plans is not to make money, the point is to keep the economy of the town going, to keep people employed. If people place a large value on security, then even if the government takes a loss on paper, it may not be an economic loss. That is, we must put a value on the jobs that are saved and the security it brings (simply imagine that the utility function has risk as one of its arguments - by lowering the risk of job loss and the associated household disruption, you have made the agent better off, and this must be counted against any loss from any of the programs above). There is value in economic stability and security over and above whatever the government makes (or loses) on the actual financial transactions, and this must be factored into the evaluation of the policy.

This post can also be viewed on economistsview.typepad.com.

Fire The AIG Traders: It Worked In The 90's Asian Financial Crisis

Most American's are up in arms about the bonuses paid out to the very AIG traders that caused the company to fail. The company has been defending the bonuses saying that they need to retain the traders due to their exclusive knowledge of the financial products they are trying to wind down. This same argument was made during the Asian financial crisis of the late 90's, and the countries that didn't listen to it ended up much better off then the ones that did. For more on this, read the following post from Mark Thoma.

James Kwak and Simon Johnson say the arguments made to support paying bonuses at AIG - that the bonuses are needed to retain people with specialized knowledge - do not withstand closer scrutiny. Not only can the "discredited insiders" be replaced, it's best when they are:

Off With the Bankers, by Simon Johnson and James Kwak, Commentary, NY Times: A.I.G. can hardly claim that its generous bonuses attract the best and the brightest. So instead, it defends the payments by arguing they’re needed to retain employees who are crucial for winding down transactions that are “difficult to understand and manage.” ... There is no reason to believe this.

Similar arguments made during the 1997 Asian financial crisis ... turned out to be a smokescreen to protect the executives who were partly responsible for the mess. Recovery from that crisis required Indonesia, South Korea and Thailand to close or consolidate banks. In all three countries, bankers protested, claiming that their connections with borrowers were critical to recovery. ...

The leaders of Thailand and South Korea did not listen to such arguments, and thank goodness. Some of the leading Thai banks were taken over by the government. After the crisis, a civil servant in charge of one such bank noted that its bad loans were much bigger than had been indicated before the takeover, largely because of an internal coverup. Only when outsiders took over did the public discover the full scope of the losses. ...

But these reforms made all the difference. Banks became healthy and resumed lending within a few years after the crisis broke. ...

Indonesia did not respond to the crisis so wisely, and the costs were severe. ... The lesson of all this is that when insiders have broken a financial institution, the most direct remedy is to kick them out. Traders are hardly in short supply, and you don’t need to rely on the ones who made the toxic trades in the first place. Companies must always plan around the potential departure of even their star traders, or they are certain to fail. ...

If A.I.G. wants to argue that complex transactions, hedging positions and counterparty relationships require employees who are intimately familiar with those trades, it should at least provide evidence that the arguments for doing so are sounder than the ones made in Indonesia in 1997, when leading bank-owning conglomerates claimed that only they understood their financing arrangements... We heard variants of the same idea in Poland in 1990, Ukraine in 1994 (and in the Ukrainian crises subsequently), and Argentina in 2002.

Any grain of truth in these arguments must be weighed against the costs of allowing discredited insiders to manage institutions after they have blown them up. Even if the conclusion is that a few experts need to be retained, offering guaranteed bonuses to virtually the entire operation is hardly the way to achieve the desired results. We should not let people think that the best way to guarantee job security is to lose lots of money in a really complicated way. The argument that A.I.G.’s traders are the people that we must depend on to save the United States economy is ... weak and self-serving...

This post can also be viewed on economistsview.typepad.com.

The Las Vegas Real Estate Horror Show — In Graph Form

We all know that things have been bad in the Las Vegas real estate market, but just how bad is it? A vast majority of the sales happening now are foreclosures, and the exact numbers might be frightening — even to those who don't own a house there. For a graphic depiction read the the following blog post from Tim Iacono.

This report from the Las Vegas Sun carries one of the better graphics that have crossed my computer screen lately depicting the extent to which distressed sales have impacted the local real estate market in and around "Sin City".

Of course, conditions are much worse in Nevada than in most other parts of the country, but large swaths of California, Florida, and Arizona probably have real estate sale figures that are not too different from these. The report by Chris Morris and Alex Richards contains just the following commentary.

When Nevadans started to realize they were at the epicenter of a full-blown foreclosure crisis in 2007, riding a rising wave of loan defaults that eventually turned into auctions and bank repossessions, they didn't really understand what was in store for the real estate market. In the valley today, foreclosure sales largely outpace regular sales, and they drive the median price of single-family homes down considerably — by roughly $25,000 in February.

The graphic really tells the story:

Nice work.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Fed Ups Balance Sheet $1.2 Trillion: Irresponsible, Or Just What The Economy Needs?

With the recent announcement that the Federal Reserve plans to buy up $1.2 trillion in mortgage backed securities and other financial instruments, there has been a economic divide created. On one side Americans will benefit from reduced mortgage rates, however, opponents to the decision argue that this will lead to major inflation and devalue the savings of responsible Americans. It seems that anyone "responsible" is getting victimized in all these stimulus measures. Furthermore there is always the worry that the foreign buyers of our debt will be turned off by our actions and decide to stop buying these assets, or even worse sell off what they already own. For more on this, read the following blog post from Tony Straka.

Word has probably spread around by now that the Federal Reserve is going to buy everything in America that's not nailed down, throwing another $1,150,000,000,000 lifeline at markets. (Click here to see what a trillion looks like.)

The Federal Open Market Committee (FOMC) yesterday informed the public that it will expand its dominating position in the MBS market, throwing an additional $750 billion there. The buying spree does not end there. Having arrived at zero interest rate policy 3 months earlier the Fed now hopes to control interest rates by monetizing US Treasuries equalling $300 billion. Stirring still more Bourbon in the punch bowl the Fed will also up its portfolio of agency debt by another $100 billion.

Markets rallied on the news with Treasuries shedding up to 51 basis points. Gold outshone everything and spurted more than $50 on the FOMC's news that will ultimately lead to higher inflation rates despite the FOMC statement that said,

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued.

Surprisingly chairman Ben Bernanke and his troops are more worried about possible deflation despite the Fed's balloning balance sheet that will pass the $3 trillion mark this year.

Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

Latest CPI figures show a different picture. Inflation rose to 0.5% (January: 0,4%) or 6% annualized in February.

GRAPH: Gold reacted with the biggest jump seen in decades, rising more than $50 after the Fed released more measures that are designed to fuel monetary inflation. Chart courtesy of kitco.com

Economists were up in arms about the Fed's measures. Stephen Stanley of RBS Greenwich Capital said via the WSJ blogs:

The agency MBS market is close to $4 trillion, so the Fed will end up owning almost one-third of the agency mortgage market. If this was a “rigged market” (to quote one of my learned colleagues on the mortgage desk) before, what should we call it now?! … $50 billion per month in Treasuries pales in comparison to new supply. Just to flesh that point out, we project that auctions of 2’s, 3’s, 5’s, 7’s, and 10’s will total $150 billion in March. In essence, even if all the purchases are limited to 2’s to 10’s, the Fed’s program will merely be a third of the new supply (and far short of one-third of the total market, as is the case for agency MBS).

Morgan Stanleys David Greenlaw said,

Even with energy prices having flattened The Fed’s Treasury purchases will absorb a very significant portion of the amount of gross issuance that we anticipate to occur over the next six months… The Fed’s announcement signals a clear intent to continue to drive mortgage rates lower and we expect them to meet this objective. This could represent a powerful source of stimulus for the household sector of the economy. In 2008, the average mortgage rate on the outstanding stock of loans was about 6.50%. So, if the Fed brings 30-yr fixed rate mortgages down to 4.50% and all homeowners are able refi, the aggregate permanent cash flow savings would be on the order of $200 billion per year.

Bloomberg summed it up in the lead of their coverage:

By committing to buy Treasuries and double his purchases of mortgage debt, Federal Reserve Chairman Ben S. Bernanke signaled his determination to avoid a repeat of the Great Depression and his willingness to pump as much cash into the economy as needed to end the current crisis.

I conclude nothing has changed in the Fed's perception that new fiat money will also solve this crisis. Taking gold's reaction as the canary in the coal mine markets will recognize that the Fed is on the way towards hyper inflation. As in the Weimar republic the US central bank spins up the presses to monetize the debt. At the end of the Weimar republic one percent of government income came from taxes and 99% came fresh from the printing presses.

President Barack Obama may have no other choice than to take this route as foreign investors grow wary about the capability of the USA to serve its debts and we may see less participation in Treasury auctions also for the reason that sovereign wealth funds will spend a bigger portion domestically as nearly every nation is confronted with the economic downturn. For the time being gold investments may turn out again to be the safest asset to hold.

UPDATE: Mint.com says one trillion greenbacks could fund an inflation-adjusted New Deal twice over. Check out their way of visualizing what one trillion can buy and be in for a dose of reality.

I especially liked this one. Do you still say this crisis is manageable? Illustration courtesy of Mint.com.

This post can also be viewed on prudentinvestor.blogspot.com.

We Avoided Deflation Again: Soon Inflation Could Be Problem

The latest CPI reports showed that we once again avoided the dreaded "D" word — deflation. But as James Picerno points out while we are worried about deflation now, at some point here we are going to have to unwind all the policies that have been enacted to boost the economy. Since policy makers tend to be a little behind on the unwinding side in all likelihood we will experience hefty inflationary pressure before things balance out again. So while we are worried about deflation now, soon our concern needs to move to controlling inflation off the backend. For more on this, read the blog post below from James Picerno.

Today’s report on consumer price inflation (CPI) for February confirms yesterday’s news on wholesale prices for last month: deflation is on the run. For the moment, anyway.

That’s good news, but if it’s true, then monetary policy becomes increasingly tricky in the months ahead. We say if it’s true because it’s hard to make definitive conclusions on just a few months of data. At the moment, the case for arguing that deflation has been banished rests on January and February numbers. Deciding if that’s a trend with legs remains speculative, albeit less so than in the past several months. Only once it's clear that the economy is past its worst point in the current downturn will it be obvious that deflation is no longer a threat. Where and when that point lies, alas, isn't yet obvious, at least to this observer.

Meanwhile, the Labor Department reports this morning that consumer prices rose 0.4% last month on a seasonally adjusted basis. That’s up from January’s 0.3% and both numbers stand in sharp contrast to the previous three months (Oct through Dec), when CPI dropped sharply.

Core inflation (excluding food and energy) was up 0.2%, as it was in January, suggesting that overall prices, as defined by the Federal Reserve, are more or less stable. For the year through February, core CPI advanced 1.8%, roughly in line with where the Fed would like to see it remain through time.

Does this mean the all-clear sign for deflation worries is past? Perhaps, but it’s still too soon to say. There was never any doubt that a determined central bank can engineer inflation. Indeed, that’s the natural order of economic behavior and many a central bank has unwittingly fostered higher inflation without necessarily trying. The fact that the Fed has been working over time to generate higher inflation as an antidote to elevated deflationary risks should surprise no one when the effort bears fruit.

One clue that the reflation efforts are more than noise comes by noting that CPI’s major subcategories all posted higher prices last month save for food and beverages. The same was true for January, a month when food prices climbed as well. That’s a big and productive shift from 2008’s fourth quarter, when price declines were running hard. At the time, the fear was that the negative price momentum would build a head of steam and, left unchecked, would develop into sustained deflation.

As we write, there’s reason to think the Fed’s policy of nipping deflation in the bud is working. Is it time to pull the plug on the massive liquidity injections? No, not yet. There's still a strong, negative headwind blowing in the economy, starting with the labor market. Until we learn more about how the current business cycle is unfolding, the case for keeping Fed funds just above zero is compelling. One metric to watch closely in the coming weeks is initial jobless claims, which is one of several critical components for estimating the current state of the business cycle, as we’ve discussed.

Meantime, Bernanke and company begin their two-day gab fest today at the Fed. As we write, the Fed funds futures market is expecting more of the same: leaving the Fed funds rate unchanged at just over zero. For the moment, that’s prudent, but it may not be so for much longer. When it’s clear that deflation is no longer a clear and present danger, it’ll be time to start raising interest rates to keep the inflationary medicine from bubbling over down the road. That’s not going to be easy in an economy that, even in the best of scenarios, is likely to be struggling for the foreseeable future.

In short, we may be nearing the end of the heightened risk for deflation. That suggests that a new era for monetary policy is coming, and it promises to be a difficult one, which is to say that the risk of error will be quite high. As inflationary pressures return, albeit slowly and tenuously, the central bank will have to navigate a fine line of keeping prices under control without creating excessive drag for economic growth. The previous run of monetary policy decisions look like child’s play by comparison.

This post can also be viewed on capitalspectator.com.

Median Sales Price In Southern California Stops Falling

Could the real estate market bottom finally be here? A recent report shows that the median sales price in Southern California has stopped falling — at least for one month. In some places values have even started to rise again. Although it is easy to get excited about this report, Tim Iacono does offer some warning in his blog post below.

Dataquick reported February real estate sales data for Southern California earlier today and it looks as though the median price stopped declining for the first time in almost two years.

After dropping to a six-year low last month, the median price across all of Southern California held steady at just $250,000 - that still sounds like a lot of money.

You'd likely agree if you've ever seen a median home in Southern California.

As shown above, prices in all six counties are now down more than forty percent from their peak and San Berdoo looks as though it may crack the minus 60 percent threshold as soon as next month.

Median home prices going back to late 2002 are shown below - note that both San Diego and Orange County posted advances from January to February.

Since Marshall "almost all if not all of those gains are here to stay" Prentice is now retired, new DataQuick President John Walsh provides the commentary:

The market is so tilted away from normal mainstream activity that it's impossible to generalize or predict based on the atypical patterns we're seeing. That means that normal demand and supply is building up. The floodgates could open once mortgage credit starts to open up.

Well, maybe if the banks sense that things are stabilizing a bit, we'll see a flood of bank-owned properties on the market, but it's hard to imagine you really need floodgates to hold back demand right about now given the state of the local economy.

Foreclosures were said to account for 56.4 percent of all February sales, unchanged from last month, up from a 36.2 percent share a year ago.

These distressed sales have contributed to year-over-year price declines that now far exceed any of the annual gains a few years back, prices in the Inland Empire continuing to plunge while declines in other areas slow.

Pricing in my old stomping ground of Ventura County have improved dramatically over the last couple months, from an annual decline of 36 percent in December to a drop of just 27 percent in February.

In the words of inimitable groundskeeper Carl Spackler from the 1980 movie classic Caddyshack, "So we got that goin' for us, which is nice".

