Democrats have been pushing a foreclosure bill that would provide $4 billion to states and cities to repurchase foreclosures and rehabilitate them, along with a more encompassing $300 billion housing bill. Republicans have strongly opposed the bills saying they represent a bailout of lenders, among other things. Now that the White House and Republicans want to get their Fannie Mae and Freddie Mac rescue bill passed ASAP, Democrats are trying to strike a deal.

The Fannie and Freddie rescue plan involves extending the government sponsored entities an unspecified line of credit (basically unlimited), along with establishing the right for the government to step in and buy equity positions in the company if they need to, according to the Wall Street Journal. The Congressional Budget Office estimates the cost of Treasury's proposals to the federal government to be in the tens of billions of dollars, according to the Wall Street Journal. This doesn’t sound so hot to us taxpayers, but if you consider what would happen if we let Fannie and Freddie fail, tens of billions of dollars doesn’t sound too bad. These two companies run the mortgage market, and if they go under, so too does the entire U.S. mortgage industry. It is one of those "you’re damned if you do, damned if you don’t" things.

While Democrats do recognize the importance of Fannie and Freddie, most are reluctant to give the companies a blank check. They want to make adjustments to the proposal, but Republicans want to see this thing done now. This is where politics comes into play: Now the Democrats are trying to push their foreclosure and/or housing bills to be passed in conjunction with the Freddie and Fannie one, and are threatening to hold talks up unless Republicans comply.

Whether or not Republicans give in remains to be seen, but I can’t help to think as a taxpayer that I’m getting the short end of the stick here. So you’re telling me that not only do you want to pass a bill that is going to cost us tens of billions of dollars, but now you want another $4 billion minimum (possibly $300 billion if the full housing bill is included) on top of that to bail out lenders who made dumb choices?

Labels: economy, foreclosures, housing bubble, politics

Yesterday I wrote about the failure of IndyMac bank and how it was seized by federal regulators on Friday, but I didn’t cover the “what’s next?” aspect. There are a couple of things in particular that investors who have IndyMac loans need to know, and for those without IndyMac loans it is still good information to understand in case you deal with other bank failures in the future.

Some of the most important things that could be impacted by IndyMac’s failure are construction loans. For those who are not familiar with construction loans, typically banks pay out the loans based on certain milestones. So, after a builder gets the foundation done, they receive a payment which covers the expenses until the next milestone, and so on. Well, now all the builders who rely on these distributions to fund the construction of their homes might have some problems. Because the FDIC (who now controls IndyMac) has certain protections, they are able get out of these loans if they so choose.

One developer’s concern was captured in The Wall Street Journal: "’I don't know what's going to happen,’ says Raymond Pacini, chief executive of Hearthside Homes, a small builder based in Irvine, Calif., that has two loans totaling $34 million from IndyMac. ‘We are just waiting for the dust to settle.’” According to the same article, a FDIC representative was quoted as saying the FDIC was prepared to do a case-by-case review of the construction loans. So, if you are a developer with an IndyMac loan, you had better cross your fingers and hope for the best. But if I were you, I would start looking for a backup plan just in case.

Another interesting development, which is not necessarily part of a typical FDIC bank seizure, is that the new IndyMac is putting all foreclosures on hold. The FDIC chairman Sheila Bair has been one of the most outspoken parties about how banks should cut borrowers some slack and really try to work things out before proceeding to foreclosure. Now that the FDIC has taken control of one of the biggest mortgage lenders in the country, Bair has a chance to test out some of her ideas and seems ready to do so. They didn’t specify whether or not they were willing to work out deals with investors who have bad loans with them but, chances are, if you were ever going to be able to cut a deal now is the time. The FDIC is actively trying to sell off IndyMac’s assets and it is very likely that the purchasing party will not be as friendly as Bair wants IndyMac to be.

Lastly, it appears that the FDIC is prepared to let depositors withdraw up to 50 percent of their uninsured deposits at this time according to the Wall Street Journal. This is probably a welcome surprise to most depositors, given the circumstances. The FDIC is hoping that the balance of those deposits will be covered eventually, but that is not guaranteed.

Labels: Banks, business, economy

On Friday federal regulators seized IndyMac Bank, making it the third largest bank failure in U.S. history according to the Wall Street Journal. The largest bank failure in U.S. history was the $40 billion failure of Continental Illinois Bank & Trust Co. back in 1984. IndyMac Bank held about $32 billion in assets, and it is estimated that the failure will cost the Federal Deposit Insurance Corp. (FDIC) between $4 and $8 billion, amounting to around 10 percent of the fund’s total reserves according to the Wall Street Journal.

If you were to ask why the bank failed you might get various answers, but here is what a couple key players had to say as reported by the Wall Street Journal:

“The director of the Office of Thrift Supervision, John Reich, blamed IndyMac's failure on comments made in late June by Sen. Charles Schumer (D., N.Y.), who sent a letter to the regulator raising concerns about the bank's solvency. In the following 11 days, spooked depositors withdrew a total of $1.3 billion. Mr. Reich said Sen. Schumer gave the bank a ‘heart attack.’”

Schumer responded by saying, “’If OTS had done its job as regulator and not let IndyMac's poor and loose lending practices continue, we wouldn't be where we are today,’ Sen. Schumer said. ‘Instead of pointing false fingers of blame, OTS should start doing its job to prevent future IndyMacs.’”

Personally, I prefer the idea that the bank is reaping the rewards of all the dumb loans they made. How can one possibly justify making high LTV loans to people without verifying their income? Do you think people might stretch the truth a bit if they know you aren’t going to double-check their numbers? Duh. If they actually had proof of their income, then they wouldn’t even need to come to IndyMac: They could get a better loan somewhere else.

The question now looms of whether IndyMac is just one more in a line of many banks which are to fail, or if the carnage is done. If the outlooks of banking regulators are any indication, it is worth noting that they are hiring more examiners and prepared to take a tougher line towards risky banks according to the Wall Street Journal.

