The Housing Bubble

I haven’t looked in wikipedia much over the years, but came across this reference to a HBB post from March 2006. The AZ blogger and I worked on this for a week or more to make sure we had it right before going public. Seems kinda small potatoes with how things worked out, but it was shocking at the time.

http://thehousingbubbleblog.com/?p=256

News from the Middle East:

Kuwait property sales slide 38% in year to July
http://www.arabianbusiness.com/567402-kuwait-property-sales-slide-38-in-year-to-july

Dubai house prices see 47% annual decline
http://www.arabianbusiness.com/567384-dubai-house-prices-see-47-annual-decline

There were some comments yesterday about corruption in Russia, I found this AP article that makes the fraudsters in the US seem like Chior Boys:

Study: Roads perfect example of Moscow corruption
http://www.google.com/hostednews/ap/article/ALeqM5gVs_Wps4pbLMPjh24NRyUo1lLIkwD9AJ86M00

Construction of Moscow’s new, fourth ring road is
expected to cost 7.4 billion rubles per kilometer
($380 million per mile), his study revealed.

Hello Everyone….I see Ben is posting earlier now. It’s actually 9:14 here. It’s not as hot anymore and noticiably cooler.

I ran across this article about risk in stocks today…

http://www.msnbc.msn.com/id/32799168/ns/business-businessweekcom/

I have always been risk adversive. As for my experience, Money always seems to leave my stock fund quicker than it would go in. That’s why I have left stocks. It just feels like a legal scheme to me. I would rather deal with things I can see, like actual paper money. This whole debt culture is bad for our nation. I do subscribe to the premise that you must spend all you have, when you can. Money is the root of all evil, and it can corrupt those who arent ready to handle. Saving is good, but I surmise that saving too much can be bad. I have seen too many thrift savers save for 30 years, die young and their spouse and boyfriend live the good life afterward. Nope, sorry, not here, I am going to smell my flower’s now. But then again, this type of behavior sort of contributed to the bubble. But then again, I am not talking about living beyond my means, I am just advocating spending money I physically have. Plus, it depends on the stream of income you have coming in. I have a decent income stream coming in, but this credit bubble thing had people thinking credit is income, or classifiying it that way in their minds. I must admit, I was wired that way, until I started to look at credit differently. I really got into the FICO score, and in learning this system, I found that in order to have a truly high credit, you cant actually use credit. It is all about risk. Our society doesnt care who is assuming risk, as long as it isnt us…

Wow oh wow, talk about a blast from the past. Some memorable posters who don’t post here anymore and some that are still posting here. It was great reading. Thanks Ben.

Even tax havens are suffering in the Great non-Depression. Grand Cayman bonds, anyone?
http://www.guardian.co.uk/business/2009/sep/13/british-tax-havens-need-bailouts

Am I the only one who perceives a $33m as too small a settlement for hiding $5,800m in bonuses from BofA shareholders?

Judge Rakoff seems destined to go down in history as a hero of American capitalism.

BofA and SEC forced to justify $33m settlement
By Greg Farrell in New York

Published: September 10 2009 03:00 | Last updated: September 10 2009 03:00

Bank of America and the Securities and Exchange Commission were yesterday forced to file arguments with a federal judge justifying their $33m settlement last month over allegations of false and misleading statements to shareholders.

The filings, demanded by Judge Jed Rakoff, have extended the legal battle over BofA’s role in Merrill Lynch’s payment of bonuses to its staff during its purchase by BofA.

BofA’s filing maintained that last year’s proxy statement to shareholders concerning the acquisition of Merrill had not contained misleading statements about the bonuses but argued that a $33m settlement, without admission of liability, was preferable to a protracted battle with one of its primary regulators “at a time of uncertain and difficult market conditions”.

The SEC insisted that BofA had misled its shareholders by declaring that large bonuses would not be paid at Merrill without BofA approval, even though the bank had already given its approval for the payment of as much as $5.8bn. However, as it lacked specific evidence against individual BofA executives in the alleged mis-statements, the SEC determined that a substantial fine involving the bank was justified.

The legal jousting over an issue that both parties had considered settled erupted after Mr Rakoff refused to accept the proposed SEC/BofA settlement. At a hearing last month, he castigated the regulator for determining that the bank had issued misleading statements but failing to identify the individuals allegedly responsible.
…

Another hero of American capitalism is born. You go, Vern!

THE WALL STREET JOURNAL
REVIEW & OUTLOOK
SEPTEMBER 13, 2009, 7:05 P.M. ET
Who’s Too Big to Fail?

Regulators today won’t define ’systemic risk,’ unlike 25 years ago.

With Congress back in session and the anniversary of the Lehman Brothers failure upon us, the Obama Administration is resuming its quest for greatly expanded authority to bail out American businesses. Under the Treasury reform blueprint, any financial company, whether a regulated bank or not, could be rescued or seized by the Federal Deposit Insurance Corporation if regulators believe it poses a systemic risk.

If recent history is any guide, when the feds stage their next intervention, they will not define “systemic risk” and they will refuse to release the data underlying their decision. To this day, taxpayers can only guess at the specific reasons behind the ad hoc rescues that began with Bear Stearns in March of 2008. Now Team Obama seeks to codify the bailout policies of the last 18 months.

Before receiving authority for new adventures across U.S. commerce, financial regulators should explain their current interventions. The basic questions: How exactly does the government measure systemic risk, and how do regulators know that the U.S. economy can’t live without a particular firm? Americans still don’t know why Bear, Citigroup and AIG were saved, but Lehman wasn’t.

A recently-filed federal lawsuit seeks answers. Plaintiff Vern McKinley worked at the FDIC in the 1980s and is now suing his old employer, as well as the Federal Reserve. The two agencies have been stiff-arming his Freedom of Information Act requests on last year’s bailouts.

Last December, Mr. McKinley sent a FOIA request to the Fed to find out what Fed governors meant when they said a Bear Stearns failure would cause a “contagion.” This term was used in the publicly-released minutes of the Fed meeting at which the central bank discussed plans by the Federal Reserve Bank of New York to finance Bear’s sale to J.P. Morgan Chase. The minutes contained only the vague warning of doom, without any detail on how exactly the fall of Bear would destroy America. Mr. McKinley’s request sought the supporting documents for this conclusion.

He also requested minutes of the autumn FDIC board meeting at which regulators approved financing for a Citigroup takeover of Wachovia. To provide this assistance, the board had to invoke the “systemic risk” exception in the Federal Deposit Insurance Act, and therefore had to assert that such assistance was necessary for the health of the financial system. Yet days later, Wachovia cut a better deal to sell itself to Wells Fargo, instead of Citi. So how necessary was the FDIC’s offer of assistance?

