07.05.09
Posted in Unemployment Catastrophe at 9:15 am by Brian John
W
ith U.S. unemployment set to climb to 10%, and Canada not far behind, the North American market economies will soon be looking at what used to be derisively termed “European levels” of unemployment. The question is whether these high unemployment rates are merely short-term blips that will be followed by quick recoveries, or whether high jobless numbers will persist, turning Canada and the United States into grim replicas of sclerotic Europe.
Recent economic history suggests both Canada and the United States can quickly rebound from economic slumps. Unemployment in the United States, for example, hit a peak of 10.8% in the midst of the 1982 recession, but it was all over six months later.
Almost all recessions are followed by economic chatter about a looming “jobless recovery.” And all such chatter has, in the past, been proven wrong. Markets quickly adjusted to changing economic circumstances. Investors began investing, capital spending rose, workers and employees moved on to new jobs, consumers began spending again. Markets, left alone, function quickly. Read the rest of this entry »
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Posted in Health Care Crisis-The Discussion at 9:12 am by Brian John
Just this week, Wal-Mart raised eyebrows across the country when it came out supporting an employer health insurance mandate.
Now, Wal-Mart has got to know that its endorsement is probably not good for its profits. Wal-Mart is the country’s biggest employer, with more workers than the US Army.
What’s going on here? Does Wal-Mart, a cut-throat, calculating company when it comes to costs and the competition, know that an employer mandate is even worse for its competition’s profits, and is getting on board to crush its rivals?
An employer health insurance mandate means companies would have to offer health insurance to their workers, no matter what.
The insurance could be paid for with higher taxes, possibly a new form of an 8% payroll tax that companies (translation, workers) would pay. It would mean workers would be enrolled in a low quality HMO type plan that wouldn’t cover the same level of health care costs now incurred.
Before we get to the details of the impact of Wal-Mart’s move, watch this first. Wal-Mart’s support came a day or so before new Congressional Budget office numbers showing the impact on the mushrooming federal deficit of the Senate’s health reform proposal, spearheaded by Democratic Senators Chris Dodd and Ted Kennedy.
The new CBO numbers show the cost of this legislation is now below the $1 tn mark. How does the Senate get there? By not including the costs for expanding Medicaid costs, and because of the employer mandate.
Specifically, according to the CBO, by 2019 the Senate bill will cover 21 mn. That cost comes to about $597 bn. Again, the Senate bill does not include expanding costs for Medicaid. And the new CBO figures doesn’t include the cost of the 15 mn people expected to be enrolled in the employer-mandated coverage.
The CBO’s initial $1 tn plus number that the White House and Democrats in Congress had gulped at, then attacked, had assumed—get this—that employers would dump those 15 mn or so workers onto the US government—meaning, federal taxpayers.
This is a rare admission, a rare bit of candor, a rare acknowledgement of behavioral economics by the CBO. Meaning, a government research body is acknowledging what analysts have been saying all along–that companies would cancel coverage for 15 mn workers employees and shove them off onto the Health Insurance Exchange, where they would then get taxpayer subsidies to buy health insurance.
So, what’s the deal with Wal-Mart and an employer mandate for health insurance? Fox News analyst James Farrell weighs in.
First, Wal-Mart already provides more employee health insurance than its average competitors. Approximately 52% of Wal-Mart’s 1.4 mn U.S. employees are covered by company-provided insurance, while the retail industry average is 45%.
To raise this coverage to 100%, Wal-Mart would have to increase its coverage by 48%, while its average competitor would have to increase their coverage by 55%. Advantage: Wal-Mart.
Second, Wal-Mart has economies of scale that its competitors lack. As a large employer, Wal-Mart already likely pays a lower premium than its competitors with far less employees.
For example, the CBO notes that the share of the health insurance premium that covers administrative costs varies significantly by the size of firms, from about 7% for firms with at least 1,000 employees to a more sizable 26% for firms with 25 or fewer employees.
Requiring employers to provide health insurance to all employees would thus probably cost Wal-Mart less on a per employee basis than its competitors. Advantage: Wal-Mart.
Third, the economies of scale and greater percentage of covered employees would further benefit Wal-Mart if the government mispriced the penalty that it would assess on employers for failing to provide health insurance for its employees.
The government plans to smack companies that don’t participate with a fine, a so called play or pay requirement. The fine could be equal to 8% of pay for each worker not given coverage. Advantage: Wal-Mart.
Follow the math here. If the government prices the penalty lower than Wal-Mart’s average contribution to health insurance per worker, Wal-Mart could just pay the penalty for each employee. Wal-Mart would have to math out its benefits here, taking into account the current cost of insurance coverage and the penalty times the number of employees whose coverage Wal-Mart would be dropping.
Fourth, Wal-Mart has indicated that its endorsement (which will likely be touted by the Administration as evidence of the wisdom of its health insurance reform) is conditioned only upon the ultimate mandate being designed in a way that further advantages Wal-Mart compared to its competitors. Advantage: Wal-Mart.
According to the Congressional Quarterly, Wal-Mart spokesman Greg Rossiter said “that Wal-Mart wanted an employer mandate that would have companies pay in based not on how many employees they have, but based on ‘profit per employee.’”
Wal-Mart has more workers than the US Army, and low-wage employees as well, so you can see why it wanted an employer mandate based on this metric. If an employer mandate was constructed otherwise, Rossiter said, “it certainly could become a disincentive to support it.”
Wal-Mart’s Health Reform Gambit - Elizabeth MacDonald, Fox Business
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Posted in Health Care Crisis-The Discussion at 9:06 am by Brian John
Health insurance is supposed to offer protection — both medically and financially. But as it turns out, an estimated three-quarters of people who are pushed into personal bankruptcy by medical problems actually had insurance when they got sick or were injured.
And so, even as Washington tries to cover the tens of millions of Americans without medical insurance, many health policy experts say simply giving everyone an insurance card will not be enough to fix what is wrong with the system.
Too many other people already have coverage so meager that a medical crisis means financial calamity.
One of them is Lawrence Yurdin, a 64-year-old computer security specialist. Although the brochure on his Aetna policy seemed to indicate it covered up to $150,000 a year in hospital care, the fine print excluded nearly all of the treatment he received at an Austin, Tex., hospital.
He and his wife, Claire, filed for bankruptcy last December, as his unpaid medical bills approached $200,000.
In the House and Senate, lawmakers are grappling with the details of legislation that would set minimum standards for insurance coverage and place caps on out-of-pocket expenses. And fear of the high price tag could prompt lawmakers to settle for less than comprehensive coverage for some Americans.
But patient advocates argue it is crucial for the final legislation to guarantee a base level of coverage, if people like Mr. Yurdin are to be protected from financial ruin. They also call for a new layer of federal rules to correct the current state-by-state regulatory patchwork that allows some insurance companies to sell relatively worthless policies.
“Underinsurance is the great hidden risk of the American health care system,” said Elizabeth Warren, a Harvard law professor who has analyzed medical bankruptcies. “People do not realize they are one diagnosis away from financial collapse.”
Last week, a former Cigna executive warned at a Senate hearing on health insurance that lawmakers should be careful about the role they gave private insurers in any new system, saying the companies were too prone to “confuse their customers and dump the sick.”