I don’t believe that IndyMac will be the last bank to fall at the hands of the subprime crisis, but they very well may be the largest. If you start dealing with anything much larger than IndyMac, the government would likely get more involved in fixing problems before it came to this. I said it after the NetBank failure, and I’ll say it again: If you are depositing money in a bank right now, then make sure that it is an FDIC insured account. Not all deposit accounts are FDIC insured, and the insurance only covers the first $100,000 (and $250,000 for retirement accounts). About 10,000 depositors of IndyMac, with deposits of approximately $1 billion, learned that lesson the hard way, and may receive little if anything. If you have more than $100,000 sitting in a smaller bank deposit account, I would suggest transferring the excess over $100,000 to either a very large bank, or several insured accounts at different banks. Really though if you are going to put your money at risk, you might as well invest it in something that will return a little more than deposit accounts do.

Labels: Banks, economy, finance

Inflation certainly has been on the rise of late, but a closer look at Inflation might reveal some things that are lost in the hype. If we actually look at what is driving inflation right now, the resounding culprit is commodities. From food to construction materials--and, of course, oil--commodities are seeing dramatic increases in prices. Since these are things that consumers see and buy every day naturally they are feeling the pressure, and because they are items they deal with everyday and can see how prices are increasing, it means that inflation is on their minds. In all of this, the fact that prices on many items and services are actually falling--in some cases dramatically--is being lost in the fray. In addition, there are some other underlying factors surrounding employment that could also have a serious impact on inflation.

I was reading an article from Michael Shedlock (a.k.a. "Mish") that was posted on Seeking Alpha which really brought out this next point. In the article, Mish quotes a business owner who had e-mailed him about how he is now able to get workers for $8 to 12 an hour that were previously costing him $15 to 20. Then Mish goes on to talk about how jobs have declined for six consecutive months, and that in order to break even on the job front (taking into account new people joining the workforce), we have to add at least 150,000 new jobs. He also talks specifically about how state and city layoffs are at 45,000 so far and mounting, along with the fact that strip mall vacancies are at their highest levels in more than 10 years. These are just some of the ominous signs for employment, but the basic idea is that unemployment is continuing to rise and employers have all the leverage right now.

With unemployment rising, wages seemingly falling (in some cases, at least) and people being scared out of their mind about the economic prospects, we can expect spending to fall. This was already the case before the stimulus payments went out, and as those payments dry up, so should the little boost in spending we are seeing. As demand for products and services fall, companies will have to lower their prices in order to sell their products. In some cases this may lead to businesses going under or push competitors to consolidation; regardless, we will surely see some changes.

Predicting commodity prices is a little harder because demand for commodities does not just come from Americans. Much of the commodity price increases can be traced to the ridiculous amount of growth going on in several Asian countries right now, particularly China. They are seemingly willing to pay whatever they have to in order to get their hands on materials, and it is forcing the price up for everyone. If I had to guess, though, I’d say that we should see some easing in commodity prices soon. As the U.S. and other western countries start to scale back, it will impact those Asian countries which are providing us with exports. As we cut back on our consumption, they will have to cut back on their production, resulting in less demand for the commodities used to make the products. The main thing I think that we have to worry about is food. While Americans certainly can do with a cut back in their diets, we still have to eat. Considering that we are continuing to use an increasing amount of food supplies for fuel, and the increase in global demand and consumption, food will continue to be highly sought after, although a modest price drop is not out of the question.

Labels: economy, inflation

If most people had to guess about the employment prospects for recent college graduates, they would probably paint a pretty dim picture. The economy is certainly not hitting on all cylinders right now, and there are more companies laying off folks right now than there are companies hiring. Coupled with the timid business investment environment, you can see why most have this view. Yet things might not be so bad after all, at least for some graduates, according to a press release from the National Association of Colleges and Employers (NACE).

NACE reports that, while job opportunities for college graduates are down in number, salaries for college graduates have actually increased 7.1 percent over last year. So for those graduates lucky enough to get a job, they are in great shape. The rest are probably doomed to spend some more time living with Mom and Dad.

On the surface, this wage increase may seem like a surprise, but at the same time it really shouldn’t be. In this competitive job market, companies are enjoying the luxury of selecting only the best and the brightest. For the increased productivity they are going to get from these individuals they are willing and able to pay more. During the last several years, businesses have been focusing a lot on increased productivity. Ideally, businesses want to have as few people as possible producing as much possible, while still being economically beneficial, of course.

If you happen to be in college, know that it is now more important than ever to set yourself apart. The best of the best have great prospects, and the rest do not. Moral of the story: Make sure you are one of the best.

On another note, if you have the right skill set and aren’t interested in corporate America, then maybe you should consider starting your own business. More than ever, young people are making a name for themselves as entrepreneurs. It is hard work, loaded with risk, but just take a look at Bill Gates or Michael Dell (of course, they both dropped out of college, though I don't necessarily recommend that path), or any number of other young entrepreneurs to see the potential rewards.

Labels: business, economy

“Ever since the oil shortages of the 1970s, one report after another has cautioned against America’s oil addiction.”

“Nearly 70 percent of the 21 million barrels of oil the United States consumes every day goes for transportation, with the bulk of that burned by individual drivers, according to the National Commission on Energy Policy, a bipartisan research group that advises Congress.”

“’Much of what we’re seeing today could have been prevented or ameliorated had we chosen to act differently,’ says Pete V. Domenici, the ranking Republican member of the Senate Energy and Natural Resources Committee and a 36-year veteran of the Senate. ‘It was a bipartisan failure to act.’”

“Home to only 4 percent of the world’s population, the nation slurps up about a quarter of the planet’s oil — and Americans’ daily use is nearly twice the combined consumption of the Chinese and Indians, according to an annual energy survey published by BP, the British oil giant.”

“According to energy policy experts, it was in the late 1980s and early 1990s — during the administrations of President George H. W. Bush and Bill Clinton — that things began to go wrong. Before that point, the country reaped the benefits of the first fuel-economy standards, passed in 1975, known as corporate average fuel economy, or CAFE. Between 1974 and 1989, the efficiency of a typical car sold in the United States almost doubled, to 27.5 miles per gallon from 13.8.”

“…oil consumption in 1990 totaled 16.9 million barrels per day, basically on a par with the 17 million barrels per day consumed in 1980, even as the economy grew substantially.”