This post can also be viewed at themessthatgreenspanmade.blogspot.com.

Does Obama Deserve An "F" Grade For His Economic Policies?

There has been a lot of criticism lately of President Obama's economic policies, but are they really so bad to deserve the "F" grade recently given to them by the Wall Street Journal? Obviously a good deal of economists think so, but economics professor Mark Thoma has a different view. For more on this, read the following post from Mark Thoma.

I was asked about the grade of "F" the WSJ gave to the economic policies of Obama and Geithner:

Grading Obama on the economy, by Mark Thoma, Comment is Free, UK Guardian: Obama hasn't received high marks for his handling of the financial crisis. Does he deserve a failing grade?

The Obama administration's economic policies received a low average rating from 54 economists participating in a recent poll appearing in the Wall Street Journal, low enough to allow the paper to award an "F" grade to the president and US Treasury secretary Timothy Geithner. (Ben Bernanke fared a bit better.)

However, there was considerable variation across the 54 responses, perhaps because the question was too broad. In particular, when assessing the administration's policy successes or failures to date, it's important to separate the stimulus package from the bailout package, and to separate the economics from the politics.

Though they are often confused, the stimulus package is intended to jump-start the economy and is largely independent of Geithner and the Treasury, while the bailout policies are directed at repairing the financial sector and are, to a large extent, a direct product of the Treasury's efforts.

The economic policies underlying the stimulus package do not, in my opinion, deserve a failing grade, or anything close to that. The policies the administration would have liked to have implemented were based upon solid principles. But I was disappointed with the actual legislation.

The problem was the politics, not the economics. The administration did not get out in front and dominate the political message. Instead, the framing was left to the opposition, and that forced compromises in the stimulus legislation that limited its potential effectiveness, perhaps to the point of falling below the critical threshold needed to get the economy moving.

For example, the bill that actually emerged slanted too much toward tax cuts that are likely to be saved rather than spent, thus reducing the impact on aggregate demand. There was not enough help for state and local governments, and there was not enough help for struggling households who have taken big balance sheet and employment hits as the crisis has unfolded. So while I would give the policy design decent marks, the actual implementation has fallen short, largely due to a tendency to compromise instead of taking control of the political battlefield.

The financial bailout suffers from a similar problem, but here the economics have been problematic as well. The plan has been slow to develop, and does not seem to recognise the nature of the problem. However, this may be due to fear of the politics associated with nationalisation rather than a lack of understanding of the problem and then potential solutions to it. Or it could be from a genuine belief that nationalisation ought to be a last resort.

But all of the false steps, the hesitation, the lack of a firm commitment to a particular course of action look to me like they have been driven by a desire to find some way, any way, of avoiding the political consequences of doing what they know needs to be done in their heart of hearts: take temporary control of the banks, separate the good assets from the bad, recapitalise the banks as necessary, then sell the reconstituted banks back to the private sector.

But instead of leading the political argument, they have allowed the opposition to dominate the political landscape and that has forced the administration's hand in terms of the policies they are able to pursue. In the case of the financial sector, it's time to stop hoping that muddling along until the economy recovers will somehow solve the problem, and to get out in front and lead. As for the stimulus package, the message is the same. Given that the first package may not be enough due to the lack of a proper political foundation, and therefore that a second round may be needed, it would be helpful to begin paving the political path forward here as well.

This post can also be viewed on economistsview.typepad.com.

Housing Starts Up, But Numbers Are Deceiving

A lot of people are getting excited about the fact that housing starts are up over 20 percent, but their excitement might be a little premature. Tim Iacono from The Mess That Greenspan Made tells us why these numbers could be a little deceiving in his blog post below.

The Commerce Department reported(.pdf) that housing starts rose for the first time in eight months, up 22.2 percent in February from record lows in January, largely as a result of a rebound in condominium and apartment building.
While a 22 percent gain sounds impressive, it is important to recall just how low last month's record low numbers were.

Housing starts rose from an annualized, seasonally adjusted rate of 466,000 in January to a rate of 583,000 last month, but the January totals were a full 42 percent below the previous record low of 798,000 in January of 1991, a rate that is not adjusted for the increase in population.

This data series goes all the way back to 1959 and to see the rate of housing starts averaging well over a million units for five decades gives the February figure of 583,000 a very different connotation than when simply comparing the total to January.

On a year-over-year basis, housing starts fell 47.3 percent.

Building permits, a forward looking indicator for new construction, rose 3.0 percent in February, from a rate of 521,000 to 547,000, and are now down 44.2 percent from a year ago.

Record foreclosures and an increasing number of sales of bank owned properties have undercut builder prices for many months now with almost 300,000 homes entering some stage of foreclosure in February. This adds to the growing inventory of bank owned properties, most of which have remained off of the resale market according to RealtyTrac, a California-based provider of default data.

Yesterday's National Association of Home Builders housing market index remained near record lows, buyer traffic worsening in the latest report, as the near-term outlook for homebuilders remains grim.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Nice...AIG Is Paying $165 Million To The People That Ruined The Company

What is going on over at AIG? The latest fiasco coming from AIG is the news that $165 million in bonuses are scheduled to be paid out to the financial products unit. Oh, one other thing, that is the unit that basically bankrupted the company. How on earth are these people still even working for the company, let alone getting bonuses? Typically when someone screws up that much they get fired, not rewarded. Meanwhile the American public is left completely baffled at the situation. So far we have given AIG about $170 billion, — which kept the company in business — and now AIG is telling us that we have to allocate $165 million of this tax payer money to give to the people who caused us to have to pony up the $170 billion to begin with? I know they have some contract things in place and all, but as Laura Wilson from Information Security Resources points out in her blog post below, I'm sure there is a way for us to get around that contract considering the situation. Oh yeah, here is a thought too: how about we FIRE some of these people! There are a lot of good financial people looking for jobs right now, and a little shake up over there might not be such a bad thing.

The plaint that credit default swap-promulgating AIG (AIG) is contractually obligated to pay out millions in bonuses to the same pitted brass that led the company, the industry, and the entire economy off a cliff is a bunch of horse hooey.

If you are on the management team of a company that lays off workers, can’t pay its bills, leaves shareholders holding nothing, and has to take public bailouts, it’s your damn job to make a deal to restructure that company, or wind it down responsibly.

Your bonus is getting to keep porking up to the paycheck trough while other workers are losing salary, severance, and health care.

New York Times: The payments to A.I.G.’s financial products unit are in addition to $121 million in previously scheduled bonuses for the company’s senior executives and 6,400 employees across the sprawling corporation. Mr. Geithner last week pressured A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.

The payment of so much money at a company at the heart of the financial collapse that sent the broader economy into a tailspin almost certainly will fuel a popular backlash against the government’s efforts to prop up Wall Street. Past bonuses already have prompted President Obama and Congress to impose tough rules on corporate executive compensation at firms bailed out with taxpayer money.

A.I.G., nearly 80 percent of which is now owned by the government, defended its bonuses, arguing that they were promised last year before the crisis and cannot be legally canceled. In a letter to Mr. Geithner, Edward M. Liddy, the government-appointed chairman of A.I.G., said at least some bonuses were needed to keep the most skilled executives.

I sure would like to see those AIG contracts - I’ll bet I can poke a hole in the specious supposition that the company really, really wants to do the right thing, but its little hands are tied. Since the public bailout of AIG, we all have an ownership interest in where the money is going, and are entitled to ask probing questions.

New York Times: “We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr. Geithner on Saturday.

Still, Mr. Liddy seemed stung by his talk with Mr. Geithner, calling their conversation last Wednesday “a difficult one for me,” and noting that he receives no bonus himself.

“Needless to say, in the current circumstances,” Mr. Liddy wrote, “I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them.”

I know contracts inside and out, at the real-world, down and dirty level, not the black-box, ivory tower, theoretical stratum that gets adjusted as the tectonic plates of business deals crash into each other.

Although I have chosen not to practice law anymore, I am really good at understanding the terms of these agreements, and evaluating when it would appropriate to reward corporate players for their performance.

And, when it is not.

New York Times: Of all the financial institutions that have been propped up by taxpayer dollars, none has received more money than AIG, and none has infuriated lawmakers (and Ben Bernanke per 60 Minutes) more, with practices that policy makers have called “reckless”

The bonuses will be paid to executives at A.I.G.’s financial products division, the unit that wrote trillions of dollars’ worth of credit-default swaps that protected investors from defaults on bonds which were backed in many cases by subprime mortgages.

The bonus plan covers 400 employees, and the bonuses range from as little as $1,000 to as much as $6.5 million. Seven executives at the financial products unit were entitled to receive more than $3 million in bonuses.

Any attorney who advises that these bonuses are appropriate ought to have his or her head checked.

Base salary, maybe, if not outrageous. No bonus. No severance unless everybody else also received proportionate assistance. Don’t care what the contract says - attack it in bankruptcy or wind down - I saw it many times in the Silicon Valley meltdown.

But the official also said the administration will force A.I.G. to eventually repay the cost of the bonuses to the taxpayers as part of the agreement with the firm, which is being restructured.

AIG’s main business is insurance, but the financial products unit sold hundreds of billions of dollars’ worth of derivatives, the notorious credit-default swaps that nearly toppled the entire company last fall. AIG had set up a special bonus pool for the financial products unit early in 2008, before the company’s near collapse, and when problems stemming from the mortgage crisis were just becoming clear.

There were concerns that some of the best-informed derivatives specialists might leave.the company. AIG then locked in $450 million for the financial products unit, and prepared to pay it in a series of installments to encourage people to stay.

This poignant issue is near and dear to me, as I have shut down management bonuses before, even when I would have received some of that money, and even when I really needed it.

I also have been lucky enough to work with one of the premier corporate governance experts in the country and with a bankruptcy and wind down expert whom I hope will end up on the federal bench.

In the past, I have known both of these gentlemen to express support for my assertion that it is appalling for a destitute company to pay out management and deal bonuses to the team that took the company under.

New York Times: A.I.G.’s main business is insurance, but the financial products unit sold hundreds of billions of dollars’ worth of derivatives, the notorious credit-default swaps that nearly toppled the entire company last fall.

Under a deal reached last week, A.I.G. agreed that the top 50 executives would get half of the $9.6 million they were supposed to get by March 15. The second half of their bonuses would be paid out in two installments in July and in September. To get those payments, Treasury officials said, A.I.G. would have to show that it had made progress toward its goal of selling off business units and repaying the government.

Nice. You just keep holding that moral compass you got there, guys.

Laura is a business consultant and an advocate for information security, consumer protection, long-term shareholder value, and better management decisions. Her specialty is finding and fixing risks and threats to sensitive data. Her experience includes international banking, credit card, and mortgage companies, venture capital portfolio companies, and software and technology providers. She practiced law in Silicon Valley during the tech boom and meltdown, handling corporate governance and information protection.

This post can also be viewed on yourmortgageoryourlife.wordpress.com.

China Beginning To Use Monetary Leverage On U.S.

While the U.S. has racked up trillions in debt, China has been buying up this U.S. debt. Now China owns more U.S. debt than any other country on the planet, and of course with that comes a great deal of political power over the U.S. China owns so much of our debt that if they were to start selling it off in mass quantity it could collapse our entire financial system. China has not said that they have any intention of doing so, nor would it be financially wise for them to, however, the threat alone carries a lot of weight. One of Obama's campaign claims was that he intended to fight China's monetary manipulation, but with little surprise — after urging from China — the U.S. backed down. Now China is urging the U.S. to be more prudent with their stimulus spending — in order to protect the value of their investment. Kathy Lien dives more into this story in her blog post below.

According to the latest data from Treasury, foreign investors were net sellers of U.S. dollars. The Madoff scandal led to a tremendous amount of liquidation by hedge funds in the Caribbean and Luxembourg but we have our eye on China. The Asian Giant continues to be a net buyer of dollar denominated investments, albeit at an increasingly sluggish pace. For the third month in a row, China has slowed their purchase of U.S. dollars. There are many reasons why their demand for dollars is waning, but don’t expect them to become net sellers of U.S. dollars anytime soon ahead of the Treasury’s report on Currency Manipulation next month.

With a month to go before the report is due for release, China is flexing their muscles. This weekend, Chinese Premier Wen Jiabao signaled to the U.S. that they are fully aware of the power they have on the U.S. economy and how the U.S. needs China just as much as China needs the U.S. He said that “we lent such huge funds to the United States, and of course we’re concerned about the security of our assets.” If China decided that U.S. investments are no longer safe, their liquidation would drive yields significantly higher and stocks significantly lower. The consequences of infuriating China are severe because they have the power to retaliate.

China’s continual accumulation of U.S. Treasuries is also political. With a growing U.S. deficit, there are much better ways for China to spend their money such as investing in resource companies. The sharp decline in Chinese exports also automatically reduce their need to weaken the Yuan by buying U.S. dollars. However for political reasons, the Feb and March TIC data should continue to report that China is a net buyer of U.S. dollars.

CNBC VIDEO: Is US Debt Still Desirable to China?

This post can also be viewed on KathyLien.com.

Jon Stewart Goes After Jim Cramer

In the much anticipated interview with Jim Cramer from CNBC's Mad Money show, Jon Stewart — host of The Daily Show — went after Cramer. Stewart was critical of Cramer's role in concealing the truth on certain financial matters from viewers of his show, and the American public. Tim Iacono breaks down the interview further in his blog post below.

The online media is loaded with coverage this morning of last night's appearance by Jim Cramer on The Daily Show and for good reason. While some may have been disappointed in the showdown, as is usually the case, Jon Stewart asked at least a few questions that never even occur to most people and helped to shed some light on what is wrong with CNBC.

The videos are in three parts below with the juiciest excerpt in between.

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Pt. 1

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

Apparently (and understandably) Comedy Central is getting all the ad revenue they can out of this event, that first clip above barely longer than the commercial... Hmm... or maybe not... it looks like the 30 second commercials don't get cued up when they're embedded...

Here's part two and a transcript of the last minute or so is provided further below.

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Pt. 2

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

This is the exchange that made the biggest impression on me:

Jon Stewart: Honest or not, in what world is 35-to-1 leveraged position sane?

Jim Cramer: The world that made you 30 percent a year for year after year beginning from 1999 to 2007 and it became very easy to play.

Stewart: But, isn't that part of the problem? Selling this idea that you don't have to do anything. Anytime you sell people the idea that, "Sit back and you'll get 10 to 20 percent on your money" - don't you always know that that's going to be a lie? When are we going to realize in this country that our wealth is work - that we're workers - and by selling this idea of "Hey man, I'll teach you how to be rich" - how is that different from an infomercial?