“The number of uninsured people has increased as more have fallen victim to deceptive marketing practices and bought what essentially is fake insurance,” Wendell Potter, the former Cigna executive, testified.
Mr. Yurdin learned the hard way.
At St. David’s Medical Center in Austin, where he went for two separate heart procedures last year, the hospital’s admitting office looked at Mr. Yurdin’s coverage and talked to Aetna. St. David’s estimated that his share of the payments would be only a few thousand dollars per procedure.
He and the hospital say they were surprised to eventually learn that the $150,000 hospital coverage in the Aetna policy was mainly for room and board. Coverage was capped at $10,000 for “other hospital services,” which turned out to include nearly all routine hospital care — the expenses incurred in the operating room, for example, and the cost of any medication he received.
In other words, Aetna would have paid for Mr. Yurdin to stay in the hospital for more than five months — as long as he did not need an operation or any lab tests or drugs while he was there.
Aetna contends that it repeatedly informed Mr. Yurdin and the hospital of the restrictions in policy, which is known in the industry as a limited-benefit plan.
The company says such policies offer value by covering some hospital expenses, like surgeons’ fees or a stay in the intensive care unit. Aetna also says all of its policyholders receive significant discounts on the overall cost of hospital care. But Aetna also acknowledges that a limited-benefit plan was inappropriate in Mr. Yurdin’s case because his age and condition — an irregular heartbeat — made him likely to require more comprehensive coverage.
“Limited benefits aren’t right for everyone, and it clearly wasn’t right for Mr. Yurdin,” said Cynthia B. Michener, an Aetna spokeswoman.
Charles E. Grassley, the ranking Republican on the Senate Finance Committee, which is taking a lead on health legislation, says Congress needs to make “meaningful” insurance coverage more affordable and accessible. But “until that happens,” he said, “any presentation of limited-benefit plans ought to be completely straightforward, and not misleading in any way.”
The Work-Up: Insured, but Driven Bankrupt by Health Crises - NY Times
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Posted in Our phony middle class, Small Business-Bedrock of America at 9:02 am by Brian John
Entrepreneurship and new small businesses are supposed to lead us out of the recession, just as they have in prior downturns, right?
Sure. Your neighbor’s grand idea will persuade a bank to lend her start-up money; she’ll open for business in six weeks; and money will immediately flow from customers to her to her employees. Taxes will be paid, and the national economic engine will hum effortlessly in no time.
If only.
Today shows a different reality: Commercial bankruptcies are surging. Fewer people are starting small businesses, and firms already open are struggling under changing consumer habits, a lack of funding options and tougher bankruptcy laws. If a nationwide trend seen since January holds true, more than 300 businesses will file for bankruptcy — today alone.
Cafe Boulevard, for 12 years a popular European-style restaurant in Dayton, Ohio, hasn’t been able to endure the downturn.
Rising gas and food prices, increased competition and an ill-timed expansion cut profits. Local unemployment made matters worse, because the regulars no longer showed up. In April, the restaurant’s owner, Eva Christian, was one of 8,149 U.S. business owners who filed for bankruptcy-court protection.
She didn’t close the cafe. Instead, Christian is trying to retain her employees while she works with creditors.
“When I decided to file for Chapter 11 bankruptcy, I felt crushed,” Christian says. “But my attorney said that Donald Trump did it, and GM did it, and Delta did it. It gives people the opportunity to bounce back.”
The first five months of this year have shown a 52% increase in the total number of commercial bankruptcy filings (36,106) compared with the same period last year (23,829), according to the Automated Access to Court Electronic Records. On average thus far in 2009, some 350 commercial enterprises file for bankruptcy daily — an increase of 240% from 2006, the first year after the bankruptcy law was changed.
Small companies hardest hit
Major corporate failures, like GM and Chrysler, flash across front pages and websites. But the vast majority of commercial bankruptcies, which are not separated by size of firm by data keepers, are filed by entrepreneurs and small-business owners, says Robert Lawless, professor of law at University of Illinois.
Troubling for the economy, say Lawless and Todd McCracken, president of the National Small Business Association, is the double-whammy of fewer start-ups and increasing bankruptcies.
“There is always this dynamism in the small-business community: Businesses are always dying, and new businesses are always getting started,” McCracken says. “Usually more start than fail, but my sense is that now it has flip-flopped. And it’s alarming.”
Lawless agrees.
“In the past, small-business formation increased in a recession because people had self-employment thrust upon them,” he says. “One avenue out of economic hard times — self-employment — has become less attractive, because the bankruptcy law is less forgiving” and there are fewer options for those entrepreneurs to get bank loans or to find funding elsewhere.
Trickle-down effect hurts
Small business is considered the backbone of the economy. In the past, new businesses led economic recoveries, McCracken says. Small businesses — those with fewer than 500 employees — make up half of the gross domestic product and account for most job growth.
Problems from the devastated housing market, overall recession and suffering major industries all funnel down to small businesses, especially those that supply the troubled corporations.
“When you have the GMs of the world filing for bankruptcy, they are canceling contracts and discharging debts that they owe to their suppliers,” says B. William Ginsler, a bankruptcy lawyer in Portland, Ore. “And those are small businesses that are less solvent than larger corporations.”
The transportation industry, which includes the auto and airline businesses, has sparked the biggest run-up in small-business bankruptcy filings, according to new data from an Equifax bankruptcy study. After transportation, the construction, manufacturing and retail industries are the major causes, the study says.
While not always the case, the line from one faltering company to another can be direct.
Just before the economic slump, Cafe Boulevard’s Christian opened a second restaurant in Dayton called Cena. Cena’s outlook is bleak, because a nearby General Motors assembly plant is closing, and NCR is moving its headquarters from Dayton to Georgia.
“It was bad timing to expand into a second restaurant,” Christian says.
Household spending cutbacks reach far, too. Dual-income families who are now single-income may no longer need or be able to afford child care, so many of those services are going out of business, says Lester Thompson, a bankruptcy lawyer in Dayton. Sporting goods stores and lawn-mowing services also have struggled.
Small-business bankruptcy filings jumped the most in the Los Angeles and Chicago metro areas, according to Equifax. But even smaller areas of the country are experiencing a big increase.
David Hicks, a bankruptcy lawyer in Omaha, says he has seen an increase in business struggles related to the auto industry and the mortgage crisis. Among them are owners of used car lots and housing contractors.
In South Carolina, bankruptcy attorney Jane Downey has worked with dry cleaners and gourmet sandwich shops.
Robert Chernicoff, a bankruptcy lawyer in Harrisburg, Pa., says one client who recently filed for Chapter 11 bankruptcy is the owner of a new small strip mall, Shoppes at Silver Spring. Mall owners counted on about eight tenants. It’s in a good location, Chernicoff says, but the economic downturn caused some tenants to back out, and it has taken longer to find new ones.
Chapter 7 vs. 11 vs. 13
Many small businesses owe so much money to creditors that there is no future. Such owners often file for Chapter 7 bankruptcy and shut their businesses for good. Chapter 7 allows sole proprietors to discharge their debt and for corporations to have an orderly liquidation.