“In 1990, Richard H. Bryan, a Nevada Democrat, teamed up in the Senate with Slade Gorton, Republican of Washington, and proposed lifting fuel standards again over the next decade, with a goal of 40 m.p.g. for cars. Amid furious opposition from Detroit, liberal Democrats from automaking states, like Carl Levin of Michigan, joined conservative Republicans like Jesse Helms of North Carolina, who died on Friday, to block new CAFE standards.”

“’But had we passed that bill, we’d be using three million barrels less oil a day now,’ Dan Becker then a lobbyist for the Sierra Club said.

“Consumers overseas might not like higher taxes on gasoline, but they’ve adapted, says Jeroen van der Veer, chief executive of Royal Dutch Shell, the European energy giant. In Mr. van der Veer’s native Holland, for example, gasoline sells for more than $10 a gallon, with $5.57 of that going to taxes. Even in Britain, which has substantial North Sea production, gasoline sells for $8.71 a gallon.” Several measures to raise gas tax were shot down during both the Bush and Clinton administrations.

“In 1990, three months before the effort to raise fuel-efficiency standards failed on Capitol Hill, President Bush issued an executive order making large swaths of the continental shelf off-limits to new exploration. That policy remains in effect today.”

“As Paul Bledsoe, strategy director of the National Commission on Energy Policy, recalls it, ‘The 1990s were something of a lost decade for American fuel efficiency.’ With oil prices low, consumers began snapping up pickup trucks and sport utility vehicles, which were governed by less stringent fuel economy standards, thanks to a loophole in the original 1975 law. These carried higher sticker prices and profit margins, and both Detroit and foreign automakers were happy to oblige.”

“In 2007, with oil at $82 and gas nearing $3, Congress finally approved the first big increase in fuel-efficiency standards in 32 years, requiring the fleet average to reach 35 m.p.g. by 2020. That will save one million barrels a day by 2020…”

“Since the 1980s, fuel efficiency has flatlined at 24 m.p.g., while vehicle weight has jumped more than 25 percent and horsepower has nearly doubled. In Europe, on the other hand, fuel efficiency currently stands at 44 m.p.g. and is slated to hit 48 m.p.g. by 2012.”

“Congress, meanwhile, in its bid to explain the run-up in fuel prices, is examining the role of speculation and the increased flow of investor money into commodities.”

I found it very interesting that in the '90s there was legislation proposed that would take fuel efficiency standards to 40 m.p.g. Now today we are hoping to increase fuel efficiency to 35 m.p.g. by 2020. The old saying that hindsight is 20/20 could certainly be applied in this situation, but as the author points out in the article, we all knew that oil was in limited supply. Basic economics tells you that when something is in limited supply, then as demand increases, prices are going to go higher. American auto makers saw an opportunity to make a quick buck off big gas guzzling cars and consumers ate them up.

At the end of the day, it is hard to blame the auto makers because they just produced what consumers wanted. They are businesses, after all, so we can’t expect them to do anything other than what is best for their business. On the other hand, as a nation we rely on our government officials to spot these types of glaring problems and take the necessary steps to prevent them from happening. In my mind the politicians are the main culprits, with ignorant consumers coming in a close second. We can drill in the Alaskan National Wildlife Refuge and we can drill in the Gulf of Mexico, but in the end it will have little effect. High gas prices are here to stay and I’m a firm believer in raising gas taxes. In order for us as consumers to make the necessary lifestyle adjustments, we need stern guidance away from gas. In case you are wondering how high gas prices might go, just take a look at the $8.71 a gallon being paid in Britain. It is not out of the question here by any means.

Labels: economy, Oil

Labels: business, economy, real estate, recession

Inflation is certainly on the minds of the masses today as it appears each new day brings with it a new record price for oil and food, among other things. Inflation is especially bad right now because wages aren’t keeping up with it and thus our buying power is being reduced with each passing minute. But while Inflation is certainly a bad thing, deflation may be even worse, and according to a report issued by the Bank of International Settlements (BIS), which acts as the bank for central banks, we may be heading for just that.

Deflation occurs when prices fall. That may seem like a great thing, but deflation is typically anything but great. The greatest depressions are accompanied not by inflation, but by deflation. Our economies today are driven by spending, and inflation spurs spending. If you know that something is going to be more expensive next month, or next year, you are probably going to buy it now, if possible. In fact, you may even borrow money to buy that good or service now. Not only do you benefit by acquiring the product at a lower price now, but assuming your loan is fixed, you win that way, too. Taking money now and paying it back with inflated dollars sounds like a pretty good plan, right? In an inflationary environment there is little incentive to save because money saved simply loses value.

On the other hand, in a deflationary environment, people are encouraged to save. They know that every day they hold out to buy something, the cheaper it is going to be. In addition, they most certainly do not want to take out a loan, because they would have to pay it back in appreciating dollars. They would be much better off to simply save their money and wait until they have enough to buy something outright. Naturally, this type of scenario doesn’t bode well for an economy that is built on spending. When people stop spending, a funny thing happens: businesses struggle and eventually close. That, of course, leads to people getting laid off, which leads to even less spending, and it becomes a vicious cycle. This is how depressions start--and become really bad really fast.

In its annual report, BIS said that the impact of rising food and energy prices on consumers' incomes, combined with heavy household debts and a pullback in bank lending, may lead to a slowdown in global growth that "could prove to be much greater and longer-lasting than would be required to keep inflation under control…Over time, this could potentially even lead to deflation," according to the Wall Street Journal. The BIS went on to essentially blame the central banks for the current financial problems, claiming that they kept interest rates too low for too long.

In a bit of good news though, the BIS said they see the chances of deflation as fairly low, and consider inflation to be a much greater threat at this time. The BIS is urging most central banks to consider raising their interest rates to combat this danger.

Labels: economy, inflation

With the popping of the housing bubble, the credit bubble and various other bubbles recently, it may be hard to believe, but some argue that these bubbles are in fact good for us. I know that is hard to believe, especially considering that we typically condemn them and governments strive to prevent them, but let’s take a look at some of these arguments and see what pro-bubblers have to say.