Cramer: Well, I think that your goal should always be to try to expose that there is no easy money - I mean, I wish I had found Madoff.

Stewart: But the show is called "Fast Money".

Cramer: I think that people ... there's a market for it and we give it to them.

Stewart: There's a market for cocaine and hookers!

And here's the last minute or so.

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Pt. 3

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

All-in-all, it was well worth the wait.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Do You Believe Alan Greenspan?

Former Federal Reserve chief, Alan Greenspan, is towards the top of most people's lists for who had the biggest part in the creation of the current financial crisis. Ask Greenspan, though, and he'll tell you that he had nothing to do with it. Tim Iacono calls Greenspan out on this claim, and takes a deeper look into the origin of the financial crisis in his blog post below.

On the same day that his successor signaled dramatic policy changes that would see the Federal Reserve "take away the punchbowl" before inflating yet another asset bubble, radically altering the way financial market regulators operate in the process, former Fed chairman Alan Greenspan was readying yet another in a long series of op-ed pieces aimed at defending his legacy.

He didn't cause the housing bubble, or so he says.

After yesterday's commentary by David Leonhardt at the New York Times about how the central bank had been played like a fiddle by big financial firms who took on "excessive risk" knowing that the government would be there to bail them out, you'd have thought that maybe there would be some reluctance to go forward with the editorial.

Apparently not.

Still seemingly unfamiliar with the concept of "moral hazard" where, in the words of Mr. Leonhardt, big firms can "act as if their future losses are indeed somebody else’s problem", and having only confessed to being "shocked" last year after finding a flaw in his ideological framework about how "self-interest" works in the real world, the opinion piece made it into the Wall Street Journal this morning.

Alan Greenspan still hasn't got a clue.

After a long period of relative silence since the wheels fell off the global economy last fall and as his critics grew in number, his name often cited in public opinion polls as "the one individual" most responsible for the current mess (this term, admittedly, now failing to adequately describe the extent of the problems the world now faces), his defense has become defiant, if not desperate, the most recent example being provided today:

The Fed Didn't Cause the Housing Bubble
Any new regulations should help direct savings toward productive investments.
By ALAN GREENSPAN

We are in the midst of a global crisis that will unquestionably rank as the most virulent since the 1930s. It will eventually subside and pass into history. But how the interacting and reinforcing causes and effects of this severe contraction are interpreted will shape the reconfiguration of our currently disabled global financial system.
There are at least two broad and competing explanations of the origins of this crisis. The first is that the "easy money" policies of the Federal Reserve produced the U.S. housing bubble that is at the core of today's financial mess.

The second, and far more credible, explanation agrees that it was indeed lower interest rates that spawned the speculative euphoria. However, the interest rate that mattered was not the federal-funds rate, but the rate on long-term, fixed-rate mortgages.

Not surprisingly, the "easy money" thesis is dismissed out of hand - there is nothing further about fostering a culture of debt or being overly accommodating to the slightest of financial market stumbles over a period of almost two decades, all of which surely contributed to the prevailing attitudes and conventional wisdom of just a few years ago.

Having dispensed with that, it is on to the now-familiar, "I was powerless to do anything about long-term rates" retort, as if long-term rates really played a key role in the housing bubble during its bubbliest years.

With prices having risen to nosebleed levels during the middle of the decade, who could afford to buy a house with a 30-year fixed loan?

It was the tsunami of "innovation" in financial products - Pay Option ARMs, "liar loans", MBSs, CDOs, and CDSs - all of which were blessed by the central bank, that caused nearly all the damage, not 30-year fixed mortgages.

Next comes the "savings glut" rationale for why long-term rates were such a conundrum followed by the now-familiar, "our housing bubble was just average" angle:

That ex ante excess of savings propelled global long-term interest rates progressively lower between early 2000 and 2005.

That decline in long-term interest rates across a wide spectrum of countries statistically explains, and is the most likely major cause of, real-estate capitalization rates that declined and converged across the globe, resulting in the global housing price bubble. (The U.S. price bubble was at, or below, the median according to the International Monetary Fund.)

What follows is a rebuke of Stanford University Professor John Taylor' revisionist history (apparently, it takes one to know one) in which short-term interest rates were cited as the proximal cause for the current meltdown.

And after that, it's always handy to cite glowing criticism from someone who died back in 2006, before it became widely known just how bad things would get.

Given the decoupling of monetary policy from long-term mortgage rates, accelerating the path of monetary tightening that the Fed pursued in 2004-2005 could not have "prevented" the housing bubble. All things considered, I personally prefer Milton Friedman's performance appraisal of the Federal Reserve. In evaluating the period of 1987 to 2005, he wrote on this page in early 2006: "There is no other period of comparable length in which the Federal Reserve System has performed so well. It is more than a difference of degree; it approaches a difference of kind."

That's just pathetic when you think about it...

Even after the recent admonishment from the late Milton Friedman's long-time partner Anna Schwartz as documented in "A 92-year old finger pointed squarely at the Fed", he has the chutzpah to cite favorable words from 2006.

Lastly, the question of regulation and the lack of sophistication.

It is now very clear that the levels of complexity to which market practitioners at the height of their euphoria tried to push risk-management techniques and products were too much for even the most sophisticated market players to handle properly and prudently.

However, the appropriate policy response is not to bridle financial intermediation with heavy regulation. That would stifle important advances in finance that enhance standards of living.

Before getting to the big finale, it's worth noting that the book has not yet been written on these "enhanced standards of living". It seems that standards of living in most of the world, particularly in the U.S., are one big moving target right now, a target that is generally moving in the downward direction.

Come to think of it, "enhanced" is clearly not the right word choice here - it is premature at best and, at worst, it is a sad, almost mocking commentary on the rapidly changing lives of the vast majority of people in the world.

And, in conclusion...

If we are to retain a dynamic world economy capable of producing prosperity and future sustainable growth, we cannot rely on governments to intermediate saving and investment flows. Our challenge in the months ahead will be to install a regulatory regime that will ensure responsible risk management on the part of financial institutions, while encouraging them to continue taking the risks necessary and inherent in any successful market economy.

Maybe what the smartest economists in the world thought was "sustainable growth" wasn't sustainable at all and all that "risk taking" was just a way for bankers to enrich themselves.

People are beginning to sour on the whole idea of "prosperity", that is, if the current economic and financial market tumult is part of the package.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Misguided Optimism From The White House

While the White House seems to be in a cheery mood about the future of the economy, you might want to hold off your enthusiasm. As Tim Duy points out, the economic data being released is in no way positive — and of course the administration fresh off the passing of their new stimulus package isn't going to admit defeat anytime soon. Mark Thoma looks closer at a recent article from Tim Duy that addresses the misguided optimism coming out of the White House in his blog post below.

Tim Duy doesn't see the light at the end of the tunnel that the administration says may be there:

Optimism Abounds at the White House, by Tim Duy: With the ink barely dry on the recent stimulus package, commentators are already calling for a fresh round of stimulus. But will these calls be heeded, or fall on deaf ears? For now, it looks like the Obama Administration is standing firm. And, really, what else could we expect? A call for more stimulus at this juncture is only a signal that the first package was destined to be a failure from the beginning, an admission that this Administration could not afford so early in the term. Christina Romer, chair of the Council of Economic Advisers, delivered a clear message today:

“We absolutely need to let this one work,” Christina Romer, chair of the White House’s Council of Economic Advisers, said Monday at the Brookings Institution. Tax withholding tables are just now being changed to get more money into consumers’ pockets, she said, and many forecasters are saying the recent uptick in consumption may mean the economy is approaching bottom. “I think people are perhaps seeing some light at the end of the tunnel,” Ms. Romer said.

Light at the end of the tunnel...what information exactly is flowing into the Oval Office? Did the White House get the same jobs report the rest of us saw last Friday? Not so much light in that report as pitch black. Another 651k employees cut from payrolls, unemployment pushed to 8.1%, and the U6 rate pushed to a whopping 14.8%. These numbers are all expected to deteriorate in the months ahead. What else did we see last week? Perhaps the light was the in the ISM reports? Manufacturing barely budged, and remains mired deep in recession territory; nonmanufacturing tells a similar tale. Initial claims fell, but at 639k still signalscontinued sharp deterioration in the labor market, and the 4-week moving average still edged up. Maybe she is referring to the downward revision to 4Q08 productivity, which suggests firms still have more work to do in reducing labor costs.

Recent data shows little light, in my opinion. It describes an economy in virtual free fall. Romer appears to be holding onto the hope that the relative stabilization in real consumption expenditures signals a bottom of activity. I hope she is correct, but I remain cautious - households are getting a significant boost right now from declining energy prices, but with oil prices settling out in the $35 to $50 zone, future gains are less likely. Moreover, the confidence numbers are not supportive of a bounce back in consumer spending:

Most irritating is that Romer knows all this; she is much too smart to not appreciate the severity of the data. But once you go are in the Administration - whatever Administration - you heed to the party line. Romer continues the line:

The White House is betting that addressing the root cause of the economic downturn — the housing and financial-sector trouble — will be enough (along with the stimulus spending) to return the U.S. to growth. Tim Geithner, the Treasury secretary, “loves to say, ‘There’s more stimulus in financial rescue than in stimulus,’” Ms. Romer said. “By getting our financial markets back, getting lending going again, that’s incredibly important for aggregate demand and for spending.”

Sometimes I feel like I am in Oz. And I want to go home, so badly do I want to go home. To a time that credit flowed like water from a spring, and the answer to all life's problems could be found in a home equity line of credit. And Geithner is whispering to me, "just click your heels, and say 'I want to go home.'" Yet for months I have been clicking my heels - since Fall of 2007 - and still I am stuck in Oz.

Efforts to unglue the financial system are important, but I sense that the Administration's expectations of what will by delivered by a fix will fall far short of what is necessary to fill the growing hole in the US economy. Even BOA CEO Ken Lewis, in a self-serving WSJ oped, admits as much:

Second, one of our greatest challenges is balancing the need to extend credit with the need of households to pay down excessive debt. In an economy that became too dependent on debt-driven consumption to create growth, the prospect of household deleveraging is sobering. The answer, in my view, is to let competitive forces lead us back to responsible lending practices, not the type of indiscriminate lending that has created so many problems.

Even if households suddenly rediscover their love affair with credit, a big if given the destruction of wealth in recent months, they will find themselves stymied by tighter credit conditions. A healthy, well functioning financial system simply will not extend credit on the scale seen in recent years. Without a replacement for that demand, economic activity will slide into a sub par equilibrium, and would likely remain sub par for an extended period of time as structural imbalances are corrected. David Altig at macroblog summarizes:

When I look ahead, I envision the U.S. economy over the next several years in terms of a simultaneous process of recovery and reformation: Recovery in the sense that the actual contraction of GDP will end, but reformation in the sense of structural transformation in financial markets, consumer behavior, and perhaps an adjustment of the global imbalances that are arguably at the root of much of the financial instability that has characterized the past decade.

Additionally, what is the time line for a financial market fix? One month, or one year? Will TALF jump start the securitization market overnight? How much damage will be done to the US economy while we wait? This Administration appears willing to find out.

In short, I grow increasingly fearful that the pace of economic deterioration will leave the US economy in a much deeper hole than this Administration expected, swallowing the stimulus package. Moreover, that even with a functional financial market, crawling out of that hole will be difficult at best. I see little but fiscal stimulus that could fill that hole. You might not like it, you might worry about the long term budgetary consequences, but we all might soon fall back on the old battlefield adage: There are no atheists in foxholes.

This post can also be viewed on economistsview.typepad.com.

How Does U.S. Stimulus Spending Compare To The Rest Of The World?

The current economic crisis has lead to the fastest rate of job loss in any period since 1974, according to the New York Times. To help curb this disturbing trend President Obama has spent billions. But how does this recession's unemployment figures compare to past recessions? How much has the U.S. spent on our stimulus compared to other countries? Kathy Lien shows us some charts which answer those questions in her blog post below.

The labor market in the U.S. is weakening and the Obama Administration is trying to compensate by spending aggressively. The NY Times and Wall Street Journal released some great images on how job losses in the current recession compares to previous downturns and how the current degree of U.S. spending compares to the rest of the world.

Also check out the NY Time’s interactive How the Government Dealt With Past Recessions

This post can also be viewed on kathylien.com.

Renter's Rights When Landlord Is In Default

As CNN reports, renters are definitely at risk in today's collapsing real estate market. In the event a home goes into foreclosure the lease agreement on said property is typically voided. The good news is that new laws have recently been passed that help renters in situations like this, but so far only Freddie Mac and Fannie Mae loans are required to be part of the program. If your landlord has their mortgage with a different provider, you may be out of luck. With 40 percent of all foreclosures happening to homes with renters in them, sadly there are a lot more people who are going to be in the same situation as the lady in the video. For more on this, read Tim Iacono's blog post below:

Wow! About 40 percent of all foreclosures are for properties that are being rented. We'll have to keep this in mind when looking for a new place - a report the other day said there are ten new foreclosures every day in Deschutes County, Oregon, where we're headed.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Obama's Stimulus Plan Won't Be Enough, And Could Even Ruin Him

Politics is a tricky game, and President Obama could be setting himself up for a tremendous fall. Right now his approval rating is sky high, but so too are his expectations. As famed economist Paul Krugman points out in his article, Obama's recent economic stimulus plan is much too small, and in all likelihood he is going to be forced to ask for more money. When that time comes people are going to assume the last stimulus package was a failure, and naturally Obama will take the brunt of the blame for it. He had a hard enough time garnering the necessary Republican support (3 votes) to get the first bill passed, and you can bet the next time around will be 100 times harder. For more on this, read Mark Thoma's blog post below:

I've heard people say the debate over the size of the stimulus package was misrepresented in the media, that the media rarely presented the view that the plan was too small.

President Obama’s plan to stimulate the economy was “massive,” “giant,” “enormous.” So the American people were told... Watching the news, you might have thought that the only question was whether the plan was too big, too ambitious.

Yet many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries — and suggest that the Obama administration’s economic policies are already falling behind the curve.

Why do you say that? Won't his plan create millions of jobs?

Mr. Obama’s promise that his plan will create or save 3.5 million jobs by the end of 2010 looks underwhelming, to say the least. It’s a credible promise... But 3.5 million jobs almost two years from now isn’t enough in the face of an economy that has already lost 4.4 million jobs, and is losing 600,000 more each month.

Ah, I see. Even though it's likely to create 3.5 million jobs as promised, it's still millions short of what is needed. So how do we improve the plan?