Those who want to reorganize a business or sell it as a going concern may file for Chapter 11. Chapter 13 is a similar but less costly and time-consuming option that is limited to individuals who have a certain amount of debt.
Last month, Randy Wicker filed for Chapter 11 bankruptcy because his 15-year-old business, Earth Structures, had hit a significant rough spot after previously earning up to $8 million annually. His corporation, based in Spartanburg, S.C., primarily builds retaining walls for highway projects.
Earth Structures has worked on Department of Transportation projects, but those have nearly disappeared. Wicker and other contractors are now competing in the commercial market.
“More contractors are vying for less jobs,” Wicker says.
“Maybe President Obama’s effort to restore the highways with a stimulus plan will lead to more work for him,” says Downey, his lawyer.
Lack of loans worsens problem
The credit crunch is a major contributor to the rise in filings.
Loan dollar volume from the U.S. Small Business Administration has increased 35% since the American Recovery and Reinvestment Act was passed on Feb. 17, according to the SBA. Even so, a National Federation of Independent Business trend report states that in May the percentage of business owners reporting that loans are harder to get rose to 16%, the highest reading since the 1980-82 recession.
Businesses can’t easily rely on credit cards these days, either.
“What’s happening now is that a lot of banks are retrenching and cutting back on lines of credit and credit card limits,” McCracken says.
With that reality, and loath to dip into their retirement savings, struggling small-business owners have few options other than bankruptcy. When the bankruptcy law changed in 2005 it was mostly aimed at curbing abuse of personal bankruptcy filing. But it also singled out small businesses for harsher treatment, and those changes did not apply to larger corporations, Lawless says.
Small businesses that file for bankruptcy have a shorter time frame to reorganize, Hicks says. “And before, a judge could pull the plug on a small-business owner that was playing the system, or he could give a break to somebody who was legitimately trying to reorganize,” he says. “Most of the discretion is now gone.”
But the data show the change hasn’t deterred small businesses from filing for bankruptcy.
“You can change the bankruptcy law all you want, but if we have a recession, lots of business are going to file,” says John Pottow, professor of law at the University of Michigan Law School. “The increase is yet another sobering economic milestone.”
Bankruptcy is still the only option for many small-business owners who are hanging by a thread.
“The failure of a small business doesn’t have to be a lifetime sentence for the owner,” says U.S. Bankruptcy Court Judge Lewis Killian, in Tallahassee. “Bankruptcy gives them the ability to go forward, to start up again and be successful.”
Small Businesses Vital to Economic Recovery Go Bankrupt - LA Times
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07.02.09
Posted in A Growing List Of One Term Presidents, Analysis & Commentary, Back to the basics at 9:02 am by Brian John
The blunt truth is that even if we had had President Obama’s financial regulatory “reforms” in place four years ago–reforms designed to prevent another financial meltdown–we would still have experienced a horrific economic disaster. In other words, the Administration’s prescriptions deal with the symptoms–and those badly–not the underlying causes.
The astonishing housing bubble could not have happened without the Federal Reserve’s easy-money policy, which got under way in late 2003. If not for the excess liquidity created, there would not have been sufficient fuel to distort the housing market and ultimately the financial system. Yet President Obama has remained mum regarding the need for a strong and stable dollar. Without such a policy it’s guaranteed we’ll continue to experience financial turmoil.
The Fed’s punishment for its wretched doings is that Congress will likely give it more regulatory powers. That’s the thing about government: The more it fails, the more power it accrues.
Obama’s Financial Overhaul Is Largely Useless - Steve Forbes, Forbes
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Posted in Madoff Scam, Unindicted Co-Conspiritors at 8:57 am by Brian John
Though he claims to have acted alone, it took more than a fountain pen to pull off his massive fraud.
Don’t Be Fools: Bernie Madoff Didn’t Act Alone - Randall Forsyth, Barron’s
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Posted in Mortgages, Our phony middle class, Political Chaos, Residential Market, Unemployment Catastrophe, Wage Deflation, Who Guarantees the Guarantor?-You Do! at 8:52 am by Brian John
To read “Our Lot: How Real Estate Came to Own Us” is to relive, in painful, anecdotal detail, the real estate bust that brought our economy low. Through Alyssa Katz, a journalism professor at New York University and the former editor of the magazine City Limits, we remeet the exploited homeowners and the naive investors, and we cringe again at the blundering politicians and opportunistic lenders.
But “Our Lot” is also a reminder that our memories are short, and that the same mix of hope, greed, good intentions and bad policy has been inflating and popping real estate bubbles since the days of LBJ. Behind it all is a conviction shared by nearly all Americans, be they Democrats or Republicans, Wall Streeters or the ARMed and desperate masses, that home ownership is a good thing — good for the neighborhood, the country and the average citizen holding the deed and the debt. “Our Lot’s” long view is perhaps most unnerving for the doubt it casts on that timeworn belief. Salon interviewed Katz by phone.
Isn’t homeownership actually good for you? I thought it was the panacea for almost all social ills, it drove the crime rate down, educational achievement up, and so on.
Yes, well, homeownership is only as good as the amount of home you actually own, and I think the big problem in the last generation or so is that Americans have turned to more and more and more debt to reach for the American dream.
There’s a lot of great examples out there — the Nehemiah homes that transformed East New York in Brooklyn from a really devastated and dangerous place to someplace that’s still really poor and has a high crime rate but has an opportunity to really grow and have a stable bunch of families really invested in building a home there. So all that’s great. Certainly there’s a lot of evidence that homeowners do tend to stay in one place for longer, their kids perform better in school. They tended to be more involved in local politics, community affairs, and block cleanups. The problem is, it’s very hard to separate out the effects of homeownership itself from the fact that people who have a certain economic or social standing are more likely statistically to be homeowners in the first place.
Does this mean that we shouldn’t actively encourage homeownership, using government money or government policy?
I think there’s nothing wrong with using government money, policy, pressure, all those tools to make homeownership more of a possibility than it would otherwise be in the marketplace, simply because the market left to its own devices discriminates aggressively. It rewards people who already have wealth, who have already had a leg up economically, and it’s great to give other people the opportunity as well.
The problem is that homeownership is the only housing policy that this country has ever shown any commitment to. Renters are treated miserably.
And that’s one big distinction you see between the U.S. and European countries that also had very loosely regulated mortgage-security markets and have had problems there. I think one reason you’re not seeing mass foreclosures on quite the scale that you had in the U.S. is that for large proportions of the population in many European countries, including the Netherlands, Germany, France, Switzerland, renting is supported through government policies that, for instance, protect tenants so that they don’t have to worry about getting kicked out at the end of the year.
Whereas in the U.S., homeownership was always the only option. And anyone who can afford to, or thought they could afford to, would choose that option. So that’s really the problem here.
Whose fault is the mess that we’re in now? And how far back do we need to go to start tracing the blame?
I think the message of my book, unfortunately, is that it’s to some degree everybody’s fault, including, I should say, liberal activists, with whom I’m extremely sympathetic, and think were right.