After Mr. McKinley sued the agency this summer, the FDIC coughed up a previously undisclosed staff memo to the FDIC board. Again, the agency redacted the substance, providing roughly two pages of text from the nine-page original. The section of the memo titled “Systemic Risk” was entirely erased. As for the Fed, it blew off Mr. McKinely’s initial request and has since responded mainly with some highly uninformative letters from the Fed staff to Congress.
…

Sorry if this article is a bit dated, but hopefully its timeless message will compensate.

The New Boom-Bust Cycle

The housing and finance sectors caused the economic mess. Here’s why they can’t fix it.

By Daniel Gross
Jun 17, 2009 | Updated: 11:01 a.m. ET Jun 17, 2009

The financial media are desperate to find good news in the troubled finance and housing sectors, the very industries that got us into this mess. This quest for green shoots is frequently comical. Today, the Wall Street Journalfeatured a piece about new jobs in the financial services industry. Why, JPMorgan hired 950 new loan counselors, and a former Morgan Stanley guy found a job with an asset-management company! But given that financial services firms have shed 600,000 jobs since December 2006, that hardly seems like a triumph.

On Tuesday, Bloomberg noted that housing starts were “soaring,” in May, up 17.2 percent from April. That’s up three straight months, the Journalchimed in. But housing is an extremely seasonal business. The CEO of a large bank once told me that his bank’s mortgage business all but disappeared in the fall because men in the Northeast wouldn’t look at houses on Sundays during the football season. So noting that housing starts or sales rose sequentially in the spring months is a little like saying traffic at the train station next to Yankee Stadium was up hugely in April, when 20 games were played, from March, when no games were played. What really matters is the comparison with the previous year. And the news is horrid on that front. “Year over year, housing starts were 45.2 percent lower than the pace of construction in May 2008,” the Journal noted.

If you’re waiting on housing and finance to get us out of the mess they caused, then you better pull up a comfortable chair and a bag of popcorn, because it’s going to be a long wait. Just as regulators always fight the last battle—regulating accounting after the dot-com meltdown, promising to regulate derivatives now—analysts always look to the last boom to cause the next one. The new reality is that the sector that dragged the economy down is never the one to lead the recovery.
…

The Bare Market
Scenes of Economic Desolation
By Kathy Jones

Green shoots bustin’ out all over…

So many real estate articles to post, so little time to post them all…

Boston’s Incredible Shrinking Skyscraper

The Hancock Tower lost half its value in a year. The rest of commercial real estate could be next.

By Daniel Gross | NEWSWEEK
Published Sep 4, 2009
From the magazine issue dated Sep 14, 2009

For most of its 34-year life, the Hancock Tower, which looms above its brick neighbors in Boston’s Back Bay, has been the sort of place where money comes to be managed and protected. Its tenants include Ernst & Young and the investment firm Highfields Capital. The I. M. Pei–designed sliver of glass doesn’t seem like a place where several hundred million dollars can vanish in a few months.

But that’s exactly what happened at the 62-story building, now under its fourth owner in six years. In January, an aggressive young wheeler-dealer defaulted on a portion of the building’s $1.3 billion mortgage just 24 months after buying it. In March, two firms that had purchased chunks of the tower’s second mortgage for pennies on the dollar assumed control, essentially rendering up to $400 million of debt worthless. The Hancock’s market value is now about $700 million—half what it appraised for less than two years ago.
…

This seems like poor timing for a marital spat…

Sept. 13, 2009, 11:48 p.m. EDT

China mulls sanctions on U.S. imports of car parts, poultry

HONG KONG (MarketWatch) — China said Sunday it would launch an anti-dumping investigation into U.S. sales of chicken and auto products, a move apparently in response to Washington’s decision to impose punitive sanctions on Chinese tire imports late last week.

China’s Ministry of Commerce said it was starting proceedings after having received complaints that U.S. products were being sold in China at below-market prices, according to reports.

The ministry has denied that the actions against U.S. producers are a form of protectionism.

“China has consistently opposed trade protectionism, and the country’s actions since the financial crisis have reflected this stance,” The Wall Street Journal reported the ministry as saying.

“China is willing to continue to act in accordance with countries around the world to push forward the world’s economic recovery,” it said.
…

Here’s a Sunday night, Monday morning chuckle

Billionaires for Wealthcare thank teabaggers for their support:

http://tinyurl.com/ozlzjj

Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman
By Mark Deen and David Tweed

Sept. 13 (Bloomberg) — Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult…

In FTSE’s worst year ever, executive pay leaps 10%

http://www.guardian.co.uk/business/2009/sep/14/executive-pay-keeps-rising

Higher executive compensation for poor performance is alive and well on both sides of the pond.

“Executives at Britain’s top companies saw their basic salaries leap 10% last year, despite the onset of the worst global recession in decades, in which their companies lost almost a third of their value amid a record decline in the FTSE.”

“The Guardian data also shows that a coterie of elite bosses at the helm of multinational corporations are seeing their overall pay packets soar ever higher. The 10 most highly paid executives earned a combined £170m last year – up from £140m in 2007. Five years ago, the top 10 banked some £70m.”

“In the wake of the banking crisis, there has been a wave of shareholder revolts over directors’ remuneration. But even if investors vote against over-generous boardroom payouts, companies are not obliged to take their views into account.”

Stiglitz Says Banking Problems Are Now Bigger Than Pre-Lehman

Sept. 13 (Bloomberg) — Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

“If this crisis proves nothing else, it proves you cannot help people by lending them more money than they can pay back.” ~Phil Gramm

Jackson calls for bailout change
The Post and Courier September 14, 2009

A year after the Wall Street meltdown that sucked up billions in government bailout money, millions of Americans are still in big trouble unless the plan is seriously overhauled, the Rev. Jesse Jackson said Sunday in North Charleston.

“There’s a transfusion at the top and hemorrhaging at the bottom,” the longtime civil rights leader and Greenville native said at a news conference at Charity Missionary Baptist Church.

Jackson, who also is a Baptist minister, was in town to honor the Rev. Nelson B. Rivers III, the former NAACP leader who is celebrating his first anniversary as pastor at Charity.

Jackson delivered the sermon during the anniversary service. But before the service started, he spent about 30 minutes talking with reporters and church members about jobs and health insurance.

The bailout money has not been used to create new jobs, Jackson said. Instead, unemployment continues to rise.

“It’s time … to use that money to invest in America,” he said. “There must be some plan to link bailing out banks and … putting America back to work.”

A key part of the plan must be revising our foreign trade policy, Jackson said. Otherwise, there’s no way American workers can compete with cheap foreign labor, he said.

“We have a tremendous crisis in manufacturing deficit and trade deficit,” he said. “The problem we have today is the unevenness of the field.”