There are now three big questions about economic policy. First, does the administration realize that it isn’t doing enough? Second, is it prepared to do more? Third, will Congress go along with stronger policies?

What are the answers?

On the first two questions, I found Mr. Obama’s latest interview with The Times anything but reassuring.

“Our belief and expectation is that we will get all the pillars in place for recovery this year,” the president declared — a belief and expectation that isn’t backed by any data or model I’m aware of. ... And there was no hint in the interview of readiness to do more.

Do you mean he doesn't seem ready to do more in terms of fiscal policy, or that he's not ready to do more of anything, in particular, more to help the banking system recover?

A real fix for the troubles of the banking system might help make up for the inadequate size of the stimulus plan... But he went on to dismiss calls for decisive action... As I read it, this dismissal — together with the continuing failure to announce any broad plans for bank restructuring — means that the White House has decided to muddle through on the financial front, relying on economic recovery to rescue the banks rather than the other way around. And with the stimulus plan too small to deliver an economic recovery ... well, you get the picture.

Yep. It's like one of those bad dreams where your feet won't move fast enough to get away from the impending doom closing in on you. Will the administration wake up and get moving?

Sooner or later the administration will realize that more must be done. But when it comes back for more money, will Congress go along?

One side won't, that's pretty clear, and I'm not so sure about the Democratic side of the aisle either.

Republicans are now firmly committed to the view that we should do nothing to respond to the economic crisis, except cut taxes — which they always want to do... If Mr. Obama comes back for a second round of stimulus, they’ll respond not by being helpful, but by claiming that his policies have failed.

And if there are any small successes to point to Republicans will, of course, insist it was because of the tax cuts in the first round of stimulus. Where does the public stand at this point?

The broader public ... favors strong action. ... But will that support still be there, say, six months from now?

I wouldn't count on it.

Also, an overwhelming majority believes that the government is spending too much to help large financial institutions. This suggests that the administration’s money-for-nothing financial policy will eventually deplete its political capital.

I don't suppose we can borrow political capital from China?

So here’s the picture that scares me: It’s September 2009, the unemployment rate has passed 9 percent, and despite the early round of stimulus spending it’s still headed up. Mr. Obama finally concedes that a bigger stimulus is needed.

And at that point, he begins pushing a new plan?

But he can’t get his new plan through Congress because approval for his economic policies has plummeted, partly because his policies are seen to have failed, partly because job-creation policies are conflated in the public mind with deeply unpopular bank bailouts. And as a result, the recession rages on, unchecked.

Would you bet some of your Nobel money on that prediction?

O.K., that’s a warning, not a prediction. But economic policy is falling behind the curve, and there’s a real, growing danger that it will never catch up.

This post can also be viewed on economistsview.typepad.com.

3 Straight Months Of 600,000 Plus Job Losses: When Will The Nightmare End?

We have seen 14 straight months of job declines and 3 months in a row now where the declines have exceeded 600,000. So when will the unemployment tailspin end? James Picerno from The Capital Spectator addresses that question, and looks closer at the latest employment numbers in his blog post below.

Another monthly employment update, another dismal report. So it goes in a vicious recession. The only question: When will it end?

We take a stab at some perspective below, but first let's recap this morning's ugly numbers. Last month suffered another sharp fall in nonfarm payrolls, the U.S. Bureau of Labor Statistics reports. The economy lost 651,000 jobs in February—the 14th consecutive month of payroll declines and the third month of losses above the 600,000 mark. In this year's first two months alone the economy has already shed nearly 1% of total nonfarm payrolls. Unfortunately, the outlook for March doesn’t look good either.

That brings us to the burning question: When will this nightmare end? We don't have the answer, nor does anyone else. That said, a fair reading of the economic data, including a review of past recessions through history, suggests that the bleeding will go on for some time. That's just a guess, of course. Can we do better than simply guessing?

Perhaps. One small effort on that front comes by considering the trend in initial jobless claims, which is a leading indicator of sorts in that it previews the state of the economy in the immediate future. If more workers file for jobless benefits today, the ranks of the unemployed next month will reflect the fact in official jobless tallies.

Looking to the trend in initial jobless claims offers some perspective on how the cycle is unfolding and where we are in the current cycle. Let's start by looking at the four-week moving average of weekly jobless claims from 1967 through yesterday's update, which shows that weekly claims fell substantially to 631,000 for the week ended February 28, 2009. That's a step in the right direction, but anything over 600,000 clearly suggests the recession fires are still burning hot.

But looking at jobless claims numbers alone can be misleading because the size of the labor pool changes through time. Generally, nonfarm payrolls expand, even if recent experience tells us otherwise. Nonetheless, over the long haul, the labor force increases, at least it has over the long stretch of history in the U.S. As such, we need to look at jobless claims in context with current nonfarm payrolls through time, as we do in the next chart.

Putting jobless into perspective with the overall level of nonfarm payrolls suggests that initial jobless claims will peak before the recession end, or at least peak as the recession ends. That's potentially valuable information if you consider that the official notice that the recession has ended won't coming for many months after the fact. That leaves us to look for other indicators in real time, and initial jobless claims are on the short list.

In the past six recessions, the four-week moving average of weekly jobless claims as a percentage of current nonfarm payrolls peaked either in the month the recession formally ended (as per NBER) or the month directly ahead of the recession's formal end. By this measure, in just one case since 1969 did the jobless claims peak arrive much earlier: the 1969-70 recession ended in November 1970; the jobless claims peak came in May 1970.

Where does that leave us currently? The latest bar in the far right-hand side in the chart above is simply the latest batch of numbers. The four week moving average of initial jobless claims through February 28, 2009 represents 0.48% of last month's total nonfarm payrolls. History suggests that we have a ways to go before the employment pain ends. That forecast is based on the following: The high point for the past 40 years is 0.75% in 1982—well above the current 0.48%. Adjusting for the fact that this is likely to be the worst recession since the Great Depression implies that we might go to well above 0.75% this time.

In short, there's more pain to come, or so we expect. We're probably beyond the halfway point in this process, although there's still too much uncertainty to say for sure. Perhaps we'll see some concrete evidence, one way or the other, in the coming months. But for the moment, the economy continues to bleed and there's not much reason to expect an imminent end to the pain. The recession, in short, roars on.

This post can also be viewed on capitalspectator.com.

Is Obama Killing Capitalism?

Most of Obama's recent moves have been heavily opposed by Republicans, but is he single handedly killing Capitalism — and Wall Street — as some are claiming? Economics professor Mark Thoma thinks that the claim is absolutely absurd, and in fact agrees with Robert Reich that Republicans are more responsible for the falling markets than Obama is. Thoma looks at a couple articles, and gives his input on the subject in his blog post below.

Republicans made the bed, now they want someone else to sleep in it:

Is Obama Responsible for Wall Street's Meltdown? Where Populist Rage is Heading, by Robert Reich: Is Obama responsible for the meltdown of the Dow? The consistently wrong-headed Wall Street Journal's editorial page says so, as does Republican Fox News, CNN's reliably demagogic Lou Dobbs, and now CNBC... CNBC's Jim Cramer, who bloviates nightly about stock picks, says Obama is pushing a "radical agenda" that's destroying investor's wealth. My friend Larry Kudlow, who rants nightly about nearly everything, says Obama is destroying capitalism. CNBC reporter Rick Santelli's ballistic nonsense about Obama's mortgage plan made him a pop-populist icon for a week or so.

The argument that Obama is somehow responsible for the collapse of Wall Street is absurd. First, every major policy that led to this collapse occurred under George W's watch (or, more accurately, his failure to watch). The housing and financial bubbles were created under Bush and exploded under Bush. The stock market began to collapse under Bush.

Second, it's inevitable that stocks, led by the bloated financial sector, would lose their remaining hot air as the new administration begins "stress-testing" the big banks, many of which are technically insolvent. After all, their share prices were built on a tissue of lies and dreams. Other sectors whose values were similarly distorted and distended by years of financial deception and regulatory disregard, such as housing and insurance, will also have to return to the real world before they can recover. Which could mean more stock losses.

Finally, none of the financial wizards who are now charging Obama with leading America into the abyss has offered an alternative plan for getting us out of the mess that, not incidentally, many of these same wizards happily led us into. For years, the Wall Street Journal editorial page and the financial gurus of cable news cheered as Wall Street leveraged its way into oblivion.

This bizarre charge wouldn't be worth mentioning were it not a market test for a more intense attack from Wall Street and Republican media outlets next year as the nation moves into ... range of the 2010 midterm elections. Republicans have made no secret of their wish to blame Obama for the bad economy, and to stir up as much populist rage against his so-called "socialist" tendencies as politically possible. History shows how effective demagogic ravings can be when a public is stressed economically. Make no mistake: Angry right-wing populism lurks just below the surface..., ready to be launched not only at Obama but also at liberals, intellectuals, gays, blacks, Jews, the mainstream media, coastal elites, crypto socialists, and any other potential target of paranoid opportunity.

To complicate matters for Republicans, however, grass-roots populist rage is also building against Wall Street itself, and with some justification. Top Wall Streeters who raked in tens of millions of dollars a year for more than a decade have now effectively eviscerated the pension fund savings of millions of middle-class American workers and destroyed millions of Main Street jobs. The public is understandably appalled that its tax dollars are being used to pay and prop up the very people and institutions responsible for this debacle. And there seems to be no end in sight... Yet no one seems to know exactly where these dollars are going, or why. ...

The Wall Street and Republican media attack machine doesn't know exactly what to make of this. The Wall Street Journal's editorial page, along with CNBC, alternates between attacking Obama for bailing out Wall Street and excusing Wall Street's excesses. But then again, Obama doesn't seem to know exactly what to make of it either. He seems to vacillate as well -- one moment scorning Wall Street, the next moment justifying further bailouts. I do hope he takes a firmer hand, drawing a clearer distinction and making a clearer connection between clearing up these financial balance sheets and helping average people. Otherwise, the next populist uprising will be born in this moneyed quagmire. It is here -- within the muck that was created by AIG, Citigroup, Fannie and Freddie, other giant financial institutions, now in combination with the U.S. Treasury and Fed -- that the public is most confused, bears its most serious scars, and is potentially most burdened in future years...

Why people should ignore Larry Kudlow:

The Housing Bears Are Wrong Again, by Larry Kudlow, NRO, June 2005: This tax-advantaged sector is writing how-to guide on wealth creation.

Homebuilders led the stock parade this week with a fantastic 11 percent gain. This is a group that hedge funds and bubbleheads love to hate. All the bond bears have been dead wrong... So have all the bubbleheads who expect housing-price crashes in Las Vegas or Naples, Florida, to bring down the consumer, the rest of the economy, and the entire stock market.

None of this has happened. ... Meanwhile, the homebuilders index has increased 76 percent over the past year, with particularly well-run companies like Toll Brothers up about twice as much. The bubbleheads missed all this because they haven’t done their homework. If they had put a little elbow grease into their analysis, they would have learned that new-housing starts for private homes and apartments haven’t changed much during the past three and a half decades. ...

Which leads to a final thought: Why not apply the same tax laws that have benefited home owners to stock market investors and home buyers? If this were to come about, even more wealth would be created in America, leading to even more new business and job creation. ...

Yes, too bad we didn't make the bubble even bigger. If capitalism is destroyed, something that's highly unlikely, it won't be Obama's fault. It will be the fault of people like Kudlow who "haven’t done their homework" and who opposed any and all attempts to temper the housing bubble through regulation or any other means - see the ridicule of "bubbleheads" above - and who continue to oppose such measures today. Capitalism may change, in fact it needs to change - the excesses that allowed the housing bubble to develop need to be tempered through regulation and other means - but if Kudlow and company have their way and continue to assert that what's good for the rich is good for America, that regulation was the problem not the solution, and that tax cuts are the answer to every problem, the change that is needed won't happen. It's easy to understand why they are so vocal in their opposition to the kinds of changes that are being proposed. The change that is needed to help stabilize the system will bring about destruction (creatively we hope), and people like Kudlow will likely be the ones who feel the brunt of that change as the advantages unregulated markets brought them disappear. But they shouldn't confuse the destruction of the elements that allowed them to take advantage of the system with the destruction of the system itself.

This post can also be viewed on economistsview.typepad.com.

The Pound And Euro Are Taking A Beating

The recent interest rate cuts by the Bank of England and the European Central Bank have lead to major selling of the Pound and Euro. Currency expert Kathy Lien talks about the recent development and offers her insight into the situation in her blog post below.

The Euro and British pound have come under severe selling pressure after the ECB and BoE cut interest rates by 50bp. Interest rates are now at historic lows for both central banks and even though the rate announcements were negative for both currencies, the Euro has sold off more aggressively than the British pound because ECB President Trichet warned that growth will be signicantly reduced in 2009 and 2010 while inflation will remain well below 2 percent.

More importantly, he admitted that the ECB is studying non-standard measures which include quantitative easing. However, Trichet prefers to use the Fed’s label of credit easing over quantitative easing (What is the Difference Between Credit and Quantitative Easing?). The mere possibility that the ECB could consider Quantitative Easing was enough to drive the EUR/USD below 1.25. With the third highest interest rate of the G10 nations, further interest rate cuts are still possible. By saying that they have not made a decision about whether 1.5 percent is the lowest level makes 1 percent interest rates a real possibility for the Eurozone. In fact, Trichet may opt for another rate cut before credit easing. For the US dollar, British pound and Japanese Yen, no surprises are expected from future rate decisions. However for the Euro, the prospect of lower interest rates and the uncertainty of if and when the ECB will adopt credit easing should keep the EUR/USD under pressure.

Bank of England: Rates May Have Hit Rock Bottom

As for the Bank of England, I believe today’s 50bp rate cut to 0.5 percent is their last. The central bank has been worried that excessively low interest rates would erode profitability of banks, reducing their incentive to lend. Now that they have been given the authorization to begin Quantitative Easing, it will be their new focus. UK Gilts have soared on the announcement that the government will purchase up to £100bn in Gilts and £50bn in private sector assets (syndicated loans and ABS). As we indicated in our ECB and BoE preview, Quantitative Easing is negative for a currency, but if the BoE is done cutting interest rates, further weakness in the British pound may be limited.

This post can also be viewed on kathylien.com.

Obama's Housing Plan Will Just Create Another Housing Crash

Obama's new housing stability plan has some blatant flaws, including most notably that it is setting us up for another crash 5 years from now. In addition the way the plan is structured it is setting itself up for abuse — this will cost taxpayers a lot of money when all is said and done. Tim Iacono looks at the new housing plan details, and addresses some concerns he has about the program in his blog post below.