“…in bubbles, investors' money is used to build infrastructure that can't possibly repay its upfront costs, but ends up being beneficial for companies and consumers in the long run - particularly after more-efficient companies have picked up the pieces on the cheap,” according to Daniel Gross, author of Pop! Why Bubbles are Great for the Economy, as reported in New Scientist. The same New Scientist article goes on to give several examples of this phenomenon, including the recent dot-com bubble which paved the way for today’s Internet. For a more historical example, they offer the railroad bubble of the 1840s which later, even though the original investors lost everything, proved to be quite beneficial for Britain because it laid the infrastructure for the best railroad system in the world at the time.

Here is another quote from the article: “Didier Sornette, a physicist who is now a risk specialist at the Swiss Federal Institute of Technology in Zurich, argues in a paper in press at Journal of Economic Interaction and Coordination that it is only during the reckless abandon of bubbles that individuals and companies take the foolhardy risks needed to develop technologies with large social impacts but low financial returns.”

The author of the New Scientist article argues that today's bubbles could also prove to be beneficial in the long run. The housing bubble has created a huge inventory of housing that is now available at a discount for buyers; borrowing money will be easier after the bubble than it was before because it fostered the creation of sophisticated risk analysis techniques; and even the oil bubble could be good because it will likely lead us to explore alternative energy.

Overall, I thought the author made some excellent points, and I can see how some bubbles--while hard to swallow in the short term--can prove to be beneficial in the long term. One thing missing from his article, though, is a comparison with bubbles that didn’t turn out to have any great lasting benefit. Sure, we can see that a few bubbles throughout history have turned out well, but have there ultimately been more bubbles that resulted in good outcomes or bad outcomes? Because if most bubbles still turn out bad when all is said and done, it is hard to say that we don’t need to worry about them.

Just looking at today’s bubbles, I can see how the oil bubble can potentially turn out to be beneficial, but I’m having a much harder time with the housing and credit bubbles. Sure, people can seemingly buy houses at a discount, but in reality housing prices still haven’t reached as low as they were prior to the bubble in many markets. Housing prices are still falling, so we may end up in better shape price-wise, but we also have to consider that around 67 percent of Americans are homeowners. With that in mind are we really better off in general, or are the 33 percent of population comprising renters the only ones better off? A case could be made either way I suppose, but I doubt that if we had the chance to do it all over again we would choose the bubble over nice steady growth. As far as the credit bubble, we can look at the infrastructure, businesses and so on that we were able create thanks to cheap credit, but again I’m not sure that those benefits are going to outweigh the costs either. I guess ultimately only time will tell.

In the end of the article, though, the author makes a great point: Ever since the tulip bubble of the 1630s we have been trying to prevent bubbles, but ultimately, we have proved unsuccessful. It seems that no matter how hard we try, human nature will fuel this bubble behavior, and thus perhaps we would do better to spend our time trying to make the best of the bust rather than trying to prevent the boom.

Labels: economy, housing bubble, real estate

Argentina became infamous earlier this decade for defaulting on their debt during a major financial crisis, and now it appears they have defaulted once again. This time around, things aren’t quite as bad in the country, and the default is a little different, but their actions still qualify as default, according to an article written by a couple economics professors for the Wall Street Journal. Carmen Reinhart from the University of Maryland and Kenneth Rogoff from Harvard claim in their article that Argentina has manipulated their inflation data in order to pay out less on their inflation indexed debt, thus putting them in default.

The professors say that the government’s scheme began with the firing of their top statisticians. Now the inflation measurements that are being “officially” reported are drastically understated. According to the article, Argentina is reporting an inflation rate of less than 10 percent when by most external measurements, the real rate should be closer to 30 percent. The Argentine government owes around $30 billion in inflation indexed debt, according to the article.

Investors should know that circumstances such as this are always a risk when investing, especially in developing countries. Argentina isn’t alone in these types of actions, either. Across the world, countries manipulate their statistics to be in their favor. Sometimes they are minor “adjustments” and sometimes that are major and pretty blatant, like in this case.

I want to also point out that, while these types of things are more pronounced in developing countries, they happen here at home, too. The U.S. has adjusted things in their favor before (such as the gold price in the '30s) and still do it today (such as the CPI and GDP). So don’t be naïve and think this will never impact you because you don’t invest abroad; government manipulations of economic data happen here, too. Inflation indexed bonds just happen to be one of the easiest debts to influence, so invest in them with your eyes wide open.

Labels: economy, inflation, international, investments

In an interview with Fortune, Republican presidential candidate John McCain was asked what the single gravest long term threat to the U.S. economy was. This is not an easy question, with so many choices and all. Is it the housing crisis or the credit crisis? What about the huge deficit the country is running, or the rising cost of energy? How about Social Security? McCain didn’t select any of those options; instead, he said that radical Islam was the single biggest threat to the U.S. economy. Pardon me a moment while I let this sink in a bit…nope, still don’t see it…oh well, maybe it’s beyond me. Why don’t we analyze it a little more and see if that helps?

Okay, so 9/11 did a number on our economy, I give him that. I can also understand the argument that terrorist attacks, or even the threat of them, can upset consumers, thus affecting the economy. So radical Islam can have an impact on the economy, but is it really the biggest threat? Wait…I think I get what he is trying to say--maybe McCain is telling us that radical Islam is the biggest economic issue because it is forcing us into war and costing us not only billions of dollars each year to fight abroad, but also billions to fight here at home. Oh, and it is also a problem because the movement keeps growing stronger the more we fight it--kind of like using fire to put out fire. Wow, I totally understand now, this fight is going to go on forever--man, that is going to be a downer for our economy. Okay, so now I see why it is such a huge problem…

In all seriousness, I could go on for awhile about why radical Islam is, and has, been fueled by our actions, but for the sake of brevity I will not (for more information here is a good write up). Based on the fact that we in essence created (in many cases) and have fueled radical Islam, maybe the biggest long- term threat to the U.S. economy is not radical Islam, but rather poor foreign policy. That might not be such a bad selection after all. We could look at the national debt as a big one, but we can also say that a lot of that debt was created because of poor foreign policy decisions. We could make the same case for several other problems as well.