Signs of Spring in Sarasota

http://www.heraldtribune.com/article/20090914/ARTICLE/309149998/2055/NEWS?Title=A-sign-of-recovery-bidding-wars-for-houses

“The Herald-Tribune analyzed Multiple Listing Service data for all home and condo sales that closed in 15 Sarasota-area ZIP codes from Jan. 1 through Aug. 31.”

“Of more than 3,200 transactions studied, 520 — about 16 percent — had a sale price higher than, or equal to, the listing price, a possible sign of competitive bidding.”

“The data showed that the higher offers were much more common at the low to medium range of the price spectrum, but were not confined there.”

What they do not report is that 84% of all houses listed sold below listing prices. Greater fools are still alive and living in SW Florida.

Car dealers fight slow sales after end of Clunkers
Across the nation, many car dealers fight slow sales after Cash for Clunkers program ends
September 13, 2009,

YPSILANTI TOWNSHIP, Mich. (AP) — As Gene Butman Ford opened its doors Saturday, salesmen outnumbered the shoppers looking at a depleted stock of cars and trucks, and it didn’t appear that many customers were ready to buy.

Like many dealers across the country, the dealership in Ypsilanti Township, Mich., west of Detroit, is suffering from a Cash for Clunkers hangover, and Sales Manager Paul Grahl isn’t sure when it will end.

“We’re getting some traffic, but my business is a long way from healthy,” said the longtime salesman. “We suspect it’s going to be 90 days before we get back to any kind of normalcy.”

The clunkers program lured hundreds of thousands of people to dealers in July and August with government rebates of up to $4,500 to trade in older, inefficient vehicles for newer, more fuel-efficient ones.

While most dealers are grateful for the boost, they’re paying for it now with fewer customers. The government rebates drew people into the market who otherwise would have kept driving their clunkers due to uncertainty over the sputtering economy. Those customers might have made their purchases later in the year.

“It was good while it lasted,” said Phil Warren, sales manager at Toyota Direct in Columbus, Ohio. “Now we’re a little bit concerned about what happens next. The program may have just taken a lot of people out of the market.”

David P. Goldman, who wrote behind the pseudonym “Spengler” for several years, says Asian financiers aren’t happy with the weak U.S. dollar:

“I just spent two weeks in the Far East talking to a variety of financial types. Everyone is sick of the dollar as a reserve currency; everyone foresees a diminution of American power under the Obama administration; and no-one has a clue what alternative might present itself to the dollar.”

Atlantic City’s First Casino in Jeopardy of Closing

Resorts Casino, the first casino to open for business when New Jersey started licensing gaming operations, may be headed for closure unless gambling regulators approve an unusual request.

Even though there have been several major casino bankruptcies this past year, including such high-profile examples as Station Casinos and Trump Entertainment, most operations continued with business as normal on the gaming floor. But the Resorts Casino Hotel, the first casino to open in Atlantic City when New Jersey legalized casinos, not only may go bankrupt, but actually close down.

Other casino operations still return earbnings, and only need to rid themselves of onerous debt to recover their viability. This means that Trump and Stations casino gambling continues apace, even while lenders and owners negotiate settlement against credit covenants.

But Resorts is in worse condition than others. The casino has not made a mortgage payment in almost a year. The casino’s operators have filed a request with regulators to give the company’s lenders control and ownership of the historic gaming venue.

“Resorts has experienced the same downdraft in their cash flows as all other Atlantic City operators,” analyst Andrew Zarnett told the Philadelphia Inquirer. “However, by being one of the smaller operators in the market, instead of reduced profit, they’ve experienced absolute losses .”

Gooooooooooood morning HBB!!

My wife and I nearing are nearing baby #2 time! Now it’s just hurry up and wait. I am making another proactive move and job-switching again. Luckily I am good at what I do — there is some risk, but I am running from the massive budget cut blade like many others.

I was at a conference and met a dude from Orlando who just moved out of a gated community. He said it was like a prison and gangs were running the grounds. He took his daughter to the community playground and a bunch of young men started doing drugs and he asked them to stop, so of course they threatened to kill him. Amazing story.

As for Pinellas, there are still tons of unlisted foreclosures. I know this because some of the properties I’ve nibbled at have been listed and de-listed now several times. The one I was most interested in is now completely abandoned and racking up a lot of liens with the city for maintenance.

We still want to move, but it’s a fluid situation and it’s looking like more and more we will be in Florida for another year or so. That’s the catch-22 with education: there is a lot of security, but you lose it all when you go to a different district. Leaving the state would not be a smart move until this thing is over, which is just around the corner!

This guy, Stephen Roach, wants to “avoid the interplay between financial bubbles and the real economy.” (I know I didn’t get that quote entirely correct.)

Translated: We want to have all the bubbles we can, we just don’t want to suffer consequences when they pop. We also don’t want to be held responsible.

Here is the link.
http://www.cnbc.com/id/15840232?video=1252526478&play=1
Rant on:
“Equity markets” have become disconnected from the risk they have taken on. I’m still of the opinion that we are in a very dangerous situation. We have a narco war in Mexico, looming failure in Afghanistan, Iraq is trying to heat up again, it is impossible to determine WHAT China is up to, oil may crash to lower levels, foreclosures are going to remain at a very high level for a very long time, and the “banks” have been successful in preventing complete and honest disclosure of their books. This is but a short list.

Yes, I know that there have been problems throughout history. That is not the issue! In the end, the world economy was based upon a financial bubble that ran out of people to lend money to. The focus of this bubble was house sales and refi’s which produced nothing in terms of products or new technologies.

Frankly, I miss the internet bubble. No, I didn’t like it, but it did have the potential to increase real wealth. Instead we are trying to “reflate” the economy. I’m going to sit this out, also. I will keep my house equity (which is a considerable amount) right where it is: In My House.

Rant off.

Roidy
P.S. It still can’t be “fixed”.

Decoupling is back in fashion.

When markets around the world tumbled in unison last fall, the once-popular view that Asian markets and economies could hold up despite the turmoil in the West was quickly forgotten.

Now, investors have once again embraced the idea of “decoupling.” Markets in Shanghai, Hong Kong and Singapore are up nearly twice as much as those in the U.S. and Europe as their economies recover strongly from the recession.

Get a load of this — some want to give those on Social Security a cost of living increase, even though inflation is zero and wages are going down.

http://thehill.com/homenews/house/58479-dems-push-for-increase-to-social-security-payments

That Democratic idea reminds me of the Republican idea of massively expanding Medicare, putting it all on the credit card, and doing nothing about the health care situation of working taxapayers.

Here’s a quote:

“It would simply be unacceptable for seniors on fixed incomes to not receive additional income in the coming year, something that hasn’t happened in over three decades,” Sanders said in a statement.

Yup, seniors on fixed incomes have received additional income every year for 30 years.