Details of the Treasury Department's Homeowner Affordability and Stability Plan were announced today. It's quite an interesting undertaking that seems like it will be good fun for at least the next couple years as stories of abuse and odd goings-on come to light.

There are three basic components - aid for refinancing, foreclosure avoidance, and more support to Fannie Mae and Freddie Mac. It is the middle component, more properly known as the "Homeowner Stability Initiative", that is most intriguing and most likely to be abused in ways that can only be imagined today. Here's how the plan will work:

- The lender will have to first reduce interest rates on mortgages to a specified affordability level (specifically, bring down rates so that the borrower's monthly mortgage payment is no greater than 38% of his or her income).

- Next, the initiative will match further reductions in interest payments dollar-for-dollar with the lender, down to a 31% debt-to-income ratio for the borrower.

- To ensure long-term affordability, lenders will keep the modified payments in place for five years. After that point, the interest rate can be gradually stepped-up to the conforming loan rate in place at the time of the modification. Note: Lenders can also bring down monthly payments to these affordability targets through reducing the amount of mortgage principal. The initiative will provide a partial share of the costs of this principal reduction, up to the amount the lender would have received for an interest rate reduction.

The old days of a maximum 28 percent of income toward servicing a mortgage have almost returned. Over the years, many have been turned down for mortgages because they failed to meet this requirement - it's crazy to think that this figure got as high as 50 or 60 percent a few years back and then, well beyond that, when people started to lie about how much they made.

In the second step above - where government money enters the picture - there is a downward limit of two percent for the mortgage rate which, effectively, creates a lower limit on income for qualifying.

In other words, your mortgage payment won't get reduced to zero if you lost your job.

Here's an example of how it would work for "Family C" who, back in 2006, took out a 30-year subprime mortgage of $220,000 at 7.5 percent, on a house worth $230,000 at the time. Since the purchase, their home's value has fallen 18 percent to $189,000 and their income has shrunk such that their monthly mortgage payment of $1,538 is now 42 percent of their $3,650 monthly income.

Here's how lucky "Family C" gets their mortgage payment reduced by $406.
Here's the part about the lower limit on the new interest rate:

Protecting Taxpayers: To protect taxpayers, the Homeowner Stability Initiative will focus on sound modifications. If the total expected cost of a modification for a lender taking into account the government payments is expected to be higher than the direct costs of putting the homeowner through foreclosure, that borrower will not be eligible. For those borrowers unable to maintain homeownership, even under the affordable terms offered, the plan will provide incentives to encourage families and lenders to avoid the costly foreclosure process and minimize the damage that foreclosure imposes on lenders, borrowers and communities alike. Moreover, Treasury will not provide subsidies to reduce interest rates on modified loans to levels below 2%.

In the first part of the passage above, it's not clear how they'll determine if it makes more sense to modify the loan or to foreclose, but the two percent lower limit is very clear.

You can just see some of the possibilities here where people will figure out what they need to do to get their income down to that two percent rate - it will usher in a whole new wave of "liar loans", only this time people will be wanting their income to show up on the paperwork at a lower level.

Most importantly perhaps, this sets up a whole new wave of mortgage rate resets in five years as all of these loans revert to market rates which are sure to be much higher than the temporary rate.

This is, effectively, a government subsidized 5-year ARM with rates as low as 2 percent.

My, what progress we're making...

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

We Are Giving AIG More Money? Say It Ain’t So...

After insurance giant AIG reported the biggest quarterly loss in history — $61.7 billion to be exact — the government is ready to give them another $30 billion to help maintain their operations. In addition the government is restructuring past bailout deals to ease the burden on AIG. This new $30 billion will bring the total bailout tab to around $180 billion. That is, and should be, a difficult number to swallow. We will have invested $180 billion in ONE company. There are only two U.S. companies that even have market caps above $180 billion (Exxon and Walmart). AIG’s market cap is about $1.2 billion, in case you were wondering.

I’d like to say I thought this would be the last bailout for AIG, but if I did I’d be lying. Right now we are simply plugging holes in AIG with taxpayer dollars, and once the $30 billion gets used up they are going to come crawling back for more. The worst part is after we have already invested $180 billion, how are we going to say no to a few billion more? What will the final tally be when all is said and done? Your guess is as good as mine.

Matthew Karnitschnig from the Wall Street Journal wrote a good blog post that goes over some of the restructuring pieces included as part of the latest bailout. If you want to become more depressed about this whole situation then you are right now, I’d encourage you to read it. Here is the link: http://blogs.wsj.com/deals/2009/03/02/aig-the-rest-of-the-story/

How Did The Financial Crisis Happen?

So, how did we let this whole financial crisis happen? Ask 10 people and you are likely to get an array of answers, none of them necessarily wrong. After all, with so many glaring problems with the US and other economies of the world, it is hard to say for certain what the exact cause of the huge mess we are in actually was. If anyone would know the answer, though, Paul Krugman would probably be at the top of the list. Mark Thoma looks at a recent article from Krugman that attempts to answer this question in his blog post below:

[From Revenge of the Glut, by Paul Krugman, Commentary, NY Times.] You must hate getting asked this all the time, but how did the financial crisis happen?

The answer, I’d suggest, can be found in a speech Ben Bernanke ... gave four years ago. ... The speech,... “The Global Saving Glut and the U.S. Current Account Deficit,” offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.

What was so novel about his explanation?

In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98..., these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world. The result was a world awash in cheap money, looking for somewhere to go.

That sounds like a good thing. Small countries are wealthier and looking for productive places to invest their money. Where did they invest the money? In their own countries?

Most of that money went to the United States — hence our giant trade deficit... But ... money surged into other nations as well. In particular, a number of smaller European economies experienced capital inflows that ... were ... large... compared with the size of their economies.

So most of the money came here? That seems backwards given all the needs that developing countries have, that's why we call them "developing." Why did that happen?

Mr. Bernanke cited “the depth and sophistication of the country’s financial markets (which, among other things, have allowed households easy access to housing wealth).” Depth, yes. But sophistication? Well, you could say that American bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors.

You could, and did, passionately too I might add. Sorry -- go on.

And wide-open, loosely regulated financial systems characterized many of the other recipients of large capital inflows. This may explain the almost eerie correlation between conservative praise two or three years ago and economic disaster today. “Reforms have made Iceland a Nordic tiger,” declared a paper from the Cato Institute. “How Ireland Became the Celtic Tiger” was the title of one Heritage Foundation article; “The Estonian Economic Miracle” was the title of another. All three nations are in deep crisis now.

You mean the flat tax didn't save Estonia? John Stossel will be so disappointed. So what burst Stossel's bubble economy?

For a while, the inrush of capital created the illusion of wealth..., just as it did for American homeowners: asset prices were rising, currencies were strong, and everything looked fine. But bubbles always burst sooner or later, and yesterday’s miracle economies have become today’s basket cases...

Here in the U.S., shouldn't the fact that the bubble was located mostly in the zoned zone have protected flatlanders? Why is the recession so widespread?

In America, the housing bubble mainly took place along the coasts, but when the bubble burst, demand for manufactured goods, especially cars, collapsed — and that has taken a terrible toll on the industrial heartland. Similarly, Europe’s bubbles were mainly around the continent’s periphery, yet industrial production in Germany — which never had a financial bubble but is Europe’s manufacturing core — is falling rapidly, thanks to a plunge in exports.

Did you know that, according to one survey, one third of the people are losing sleep over the economy? Is there a simple way to explain to them how this happened?

If you want to know where the global crisis came from, then, think of it this way: we’re looking at the revenge of the glut.

And the saving glut is still out there. In fact, it’s bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust.

I don't think you're helping anyone's sleep. Should they just pull pillows over their heads until this is over? How long do they have to wait for morning in America?

One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.

So that’s how we got into this mess. And we’re still looking for the way out.

Thanks. We'll all sleep so much better now, especially when we remember how capable policymakers have proved themselves to be up to this point.

This post can also be viewed on economistsview.typepad.com.

Just How Crazy Is The Stock Market Today?

So just how upside down is the stock market today? Kathy Lien pulled some interesting figures that will make you think a little bit about that question. Everyone knows that the market is down, but this really puts it into perspective. Check out Kathy Lien's blog post below:

Here is some interesting food for thought

It’s a sign of the times when …

The Sunday paper costs more than NYT stock
The Citi ATM fee costs more than C stock
The paper that a mortgage is written on costs more than FRE stock
A subscription to Sirius Satellite radio would cost more than SIRI stock
A gallon of gas costs more than F stock
One ride costs more than SIX (Six Flags) stock
A bottle of soda costs more than JSDA (Jones Soda) stock
A 5 minute long distance phone call costs more than VG (Vonage) stock
A 5 stick pack of gum costs more than RAD (Rite-Aid) stock
The strawberries in a smoothie cost more than JMBA (Jamba Juice) stock

This post can also be viewed on kathylien.com.

Produce The Note: A New Way To Fight Foreclosure

Thanks to a recent TV spot on Good Morning America (along with other press exposure) banks are going to be hearing these words a lot, "Produce the note." A new movement is under way that is causing banks a lot of pain and grief. Essentially how it works is that a homeowner in foreclosure will submit paperwork requesting that the bank produce a copy of the original note. Sounds easy enough, but with the number of times these notes have been bought, sold and transferred, the paper trail can be hard to follow. Desperate homeowners are finding that if nothing else this tactic is buying them a little more time in their home. Tim Iacono looks at this new tactic in his blog post below:

The little guy fights back by making a simple request - prove that the borrower owes the money to the bank before foreclosing.

It really is hard to have much sympathy for the borrower, at least in this case - the lady borrowed $140,000 against a house for which she paid just $39,000.

It does, however, add great irony to the situation.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Currency Market Update: Look To The Australian Dollar

Yesterday's market rally got a lot of investors excited, but the rally was short lived. Currency expert Kathy Lien points out 3 reasons why investors should have been suspicious of the rally in her blog post below. In addition Lien offers some insight into the future of currencies, and suggests that the Australian Dollar might be a great investment opportunity right now.

The currency and equity markets are turning lower after a strong rally on Tuesday. In my Daily Currency Focus, I talked about the 3 reasons why the currency market rally was suspicious. None of the reasons for Tuesday’s jump delivered real solutions. The market only rallied because Bernanke delivered no surprises. President Obama’s attempt at reassuring Americans also failed to comfort investors.

Instead we are faced with a weakening economy that is only confirmed by this morning’s plunge in existing home sales. Sales of existing homes plunged 5.3 percent to a 12 year low in the month of January. The housing market remains the Achilles heel of the US economy as prices fall and demand wanes. The median price of a home sold dropped 14.8 percent compared to the year prior. Such disappointing numbers are not much of a surprise given the big decline in housing starts and building permits. With banks and mortgage lenders reluctant to lend, even potential homeowners with sufficient capital have found difficulty attaining loans.

The British pound has been hit the most because Bank of England member Barker said that the weak sterling is helpful. UK officials have taken every opportunity to talk down the currency.

USD/JPY on the other hand remains an animal. Despite weak economic data and a turn in equities, the currency pair continues to rise.

My favorite is still the Australian dollar because of strong M&A flow, higher gold prices and the prospect of the country remaining recession free. The AUD/USD is also prime for a breakout.

This post can also be viewed on kathylien.com.

Why We Should Break Up The Big Banks

Last week there was a lot of speculation that the US government would privatize mega banks, Citigroup and Bank of America, but now it appears that they are going to be happy with large stakes in the banks. The government believes that nationalizing the banks would ultimately cause more harm than good, and would like to avoid that path. Simon Johnson has a different view, though, he believes that the best course of action is to nationalize the big banks causing us so much grief, and then sell them off again in smaller pieces. This would ultimately remove much of the political power these monsterous institutions have over the government and our economy as a whole. Mark Thoma from the Economist's View looks at Johnson's article and adds some thoughts of his own in his blog post below:

Simon Johnson:

Privatize The Banks Already, by Simon Johnson: ...In some important and not good ways, we have already nationalized the financial system.

There’s the direct ownership that the government received through TARP and the reupping with Citi, BoA and some others. These stakes are obviously not (yet) voting stock, but the taxpayer certainly has capital at considerable risk.

Then we have the lines of credit provided by the Federal Reserve which, without a doubt, were instrumental to the survival of almost all major banks during the fall - and arguably remain critical today. The taxpayer has further downside risk here.

And, most importantly perhaps, we have the expansion of the Fed’s balance... In effect, the Fed is becoming a commercial bank as well as a central bank.

The government is essentially taking over the role of intermediation - take funds in and lend them out - for the US economy. This is a form of nationalization, and it will lead to all the lobbying and politically directed credits we have seen in other nationalized financial systems; taking away this credit once the economy starts to recover will not be easy. We have state control of finance without, well, much control over banks or anything else - we can limit executive compensation (maybe) but we don’t get to appoint directors (or replace entire boards) and we have no say in who really runs anything. Responsibility without power sounds accurate. ...

How then do we really privatize? By exercising leadership: take over insolvent banks and immediately reprivatize them. ... The taxpayer retains a significant number of shares (or the option to buy common stock) as a way to ensure upside participation...

Above all, we need to encourage or, most likely, force the large insolvent banks to break up. Their political power needs to be broken, and the only way to do that is to pull apart their economic empires. It doesn’t have to be done immediately, but it needs to be a clearly stated goal and metric for the entire reprivatization process.

No argument here. If there are good reasons to have banks so large their failure could bring down the entire system, a situation that gives them quite a bit of political leverage, I haven't heard them. There are questions about whether having many small banks as opposed to a few big banks reduces systemic risk, and if not, whether having lots of small banks makes policy intervention to stabilize and clean up the system more difficult when problems do arise - having just a few banks might be easier. But breaking up the banks does reduce political and economic power and I see no reason not to make this "a clearly stated goal and metric for the entire reprivatization process."

This post can also be viewed on economistsview.typepad.com.

Secret TARP Bailout Details To Be Released By Court Order

It appears that we finally (hopefully) will be able to see where our tax dollars are going, thanks to a recent court ruling. This court order will force the Treasury to release some of the information that they have been concealing from the American public in regards to the massive bailout of the country's financial system. Anthony Freed provides us with more information on this development in his blog post below:

Advocates of an open Government and transparent allocation of taxpayer funds celebrated the news late Friday afternoon (2-20-09) that the U.S. District court has moved to enforce a Freedom of Information Act (FOIA) request to release more details about exactly how TARP bailout funds have been and are being used.

The TARP was passed in early October, 2008, in an effort to stem the damage to the nation’s financial industry incurred during a decade of lax risk-abatement that pervaded the banking culture after the legislative emasculation of the Glass-Steagall Act.