At the end of the day, we know exactly why McCain chose radical Islam as the biggest problem, and that is because he is riding the “national security” ticket. If any voter has serious doubts about our national security, McCain is their man. The politics of fear, as it is called, is probably the biggest thing McCain has going for him right now, and he wants to milk it for all he can. The more American voters he can convince that national security is an issue, the better chance he has to win. It also doesn’t hurt that Barack Obama, the Democratic candidate for president has family ties to Islam, a point which has unfairly caused accusations that he is supporting terrorists--despite the fact that Obama himself is a Christian, not a Muslim. Long story short, McCain chose this reason for political purposes, yet he might not be too far off in actuality--only he needs to focus less on the effect and more on the cause.

Labels: Barack Obama, economy, John McCain, politics

To help stop the surging tide of foreclosures some cities have decided to take matters into their own hands, or in the case of Trenton N.J., place it in God’s hands. These cities have put their creative energy to work and are seemingly willing to do whatever it takes to keep residents in their homes. A recent Associated Press article talked about several creative measures being taken by cities:

In Philadelphia, the court decided to make it mandatory for lenders and homeowners to get together to try to work a deal out before they would proceed with a Sheriff sale. In addition, the court assigned homeowners volunteer attorneys and housing counselors.

In Cleveland, the city decided to sue lenders for hundreds of millions of dollars in damages stemming from loans they deemed to be predatory. Minneapolis and Buffalo are undertaking similar lawsuits. The lenders, of course, say that these lawsuits have zero merit and that they are simply an act of desperation on behalf of the cities.

In Jacksonville, Fla., residents in distress can apply for interest free loans of $5,000 which will be forgiven if they remain in their homes for at least five years. Louisville, Ky., has a similar program but they require residents to remain in their homes for 10 years.

Los Angeles is staffing foreclosure counselors in neighborhood centers for jobs and city services in addition to working with neighborhood councils.

Perhaps the most creative and useful--or most desperate, depending on one’s beliefs--comes from Trenton, N.J. Trenton’s mayor, Douglas H. Palmer, has requested all preachers in the city to preach at least one sermon on foreclosure in June. In addition, he has asked churches to distribute to their congregations materials meant to help people facing foreclosure. Many people from the churches are even wearing T-shirts that say “Save Trenton Homes!” with numbers for a help hotline on the back.

The number of foreclosures continue to rise, and it doesn’t appear that it is about to stop any time soon. As time goes on I would expect to see continued acts such as these from desperate people. I certainly don’t blame the cities for trying--at the very least, it shows their residents that they care about them and are willing to put up a fight. However, in the end, most of these desperate measures will fail to help. Trying to keep someone in a home they can’t afford is futile. We will have to accept that the market needs to correct itself, and next time around we as homeowners need to ensure that we don’t get ourselves into homes and mortgages that are more than we can handle. This housing crisis is one big learning experience for Americans: Don’t spend money you don’t have, or in the case of lenders, don't lend money to people who can’t pay it back. I just hope the federal government doesn’t pass the big bail out deal that changes the lesson around to don’t be afraid to spend more money than you have, or be careless with your lending, because the government will bail you out if it comes to it.

Labels: economy, foreclosures

Does Barack Obama or John McCain offer the best hope for the U.S. economy? This, of course, is the number one issue on everyone’s mind for the upcoming presidential election. The candidate who is able to best answer this question, and do so in a way that Americans can understand, stands a great chance of becoming our next president. So which candidate does offer the best hope for our economy anyway? Well, it depends on who you ask.

Yesterday in Raleigh, Obama attacked McCain’s economic policy, calling it a repeat of Bush’s miserable failure. Obama’s own plans for the economy include an expansion of unemployment benefits, another economic stimulus package of $50 billion, tax cuts for the middle and lower classes and relief for homeowners facing foreclosure, according to the International Herald Tribune. Obama was quoted in the article as saying, "We were promised a fiscal conservative. Instead, we got the most fiscally irresponsible administration in history. And now John McCain wants to give us another. Well, we've been there once. We're not going back."

The McCain campaign didn’t take the attacks sitting down, though. "While hardworking families are hurting and employers are vulnerable, Barack Obama has promised higher income taxes, Social Security taxes, capital gains taxes, dividend taxes and tax hikes on job-creating businesses," McCain spokesman Tucker Bounds said in a statement issued before Obama's remarks, according to the International Herald Tribune. "Barack Obama doesn't understand the American economy, and that's change we just can't afford.” McCain’s plans for the economy include keeping the Bush tax cuts in place as well as tax cuts for businesses.

In the end it comes down to two schools of economic thought. Obama believes that government spending and policies can help us get out of the economic rut. His policies are going to increase government spending, and overall government involvement in the economy. McCain, on the other hand, belongs to the school of thought that says the economy revolves around businesses. In his mind, the best way to stimulate the economy is to put money into the hands of businesses, who will then be able to add more workers and so on, which ultimately will lead to improvement in the economy.

One thing I haven’t talked about yet is the Iraq war. Obama, of course, wants to start drawing troops out of Iraq, potentially saving us a lot of money (money he wants to put back into our economy). On the other hand, McCain plans to keep troops there for a long time, continuing to add to our government spending on the war (much of this spending is not directly aiding America's economy). That being said, Obama’s overall plans for government spending far exceed McCain's. For the most part I tend to agree more with McCain’s policies than Obama’s, but I do side with Obama in relation to the Iraq war. While I don’t agree with pulling out altogether at this point (because it would hang those Iraqis who trusted us with their lives out to dry), I do think we need to figure out a better plan. The plan to occupy Iraq indefinitely is not a good plan. We never should have gone there in the first place, in my mind. It has cost us billions of dollars and many American lives, but that is another post for another day.

The bottom line is these two candidates differ greatly in their policies: One thinks the government can get us out of this mess, and the other is going to rely on business and the markets to turn things around. Which one is correct? We will have to wait and see. Either way, though, the new president is going to have their hands full, and I seriously doubt either one is going to be able to come up with the magic elixir that rights this thing over night. Turning this ship around is going to take some time and diligence.

Labels: Barack Obama, economy, John McCain, politics

With all the talk coming from politicians about how they plan to use the FHA to save the housing market and the economy, it may be a shocker to know that the FHA is struggling mightily right now. The FHA had to withdraw $4.6 billion from its $21 billion capital reserve fund in May to cover losses, according to the New York Times.