Americans lose their appetite for supersized homes

Monday September 14, 2009, 6:30 AM

Forget the “McMansions” of the boom years. These days, small is the new big.

For the first time in nearly 14 years, the median size of a new single-family home decreased, to 2,215 square feet last year, from 2,277 square feet in 2007, according to the U.S. Census Bureau.

Since 1991, houses for single families consistently have been getting bigger and bigger, mirroring the housing bubble and good economic conditions.

“That’s reflective of the economy back then: the stock market, the egos, people trying to compete with their neighbors and people trying to keep up with the Joneses,” said Cindy Ariosa, regional vice president for Long & Foster, a real estate company. Ariosa considers anything under 3,000 square feet a smaller home.

In the past year or so, demand has shifted away from large homes amid the collapse of the real estate market.

Cash-strapped buyers want to contain mortgage and maintenance costs, including rising utility bills, after watching their investments and retirement plans plummet, according to real estate agents and economists. And some buyers are mindful of energy consumption.

“When the economy is weak, unemployment is high, income gain is slower or nonexistent, people tend to focus on simpler things, less-expensive things,” said Kermit Baker, chief economist for the American Institute of Architects.

“There is nothing wrong with macroeconomics that another depression [won’t] cure.”

http://www.boston.com/bostonglobe/ideas/articles/2009/09/13/why_capitalism_fails?mode=PF

I have read Noriel Roubini and Paul Krugman, among others, refer to Hyman Minsky in recent essays but wasn’t familiar with his work. It seems like he really nailed it regarding the genesis of our recent crisis. Below is the most relevent excerpt from the article.

“Minsky called his idea the “Financial Instability Hypothesis.” In the wake of a depression, he noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans are almost always paid on time, businesses generally succeed, and everyone does well. That success, however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”

As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose income could cover neither, and could only pay their bills by borrowing still further. As these latter categories grew, the overall economy would shift from a conservative but profitable environment to a much more freewheeling system dominated by players whose survival depended not on sound business plans, but on borrowed money and freely available credit.

Once that kind of economy had developed, any panic could wreck the market. The failure of a single firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide attempt to shed debt. This watershed moment - what was later dubbed the “Minsky moment” - would create an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers would collapse first, as they lost access to the credit they needed to survive. Even the more stable players might find themselves unable to pay their debt without selling off assets; their forced sales would send asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that depended on the now-collapsing financial system.”

Hmmm. That sounds depressingly familiar. Looks like I need to add a few more books to my extensive reading list.

However, one big point of contention I have with Minsky is his suggestion that in times of financial collapse the government should step in and become “the employer of last resort” this seems to me to be a recipe for disaster. More disastrous than what we have now? Who knows? but regardless, that’s a subject for another post.
One thing government MUST do going forward though is make sure that there are SIGNIFICANT restraints on speculative investment and capital reserve requirements to make certain that “ponzi borrowers” can’t arise and a ponzi economy can never get started in the first place. In hindsight this all seems SO obvious but the human animal is very adept at rationalizing his avoidance of reality. Are we, in fact, any smarter than yeast?

Revealed: The ghost fleet of the recession

The biggest and most secretive gathering of ships in maritime history lies at anchor east of Singapore. Never before photographed, it is bigger than the U.S. and British navies combined but has no crew, no cargo and no destination - and is why your Christmas stocking may be on the light side this year

www DOT dailymail DOT co DOT uk/home/moslive/article-1212013/Revealed-The-ghost-fleet-recession.html

The payment makers are going on strike! First salvo fired in the video revolution! What will the debt pushers do now?

“And responsible lenders, including community banks, doing the right thing shouldn’t have to worry about ruinous competition from unregulated competitors. ”

-from Obama’s speech today. Isn’t the ‘ruinous competition’ now coming from the TBTF institutions who are getting an unfair advantage from the government? “Doing the right thing” has not been a strategy that has paid off well during your administration, Mr Obama.

Obama challenges Wall Street to change
‘Wall Street cannot resume taking risks without regard for consequences’

BREAKING NEWS

updated 4 minutes ago
WASHINGTON - President Barack Obama sternly warned Wall Street against returning to reckless and unchecked behavior that had threatened the nation with a second Great Depression.

Even as he noted the U.S. economy and financial system were pulling out of a downward spiral, Obama warned financial titans on Monday — the first anniversary of the Lehman Brothers collapse — they could not count on any more bailouts.
…………

So Bush starts the bank bailouts because the failure of the financial industry would be the end of the world as we know it. Of course when Obama took the helm, he continued on the same course. Now he thinks he can tell the banks that they’ll have to live the consequences of their actions? Either it wasn’t necessary to bail them out before, or it will be necessary again. Fool the Office of the President once, shame on you….

My tip for today: Never buy a used American car with over 100,000 miles on it. i bought my first one six months ago, a 97 Jeep Grand Cherokee. Always needs something fixed on it, luckily parts are cheep. What was I thinking?

How about Japan and China sell their junk back and forth to one another.

Incoming Tokyo government threatens split with US
A split is emerging between the United States and Japan over the new Tokyo government’s anti-globalisation rhetoric and its threats to end a refueling agreement for US ships in support of the war in Afghanistan.

New Tokyo government threatens split with US
Yukio Hatoyama blamed the US for the ills of capitalism AP

Yukio Hatoyama, the leader of the Democratic Party of Japan, has caused alarm in Washington after publishing an article blaming the US for the ills of capitalism, the global economy and “the destruction of human dignity”.

He also intends to examine an agreement that permits US warships to dock at Japanese ports, in violation of the nation’s non-nuclear principles. Mr Hatoyama says he will also look again at the $6 billion cost faced by Japan to transfer thousands of US troops from their base in Okinawa to the Pacific island of Guam amid a wide-ranging review of the American military presence on Japanese soil.

His election campaign promised a more “independent” foreign policy from Washington and closer relations with Asian neighbours, including China. On Thursday, he repeated his intention to defy the US and end the Maritime Self-Defence Force’s resupply mission in the Indian Ocean.

Mr Hatoyama will be sworn in on Wednesday after an historic victory that ended decades of near unbroken rule by the Liberal Democratic Party. He will have his first meeting with Barack Obama, the US president, at the United Nations on Sep 22.

The Pentagon reminded Japan of the expectations it faced as a “great power and one of the world’s wealthiest countries”. Geoff Morrell, a spokesman, said: “There is an international responsibility, we believe, for everyone to do their share, as best they can, to contribute to this effort to bring about a more peaceful and secure Afghanistan.”

Judge rejects deal between SEC, BofA over bonuses

14th, 2009 | NEW YORK — A federal judge on Monday rejected a $33 million settlement between the Securities and Exchange Commission and Bank of America Corp. over bonuses paid by Merrill Lynch.