But what we really had was a collision of ideologies over this question of: How do we make it possible for everyone to be a homeowner? How do we eradicate this horrible legacy of discrimination, which had left the homeownership rate for whites much, much higher than that for blacks and Latinos? There was real work that needed to be done there. So I think we really have to go back to the 1970s, when we started to see pretty aggressive policy measures on the part of the federal government to try to level the playing field.
You talk about another real estate bubble in the early ’70s, when everybody who wanted one could get a mortgage. The wreckage that was left behind looks totally familiar.
Yes. Rather infamously, the federal housing administration, which is the government agency that insures mortgages — it’s what built Levittown and all those 1950s suburbs after the war — discriminated very aggressively, on the basis of what was thought to be sound statistical evidence, that the insurance fund would only be safe if it were to insure suburban and overwhelmingly white areas.
So what happened in ‘67 and ‘68 was that federal housing officials reversed that entirely. They proclaimed, initially just in the riot areas and then more broadly across cities, that FHA, the Federal Housing Administration, would now be open everywhere! And in fact, as I note in the book, the only circumstances under which HUD did not insure mortgages is if the house is literally falling down.
Real estate agents and loan brokers descended on inner cities, trying to find borrowers who would be unlikely to pay their mortgages back, because the real-estate speculator would get paid in full by the federal government, and paid more quickly and more generously, because of forgone interest that they would get compensated for. The sooner that borrower went into foreclosure the more generously that entrepreneur would get paid.
When was that mess cleaned up?
About ‘73, ‘74. There were tens if not hundreds of thousands of abandoned houses all over the country as a result of the FHA debacle, and it got a lot of attention at the time and was almost forgotten to history after that.
And then we have the Reagan presidency and — correct me if I’m wrong — but that’s when the securities market for mortgages really blossoms, right?
Absolutely. Mortgage-backed securities had existed since about 1970. They existed in the ’20s too, and that was part of why the Depression happened — they had been made illegal after that. But they came back as a government product in 1970. As I recount in the book, Lewis Ranieri of Salomon Brothers, which was trading in government-backed securities, thought, “Couldn’t we just do this ourselves? Why do we need to have Freddie Mac or Fannie Mae in the middle, why don’t we create these securities?”
In order to do that, they needed to rewrite all those laws that had been passed following the crash in 1929 and thereafter, which was as much a housing and real estate bubble crash as it was a stock market crash.
Who’s to Blame For the Housing Crash? - Mark Schone, Salon
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Posted in A Growing List Of One Term Presidents, Important Skills - No Apprentice Programs at 8:46 am by Brian John
Responding to the almost monolithically positive coverage of the Obama administration by the national press, Phil Bronstein, editor-at-large for the Hearst Newspapers, observed recently that the Administration and the reporters covering it should “get a room.” And while USA Today’s account of Barack and Michelle Obama’s “United We Serve” initiative appeared after Bronstein’s quip, its coverage of same serves as yet another example of a media apparently unwilling to show even the remotest amount of skepticism about an Administration and program that deserve a great deal of it.
As USA Today’s Andrea Stone wrote, “First Lady Michelle Obama will launch a summer of service” that the “White House hopes will help the economy recover through the work of individuals.” This is not a joke, and this is also not a parody of slavish White House reportage from the Onion. Stone was serious.
But back to reality, and taking nothing away from either charitable work or volunteerism, neither has anything to do with economic growth. If anything, for drawing potential workers away from the wage economy, volunteerism detracts from economic activity.
Nothing Stimulative About Obama’s Volunteerism - John Tamny, RCM
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07.01.09
Posted in Collateral Damage, Coming Social Unrest, Deflation-Inflation-Stagflation, Insolvency, Our phony middle class, Political Chaos, US Trade Imbalance, Unemployment Catastrophe, Wage Deflation, We Have Become Beggars To The World at 9:07 am by Brian John
By Kathleen M. Howley
June 29 (Bloomberg) — Driving through Riverside, California, Bruce Norris pointed to a half-dozen empty houses with “For Sale” signs stuck in untended lawns that he said investors might buy if banks would just extend some credit.
“People today look at us as the enemy,” said Norris, 57, head of Riverside-based Norris Group, which purchases and renovates homes to rent or sell. “That’s a big problem for housing because if we can’t get the financing we need, a lot of these properties are going to sit vacant.”
Four months after President Barack Obama pledged $275 billion to shore up home sales, the engine that powered every U.S. recovery since 1960 is stalled. Bankers’ reluctance to finance buyers who won’t live in properties is one barrier to a turnaround. Stricter qualifying rules and a rise in the cost of residential loans to 5.42 percent have impeded new mortgage lending, which is at a 13-year low. An inventory of 2.1 million unoccupied houses on the market, created by the fastest foreclosure pace in history, may be a drag on a revival.
The $8,000 first-time homebuyer tax credit in the U.S. economic stimulus package and a government program to subsidize some mortgage payments have had little effect, according to Eric Belsky, executive director of Harvard University’s Joint Center for Housing Studies in Cambridge, Massachusetts.
“It hasn’t been much more than a see-sawing of data,” Belsky said in an interview. “Housing has led the U.S. economy out of every recession for at least 50 years, and for that to happen again more stimulus is going to be needed.”
Leading Indicator
The residential real estate market improved ahead of the end of the past seven contractions, with home construction starts beginning to climb an average of seven months before gross domestic product picked up and sales gaining about four months in advance, according to data compiled by David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California.
Expenditures by homeowners — first on transaction fees, then on necessities and luxuries including furniture, gardening tools, kitchen renovations, basic upkeep and property taxes — kept the momentum going, Belsky said.
Existing U.S. home sales in May rose 2.4 percent to an annual rate of 4.77 million, lower than forecast, and the median price was down 16.8 percent from the same month in 2008, according to the Chicago-based National Realtors Association.
There’s little chance the turnover will increase enough this year to end the housing recession, said Andres Carbacho- Burgos, an economist with Moody’s Economy.com in West Chester, Pennsylvania.
‘Lousy Job Market’
“We have a lousy job market and an excess of around 1 million extra homes that has to be worked off,” he said in an interview. “The housing market is not going to hit bottom before mid-2010.”
Housing starts are at their lowest level since 1945, even with a 17 percent increase in May that pushed the annual rate to 532,000 from a 454,000 pace the prior month. So many properties are for sale — 3.8 million as of last month — that it would take 9.6 months to unload them at the current sales pace, according to the Realtors group. The inventory averaged 4.5 months in the six years from 2000 to 2005.
While there is pent-up demand that would eat away at the stock, “people are scared to spend the money because they’re worried about losing their jobs,” said Nariman Behravesh, chief economist at IHS Global Insight in Lexington, Massachusetts, in an interview.
6 Million Jobs
The unemployment rate, which reached a 26-year high of 9.4 percent in May, will probably exceed 10 percent this year, Obama said at a June 23 White House news conference.
“The American people have a right to feel like this is a tough time right now,” Obama said, calling it “pretty clear” payrolls will continue to shrink. About 6 million jobs have disappeared since January 2008, marking the biggest employment loss of any retrenchment since the Great Depression.