“Let me repeat: F.H.A. is solvent,” FHA commissioner Brian Montgomery said Monday in a speech at the National Press Club, according to the New York Times. “However, no insurance company can sustain that amount of additional costs year after year and still survive. Unless we take action to mitigate these losses, F.H.A. will soon either have to shut down or rely on appropriations to operate.”

Something has to change or else the FHA will soon be under water. This is a bit scary to think about because right now, FHA loans make up a good portion of the mortgage market, and an even larger portion in many low income areas. If the FHA were shut down, the real estate market would be in for a huge blow. In reality, though, it is unlikely the FHA will actually shut down even if they become insolvent. Instead, the government would float them the money they needed to continue operations until such a time as they could stand on their own two feet again. As you probably guessed that means taxpayers would ultimately be subsidizing the FHA.

There is one glaring reason why the FHA is struggling right now, according to Montgomery. He blames the seller financed down payment program, otherwise known as down payment assistance. In this program the seller donates the required down payment (typically 3 percent) to a non-profit corporation which then gives the money (minus a fee, of course) to the buyer, who uses it as the necessary down payment. Sound a little sketchy to you? I can assure you I feel the exact same way. Nonetheless, this program has been around for years--and it has been a problem for years as well. 60 percent of the FHA losses can be directly attributed to this program, according to the New York Times, even though these loans only make up around 35 percent of the FHA’s portfolio.

The FHA has been trying to get rid of this program for years, but has met strong resistance and been unsuccessful. Backers of the program say it provides much-needed assistance to low income and minority families who would otherwise be unable to buy homes, according to the New York Times. Naturally, the FHA is continuing its fight against the program, but based on their past experience, it doesn’t appear they are likely to be successful.

“If there’s any justice in this country, they will fail yet again,” Scott Syphax, president of Nehemiah Corporation of America, which provides such loans, said in the New York Times. Wow, you’ve got to love that mentality--if there is any justice in America, we should continue putting people in houses they can’t afford and potentially break the FHA, which would cost taxpayers billions upon billions of dollars. Is it just me or is this guy’s idea of “justice” a little skewed?

Ultimately, whether the down payment assistance programs stay or go, the housing market will likely suffer. If they stay, the FHA will probably need taxpayer support; if they go, then we are losing 35 percent of the FHA loans out there which means we would have even fewer people buying homes. In my mind, though, the right way to go is to ban these programs. The statistics show beyond a doubt that these loans result in an extremely high default rate (about 3 times the FHA norm) and it is not fair to pass this burden on to taxpayers.

Labels: economy, housing bubble, politics

After the latest round of unemployment figures, there is renewed buzz for another economic stimulus package. At this point it is just talk, but depending on how the first economic stimulus package pans out, and whether the price of oil comes down, we may see the talk turn to action sooner rather than later.

President Bush has expressed interest in more economic stimuli, but he wants to wait until we can see how the first round performs first. In addition, Bush has his hands full at the moment trying to get his tax cuts to become permanent, according to CNN. A couple of the plans being proposed in the Senate, though, are increasing unemployment benefits and a $300 billion FHA loan boost, according to CNN.

Those of you who are frequent readers of my blog probably know that I wasn’t a big fan of the first economic stimulus plan, and I’m certainly not in favor of another one. Without getting into a full on tirade about how irresponsible our government is, we are more than $9 trillion in debt, and we should not be going further in debt in order to “attempt” to artificially rouse our economy. Contrary to popular belief, we can’t keep borrowing or printing money indefinitely without recourse. We are walking on thin ice right now, and who knows when it is going to break--but the more weight we add, the higher the chance goes.

Ultimately, I expect we will see some sort of economic stimulus because I seriously doubt the first one is going to have the effect that Bush is hoping for. It was a poorly devised plan to begin with, and things are only getting worse for American consumers. When it gets a little closer to election time (assuming the economy doesn't miraculously get better) you can bet that Bush is going to put his best foot forward for the American public in order to attempt to gain support for the Republican presidential candidate: John McCain. He will propose some miracle plan--that is completely full of hot air--which he will claim will fix everything, and then dare the Democrats to shoot it down. As long as Bush does it right and positions it so that the American public agrees with it, then if the Democrats don’t vote it through they will look like the bad guys and then Obama will take the hit. By the time the public finds out that the net effect of this plan leaves us worse than where we started, it will be too late.

I don’t want to be pessimistic, but I have a hard time not being so when talking about our government right now. I hope that the government thinks twice about another stimulus plan, and actually takes into account our budgetary deficiencies, but when has that ever stopped them before? If you are wondering where I am, I’m heading out to get a wet suit, because the water under the ice looks awfully cold.

Labels: Barack Obama, Bush, economic stimulus, economy, John McCain

The national unemployment rate surged a half a point to 5.5 percent in May, signaling the largest increase since 1986 and far surpassing analysts' expectations, according to Bloomberg. To show how surprising these numbers were, not a single analyst forecasted the unemployment rate to go this high, and the consensus among the analysts was an unemployment rate of 5.1 percent, according to a Bloomberg news survey.

The funny part about this is that just yesterday, people were starting to feel better about the prospects for the economy. In fact, this was the headline on YahooFinance yesterday afternoon: “Wall Street shrugs off spike in oil and finds solace in upbeat jobs data, retailer sales.” Yesterday the Dow was up almost 214 points, the biggest one-day gain since April 18, according to the Associated Press. The great jobs news everyone was excited about was the drop in number of laid-off workers seeking unemployment benefits. Oh, how the economic winds can change.

After today’s job data, and with the price of oil continuing to surge, the markets shed (in less than an hour, I believe) all of yesterday’s gains and then some. Once again this is evidence of how traders cling to every little glimpse of good news and look past the big picture. If people would have just sat back and thought things through, they would have seen that the jobs outlook in the U.S. is not a rosy one. The data that was reported yesterday is a bit misleading. Just look at report after report after report about how business owners are hesitant to add jobs right now and how many of them are actually planning to cut staff. Read about how consumer confidence continues to slide and how housing prices continue to tumble. A report from CNNMoney stated that Americans lost $1.7 trillion from their collective net worth in the first quarter of 2008 alone. Does any of this news seem to make a case for businesses to bring on additional workers? All I’m seeing are reports of pending layoffs. Am I missing something?