FOX Business sued Treasury on Dec. 18 over failure to provide information on the bailout funds or respond to FBN’s expedited requests filed under the FOIA. The initial request, filed on Nov. 25, sought actual data on the use of the bailout funds for American International Group (AIG) and the Bank of New York Mellon (BK), and an additional request, filed on Dec. 1, sought similar data on the bailout funds for Citigroup (C).

FBN asked the Treasury Department to identify, among other issues, the troubled assets purchased, any collateral extended, and any restrictions placed on these financial institutions for their participation in this program.

The Treasury Department - along with the other banking regulators like the FDIC, OTS, and the Federal Reserve - are notoriously secretive concerning the data they collect and their subsequent analysis of the viability of any particular institution, preferring to operate instead behind closed doors.

This tendency often leaves investors in the dark, which generally tends to work in the banks’ favor. Regulators would argue that they are not in the business of moving markets, and that some data may be misinterpreted and inadvertently cause a run on funds at named institutions, evidenced by Schumer’s now infamous disclosure of details that may have led to the collapse of Indy Mac Bank in 2008.

That argument may have held some water until the TARP bailout effectively made the U.S. taxpayer a shareholder in any number of as yet identified institutions, and the owner of any assortment of exotic financial instruments which have proved toxic to Global capital markets.

Judge Richard J. Holwell of the U.S. District Court for the Southern District of New York said in a decision Friday that the government is directed to comply with FOX Business’s request under the FOIA “within 30 days and to produce a Vaughn index with 45 days.” That means Treasury must comply with FOX Business’s request by Monday, March 23, and must produce a Vaughn index by Monday, April 6.

The Treasury will have the chance to withhold some documents and information they deem too sensitive, but now have to provide an itemized “Vaughn index” of which documents and information have been redacted, and for exactly what reason.

“A Vaughn Index must: (1) identify each document withheld; (2) state the statutory exemption claimed; and (3) explain how disclosure would damage the interests protected by the claimed exemption.”

This may open the door to further FOIA challenges to release the remaining information if the Treasury fails to convince the courts that their vetting of information was reasonable.

I don’t think Treasury has realized that they are not the only ones who have new powers and responsibilities in the implementation of this historic bailout - the courts have yet to weigh-in on much of this, including who is ultimately going to be held responsible for the mess that is the economy, even if it is still taxpayers who have to foot the bill to clean it all up.

My guess is that the courts feel very differently about full disclosure than does the insider Wall Street elite who regulate themselves from Washington D.C. in seeming perpetuity.

Frank Rich of the New York Times wrote a good op-ed piece called What We Don’t Know Will Hurt Us, which helps further the argument that it is time to get to bottom of exactly what is going on with our economy, and why their seems to be so little consequence for the perpetrators of so much devastation.

Americans are right to wonder why there has been scant punishment for the management and boards of bailed-out banks that recklessly sliced and diced all this debt into worthless gambling chips. They are also right to wonder why there is still little transparency in how TARP funds have been spent by these teetering institutions. If a CNBC commentator can stir up a populist dust storm by ranting that Obama’s new mortgage program (priced at $75 billion to $275 billion) is “promoting bad behavior,” imagine the tornado that would greet an even bigger bank bailout on top of the $700 billion already down the TARP drain.

Remember, the fundamental point of the TARP bailout is to funnel incredible amounts of taxpayer money - debt, actually - to the very institutions and people who are responsible for driving the markets off the cliff in the first place.

And they got paid handsomely for doing it.

It is time for our nation’s financial machine to drop the self-righteous arrogance they have cloaked themselves in for too long, for all of those paper-pushing money lords to release their false sense of entitlement, relinquish their ill-gotten wealth from the last 10 years, and to return to their proper place in the economic landscape as facilitators of capital creation, not the creators of capital.

Accountability in the largest disbursement of public funds in history is not only a good idea, it is essential to our democracy, as is ending the revolving door between corporate boardrooms and the regulatory offices of our government.

The Fox Business FOIA request and the court’s decision to release more information should serve as a warning to the Wall Street good ol’ boys that their orgy of omnipotence is truly over, and that the era of accountability is in.

This post can also be viewed on yourmortgageoryourlife.wordpress.com.

Nationalizing Banks Will Harm The US Dollar

The buzz in the financial industry right now is whether or not the government is preparing to nationalize Citigroup and Bank of America, the two largest US banks. The government denied that they are even considering this measure, however, we wouldn't expect them to say anything else. The amount of liabilities that these banks have is staggering, and as Kathy Lien explains in her blog post below, a nationalization of these banks will have a dramatic impact on the US dollar.

I want to share my piece on How Nationalization of Citigroup and Bank of America could impact the US dollar if you haven’t caught it already (so I’m am posting his before I head to the NY Traders Expo).

The rally in gold prices tells us one thing and one thing only, which is that the fear has returned to the market. There is currently a lot of speculation that Citigroup and Bank of America could be nationalized by the US government. Although this would drive equities lower, it could also trigger capital flight out of the US dollar.

When Northern Rock was nationalized by the UK government in February of 2008, the British pound fell from 1.9638 to a low of 1.9363 over the course of 3 trading days. Although the dollar initially rallied on the news that the US government was taking over Fannie Mae and Freddie Mac in September 2008, it quickly gave back those gains to end the week lower against the Japanese Yen.

Nationalization will ultimately be negative for the US dollar because it increases the debt and liabilities of the US Federal Reserve and hence taxpayers. Nationalization is by no means a foregone conclusion especially since it is not a part of the US Treasury’s Financial Stability Plan. Senate Banking Committee Chairman Christopher Dodd floated the idea of short term nationalization around but it will probably be the last option for the US government if the Financial Stability Plan fails to work quickly. In fact, the rebound in US equities was triggered by speculation that the Treasury could release more details regarding their plan to rescue the financial system next week. Also keep an eye on Bernanke’s Humphrey Hawkins Testimony on the US economy and Monetary Policy.

This post can also be viewed on kathylien.com.

Should We Create Government Sponsored Shadow Banks?

According to Paul McCulley from Pimco, to revive the economy the government simply needs to create government sponsored shadow banks. Naturally this idea is a little controversial, especially considering the recent demise of this type of system. Tim Iacono from The Mess That Greenspan Made looks at an article written by McCulley in his blog post below:

Paul McCulley of Pimco thinks the new kind of shadow banking system is just swell:

The United States government now has both the tools and the will to save the private banking system, and more importantly, the real economy, from its own debt-deflationary pathologies. Not that it will be easy. But it can be done, notwithstanding the catcalls that greeted Secretary Geithner last week.

And the essential game plan is clear: use the power of the Fed, the FDIC and the Treasury to create government-sponsored shadow banks, such as the Term Asset-Backed Securities Lending Facility (the TALF) and the Public-Private Investment Fund (the P-PIF).

The formula? Take a small dollop of the Treasury’s free-to-spend taxpayer money (there is still $350 billion left) to serve as the equity in a government sponsored shadow bank, and then lever the daylights out of it with loans from the Federal Reserve, funded with the printing press.
...
Yes, there will be subsidies involved, sometimes huge ones. And yes, the process will seem arbitrary and capricious at times, reeking of inequities. Such is the nature of government rescue schemes for broken banking systems, while maintaining them as privately owned.

You might not like it. I don’t like it, because regulators should never have let bankers, both conventional bankers and shadow bankers, run amok. But they did.

So it’s now time to hold the nose and do what must be done, however stinky it smells, not because it’s pleasant but because it is necessary.

Pragmatism takes on a whole new meaning at Pimco.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Gold Prices And US Dollar Both Rising

Those who keep up with gold and currency prices have probably noticed that things are a little strange right now. Typically the gold prices work inversely, however, right now they are rising almost instep. Currency expert Kathy Lien explains more about this phenomenon, and offers some insight into what is likely causing it in her blog post below:

If you haven’t caught it already, in my Daily Currency Focus on FX360, I talked about What the Rally in the US Dollar and Gold is Telling Us. As both the Dollar Index and Gold Prices press higher, it important to know what this means:

It is not very often that we see the US dollar and gold prices move in the same direction. Since gold is priced in dollars, the value of the yellow metal tends to fall when the dollar rises and rise when the dollar falls. However this has not been the case since January 14th as the rally in the US dollar corresponds with the rise in gold prices, which closed today at a 7 month high of $970 an ounce.

The last time we saw this traditionally negative correlation turn into a positive one was in 1982. At that time, recession hit many countries including the US. Although the rise in gold prices can be partially attributed to future inflation problems, the cohesive movement in the value of gold and the US dollar suggests that central banks around the world are losing credibility. There are growing concerns that a time bomb could explode in Europe leading to more troubles for the region as a whole. If that is the case, there may not be any safer form of investment than gold.

The rally in the US dollar and gold is telling the market that investors are worried about global economic stability outside of the US and therefore they are preparing for the worst.

This post can also be viewed on kathylien.com.

Defaults By Developing Countries Could Be Next Economic Timebomb

Just in case we needed one more thing to worry about, economic struggles in developing countries could cause them to default on their loans. This would have an effect on most developed countries, including the US. According to research compiled by Kathy Lien, though, the most vulnerable countries look to be in Western Europe. These countries lent a ton of money to developing countries, especially in Eastern Europe where unfortunately they are experience some very serious economic problems. Kathy Lien exposes more about this in her blog post below:

A time bomb is waiting to explode in the Eurozone with Western European banks at risk of defaults on Eastern European loans. This leads me to wonder how much the US and the UK are exposed to developing countries. So I compiled the following charts from the latest Bank of International Settlements data (as of September 2008).

Euro area loans to developing nations are heavily skewed towards Eastern Europe while UK lends predominately to Asia, Africa and the Middle East. The US on the other hand lends primarily to Asia and Latin America.

Default risk in Asian nations are lower than Eastern European nations, which makes the UK and US less vulnerable if a time bomb explodes in Eastern Europe.

Meanwhile USD/JPY hit a 6 week high this morning after President Obama announced a foreclosure program.

Follow the jump for Eurozone and Switzerland charts

This post can also be viewed on kathylien.com.

We Should Be Looking Out For American Jobs, Not Just American Companies

The protectionist movement has been growing in America, and with every new layoff announcement it only gets stronger. Only adding fuel to the fire is the billions upon billions of taxpayer money that the government is handing out to American companies. Naturally there would have been mass outrage if the U.S. government gave this money to foreign corporations. However, as Robert Reich explains in a recent article the country just might be better off if some of these foreign corporations received funds instead of some of the American companies. After all what good is it to unemployed American workers if these American companies take the bailout money and use it to expand operations in some foreign country? Reich's point is that we should be focusing on what will create the most American jobs, rather than just focusing on supporting American companies. Mark Thoma presents the article by Reich in his blog post below:

Robert Reich:

The Perils of Confusing American Companies With American Jobs, by Robert Reich: Do not confuse American companies with American jobs. The new stimulus bill, for example, requires that the money be used for production in the United States. Foreign governments, along with large U.S. multinationals concerned about possible foreign retaliation, charge this favors American-based companies. That's not quite true. Foreign companies are eligible to receive stimulus money for things they make here... For example, Alstom, the French engineering company, is eligible to receive stimulus funds for the power turbines it produces in Tennessee... On the other hand, U.S. Steel may not be eligible for stimulus money for the steel slabs it casts in Ontario, Canada.

I'm not defending the "buy American" provisions... I'm just saying they're not the same as "buy from American companies." And although these provisions skate close to protectionism and risk foreign retaliation, at least a case can be made that if American taxpayers are footing the bill..., the jobs should be created, well, here in America.

The same confusion haunts the debate over the auto bailout. Advocates of bailing out GM and Chrysler, and most likely Ford, say America can’t afford to lose "its" auto industry. But ... foreign-owned automakers, already producing cars here in the United States, employ – directly or indirectly – hundreds of thousands of Americans. ...

Meanwhile, the Big Three themselves are global. A Pontiac G8 shipped by GM from Australia has less American content than a BMW X5 assembled in the United States. ...

I’m not arguing against an auto bailout. But it ought to be focused on helping American auto workers rather than helping global auto companies headquartered in America. Why pay the Big Three billions of taxpayer dollars ... when, even after being bailed out, they cut tens of thousands of American jobs, slash wages, and shrink their American operations...?

That’s backwards. The auto bailout should help American autoworkers keep their jobs or get new ones that pay almost as well.

Whether it’s stimulus or bailout, policy makers must remember that American companies aren’t the same as American workers – and our first responsibility is to the latter.

"I'm not defending the 'buy American' provisions..." Neither am I.

This post can also be viewed on economistsview.typepad.com.

Don't Worry, The Economy Is Having This Effect On A Lot Of People

In a very embarrassing display, the Finance Minister of Japan attended a press conference clearly under the influence of alcohol. He was later forced to resign of course, but can we really blame him for needing a little drink? Kathy Lien talks more about this recent development in her blog post below. In case you want to witness the event, you can also see a YouTube video of the press conference at the bottom of the post.

For Japan and Prime Minister Aso, it was a big embarrassment today that the Finance Minister Nakagawa resigned after acting drunk at the G-7 news conference.

He slurred his speech, was sleepy eyed, very disoriented and at one point, mistakenly responded to a question on interest rates that was intended for the governor of the Bank of Japan, who was seated to his left.

He will be replaced by Economy Minister Yosano.

Here is a video of Nakagawa’s performance. It is in Japanese, but just watch his facial expressions. Nakagawa is on the left, BoJ Governor Shirakawa is on the right.

This post can also be viewed on kathylien.com.

American's Worth Less Than In 2001, And It Is Getting Worse

According to a recent Federal Reserve report American's are actually worth less today than they were in 2001. Well known economist Paul Krugman blames the American tendency to spend instead of save for limiting our net worth growth, which should be of little surprise. Now it appears that this trend is ready to reverse, which will only exacerbate the economic problems the country is facing. Krugman also makes an interesting comparison to the Great Depression, and how we eventually were able to escape it. At the end of the day, though, he doesn't see the outlook for the economy as very good at all. Economics professor Mark Thoma looks at Krugman's article in his blog post below.

Do we have what it takes "to boot the economy out of a debt trap"?:

Decade at Bernie’s, by Paul Krugman, Commentary, NY Times: By now everyone knows the sad tale of Bernard Madoff’s duped investors. They looked at their statements and thought they were rich. But then, one day, they discovered to their horror that their supposed wealth was a figment of someone else’s imagination.

Unfortunately, that’s a pretty good metaphor for what happened to America as a whole in the first decade of the 21st century.