Personal bankruptcies rose 37 percent in May from a year earlier, according to the American Bankruptcy Institute, based in Alexandria, Virginia. Credit card defaults in the first quarter went to 7.79 percent from 4.83 percent a year ago, Federal Deposit Insurance Corp. data show. While the share of loans entering foreclosure moved to 1.37 percent, the highest ever, the first-quarter mortgage delinquency rate climbed to a record 9.12 percent, the Washington-based Mortgage Bankers Association said.
Housing in Peril as Financing Breakthrough Fails - Bloomberg
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Posted in AIG and all that....., The End of American Capitalism As We Know It? - Discuss, The Financial Elite, The Joy of Being A Bank, The New American Socialism, Who Guarantees the Guarantor?-You Do! at 9:03 am by Brian John
How a Loophole Benefits GE in Bank Rescue
Industrial Giant Becomes Top Recipient in Debt-Guarantee Program
General Electric Co. CEO Jeffrey Immelt, center, is applauded by Michigan Gov. Jennifer Granholm during a news conference Friday, June 26, 2009, in Birmingham, Mich. Immelt announced GE will build a $100 million manufacturing technology center in Michigan that will eventually employ more than 1,100 workers. At right is Ed Montgomery, President Barack Obama’s director of recovery for auto communities and workers. (AP Photo/Carlos Osorio) (Carlos Osorio - AP)
ProPublica and Washington Post Staff Writer
Monday, June 29, 2009
General Electric, the world’s largest industrial company, has quietly become the biggest beneficiary of one of the government’s key rescue programs for banks.
How a Loophole Benefits GE in Bank Rescue - Washington Post
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Posted in Buy Gold Stocks, Global Trade, Watch The China Market, We Have Become Beggars To The World at 9:00 am by Brian John
June is the month for mid-year revisions to economic forecasts by the major international financial organizations and other forecasters. The Organization for Economic Cooperation and Development (OECD) released its new forecasts Wednesday, predicting that the deep global recession is nearing a bottom. It’s projections of world real GDP growth of -2.2% for 2009 and +2.3% for 2010 represent the first upward revisions in OECD’s growth projections since June of 2007. In remarks last week, the First Deputy Managing Director of the IMF, John Lipsky, said he expects that his institution will be revising its projections “modestly upward, mainly with regard to 2010.” The sister organization of the IMF, the World Bank, took a contrary stance at the beginning of the week, setting back global equity markets with a downward revision of its projection for the global economy this year to -2.9%, coupled with strong negative comments on the effects of the global credit crisis on developing countries.
We are in broad agreement that a turning point in the global economy is likely in the coming months. This follows a period of particularly sharp contraction (“falling off a cliff”) in the six-month period to March of this year. A recovery appears to be already underway in many of the emerging-market economies. Among the advanced economies, the United States and Japan appear likely to begin to recover in the course of the second half, driven by what the OECD characterizes as “massive policy stimulus and progress in stabilizing financial institutions and markets.” Continued balance-sheet problems for consumers, aggravated by further increases in unemployment, will likely put a damper on the pace of recovery in the US. Continued heavy deflationary forces will continue to be a challenge to policy makers in Japan, following what was probably that country’s most severe recession in its post-war history.
While there are some “green shoots” also appearing in the euro area, the eventual recovery looks likely to lag that in the US and Japan. External demand for the region’s exports has collapsed; and tight financial conditions, rising unemployment, and financial-sector problems have constrained domestic demand. Positive growth probably will not appear until the fourth quarter of this year at the earliest.
There is broad agreement on the positive economic outlook for the Chinese economy, which appears to be on course for strong growth. The World Bank raised its 2009 forecast for China from 6.5% to 7.2%. The OECD expects 7.7% growth for China this year and 9.3% in 2010. We would not be surprised to see Chinese economic growth top 8% this year and be close to 10% in 2010. The government’s fiscal stimulus of $590 billion, along with sizable monetary stimulus, has clearly been successful in helping the economy ride out the global recession. This is quite an achievement in a year in which world trade growth is on track to register a 16% decline. In May there were notable advances in urban fixed investment (largely government-sponsored), real estate investment, and retail sales. Industrial production accelerated to an 8.9% rate. Declining exports have been a depressing factor in the first half. This trend should reverse with the expected recovery in the global economy.
Global equity markets, as is often the case, anticipated the end of the global financial crisis, the coming recovery and advanced strongly in recent months after bottoming in early March. International investors’ appetite for risk evidently returned to more normal levels as fears of “worst-case scenarios” lessened substantially. The very rapid pace of the advance in equity markets over the March through May period has been followed by a modest 6% pullback in global equities since early June. Markets clearly had gotten somewhat ahead of themselves. While risk appetite seems to have moderated in this period, there are no indications that it has turned negative. Investor flows into equity markets, particularly emerging markets, are continuing. Cumberland’s equity portfolios remain fully invested.
China’s strong performance on the economic front is reflected in its equity markets. The MSCI Index for China is up 28% year-to-date through June 23rd. An important reflection of the continuing strength of China’s market is the fact that this index drew back only -1.8% thus far in June while the MSCI Index for Emerging Markets dropped by -6.4%.
We utilize three ETFs to provide exposure to the Chinese market. The first is the iShares FTSE/XINHUA China 25, FXI. This ETF is by far the most popular China ETF, and therefore is the most liquid, an important consideration. It invests in just 25 ultra-large-caps, mostly government-sponsored Chinese firms. It is heavily concentrated in the financial sector (45.5%) and has 0% in the technology sector. The second is the SPDR S&P China, GXC. It has reached an adequate level of liquidity, with net assets of $315 million (although much less than FXI’s $9.2 billion). It provides considerably more diversified exposure to China than FXI, investing in some 130 firms, mixing large caps and small caps. It also has a high exposure to financials (32%) and includes some tech exposure (8.1%). Thirdly, we also use the Claymore/AlphaShare China Small Cap, HAO. Here we have to limit our position because the net assets of this fund are only $70 million. We are attracted by the differences in its sector exposure as compared to the previous two ETFs, including 16% exposure to information technology and only 7.7% to financials.
China’s strong performance is an important positive factor for other economies in the region, including Hong Kong (iShares MSCI Hong Kong Index Fund, EWH), Taiwan (iShares MSCI Taiwan Index Fund, EWT), and Singapore (iShares MSCI Singapore Index Fund, EWS), all of which we are overweighting in our International, Global Multi-Asset Class, and Emerging Markets ETF portfolios. China’s huge appetite for commodities is also boosting the markets for commodity-exporting economies, including Australia (iShares MSCI Australia Index Fund, EWA), Canada (iShares MSCI Canada Index Fund, EWC, and the Claymore/SWM Canadian Energy Income Index, ENY), Brazil (iShares MSCI Brazil Index Fund, EWZ) and Chile (iShares MSCI Index Fund, ECH).
Thus far we have not seen any evidence of a reemergence of the previous speculative excesses in China. Valuations continue to look relatively attractive. The price-to-trailing 12-month earnings ratio is 14.5, still below its 10-year average of 15.9%, whereas the same measures for Korea, Hong Kong, India, and Brazil are now all higher than their 10-year averages. Nevertheless, as the last 12 months have amply demonstrated, the Chinese market, like other emerging markets, can be highly volatile and requires careful monitoring.