GM is cutting 19,000 workers by July 1; Ford and the other auto companies are also trimming staff, according to Bloomberg. While the government actually added 17,000 employees, cuts are on their way in the local governments (see the previous post: Pension Plans Could Lead More Cities To Bankruptcy), and of course home builders are continuing to cut workers as they fend for their livelihood. These are just a few of the headlines. So the fact that people were getting excited because one piece of data was published tells me they so desire good news that once they have it, they lose sight of everything else.

While it might be okay to believe the economy is coming around and is on the right track (not my belief, but hypothetically speaking), even if that is true, it is going to still require some time. Problems like we have now don’t just disappear overnight, and the investor reaction to yesterday’s news was way overblown. As an investor, make sure you understand and can see the big picture. I’m not saying, you shouldn't invest, but that you should do so with your eyes open. Don’t be like everyone else out there throwing your money into the market at the first glimpse of hope, only to pull it out the next day when things don’t look so hot anymore. Investing with a long term focus can help solve this problem for the most part, and overall is a great strategy, but don’t lose sight of the big picture.

Labels: business, economy, investments

Everyone knows that home prices have been taking a beating, but one thing that people might not realize is that the balance between new and resale home prices is out of whack. As one might suspect, new homes typically sell at a premium to resale homes, but in many areas today new home values have dropped so much that they are actually selling for a steep discount compared to resale homes.

The following is an excerpt pulled from an article on Minyanville

“Richard Dugas, PHM [Pulte Homes] CEO, said he believes it is a mistake to believe the new housing market can correct without the resale market also correcting. This is an important point of distinction. New homes are now selling at a 10% to 15% discount to resale in most areas of the country. Historically, that ratio has been reversed.

‘We clearly need resale pricing to correct, and correct dramatically,' Dugas said. He cited the most recent data from the S&P/Case-Shiller index showing a 14% decline in prices year-over-year, by far the largest on record, but noted that even that kind of decline is not enough.

‘We view that [price decline] as a good thing,’ Dugas said, ‘and frankly we think resale pricing needs to continue to move down, because existing buyers are telling us they would like to buy our homes, but need to sell their existing homes, but they've obviously got to get realistic about price before they have a chance to sell those homes.’”

What Dugas is saying is that the builders have responded to market conditions by dropping their prices, but that isn’t enough. Homeowners looking to sell their homes also need a dose of reality in many cases as well. Assuming homebuilders are pricing their homes at the true market prices now, then resale homes would need to drop another 20 to 30 percent in order to regain the balance.

The article also points out that if this adjustment were to happen, Fannie Mae and Freddie Mac would have greatly underestimated the remaining correction due in the housing market. This obviously could have major implications not only to Fannie Mae and Freddie Mac, but also for the entire economy. Fannie and Freddie have a much larger stake in the housing game now than they did a few years back and any disruptions to these two companies would pretty much kill what’s left of the mortgage market and/or create a huge burden on the government and the taxpayers. For more information on what would happen and the costs involved in a Fannie and Freddie bailout, read my previous post: Fannie Mae and Freddie Mac: Will they need a Bailout, and at What Cost?

Labels: economy, housing bubble, real estate

Recently Vallejo, California became the largest city in the state's history to declare bankruptcy, and while they have the headlines now, there will likely be more cities to follow. A few weeks, ago I did a post about Vallejo’s bankruptcy. Specifically, I talked about how the housing crisis had hurt the city, but I didn’t do enough justice for one of the major factors in the decision for the city to declare bankruptcy, which was the city’s bloated pension plans.

To explain how ridiculous the pension plans in Vallejo had become, I simply need to tell you what they were offering. The following is an excerpt from an article by CNNMoney

“But the real nail in Vallejo's coffin was the city's labor costs. Under the current labor agreement, the average police officer walking the beat in Vallejo will be paid $122,000 this year before overtime, according to city documents. An average sergeant will make $151,000; a captain, $231,000. The average firefighter, meanwhile, will bring in $130,000 before overtime.

That's just the salaries, though. The final budget-crusher was the city's pension plan. Thanks to retroactive benefit enhancements approved by the city council in 2000, police officers and firefighters can now retire at age 50 and receive an annual pension equal to 90% of their final pay (assuming 30 years on the job), an amount that gets increased every year to help keep pace with inflation. The old plan had given the workers a pension equal to 60% of their final pay at age 50.”

As CNNMoney goes on to point out in their article, Vallejo is not the only city to increase pension benefits, either: “ironically, just a few hours south of Vallejo, the city of Rialto, Calif., recently approved a similar retroactive pension increase that will give police officers a pension equal to 90% of their salaries at age 50.” And there are many other cities in the same boat. Flush with cash thinks to higher property values and taxes, many cities made the same mistake Vallejo did--and just might end up with the same fate.

Government pension plans are protected by constitutional and legal guarantees, according to the article, so pretty much the only way out from under these burdensome arrangements is for the cities to declare bankruptcy.

With city revenues declining, a population aging and budgets going further and further in the red, it seems like we almost have a perfect storm brewing. In my post yesterday, I talked about how cities were slated to make major budgetary cuts, but those cities that elected for these bloated pension plan arrangements might need more than some budget cuts to save them.

Once again, as an investor, I would strongly suggest that you take some time to analyze a city’s financial strength and longevity before you buy. A city in bankruptcy is a city that is going to be short on services and on the decline.

Labels: economy, housing bubble

As if we needed another reminder about the dire straits of the current U.S. economy, the New York Times just published an article which makes an excellent point as to why things are only going to get worse.

What the New York Times points out in their article is that states and cities have yet to contract their budgets, but that is coming. Local governments have a fiscal year which begins July 1, and many of them are planning drastic cut backs to spending.

These local governments account for around $1.8 trillion of the nation’s $14 trillion economy, and their spending accounts for around double that of the Federal government, according to the article. In the past year city and state governments have spent approximately $40 billion above and beyond their budgets, which has aided in keeping the economy above water, but now the consensus is that they are going to have to scale back. Goldman Sachs is predicting that local governments will retract their budgets around $50 billion this year creating a total drop in spending of approximately $90 billion. With this major decrease in spending, and the loss of consumer confidence it is likely to invoke, we might not be able to avoid a recession for much longer.