U.S. District Judge Jed Rakoff called the proposed consent judgment “inadequate.”

Rakoff wrote in an opinion that the $33 million settlement was a “trivial penalty for a false statement that materially infected a multi-billion-dollar merger.”

Rakoff set a Feb. 1 trial date for the case. The SEC had filed civil charges against Bank of America, saying it misled shareholders about bonus payments given to Merrill Lynch employees.

Last month, Rakoff ordered the SEC to explain why it didn’t pursue charges against specific executives at Bank of America over the accusations.

Charlotte, N.C.-based Bank of America agreed to acquire Merrill in a shotgun deal a year ago at the height of the credit crisis. It was later revealed that Merrill, with the knowledge of Bank of America executives, accelerated $3.6 billion in bonus payments before the deal was closed on Jan. 1.

Both Bank of America and the SEC did not provide immediate comment on the ruling.

From everything that’s come out today, it appears as if Obama has become just another patsy of Wall St. Sickening. I thought he’d show more balls.

To the proponents of ObamaCare:

This blog is filled with thousands of posts attacking the corruption and incompetence at Fannie Mae, Freddie Mac, the SEC, Dept of Justice. And rightfully so.

And yet you all believe that the very same federal government, with the same culture of incompetence/corruption will efficiently manage the delivery of health care to 310 million people? The federal government couldn’t figure out Madoff was stealing $50B after investigating him several times, but it will run 1/6 of the economy well. They thought rules allowing a $710K for a mortgage to a strawberry picker making $14K a year was a good idea, but they will save money running health care.

I’d like to understand how you reconcile all of this.

This is the sort of local junk I hate:
http://www.slocountyhomes.idxco.com/idx/3482/details.php?idxID=239&listingID=158598

Not worth half that.

All Free Library of Philadelphia Branch, Regional and Central Libraries Closed Effective Close of Business October 2, 2009

All Free Library of Philadelphia Customers,

We deeply regret to inform you that without the necessary budgetary legislation by the State Legislature in Harrisburg, the City of Philadelphia will not have the funds to operate our neighborhood branch libraries, regional libraries, or the Parkway Central Library after October 2, 2009.

Specifically, the following will take effect after the close of business, October 2, 2009:

* All branch and regional library programs, including programs for children and teens, after school programs, computer classes, and programs for adults, will be cancelled
* All Parkway Central Library programs, including children programs, programs to support small businesses and job seekers, computer classes and after school programs, will be cancelled. We are exploring the possibility of relocating the Philadelphia Author Series programs to other non-library facilities.
* All library visits to schools, day care centers, senior centers and other community centers will cease.
* All community meetings at our branch and regional libraries, and the Parkway Central Library, will be cancelled.
* All GED, ABE and ESL programs held at Free Library branches will be discontinued, students should contact their teacher to see if other arrangements are being made.

In addition, all library materials will be due on October 1, 2009. This will result in a diminishing borrowing period for books and other library materials, beginning September 11, 2009. No library materials will be able to be borrowed after September 30, 2009.

President Obama Speaks - And Lies (Again)

President Obama stood in New York at “high noon” and talked about how we must have “change”, and that we have “helped homeowners avoid foreclosures”, how “we must put in place reforms” and that “we have helped come back from the brink” and “an irresponsible period of crisis.”
In fact, in his speech he said:

So I want to urge you to demonstrate that you take this obligation to heart. To put greater effort into helping families who need their mortgages modified under my administration’s homeownership plan. To help small business owners who desperately need loans and who are bearing the brunt of the decline in available credit. To help communities that would benefit from the financing you could provide, or the community development institutions you could support. To come up with creative approaches to improve financial education and to bring banking to those who live and work entirely outside the banking system. And, of course, to embrace serious financial reform, not fight it.

Really Mr. President?

Perhaps you would like to explain this - the outcome of the FHA under your Administration thus far?

1 month delinquent = 7.74%
3 or more month delinquent = 8.48%

Total current delinquency and foreclosure rate = 21.43%

Bluntly: You’re lying when it comes to having these institutions make only sustainable, safe and sound loans, along with helping Americans keep their homes.

(From K. Denninger)

Report from Loudoun county, VA (DC far suburb):

After having a quite-large spring bounce, it appears things are leveling off, as of August. Per MRIS stats - median prices went up quite a bit actually, from about 300k to about 340k, taking a rolling 3-month average to smooth out variations. Sales price as a percentage of list had gone up quite a bit - from about 91% to 95%, but now has leveled off. Year-over-year sales are now down quite a bit, whereas they had been up a lot last fall and during the winter. Listings are still *way* down vs. last year, though are creeping back up now.

I think we’ll enter the doldrums again this winter, with prices falling some again. The “recovery” seems to be elevated here somewhat relative to most areas - I think in large part just because so much of the income in this area is government-driven. Unemployment is only 4.8% here.

Good Judge. Maybe, “When the Whip Comes Down” Time Here. Whole text is @ NY Times.

A Federal District judge on Monday overturned a settlement between the Bank of America and the Securities and Exchange Commission over bonuses paid to Merrill Lynch executives just before the bank took over Merrill last year.
Text of the Ruling
The judge said that Bank of America “materially lied” in shareholder communications about the bonuses.

The $33 million settlement “does not comport with the most elementary notions of justice and morality,” wrote Jed S. Rakoff, the judge assigned to the case in federal court in Lower Manhattan

Tax evaders rush to beat amnesty deadline

WASHINGTON (Reuters) - Rich Americans who have evaded taxes by hiding foreign holdings have about a week to turn themselves in to an Internal Revenue Service amnesty program or gamble they will not be caught.

U.S. citizens with undeclared assets in tax havens such as Switzerland face a September 23 deadline to reveal their holdings, pay a fine and generally avoid criminal prosecution. When that amnesty program expires, any tax cheats found by the government could face criminal prosecution.

The IRS expects to find some tax evaders soon. UBS AG, the Swiss banking giant, agreed to hand over to the IRS the names of about 4,450 secret accounts as part of a court settlement reached last month.

“This is sort of their last, best chance if they are going to get off with lenient treatment,” said Evan Stewart, a regulatory lawyer at the firm Zuckerman Spaeder.

“If you’re sitting there and you’ve sheltered $50 million from the U.S. government, are you willing to gamble with the (list of) 4,500 (names) and live in terror for a year?” Stewart said.

The IRS said that, in one week of July, about 400 individuals turned themselves in under the amnesty program. That was four times higher than the number of tax evaders who stepped forward in all of 2008, according to the agency.

The IRS declined to provide any other figures about participation in its amnesty program.

IRS Commissioner Doug Shulman warned investors with money or securities in overseas accounts to step forward before the deadline.

“Once the Swiss government turns over names, all bets are off,” he said when announcing the UBS deal.

It appears to be working.