Last week the Federal Reserve released the ... latest ... report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation ... since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.

At one level this should come as no surprise. For most of the last decade America was a nation of borrowers and spenders, not savers. ... Why should we have expected our net worth to go up?

Yet until very recently Americans believed they were getting richer, because they received statements saying that their houses and stock portfolios were appreciating in value faster than their debts were increasing. ... Then reality struck... The surge in asset values had been an illusion — but the surge in debt had been all too real.

So now we’re in trouble — deeper trouble, I think, than most people realize... For this is a broad-based mess. Everyone talks about the problems of the banks... But the banks aren’t the only players with too much debt and too few assets; the same description applies to the private sector as a whole.

And as the great American economist Irving Fisher pointed out in the 1930s, the things people ... do when they realize they have too much debt tend to be self-defeating when everyone tries to do them at the same time. Attempts to sell assets and pay off debt deepen the plunge in asset prices, further reducing net worth. Attempts to save more translate into a collapse of consumer demand, deepening the economic slump.

Are policy makers ready to do what it takes to break this vicious circle? In principle, yes. ... In practice, however, the policies ... don’t look adequate to the challenge. The fiscal stimulus plan, while it will certainly help, probably won’t do more than mitigate the economic side effects of debt deflation. And the much-awaited announcement of the bank rescue plan left everyone confused rather than reassured.

There’s hope that the bank rescue will eventually turn into something stronger. ... But even if we eventually do what’s needed on the bank front, that will solve only part of the problem.

If you want to see what it really takes to boot the economy out of a debt trap, look at the large public works program, otherwise known as World War II, that ended the Great Depression. The war didn’t just lead to full employment. It also led to rapidly rising incomes and substantial inflation, all with virtually no borrowing by the private sector. By 1945 the government’s debt had soared, but the ratio of private-sector debt to G.D.P. was only half what it had been in 1940. And this low level of private debt helped set the stage for the great postwar boom.

Since nothing like that is on the table, or seems likely to get on the table any time soon, it will take years for families and firms to work off the debt they ran up so blithely. The odds are that the legacy of our time of illusion — our decade at Bernie’s — will be a long, painful slump.

[Note: James Kwak has balance sheet calculations based upon the Federal Reserve report showing the severe deterioration in household balance sheets.]

This post can also be viewed on economistsview.typepad.com.

An Idea To Break The California Budget Stalemate

The situation in California is bordering on ridiculous. Something has to be done to close the $41 billion budget deficit, but thanks to the inability of Republicans and Democrats to agree on a solution, nothing is happening. This stalemate has been going on for sometime now, and even after a 3o hour meeting this weekend they still can't agree on anything. The state is getting close to disaster and the parties need to figure out how to make this work. Tim Iacono looks at the situation more in depth in his blog post below, and even proposes a solution that might help light a fire under the legislators.

Could there be a better image than the one below from this LA Times story to symbolize the state of the California State legislature?

Apparently, they were up all night trying to get a new budget bill passed in order to close the gaping $41 billion deficit, but they were not able to produce the desired result.

The proposed plan is about an even mix of spending cuts and tax hikes, but the Republican minority doesn't seem to like the tax hikes much and, since budget bills require a two-thirds majority (which the Democrats don't have), nothing gets done until a few Republicans get on board.

In a situation that is not all that different from the U.S. Senate where a couple Republican votes are required to remove the filibuster threat, it is those few lawmakers from across the aisle that become all powerful.

What a way to run a government...

In California last night, Democrats came up one vote short of getting the three Republican votes needed to get the job done so they are set to resume talks at 11 AM today.

The deal appeared done at the weekend's start. Democrats already had sprinkled the budget with concessions to recalcitrant legislators, including more money for Orange County to please Sen. Louis Correa (D-Santa Ana), who had promised during his campaign not to raise taxes.

And two Senate Republicans were expected to vote for the package -- Dave Cogdill of Modesto, who played a role in negotiating the deal, and Roy Ashburn, a Bakersfield Republican in his final term. Among the concessions Ashburn won was a proposed $10,000 tax break for new home buyers.

Another key GOP senator, Dave Cox of Fair Oaks, was counted on by his own party's leaders to join the majority Democrats to win the two-thirds vote needed for passage. But Cox balked at the big tax bite.
...
In a bid to build pressure on balky Republicans, Schwarzenegger was ready to launch the notification process that could lead to the termination of 10,000 state workers in coming months, according to budget negotiators.

"That is a very real possibility," said Aaron McLear, the governor's spokesman.

The termination notices were intended to be sent Friday, but the governor delayed them because a budget vote appeared imminent.

They really ought to just stop paying elected officials on the first day after a new budget is due and it hasn't been passed.

A hit to the pocketbook can work wonders.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

$15,000 Homebuyer Tax Credit Trimmed In Negotiations

The Senate’s version of the economic stimulus package included a $15,000 homebuyer tax credit that would have been made available to all homebuyers. As I expressed in a blog post earlier this week, I didn’t think that it was such a good idea, and definitely not at the cost of almost $40 billion in taxpayer money. Thankfully, this credit was cut in House and Senate negotiations. The final version of the bill includes an $8,000 tax credit, which will be available to only first time homebuyers. A previous version of this tax credit was for $7,500, and was required to be paid back. This new tax credit will not need to be paid back as long as the homebuyer lives in the home for at least 3 years. The cost for this version should only cost taxpayers around $6.6 billion according to CNNMoney.

I’m not one to support any amount of artificial support for the real estate market, because I see it as unsustainable. However, if anyone is going to get a tax credit to buy a home, it should be first time homebuyers. These are the people that are entering a real estate market where prices are too high to begin with, and they need all the help they can get. I would have preferred a minimum ownership timeframe longer than 3 years, though. Anyone who was able to sell their home during the bubble should qualify. Turn that 3 years into 6 or 7, and that should do the trick.

Will this $8,000 tax credit be enough to turn the real estate market around? I doubt it, but at least taxpayers are only going to lose $6.6 billion instead of almost $40 billion, and the people getting the money will be more deserving. It is a small victory, but better than nothing I suppose.

Geithner's Misstep

Treasury Secretary Timothy Geithner's recent speech failed to inspire investors, and if anything spread more doubt. The market's expected a clear solution to be laid out, and that just did not happen. One thing was for certain, though, huge numbers were being thrown around by Geithner. As James Picerno details below in his blog post, Geithner is promissing to release more details about the rescue plan in the coming weeks. We'll have to wait and see if he actually delivers as promised this time?

It's big, it's bold, but it's also vague. And that's the problem.

Treasury Secretary Timothy Geithner yesterday explained the new new plan to solve the financial crisis that ails America. Alas, as articulated yesterday, the plan is short on solution details and long on general notions of what needs to be done.

The challenge is figuring out how the latest effort will work and, more importantly, deciding if it'll fare any better than its misguided predecessors. At the moment, that's a challenge with no immediate answer. As the David Byrne and Brian Eno audio montage intones, "America is waiting for a message of some sort or another."

Certainly the size of the announced plan is a bold stroke. How could $2 trillion be otherwise? We know that some of the money will go to buying up the so-called toxic securities that weigh heavily on the health of banks, and that's a step in the right direction, as the experience with the Resolution Trust Corp. suggests. Taking some of illiquid assets off banks' balance sheets should, in theory, help increase lending, which remains tight even at low interest rates. But the details matter, and it's not yet clear what the fine print will say.

“We need more details from Treasury on how exactly it plans to remove bad assets while protecting the taxpayer,” Senator John Kerry, a Democrat and a senior member of the Senate Finance Committee complains via The New York Times. “We have zombie banks that are weighed down because their liabilities exceed their assets. Without a precise mechanism for addressing toxic assets, it will be difficult to increase lending.”

Similar opining can be heard from economists, including a former IMF economist who now teaches at Harvard. “Tim Geithner did a great job in painting the broad strokes of the problem and laying out general principles, but it was a big disappointment not to have more details,” Ken Rogoff tells Bloomberg News.

Yes, Geithner promised to "flesh out the details" soon, presumably within the next few weeks, maybe in the next few days. Unfortunately, in the current climate, the only thing the secretary managed to do was to stoke more anxiety by introducing yet another strain of uncertainty into the marketplace. The last thing we need now is more indecision and ambiguity.

Sure, the government needs to act, but it needs to act intelligently. If yesterday's Geithner show is an indication, the latest round of talking points isn't quite ready for prime time. We feared as much when we learned over the weekend that the Treasury Secretary's scheduled speech to the Congress would be delayed 24 hours. As it turns out, Geithner should have delayed it a few more days, perhaps by a week or even more. As we learned yesterday, in the wake of a sharp selloff in the stock market, it's better these days to say nothing than to make broad comments that leave much to the imagination.

Meanwhile, the administration has been at fault by lifting expectations over the past week that it was going to announce a solution. The President has been talking up Geithner's big debut in Congress. But the optimist talking points, as much as they're welcome, were premature. No wonder, then, that the markets suffered an attitude adjustment as the reality set in that the big solution was really just another bout of talking without backing up the chatting with a concrete plan of action.

The good news is that the Geithner has only lost the first battle rather than the war. But time's running out, and so is patience. Certainly he'll have another chance to repair some if not all of the damage. But neither the Obama administration nor the economy can afford another halfway effort at explaining what happens next. The stakes now are higher than they were on Monday for bringing clarity and intelligence to the fore. Another stumble may result in even bigger financial pain, and not just in the price of equities.

"The uncertainty the government has created has made it nearly impossible to price many securities," says Douglas Dachille, chief executive of First Principles Capital Management, tells The Wall Street Journal.

At this point, no one's sure how the money will be deployed or what the rules are that will govern its usage. That's a problem. Yes, the White House is talking to Congress about just those details and a clearer plan will undoubtedly be hammered out, perhaps within a few days. Meanwhile, this is water torture, and the Obama administration probably recognizes the misstep in speaking out before a sufficient level of specifics was available for public consumption. Meanwhile, we're told that the plan was intentionally vague. Really? The White House reportedly says it wanted to be warm and fuzzy on the plan so as to give everyone an opportunity to put their two cents into the $2 trillion idea. So much for good intentions.

"First, we're going to require banking institutions to go through a carefully designed comprehensive stress test," Geithner advised yesterday. Apparently he's not kidding. But stressing out the financial industry with half-formed commentary isn't helping.

So far, however, the damage is still minimal, at least in terms of the term spread in government bonds, which is one measure of the credit crunch that's taking a toll. Nonetheless, the spread in the 10-year Note and 3-month T-bill is still over 250 basis points while the 10-year/2-year spread is just a hair under 200 basis points. By comparison, a year ago the 10-year/3-month spread was 130 basis points and the 10-year/2-year spread was 169 basis points. At the extreme low levels of interest rates generally in 2009, a wider spread would reflect running for cover into the arms of short-term government paper. That's a sign of distress in this climate if the spread is primarily a function of near-zero rates on the short end, which basically describes the current situation.

One test of the Obama administration's success on its bailout plan in the coming weeks and months will be to convince investors to move assets out of T-bills and into risky assets. An indication of that will be higher yields in T-bills, which are just hovering above zero. So far, no one's budging.

This post can also be viewed on capitalspectator.com.

Why The Government Can’t Fix The Housing Crisis

It appears the government is ready and willing to do whatever it takes to fix the housing crisis, but there is one little problem: They can’t. As part of the new stimulus package, there will likely be a $15,000 homebuyer tax credit, and not just for first-time homebuyers, but for all homebuyers purchasing a primary residence. In addition, the government will likely attempt to drive mortgage rates down to around 4.5 percent and work particularly hard to modify troubled loans to keep homeowners out of foreclosure. With these new measures in place the housing market will surely recover…right?

The answer to that question depends on your definition of recovery. Will it be enough to stop prices from falling, and possibly even help them start going up again? It’s definitely possible, but the problem won’t be fixed even if prices do turn around. Artificially inflated prices caused the housing crisis in the first place. Homeownership became an attractive option for more people than ever before through financing options that were cheap and widely available—a little too widely available, we are now discovering. ARMs, interest-only and other creative loan programs kept monthly payments low, and people could suddenly afford a more expensive house—or so it appeared. When interest rates started rising and ARMs reset, housing values stopped climbing and all hell broke loose.

So why would we believe that artificially boosting housing values will be sustainable this time? What do we think will happen when mortgage rates rise again and the tax credits expire? We won’t have to worry about ARMs resetting this time around because they are now shunned by banks for the most part, but the fundamental problem remains that housing is just too expensive compared to income. Interest rates can’t stay this low forever, and the tax credit will expire after the end of the year. Then homebuyers will only have their personal income to rely on to pay for their homes. This is how it has always been (minus government intervention), and it is how it should be. People making $50,000 a year shouldn’t be living in a $400,000 house—It’s that simple. People need to live within their means, but the government doesn’t seem to grasp this and keeps pushing measures to modify home loans. We can try to modify people’s loans all day long, but if they can’t afford their homes, then they can’t afford their homes. According to the Wall Street Journal, over 40 percent of borrowers were at least 60 days past due eight months after their loan was modified. It seems to me that these loan modifications are just delaying the inevitable and costing banks and taxpayers more money.

Before the housing crisis can truly end, housing prices must come into balance with incomes. When this happens, the problem will solve itself. When buying a home starts to make more sense than renting, people will start buying again. It isn’t that hard to figure out. Spending taxpayer money to prop up housing is not only a waste, but an unethical perpetuation of the problem. It is completely unfair to renters as well as our youth. Unfortunately, those groups represent the minority, so their voice isn’t likely to be heard. If these measures are passed, expect to pay handsomely for it and to see another bubble burst a few years from now. At least this time no one should be able to use the excuse that they didn’t see it coming.

Tax Cuts Could Deepen The Recession

There has been non-stop debate between Republicans and Democrats for the past couple weeks regarding how the economic stimulus bill should be structured. Republicans want a majority to go towards tax cuts, and the Democrats want to see high levels of spending. It appears that the Democrats are going to win out in this debate, thinks to their heavy numbers advantage, but according to the New York Fed's Gauti Eggertsson that is a good thing. He wrote a paper theorizing that in today's economic environment tax cuts have the potential to backfire, and possibly even deepen the recession. Economics professor and author of the Economist's View blog, Mark Thoma, looks at this closer in his blog post below.

Justin Wolfers summarizes a paper that suggests government spending would be better than tax cuts at reviving the economy:

Tax Cuts vs. Government Spending, by Justin Wolfers: As the Senate and the House look to reconcile competing stimulus plans, the big debate is whether to emphasize government spending or tax cuts. A new paper by the New York Fed’s Gauti Eggertsson argues that the risk of deflation should tilt the balance to government spending.