Certain states will certainly be hit harder than others, with the biggest problems being faced in those areas which are suffering the most from the housing bubble. Local governments draw a large portion of their tax revenue from property taxes, and with property values dropping upwards of 20 percent in some areas, we can expect to see serious budgetary issues.

One of the likely casualties to these budget cutbacks will be schools, according to the article. In my mind this is a shame; considering the state of our school system, this is one of the last areas we should be cutting. Apparently this is the easiest place to make the cuts, though, or at least the one that will create the least problems for elected officials in the immediate term.

We can expect a good number of layoffs as a result of these cutbacks, and consumer confidence will likely shrink further as more people begin to fear for their jobs. By contracting spending, though, people will in essence create a self-fulfilling prophecy by which more businesses are forced to make cutbacks as their profits shrink, and more people lose their jobs as a result. The local government budget cutbacks might just be the straw that breaks the camel’s back, but we’ll have to see how it all plays out.

Who knows, maybe the next president will enact another economic stimulus thereby postponing the inevitable once again. Not only are we piling more and more debt on our nation’s youth, but we are going to cut back on their education as well. So, to sum it up it is not a good time to be a young person in America. Guess I better go up the budget a bit for my daughter’s savings account, as well as create a budget for private school tuition. Looks like we are going to need it…

Labels: economy, recession

The housing crisis in the U.S. is bad, but is the oil crisis even worse? I read an interesting article that takes the stance that the oil crisis is in fact a bigger problem than the housing crisis, and I wanted to share a few of the points that the author, Jeremy Siegel, Ph.D., made.

The first point that Siegel made was that the U.S. is a net importer of oil--in fact, the largest importer of oil in the world. Each day the U.S. imports around 12 million barrels of oil at a cost of around $1.5 billion. That adds up to $570 billion a year in foreign oil imports, and makes up a large chunk of our trade deficit.

The housing crisis has surely hurt the U.S. economy and has resulted in the reduction of construction spending and the loss of many construction jobs. At the end of 2005 the U.S. was spending around $600 billion a year on residential construction, according to Siegel, and that number has now dropped to approximately $400 billion. So that, of course, is a net reduction to the economy of $200 billion, a sizable amount by any calculation. Now let’s take a peek at the impact of oil.

In 2005 oil was going for around $50 a barrel, so at 12 million barrels a day that would mean the U.S. was importing around $600 million in oil each day, or $219 billion each year. If you compare those to the numbers we looked at earlier, at today’s oil price of $130 a barrel, you see that the difference is $351 billion a year. Simply put, the oil crisis has had a greater impact on the economy’s bottom line. [Siegel makes his comparison based on 2007 oil prices, but since we were comparing housing prices from 2005 I thought a 2005 oil comparison would be better. Therefore these numbers are my own and not Siegel’s.]

The next point that Siegel makes is that the oil crisis is much worse than the housing crisis because the housing crisis was caused by a slowdown in demand, whereas the oil crisis was largely the result of supply issues. This means that resources that were slated for housing, such as labor or materials, can now be used in other sectors of the economy. “In contrast, rising oil prices are an outright cost that does not release other resources into the economy,” Siegel said.

Siegel goes on to explain that there are some adjustments which need to be factored into the estimates, such as the fact that consumption of oil tends to decrease as prices rise, but I’ll let you read the full article to hear about all of those.

Siegel ends his article with a statement of hope: “The rise in oil prices has shocked Americans into realizing that fossil fuels are not unlimited. In the long run I am optimistic that conservation and alternative fuels will significantly blunt the impact of rising oil prices and not constrain economic growth. But getting to that long run will require painful adjustments in the short run and, to that end, higher energy prices may be a blessing in disguise.”

Labels: economy, housing bubble, Oil

In the first quarter this year, Canada’s economy shrank by 0.3 percent, according to Bloomberg. So while all the talk is about a U.S. recession, surprisingly, Canada may just beat us to the punch.

This news came as a shock to me because of how strong Canada’s economy has been, including their oil industry. The biggest problem area apparently was the auto industry. If the auto- and auto-related industries were removed from the, calculations then Canada’s economy would have actually still grown, according to Bloomberg. The biggest importer of Canadian automobiles, of course, is the U.S. and we just aren’t buying too many cars right now. Not only is Canada suffering from the drop in consumer confidence in the U.S., which is the number one importer of Canadian goods, but more importantly, Canada is suffering from their strong currency.

Ever since the Canadian dollar surged against the U.S. dollar, the trade balance between the countries has changed. Canadians are buying more U.S. goods and the U.S. is buying fewer Canadian goods because the U.S. goods are comparatively cheaper thanks to the weak U.S. dollar. Now the Bank of Canada is likely to cut interest rates in response. This should lead to the Canadian dollar dropping against the dollar, as it already has begun to do.

Labels: business, dollar, economy, international

Disclaimer: This post is a departure from our usual material, in which we discuss “facts” and “figures” and all that nonsense. Today we’re sticking with black-hearted pessimism, which generally makes whatever one says more accurate than “facts” and “figures” ever could.

The Case-Shiller indices showed a decrease in home prices greater than 2 percent for the fifth consecutive month—14 percent since this time last year. On the upside—in terms of percentages—if it keeps this pace one can view the drop in prices as logarithmic: never quite reaching zero, but still abysmally bad. On the downside...well, that is the downside.

But on the down-downside—to coin a phrase, on the abyssal-side—tax and insurance costs are rising, offsetting further any deceleration in our decline. To anyone who purchased a home in the last six months: Pray for rain. You may soon need do without indoor plumbing.

But all is not lost. In this land of opportunity and innovation and class rule there is always a modest proposal to be found to address our woes, and I have stumbled upon one: Teepees!

Yes, teepees. I would say ‘yurts’, which are more stable, but this is America, former home of the teepee, and I’m pretty sure that we’re at war with the Mongols (or soon will be, given our record). But where, you must be asking, shall we find sufficient hides to create enough teepees for all the displaced homeowners who cannot even afford rent as those prices, too, have risen? We have wiped out most of the larger animals on this continent, and plastic tarps (being petroleum products) will soon be out of most people’s price range. Whence shall the raw materials come?

It is common knowledge that we are the most obese nation on the planet, though this will not be the case for much longer as we all begin to starve. As inflation and unemployment r