How’s Big Brother’s TruthSpeak Going Over?

Trust in News Media Falls to New Low in Pew Survey
By RICHARD PÉREZ-PEÑA

Trust in news media has reached a new low, with record numbers of Americans saying reporting is inaccurate, biased and shaped by special interests, according to a survey set to be released Monday.

The survey of 1,506 people interviewed in July by the Pew Research Center showed that self-described Republicans continued to take the dimmest view of news organizations, but discontent among Democrats was catching up.

On crucial measures of credibility, faith in news media eroded from the 1980s to the ’90s, then held fairly steady for several years, according to Pew surveys that have asked some of the same questions for more than two decades. But in the two years since the last survey, those views became markedly more negative.

In this year’s survey, 63 percent of respondents said news articles were often inaccurate and only 29 percent said the media generally “get the facts straight” — the worst marks Pew has recorded — compared with 53 percent and 39 percent in 2007.

Seventy-four percent said news organizations favored one side or another in reporting on political and social issues, and the same percentage said the media were often influenced by powerful interests. Those, too, are the worst marks recorded in Pew surveys.

Negative opinions grew since 2007 among both major parties, but significantly more so among Democrats. The percentage of Democrats calling the media inaccurate rose to 59, from 43; the percentage who said the media took sides rose to 67, from 54.

Views of some specific news organizations split sharply along partisan lines, with differences between Republicans and Democrats often approaching 30 percentage points. Asked about CNN, MSNBC or network television news, Democrats were much more likely than Republicans to rate them favorably, and Republicans were much more likely than Democrats to see them unfavorably. Fox News was seen much more positively by Republicans, and more negatively by Democrats.

CNN headline today:

“President says bailouts are working and economy is stabilizing.”

See you guys are all crazy. The economy is ready to boom. CNN wouldn’t lie would it?

Interesting read from a historical perspective:

History Unfolding
By Dr. David Kaiser
9-14-9

I am a student of history. Professionally, I have written 15 books on history that have been published in six languages, and I have studied history all my life. I have come to think there is something monumentally large afoot, and I do not believe it is simply a banking crisis, or a mortgage crisis, or a credit crisis. Yes these exist, but they are merely single facets on a very large gemstone that is only now coming into a sharper focus.

Something of historic proportions is happening. I can sense it because I know how it feels, smells, what it looks like, and how people react to it. Yes, a perfect storm may be brewing, but there is something happening within our country that has been evolving for about ten to fifteen years. The pace has dramatically quickened in the past two.

We demand and then codify into law the requirement that our banks make massive loans to people we know they can never pay back? Why?

We learned just days ago that the Federal Reserve, which has little or no real oversight by anyone, has “loaned” two trillion dollars (that is $2,000,000,000,000) over the past few months, but will not tell us to whom or why or disclose the terms. That is our money. Yours and mine. And that is three times the $700 billion we all argued about so strenuously just this past September. Who has this money? Why do they have it? Why are the terms unavailable to us? Who asked for it? Who authorized it? I thought this was a government of “we the people,” who loaned our powers to our elected leaders. Apparently not.

We have spent two or more decades intentionally de-industrializing our economy.. Why?

We have intentionally dumbed down our schools, ignored our history, and no longer teach our founding documents, why we are exceptional, and why we are worth preserving. Students by and large cannot write, think critically, read, or articulate. Parents are not revolting, teachers are not picketing, school boards continue to back mediocrity. Why?

We have now established the precedent of protesting every close election (violently in California over a proposition that is so controversial that it simply wants marriage to remain defined as between one man and one woman. Did you ever think such a thing possible just a decade ago?) We have corrupted our sacred political process by allowing unelected judges to write laws that radically change our way of life, and then mainstream Marxist groups like ACORN and others to turn our voting system into a banana republic. To what purpose?

Now our mortgage industry is collapsing, housing prices are in free fall, major industries are failing, our banking system is on the verge of collapse, social security is nearly bankrupt, as is Medicare and our entire government. Our education system is worse than a joke (I teach college and I know precisely what I am talking about) - the list is staggering in its length, breadth, and depth.. It is potentially 1929 x ten…And we are at war with an enemy we cannot even name for fear of offending people of the same religion, who, in turn, cannot wait to slit the throats of your children if they have the opportunity to do so…

link to full article: http://tinyurl.com/ocgqy8

Oh, Canada! Not much of a cushion under America’s hat:

Majority of Canadian employees living paycheque to paycheque, survey shows
Mon Sep 14, 5:12 AM
The Canadian Press

TORONTO - Nearly 60 per cent of Canadians would have trouble paying the bills if their paycheque was delayed by one week, a new polls suggests.

The Canadian Payroll Association survey says not only are the majority of Canadians living paycheque-to-paycheque, but they have little ability to put money away for their retirement. The survey, released Monday, said 59 per cent of Canadians would have trouble making ends meet if they missed a paycheque.

“We were surprised that people were that close to the line,” said Patrick Culhane, president and CEO of the not-for-profit association.

Culhane said those results are despite the common advice from financial planners that people should set aside three months of expenses for such items as rent, groceries and monthly bills, in case of an emergency.

Of those surveyed, the younger workforce felt the greatest pinch. The survey said 45 per cent of people aged 18-to-34 would be difficult or very difficult to make ends meet if a paycheque were delayed. Another 21 per cent in that age group said it would be somewhat difficult.

Not surprisingly, 72 per cent of single parents said missing a paycheque would cause a problem for meeting financial obligations.

The survey also found that 50 per cent of Canadian workers can’t save more than five per cent of their net pay for retirement, half of what financial experts often recommend.

Culhane said those results are despite the “guilt trip” Canadians get at the start of every year before the RRSP filing deadline.

“People know they have to do it,” he said.

However, Culhane acknowledged it has become even more difficult to save for retirement recently with the stock market swings.

About 52 per cent of those surveyed believe they need between $750,000 to $3 million to live comfortably in retirement.

And not much of a cushion here either:

In early September, The US Census Bureau released its new report titled, “Income, Poverty, and Health Insurance Coverage in the United States: 2008″ showing disturbing data that portends much worse ahead under a president and Congress doing nothing to address it.

In 2008, poverty reached 13.2% of the population, its highest level in 11 years, the result of millions losing jobs during the first year of the gravest economic crisis since the 1930s. For blacks, the figure was nearly double at 24.7%, and 31% of all Americans were impoverished for at least two months between 2004 and 2007, years of economic expansion.

At yearend 2008, even by the Bureau’s conservative measures, 39.8 million people were impoverished, the highest level since 1960, and 17.1 million lived in extreme poverty at below one-half the official threshold. In addition, for the first time since the 1930s, median household income failed to increase over a 10-year period from 1999 - 2008.