Our current problem is deficient aggregate demand. The government can raise total spending either by buying more stuff, or it can lower taxes and hope that consumers take their tax breaks to the mall. ...

But that’s not the whole story. Tax cuts stimulate both aggregate demand and aggregate supply. If taxes are temporarily lower, they make working today more attractive than working tomorrow, and thus increase labor supply. This boost to the nation’s productive capacity means that a tax-cut-based stimulus doesn’t do as much to narrow the gap between output and what we can produce.

Under normal circumstances, this doesn’t present a problem, because the Fed can lower interest rates to close this output gap. But right now, the Fed has set interest rates as low as they can go, and so different principles apply. Eggertsson’s concern is that a big output gap will lead inflation to fall, leading real interest rates to rise in the middle of the recession. These higher real interest rates further dampen economic activity, and with the Fed powerless to offset this, there’s the very real risk of a deflationary spiral. And so a tax-cut-based fiscal stimulus might actually backfire. In fact, Eggertsson reckons there’s a chance that tax cuts could even deepen the recession.

Is Eggertson’s conjecture right? Unfortunately the historical record can’t tell us: there’s never been an episode in which we’ve tried reducing taxes when interest rates were this low. When we’re in uncharted waters, we’ve got nothing but economic theory to guide us. And the theory says it’s safer to stick to a spending-based stimulus plan.

I'd like to be able to rely on this as one more piece of evidence for government spending over taxes, but I have doubts that the aggregate supply (labor supply) effect would be large enough to make much of a difference. The author also suggests caution:

I am bit hesitant to draw the lesson from this paper that it would be ideal to raise payroll taxes to stimulate the US economy today, although this clearly is a direct implication of the analysis

And he also says:

What should we take out of all of this? ...[One] lesson is that policymakers today should view with great deal of skepticisms any empirical evidence on the effect of tax cuts or government spending based on post war US data. The number of these studies is high, and they are frequently cited in the current debate. The model presented here, which has by now become a workhorse model in macroeconomics, predicts that the effect of tax cuts and government spending is fundamentally different at zero nominal interest rates than under normal circumstances.

This post can also be viewed on economistsview.typepad.com.

Total Financial Crisis Commitment Nearing $10 Trillion

Bloomberg has been fighting with the government in an attempt to gain visibility into the Federal Reserve's recent lending practices, however, to this point they have been unsuccessful. Of course the fact that the government is denying the request has only brought ramped speculation about what they are hiding. One thing that we do know is that the price tag for this financial crisis keeps growing and growing, with no end in sight. Most people are only aware of the $700 TARP package, and the new $800+ billion stimulus package nearing completion as we speak. The truth of the matter is that the real price tag is much more than that. Tim Iacono looks at the Bloomberg report in his blog post below that shows us the real price tag is close to $10 trillion (that is not a typo).

It looks like Bloomberg v. Board of Governors of the Federal Reserve System is moving along nicely with arguments to be heard as soon as this month.

Recall that Bloomberg sued the central bank after their Freedom of Information Act request about Fed lending to distressed banks was denied. They simply wanted to know what kind of assets they were getting in exchange for their pristine Treasuries, how much and from whom.

The Fed wouldn't tell 'em. The Treasury Department isn't talking either.

In the meantime, the staff at Bloomberg is taking an increasingly skeptical look at both the sums of money involved and how it is being authorized and spent, as seen in this report:

The stimulus package the U.S. Congress is completing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, enough to pay off more than 90 percent of the nation’s home mortgages.
...
Only the stimulus bill to be approved this week, the $700 billion Troubled Asset Relief Program passed four months ago and $168 billion in tax cuts and rebates enacted in 2008 have been voted on by lawmakers. The remaining $8 trillion is in lending programs and guarantees, almost all under the Fed and FDIC. Recipients’ names have not been disclosed.

“We’ve seen money go out the back door of this government unlike any time in the history of our country,” Senator Byron Dorgan, a North Dakota Democrat, said on the Senate floor Feb. 3. “Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?”

You have to wonder why Congress even bothers going through the arduous task of passing legislation for a measly trillion or two when so much money can be made available without the approval of elected officials - about four times as much by my math.

And the best part about doing it that way is that you don't have to tell anybody where it went.

Of course, Congress might want to know and you might get sued.

The Bloomber report goes on to put the total amount of money in perspective just like when Senate Republicans were talking about the stimulus package the other day with images of hundred dollar bills stacked 600+ miles high and/or laid end to end, circling the earth 40 times.

That was for just $800 billion.

Somehow, for $10 trillion, this doesn't sound nearly as impressive.

The $9.7 trillion in pledges would be enough to send a $1,430 check to every man, woman and child alive in the world. It’s 13 times what the U.S. has spent so far on wars in Iraq and Afghanistan, according to Congressional Budget Office data, and is almost enough to pay off every home mortgage loan in the U.S., calculated at $10.5 trillion by the Federal Reserve.

Maybe it is impressive, but $1,430 doesn't really sound like a lot of money.

Remember when they talked about $30 or $50 billion for Iraq and then it turned into hundreds of billions of dollars and that was such a big deal?

Now, even a hundred billion dollars doesn't sound like much anymore.

Soon, one trillion might not sound like a lot either.

This post can also be viewed on themessthatgreenspanmade.blogspot.com.

Geithner's Financial Stability Plan

This morning the new plan to rescue the financial system was unveiled by Treasury Secretary Timothy Geithner, but so far the markets have not reacted very positively to the news. It is still early, but it appears investors are not sold on the proposed government actions. In his speech Geithner threw around numbers as high as $1 tillion, which represents the expansion of a key Federal Reserve lending program, according to the Associated Press. But even that failed to impress investors. Kathy Lien talks more about the new rescue plan and the impact to currency and financial markets in her blog post below.

The Treasury Secretary has finally spoken and the markets are disappointed!

The price action in the currency markets suggests that investors are disappointed by the lack of details from the Treasury’s new Financial Stability Plan and are skeptical about the effectiveness of getting the private sector involved. Furthermore, investors are not happy about being apart of an experiment (although I think this is the only way to go because all of the old measures have proven effective).

Geithner announced a cocktail of initiatives using “things we haven’t tried before” and warned “that we will make mistakes.” If the Treasury Secretary is not 100 percent confident in his own plan, how could investors be?

Traders have plowed right back into the US dollar on the fear that the US government is rolling the dice once again. Equities have also fallen as much as 300 points.

The Treasury’s Super TARP plan, which is now renamed as the Financial Stability Plan has 3 core components:

1. More Capital for Healthy Banks

2. New Financing for as Much as $1 trillion of Consumer and Business loans

3. Public Financing for Private Investors Willing to Buy Distressed Debt (details of private/public investment fund have not been released)

Read the rest of this analysis on FX360.com

This post can also be viewed on kathylien.com.

Krugman Rips Into Senate Centrists

If you have read a newspaper, or watched the news, recently you are probably aware of the difficulties that Republicans and Democrats have had in coming to a consensus on the new stimulus bill. It appears that Democrats have been able to win the vote of at least a few Republicans, enough to get the bill passed, however, at what cost have those votes come? According to well known economist Paul Krugman, the price was extremely high. Mark Thoma from The Economist's View, looks at Krugman's article in his blog post below.

President Obama's net return on his investment in bipartisanship isn't very good:

The Destructive Center, by Paul Krugman, Commentary, NY Times: What do you call someone who eliminates hundreds of thousands of American jobs, deprives millions of adequate health care and nutrition, undermines schools, but offers a $15,000 bonus to affluent people who flip their houses?

A proud centrist. For that is what the senators who ended up calling the tune on the stimulus bill just accomplished.

Even ... the original Obama plan — around $800 billion ... with a substantial fraction ... given over to ineffective tax cuts — ...wouldn’t have been enough to fill the looming hole in the U.S. economy... Yet the centrists did their best to make the plan weaker and worse.

One of the best features of the original plan was aid to cash-strapped state governments... But the centrists insisted on a $40 billion cut in that spending.

The original plan also included badly needed ... school construction; $16 billion of that spending was cut. It included aid to the unemployed, especially help in maintaining health care — cut. Food stamps — cut. All in all, more than $80 billion was cut..., with the great bulk ... falling on ... measures that would do the most to reduce the depth and pain of this slump.

On the other hand, the centrists were apparently just fine with one of the worst provisions in the Senate bill, a tax credit for home buyers...: it will cost a lot of money while doing nothing to help the economy.

All in all, the centrists’ insistence on comforting the comfortable while afflicting the afflicted will, if reflected in the final bill, lead to substantially lower employment and substantially more suffering.

But how did this happen? ... Mr. Obama ... offered a plan that was clearly both too small and too heavily reliant on tax cuts. Why? Because he wanted the plan to have broad bipartisan support...

Mr. Obama’s postpartisan yearnings may also explain why he didn’t do something crucially important: speak forcefully about how government spending can help support the economy. Instead, he let conservatives define the debate...

And Mr. Obama got nothing in return for his bipartisan outreach. Not one Republican voted for the House version of the stimulus plan...

In the Senate, Republicans ... decried the bill’s cost — even as 36 out of 41 Republican senators voted to replace the Obama plan with $3 trillion, that’s right, $3 trillion in tax cuts over 10 years.

So Mr. Obama was reduced to bargaining for the votes of those centrists. And the centrists, predictably, extracted a pound of flesh — not, as far as anyone can tell, based on any coherent economic argument, but simply to demonstrate their centrist mojo. They probably would have demanded that $100 billion or so be cut from anything Mr. Obama proposed; by coming in with such a low initial bid, the president guaranteed that the final deal would be much too small.

Such are the perils of negotiating with yourself.

Now,... it’s possible that the final bill will undo the centrists’ worst. And Mr. Obama may be able to come back for a second round. But this was his best chance to get decisive action, and it fell short.

So has Mr. Obama learned from this experience? Early indications aren’t good.

For rather than acknowledge the failure of his political strategy and the damage to his economic strategy, the president tried to put a postpartisan happy face on the whole thing. “Democrats and Republicans came together in the Senate and responded appropriately to the urgency this moment demands,” he declared on Saturday, and “the scale and scope of this plan is right.”

No, they didn’t, and no, it isn’t.

This post can also be viewed on economistsview.typepad.com.

Concerns About The Economic Stimulus Package

The Senate is expected to vote on the new economic stimulus bill on Tuesday, according to the Wall Street Journal, and it appears it will be able to squeak through. Once the Senate passes the bill it will need to go through House-Senate negotiations, but it should just be a matter of time before the bill ends up on the President’s desk for signing. The bill has not seen the sweeping bi-partisan support that President Obama was hoping for, but could we honestly expect anything but controversy? Senate Democrats only needed a couple Republican votes to make it happen, and that is exactly what they were able to get. So what exactly about this bill has Republicans up in arms? And do their concerns have any merit?

The biggest complaint coming from the Republican side is that the bill is full of wasteful spending. According to an analysis in the Washington Post, the new version of the bill is 78 percent spending and only 22 percent tax cuts. Naturally this type of break down isn’t going to sit well with most Republicans. To make matters worse, the urgency with which supporters want to pump money into the economy has many questioning how well this massive spending will be regulated—if at all. According to the Post, “The stimulus plan presents a stark choice: The government can spend unprecedented amounts of money quickly in an effort to jump-start the economy or it can move more deliberately to thwart the cost overruns common to federal contracts in recent years.”

“’You can't have both,’ said Eileen Norcross, a senior research fellow at George Mason University's Mercatus Center who studied crisis spending in the aftermath of Hurricane Katrina. ‘There is no way to get around having to make a choice.’”

The objections to the spending portion of the bill prompted Obama to make the following statement at a recent House Democratic retreat, according to the Wall Street Journal: “So then you get the argument, ‘Well, this is not a stimulus bill, this is a spending bill.’ What do you think a stimulus is? (Laughter and applause.) That's the whole point. No, seriously. (Laughter.) That's the point. (Applause.)”

The Republicans continue to claim that tax cuts are more efficient than many of the spending proposals being included in the bill. If you are interested in hearing more about that, here is a good opinion piece recently published in the WSJ.

The way that I look at it, we have already tried tax cuts, and they didn’t work out quite as well as we had hoped. Though I don’t think that means we should give up on them all together, I am willing to give other things a try. What I don’t like is the lack of oversight on the spending. If we are going to spend $600 billion, I sincerely hope that we can spare a few million to ensure that these billions are used effectively. I don’t want to see us squander this stimulus money the way that we have the in past. This article in the Post gives a good walk-through of the potential problems with spending oversight as it sits now. Leaders would do well to read this and think hard about how they can ensure that we stimulate the economy in the most efficient and cost-effective manner possible.

Unemployment Surges Again. Stimulus Debate Continues.

In an alarming trend, the recent unemployment report was yet again worse than economists expected. January nonfarm payrolls fell by a seasonally adjusted 598,000, according to the Bureau of Labor Statistics (BLS). Economists surveyed by MarketWatch expected to see 525,000 job losses, considerably less than what was actually reported. In addition to the 598,000 job losses reported for January, the BLS also revised the job loss tally for December from 524,000 to 577,000. Sadly people are growing accustomed to this sort of news, but that doesn’t make this latest report any less grim. "The only 'positive' of today's report is that these ugly numbers put even more pressure on policymakers to finally agree on fiscal measures to stop the downward spiral of the economy," wrote Harm Bandholz, economist for UniCredit Markets as reported by MarketWatch.

This latest report just might be what is needed to get the new stimulus bill passed. I for one did not expect there to be as much debate as there has been. Although Democrats are only a couple votes away in preliminary projections, they want to ensure that the bill is in a form that is guaranteed to pass when it’s time to vote. It will be interesting to see how the bill evolves as the parties negotiate. Both sides want to see something passed, and so eventually something will get passed in one form or another. Senate Majority Leader Harry Reid has given the group of 20 bipartisan senators working to put this bill together a deadline of today to resolve their differences, according to CNN.

President Obama is pushing the Senate hard to get something passed, stressing that time is of the essence. “If we do not move swiftly to sign [the act] into law, an economy that is already in crisis will be faced with catastrophe," Obama was quoted as saying by CNN. "This is not my assessment. This is not Nancy Pelosi's assessment. This is the assessment of the best economists in the country. This is the assessment of some of the former advisers of some of the same folks who are making these criticisms right now."

Obama’s goal has been to have the legislation on his desk and ready to be signed into law on Presidents Day, February 16^th, according to CNN. There is still a lot of work to be done on the bill, but I imagine that they will have something ready by the end of the weekend, if not by the end of the day.