Bill Witherell, Chief Global Economist
Global Recovery In Sight, China at the Wheel - Bill Witherell, Cumberland
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Posted in Buy Gold Stocks, Death of the Dollar, Deflation-Inflation-Stagflation, Dollar Musings, How do you dampen the inflation dragon?, The excellent adventures of Ben Bernanke at 8:55 am by Brian John
In the past three weeks there have been several indications that the Federal Reserve is reconsidering the extent and perhaps necessity of its extraordinary liquidity provisions to the Treasury market. How far have the chairman and governors pulled back from their quantitative easing policy?
On June 3rd Chairman Bernanke commented in Congressional testimony that federal deficits cannot continue forever. In fact the deficits can continue, but the Fed’s $300 billion Treasury purchase plan will end unless additional funding is authorized by the Fed governors. At this past week’s FOMC meeting the board specifically did not authorize further Treasury purchases. The Fed is also letting one of its emergency liquidity programs expire and curtailing two others. None of these developments is an overt change in policy, but they are assurances that the chairman and the board view these liquidity measures as crisis expedients and not as permanent institutions of monetary and economic policy.
It is easy to forget that the Fed policy of direct support for credit markets was an emergency response to the crisis of confidence that overwhelmed the financial system last fall. Fed purchases of various securities supplied liquidity to non-functioning markets; they were not intended to be permanent. The Fed said as much at the time, though in the ensuing months market focus shifted from the programs themselves to the lack of a clear strategy for absorbing the excess money supply from the economy.
In March the market reaction to the financial crisis was at its peak. Treasury prices had been driven to historical highs by sustained panic buying of US Treasuries. Treasury interest rates and rates on 30-year fixed rate mortgages were at record lows. But even though mortgages rates were extraordinarily low the Fed judged that the reeling economy could not tolerate the surge in interest rates that would occur if Treasury prices began to fall. The governors may have suspected that the Treasury market would begin to drive prices lower and rates higher on its own as credit conditions normalized
In that context the Fed announced its $300 billion Treasury purchase in the FOMC statement of March 18th. The governors may also have been worried about the impact of the federal deficit on the bond market whose reaction was then an unknown quantity. But despite the Fed backstop the Treasury market fell relentlessly after March 18 with the 10-year rate rising more than 1.5%. More dangerously the dollar index fell 10% from March 18th to June 2nd. For the currency markets the Fed Treasury program has had one meaning, monetization of the Federal debt. Judging by the subsequent rise in Treasury rates the Fed governors may have known that the $300 million committed would be insufficient to hold the line on Treasury rates. But that relatively minor amount had a deadly effect on the dollar. The merest suspicion that monetization of US debt was possible sent the dollar into a three month swoon. The inflation that would result from a rapidly falling dollar and the effect of a collapsing dollar on the Treasury market itself could undo much of the economic and rate stabilization that the Fed was striving to achieve.
The Fed concern about the Treasury market was for the economic effect of higher interest rates on the US economy, particularly on the housing market thought by many to be at the heart of the economic collapse. But higher Treasury yields and mortgage rates have not, at least so far, choked whatever positive change in the economy has occurred since March. 30-year fixed mortgages have gained more than a point but the housing market has stabilized; new home and existing home sales in May were both in the center of the range they have exhibited since January.
The Personal Consumption Expenditures Index has revived since last December. It gained 0.9% in January, 0.4% in February, 0.3% in May, was flat in April and lost 0.3% in March. The half year prior to January had six negative months in a row. Non Farm Payrolls were substantially improved in May at -345,000, with the three month moving average (-500,000) having gained almost 200,000 since March (-691,000). Consumer sentiment numbers have moved up steadily since the beginning of the quarter. The economic situation that prompted the Fed quantitative easing has returned to more normal territory.
The Treasury market has also stabilized in the past two weeks. After reaching 4.00% the yield on the 10-year note had declined to 3.54% on the Friday close. The government Treasury auctions, a record $104 billion in the past week alone, have been subscribed at higher rates than normal. The bond markets are not demanding substantially higher rates on American debt, despite the vast continuing supply of US issuance.
The key to the extension of the Fed Treasury program is the attitude of the credit markets. It is relatively simple. If bond purchasers do not demand higher yields for US debt, then whatever the long term effect of the ballooning US debt and inflation the government will not be forced to pay higher rates. If Treasury prices are not falling the Fed will not have to support the market with further Treasury purchases and the currency markets will not be stampeded away from the dollar by monetization.
Foreign central banks have been unusually critical of the US government’s fiscal and debt policy. The Chinese were so again this week. But what matters are not the banker’s words or their musings about a world reserve currency. What matters is action. As long as the Chinese, Russians, Japanese and private investors continue to buy US Treasuries, the Fed will not have to choose between supporting the US economy and supporting the dollar.
It is a delicate balance but so far the Fed has, with the cooperation of the Treasury markets, kept the pointer right in the middle of the scale. The Fed has managed to mitigate the scare it threw into the currency markets in March with its recent statements and actions.
There are still a huge amount of Treasuries to be sold over the next three months and the economic situation is still dangerous. But the Fed view as reflected in the FOMC statement, no more quantitative easing and a slight though significant withdrawal from the credit markets may be the right and artful balance between keeping down US interest rates and avoiding a dollar panic in the currency markets
Last Call for Monetization? - Joseph Trevisani, FX Solutions
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Posted in Global Trade at 8:50 am by Brian John
The aggressive global policy response to defend against the slowdown has begun to gain traction, as real economic data have shown a slight improvement almost synchronously around the world. These attempts to revive growth have also resulted in a significant rise in asset markets, particularly property prices. Property markets have seen a meaningful rebound from the bottom across the Asia ex-Japan (AXJ) region, particularly in the financial centers of Hong Kong, Singapore, Seoul, Shanghai, Bangkok and Mumbai. From what we can surmise, property prices have risen by 10-40% in various pockets in the region (unfortunately, most up-to-date official national and city level property indices are not available). Hong Kong and Singapore, which are linked more closely to global financial markets, have seen the sharpest rebound. Price indices in some areas are close to the peak levels seen prior to the emergence of the global credit turmoil. Transaction volumes for the property sector have also increased significantly.
The most surprising trend can be seen in Singapore. Although Singapore is likely to suffer the worst recession in its history in 2009, property transactions are now close to their peak. During January-May 2009, total private residence transactions increased to 5,531 units (annualized run rate of ~13,247 units) versus the peak of 14,811 units in 2007.
Many Reasons for the Quick Rise in Property Prices
First, a sharp rebound in the stock market around the region appears to have increased the confidence of the locals. The MSCI Asia Ex-Japan Index (in USD terms) has risen by 71% from the trough following the global trend.
Second, excess liquidity in the system is rising. Central banks have cut rates aggressively in response to the global credit crunch, and the recent increase in capital inflows and trade surplus has added to this excess liquidity trend, as central banks appear reluctant to allow local currency appreciation in view of the still-weak external outlook. As a result, foreign exchange reserves in AXJ excluding China increased to US$1,446 billion as of May 2009 and are now close to their peak level of US$1,491 billion in April 2008. China’s foreign exchange reserves have also risen back to an all-time high of US$1,954 billion in March 2009 after declining to US$1,880 billion in October 2008. Banks have cut mortgage lending rates aggressively. Average short-term rates have declined to unusually low levels at 2% on account of the aggressive monetary policy response. M1 growth in the region accelerated to 14.9% in April 2009 from a 6.6% trough in November 2008.