The Census Bureau states that it “presents annual estimates of median household income and poverty by state and other smaller geographic units based on data collected in the American Community Survey (ACS)” covering population areas of 20,000 or more. The Bureau’s Small Area Income and Poverty Estimates (SAIPE) program also produces yearly figures “for states and all counties, as well as population and poverty estimates for school districts.” It uses data from a variety of sources, including surveys, administrative records, inter-censal population estimates, and personal income data published by the Bureau of Economic Analysis.

Critics maintain that official government figures way understate the gravity of today’s crisis, and the Bureau says:

“The official poverty thresholds were developed more than 40 years ago and have been criticized for not taking into account rising (or since the 1970s inflation-adjusted falling) standards of living, expenses such as child care that are necessary to hold a job, variations in medical costs across population groups (that have skyrocketed nationally and are now unaffordable for millions), and geographic differences in the cost of living.”

In addition, income and poverty estimates are pre-tax and exclude non-cash benefits, usually employer-provided. Disposable personal income, after income, payroll, sales, property and other taxes, reveals a far higher poverty level than the Census Bureau reports and a much graver crisis for growing millions as the economic decline deepens.

The Bureau reported that 2008 median (inflation adjusted) household income fell 3.6%, the largest single-year decline on record to the lowest level since 1997 and falling as conditions continue to worsen.

Starting to get tired of paying more? Just wait 60 days:

Tariff on Tires to Cost Consumers
by Timothy Aeppel
Monday, September 14, 2009

Consumers who buy low-price Chinese tires — the bulk of the tires China exports to the U.S. — will be hit hardest by the new tariff, as shortages in this market segment cause retailers to scramble to find alternative sources in other countries.

The tariffs, which apply to all Chinese tires, will cut off much of the flow of the more than 46 million Chinese tires that came to the U.S. last year, nearly 17% of all tires sold in the country.

The low end of the market will feel the impact of the tariff most, as U.S. manufacturers, who joined the Chinese in opposing the tariffs, have said it isn’t profitable to produce inexpensive tires in domestic plants.

“I think within the next 60 days you’ll see some pretty significant price increases,” said Jim Mayfield, president of Del-Nat Tire Corp. of Memphis, Tenn., a large importer and distributor of Chinese tires. He estimates prices for “entry-level” tires could increase 20% to 30%.

Low-end tires cost roughly $50 to $60 apiece, while premium tires can sell for $200 to $250.

It will take many months for producers in places like Indonesia and Brazil to pick up the slack. And any tire manufacturer that wants to get involved in the low-end business would have to revamp factory lines to produce the sizes and types of tires favored by U.S. consumers, a costly and complicated process.

There could also be shortages, Mr. Mayfield said, as existing supplies run low and importers have trouble finding alternative sources. Many importers stopped placing orders for Chinese tires several weeks ago, fearing they might end up ordering tires that would carry a hefty tariff by the time they arrived in U.S. ports.

The tariffs won’t just hit Chinese producers. Both of the U.S.’s remaining domestic manufacturers — Goodyear Tire & Rubber Co. and Cooper Tire & Rubber Co. — make tires in China that they sell in the U.S. Cooper this year is on track to import 2.5 million tires that it made in China. It was planning to boost that to four million next year.

Most of the tires coming from China are sold under private-label names and little-known discount brands.

I just heard Obama threatening Wall Street that “there will not be another bailout.” I guffawed - wasn’t the bailout not about Wall Street but about saving the rest of us from Great Depression Part Deux? What?

I just guffawed. The Wall Street operators are only concerned about their personal wealth. Business as usual allows them to become as wealthy as robber barons while beggaring the rest of the country. I heard the threat of no new bailout and imagined the Wall Streeters thinking, “Oh no! Don’t throw this rabbit into the briar patch!”

The speech was for public consumption of course. Is the public that stupid that they would believe that the Wall Streeters would fear this kabuki theater speech as some kind of legitimate threat, and believe that Obama is really cracking the whip?

Nice interview on NPR today with Simon Johnson

onpointradio.org/2009/09/wall-street-a-year-after-lehmans-fall

NYT piece
“Far from eagerly micromanaging the companies the government owns, Mr. Obama and his economic team have often labored mightily to avoid exercising control even when government money was the only thing keeping some companies afloat.

“A few weeks ago, there were anguished grimaces inside the Treasury Department as the new chief executive of A.I.G., Robert H. Benmosche, whose roughly $9 million pay package is 22 times greater than Mr. Obama’s, ridiculed officials in Washington — his majority shareholders — as ‘crazies.’

“Causing even more unease to policymakers, Mr. Benmosche insisted that A.I.G. — one of the worst offenders in the risk-taking that sent the nation over the edge last year — would not rush to sell its businesses at fire-sale prices, despite pressure from Fed and Treasury officials, who are desperate to have the insurer repay its $180 billion government bailout.

“But in the end, according to one senior official, ‘no one called him and told him to shut up,’ and no one has pulled rank and told him to sell assets as soon as possible to repay the loans.

Last post
baselinescenario.com/2009/09/13/economic-donkeys/

The real problem with our financial system is that our economic and political system work together to encourage excessive risk, and this risk in turn leads to cycles of prosperity and collapse. In 1998, a much smaller Lehman Brothers was placed in financial peril by the aftermath of the Asian financial crisis and failure of Long Term Capital Management, a major hedge fund. The Federal Reserve responded by lowering interest rates and other central banks followed suit. This reduced the cost of obtaining funds, effectively bailing out Lehman and other institutions in trouble.

As markets have grown to recognize how quick the Federal Reserve is to bail out institutions (and executives) in trouble, they naturally respond. In the 1990s, people talked about the “Greenspan Put” a term which derisively suggests that it is always safe to invest in risky assets, because the Federal Reserve is ready to bail out investors (a put is effectively a promise to buy an asset at a fixed price if you are unable to sell it to someone else at a higher price – this is a way to lock-in profits or limit losses on investments). However, in months following the collapse of Lehman, we learned that the “Bernanke Put” is even more valuable since Chairman Bernanke, alongside the Bank of England, the European Central Bank, and central banks in much of the rest of the world, is prepared to take drastic measures to prevent asset prices from falling when there are risks of global collapse.

This policy of responding to the aftermath of bubbles, rather than addressing them before they get going, through tighter regulation, has become the mantra of most central banks. It is usually combined with fiscal policy stimulus and other measures to support the economy. Each time banks fail, by bailing the system out again, we teach our finance sector a lesson: you can safely take too much risk because, when you lose, the taxpayer will pick up the bill. We also send a simple message to creditors: it is safe to lend to Goldman Sachs, or Barclays Bank, because taxpayers and our nations’ savers are standing by to cover your losses. Rational bank executives and creditors respond as any person would: creditors lend to banks at low interest rates, and our banks gamble heavily hoping to make large profits. Such a system is destined to fail, but the party can run for a long time.