Third, most countries in the region are implementing a fiscal spending plan of 3-5% of GDP, which has supported growth and employment.
Fourth, most countries in the region also initiated measures to boost property demand during 4Q08 (e.g., Hong Kong, China, India and Korea). These measures included lowering the down-payment for getting a mortgage loan or relaxing lending norms for property and mortgages.
Central Banks Already Voicing Some Concern
What has been the central banks’ response so far? Some have started to relay their concerns on asset prices. Last week a member of the Bank of Korea (BoK) board indicated that funds may be moving into stock and property. The board member commented, “Rising property prices may cause market instability”. Similarly, a few days back, BoK Governor Lee Seong-tae mentioned that the BoK “also has to pay attention to the possibility of rising international raw materials prices hurting (domestic) price stability or for a rapid increase in short-term liquidity causing instability in real estate and other asset prices”. Indeed, the governor of Korea’s financial supervisory service (FSS) has already advised banks to maintain restraint when growing home-backed lending. A Chinese banking sector regulator recently vowed to monitor closely banks’ lending behavior with a view to preventing allocation of bank lending to stock market and property. India’s central bank governor also, for the first time since the credit crunch unfolded last year, mentioned that the RBI would consider reversing its expansionary monetary policy, but he did not indicate any timing on such a reversal.
End of Monetary Easing, but Rate Hikes Are Some Time Away
To be sure, the national level of property prices in countries other than city states has not risen as sharply to justify the aggressive policy response. Any potential correction in the global risk markets could also reduce the pressure of asset price rises. However, considering the pace at which property prices have moved up in certain pockets of the region, it does raise the risk of broader national-level price rises. The challenge for the central banks arises from the fact that the export and IP growth trend remains below potential and has not yet recovered meaningfully. AXJ IP is estimated to have improved to 1.6% in April 2009 from the trough of -7.6% in January 2009. However, it remains below the prior trough that occurred in 2001. Similarly, while exports are declining at a slower rate, they remain weak.
Selective Controls May Be More Likely as a Response
The key question is, if property prices continue to rise in the near term across the region, what would be the likely policy response? We are currently expecting central banks to start raising policy rates in 1Q10 as the growth trend recovers further. Our global economics team expects G10 growth to follow a slow recovery path, starting in 2H09. In this environment, any concerns about asset prices in the next six months could be addressed by sector-specific measures, such as tightening lending standards for the property sector and/or other non-monetary policy measures.
Fed Exit Strategy: When and How? - David Greenlaw, Morgan Stanley
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06.30.09
Posted in DEATH & TAXES at 8:23 am by Brian John
Only five months after Inauguration Day, the focus of Washington’s economic and domestic policy is already shifting. This reflects the emergence of much larger budget deficits than anyone expected. Indeed, federal deficits may average a stunning $1 trillion annually over the next 10 years. This worsened outlook is stirring unease on Main Street and beginning to reorder priorities for President Barack Obama and the Democratic congressional leadership. By 2010, reducing the deficit will become their primary focus.
Why has the deficit outlook changed? Two main reasons: The burst of spending in recent years and the growing likelihood of a weak economic recovery. The latter would mean considerably lower federal revenues, the compiling of more interest on our growing debt, and thus higher deficits. Yes, the President’s Council of Economic Advisors is still forecasting a traditional cyclical recovery — i.e., real growth of 3.2% next year and 4% in 2011. But the latest data suggests that we’re on a much slower path. Probably along the lines of the most recent Goldman Sachs and International Monetary Fund forecasts, whose growth rates average about 2% for 2010-2011.
A speedy recovery is highly unlikely given the financial condition of American households, whose spending represents 70% of GDP. Household net worth has fallen more than 20% since its mid-2007 peak. This drop began just when household debt reached 130% of income, a modern record. This lethal combination has forced households to lower their spending to reduce their debt. So far, however, they have just begun to pay it down. This implies subdued spending and weak national growth for some time.
In a March 27 forecast, Goldman Sachs estimated average annual deficits of $940 billion through 2019. If this proves true, deficits would remain above 4% of GDP through the next decade and the national debt would reach a whopping 83% of GDP, a level not seen since World War II. The public is restive over this threat: In a recent Wall Street Journal/NBC News poll, Americans were asked which economic issue facing the country concerned them most. Respondents chose deficit reduction over health care by a ratio of 2 to 1.
Mr. Obama and his economic advisers understand this deficit outlook and undoubtedly view it as unsustainable. They also understand that increasing deficit concerns complicate their efforts toward universal health-insurance legislation, which is clearly a top priority of this administration. According to the Congressional Budget Office, which released its latest forecast June 16, such legislation would mandate more than $1 trillion of new federal spending over 10 years. Winning support for that much new spending — in the face of record deficits — will be a challenge.
This explains why the president is stressing the importance of a deficit-neutral bill. In other words, that any new spending be fully offset by a combination of Medicare and Medicaid cuts and new tax revenues. Key Senate leaders have echoed this requirement. Fully financed legislation probably will emerge after a lengthy struggle.
The poor budget outlook may impel the administration to follow up health-care legislation with an effort to fix Social Security. The shortfall in Social Security’s trust funds — which adds to the long-term deficit — is much smaller than the companion problem in Medicare funding. Public anxiety over deficits may make this fix possible now even though it has been elusive for years. If this could be done, confidence in Washington’s capacity to address its debt challenge would rise.
But even with a Social Security fix the medium-term deficit outlook will be poor. Sometime soon, perhaps in 2010, Main Street and financial markets will exert irresistible pressure to reduce the deficit.
The problem is the deficit’s sheer size, which goes way beyond potential savings from cuts in discretionary spending or defense. It’s entirely possible that Medicare and Social Security will already have been addressed, and thus taken off the table. In short we’ll have to raise taxes.
We’ll Need to Raise Taxes Soon - Roger Altman, Wall Street Journal
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Posted in Even the Terminator Can't Help California at 8:21 am by Brian John
or at least a little less worse — about the budget crisis in Sacramento.
From the Wall Street Journal tonight:
Ten states were scrambling Monday to pass budgets before a Tuesday deadline, with a handful — including Arizona, Indiana and Mississippi — facing the possibility of partial shutdowns if their legislatures don’t act in time.
The number of statehouses where budget wrangling has gone down to the wire this year is unusually high, analysts said, and reflects the difficulty legislatures and governors are having coping with income- and sales-tax collections that continue to run far below already low forecasts.
All but four states begin their fiscal years on Wednesday, and all except Vermont require that their budgets be balanced. States without budgets in hand include California, Pennsylvania, North Carolina, Delaware, Illinois, Ohio and Connecticut, where Gov. Jodi Rell, a Republican, has said she will veto the budget passed by the Democrat-controlled Legislature.
Budget Battles Come Down to the Wire in Other States, Too - Money & Co.
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Posted in Mineral Wealth at 8:18 am by Brian John
or the exception that proves corruption still rules in resource-rich countries?
Mineral Extraction and Corrupt Governments - Ken Stier, Miller-McCune
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Posted in Madoff Scam at 8:16 am by Brian John
The central problem being played out among Madoff victims is that only a small fraction of the nearly $65 billion that disappeared has been recovered. While insurance will fill some of that gap, it is clear that many people will not come close to recouping their losses — meaning that whatever one group of investors get will affect how much is available for another group.
Ever mindful that the claims process is, in effect, competitive, some groups of investors are jockeying for favorable treatment from the Securities Investor Protection Corporation, the government-chartered insurance agency.
Investors Compete for a Piece of the Madoff Pie - New York Times
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06.29.09
Posted in Let's Call What It Is - DEPRESSION, Patience is a virtue...Delusion is a vice, The excellent adventures of Ben Bernanke at 8:39 am by Brian John
So maybe we could summarize the recent strength in the leading economic index this way. The main reason we think the economy is improving is because many of us think the economy is improving.
I Think The Economy Is Improving, Therefore It Is - Econbrowser
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Posted in It Is Nice To Be Part of the Elite! at 8:35 am by Brian John
John Mack of Morgan Stanley (MS) made sure that he had a large base salary for this year, even though his firm nearly fell apart last year. The management of Citigroup (C) also wants to do something for its “best” employees. According to a number of media reports, the bank plans to give its senior investment bankers raises of up to 50%.
It won’t matter. The very best people will flee the Citi pay caps to make millions of dollars at private equity firms and hedge funds.
The federal government has proved adroit at forcing the cream of the crop, the people who create the revenue and earnings, out of America’s largest banks and brokerage firms. These people are used to making $10 million a year or better. They make their employers tens of million if not hundreds of millions of dollars in return. Talent at that level can write its own ticket. Boutique firms like Greenhill (GHL), large hedge funds, private equity operations, and foreign banks will pay the going rate to get the stars.
The Administration has made certain that the key managers at banks, their intellectual capital, will be displaced, further damaging their chances of rebounding from their worst year in decades. An operation that the government should have performed with a scalpel instead of a meat cleaver has chopped the wages of mediocre and extremely skilled bankers with the same cut.
The government can say that it saved the banks but it also took away from them their best weapons to withstand what is still likely to be a rough and dangerous future.
Douglas A. McIntyre
Citi’s Raises Won’t Retain Talent - Douglas McIntyre, 24/7 Wall Street
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Posted in Analysis & Commentary at 8:33 am by Brian John
With a subtitle like “From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression - and they’re about to do it again” run, don’t walk, to your nearest kiosk and buy Matt Taibbi’s latest piece in Rolling Stone magazine. One of the best comprehensive profiles of Government Sachs done to date. Speaking of GS, they sure must be busy today, now that Bernanke is about to be impeached and take the fall for all their machinations.
Goldman Sachs: The American Bubble Machine - Matt Taibbi, Zero Hedge
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Posted in "what to do about the crisis" ideas., A Growing List Of One Term Presidents, Analysis & Commentary at 8:28 am by Brian John
Joe Nocera has said his peace with respect to Obama’s proposed overhaul of the financial system. And in doing so, he expressed disappointment with several aspects of the proposal. In particular, he is displeased that the proposal “doesn’t attempt to diminish the use of … bespoke derivatives.” That certainly sounds ominous. But it’s also not true.
The proposal calls for increased capital charges on bespoke trades, which is a strong incentive away from them. But frankly, I’m sick of writing about the proposal. So rather than regurgitate and parse the administration’s plans for financial regulation, I’d like to take a moment to get familiar with some of the key concepts at play in the proposal, so that you can read it and come to your own conclusions. The two core areas I focus on here are derivatives and regulatory capital. With an understanding of these two areas, you should be able to get a grasp on what the administration is thinking and what effects the proposal will have in practice.
Obama’s Financial Overhaul: What You Need to Know - The Atlantic
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Posted in Mortgages, Our phony middle class, Residential Market at 8:25 am by Brian John
Falling home prices have eroded the equity that American homeowners have in their homes, as David Wessel observes in his Capital column.
More than half of American home equity is in homes for which there are no mortgages; there never was one or it has been paid off. Of the remainder, the bulk isn’t in homes with high-end jumbo mortgages or in homes with subprime mortgages, it’s in homes with conventional mortgages, the sort backed by Fannie Mae and Freddie Mac.
The situation may have to get worse before it gets better. Most economists in the latest Journal forecasting survey expect home-price declines to continue at least through this year.
Here are the numbers, courtesy of Greenspan Associates, the former Fed chairman’s consulting firm.
Value of Equity in Homes
Total: $8 trillion
Without mortgages: $4.4 trillion.
With mortgages: $3.6 trillion
Subprime negative $0.1 trillion
Alt-A $0
Prime Jumbo $0.6 trillion
FHA/VA $0.1 trillion
Conventional/conforming $2.9 trillion
First lien home-equity loan $0.1 trillion
Source: Greenspan Associates
Where’s the (Remaining) Housing Wealth? - David Wessel, RT Economics
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Posted in Deflation-Inflation-Stagflation at 8:20 am by Brian John
n its post-meeting statement, the Fed removed a passage it had used after its three previous meetings to warn of the risk of deflation, meaning a broad-based decline in prices. Deflation is closely linked with another “D” word: depression.
The old statement wording read, “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.”
That was code for deflation.
Fed Tries To Turn Conversation Away from Deflation Risk - Money & Co.
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06.28.09
Posted in Mortgages, Our phony middle class, Residential Market at 5:57 am by Brian John
A growing number of American homeowners are falling into financial limbo: They’re badly behind on payments, but their banks have not yet foreclosed.
The backlog of seriously delinquent mortgages, which so far affects about 1 million borrowers, is a shadow over hopes for a rebound in the nation’s housing markets. It masks the full extent of the foreclosure crisis and threatens to depress prices even further just as some parts of the country are hinting at recovery. For lenders, it could portend even more financial losses tied to the mortgage meltdown.
“It just means foreclosure rates are going to keep rising,” said Patrick Newport, an economist for IHS Global Insight.
Rising mortgage delinquencies were at the root of the recession, and many economists say an economic recovery will be difficult until the housing market recovers and home prices stabilize.
And even though a delayed foreclosure can be a blessing for some troubled homeowners, for others, it simply prolongs the financial distress, leaving them on the hook for the condition of the property. Even if they move out, they cannot move on.
“I have even begged them for a foreclosure,” delinquent mortgage-holder Charlotte Jensen said. When she realized she couldn’t save her Glen Allen home last year, she filed for bankruptcy, packed up her family and moved out. Nearly a year later, Bank of America has yet to take back the home.
During the first quarter of this year, the share of all homeowners seriously delinquent on their mortgage but not yet facing foreclosure more than doubled to 3.04 percent, or about $227 billion in loans. There was a total of $97 billion in such loans during the same period in 2008, according to Inside Mortgage Finance. In more prosperous times, the rate is much lower — it was less than 1 percent in the first quarter of 2007, according to the industry publication.
Not Paying the Mortgage, Yet Stuck With the Keys - Washington Post
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