This WSJ article seems to confirm what many posters here have long suspected: That the Plunge Protection Team has focused its efforts on propping up US housing prices.

Good night, and good luck!

The Wall Street Journal
SEPTEMBER 15, 2009

No Easy Exit for Government as Housing Market’s Savior

By JON HILSENRATH and DEBORAH SOLOMON
…
In a speech on Wall Street a year after Lehman Brothers collapsed, President Barack Obama said Monday the need for the government to keep stabilizing the financial system “is waning.” His administration released a 51-page report detailing rescue programs that are slowly being scaled back. But the Treasury Department, author of the report, noted that housing is one area where it’s too early to exit.

Over the past year, the government has intervened heavily at essentially every stage of the home-buying process. In fact, more than 80% of the new residential mortgage loans made this year benefited from some form of government support, according to the trade publication Inside Mortgage Finance.

To keep funds flowing to the housing market, the government bailed out Fannie Mae and Freddie Mac last year and now effectively owns the mortgage finance giants and their combined $5.4 trillion in loan portfolios. To keep mortgage rates low, the Federal Reserve is on track to purchase nearly $1.5 trillion in debt issued or guaranteed by the government’s various mortgage arms and another $300 billion in Treasurys, which set the benchmark for home lending.

And to boost sales, the government also is offering $8,000 tax credits to first-time home buyers.

Those efforts appear to have had the intended effect of braking the housing market’s plunge. They prompted Jonathan Swinton and his wife, Annie, to plunge into the market ahead of schedule. The couple plans to close on a $226,000 home in a suburb of Salt Lake City in the coming weeks.

“We had always wanted to buy a home, but we had been planning to wait a couple of years,” says Mr. Swinton, who recently completed course work for a Ph.D. in family therapy at Kansas State University and is now working at a mental health facility in Salt Lake City. “The low interest rates and the tax credit were the two primary factors that motivated us to buy this year.”
…

MarketWatch recently ran a story about how the Lehman failure was a huge mistake in crisis management. It is great to see some top academic financial economists call BS on that view.

OPINION
SEPTEMBER 15, 2009
Lehman and the Financial Crisis

The lesson is that institutions that take trading risks must be allowed to fail.

By JOHN H. COCHRANE AND LUIGI ZINGALES

One year ago today Lehman Brothers filed for bankruptcy. The weeks that followed are among the most dramatic in U.S. history. They led to a massive government intervention in the financial system—an intervention that will likely change that system forever.

Many people say that letting Lehman fail was the mistake that caused the financial crisis. To them, the lesson is that the government should never allow any “systemically important” financial institution to fail. If only Lehman had been bailed out, the story goes, we could have avoided much of a 45% drop in the S&P 500, a 4% drop in output, the rise in unemployment to 9.7% from 6.2%, and the $784 billion “stimulus” to top off a $1.59 trillion deficit.

This story is false.

The Lehman failure was not an isolated event. It was a movement in a dramatic crescendo of failures.

Two weeks prior, on Sept. 7, the government took over Fannie Mae and Freddie Mac, wiping out much of their shareholder equity. On Sept. 16, the government bailed out AIG, lending it $85 billion. On Sept. 25, Washington Mutual, the nation’s sixth-largest bank, was seized by the FDIC. On Sept. 29, Wachovia, the nation’s seventh-largest bank, was sold to avoid a similar fate. All this would have happened without Lehman. Meanwhile, the Federal Reserve and the Treasury Department went to Congress to ask for $700 billion for the Troubled Asset Relief Program (TARP).
…

Here is guidance on how to spark a panic and create Congressional support for subsequent bailout measures:
…
Which of these events set off the financial and economic crisis by freezing lending to commercial banks? The nearby chart shows that the main risk indicators only took off after Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke’s TARP speeches to Congress on Sept. 23 and 24—not after the Lehman failure.

The risk of Citibank failure (the Citi-CDS spread) and the cost of interbank lending (the Libor-OIS spread) rose dramatically after Ben Bernanke and Hank Paulson spoke to Congress. (In basis points.)
On Sept. 22, bank credit-default swap (CDS) spreads were at the same level as on Sept. 12. (CDS spreads are the cost of buying insurance against default.) On Sept. 19, the S&P 500 closed above its Sept. 12 level. The Libor-OIS spread—which captures the perceived riskiness of short-term interbank lending—rose only 18 points the day of Lehman’s collapse, while it shot up more than 60 points from Sept. 23 to Sept. 25, after the TARP testimony. (Libor—the London Interbank Offer Rate—is the rate at which banks can borrow unsecured for three months.)

Why? In effect, these speeches amounted to “The financial system is about to collapse. We can’t tell you why. We need $700 billion. We can’t tell you what we’re going to do with it.” That’s a pretty good way to start a financial crisis.
…

MANAGEMENT
SEPTEMBER 15, 2009
Judge Tosses Out Bonus Deal
SEC Pact With BofA Over Merrill Is Slammed; New York Weighs Charges Against Lewis

BY KARA SCANNELL, LIZ RAPPAPORT AND JESS BRAVIN

A federal judge threw out the Securities and Exchange Commission’s proposed settlement with Bank of America over its disclosure of controversial bonuses paid to Merrill Lynch employees, in an unusual ruling that casts doubts about how the agency handles probes of major U.S. companies.

The order, by U.S. District Judge Jed Rakoff, came as the New York State attorney general was weighing civil-fraud charges against Bank of America Corp. executives. Charges could be brought against the bank’s chief executive, Kenneth Lewis, and Chief Financial Officer Joseph Price, according to a person familiar with the investigation.
…

Telegraph uk

Similar concerns have been raised by David Rosenberg, chief strategist at Gluskin Sheff, who said that over the four weeks up to August 24, bank credit shrank at an “epic” 9pc annual pace, the M2 money supply shrank at 12.2pc and M1 shrank at 6.5pc.

“For the first time in the post-WW2 [Second World War] era, we have deflation in credit, wages and rents and, from our lens, this is a toxic brew,” he said.

It is unclear why the US Federal Reserve has allowed this to occur.

Chairman Ben Bernanke is an expert on the “credit channel” causes of depressions and has given eloquent speeches about the risks of deflation in the past.

He is not a monetary economist, however, and there are indications that the Fed has had to pare back its policy of quantitative easing (buying bonds) in order to reassure China and other foreign creditors that the US is not trying to devalue its debts by stealth monetisation.

Mr Congdon said a key reason for credit contraction is pressure on banks to raise their capital ratios. While this is well-advised in boom times, it makes matters worse in a downturn.

“The current drive to make banks less leveraged and safer is having the perverse consequence of destroying money balances,” he said. “It strengthens the deflationary forces in the world economy. That increases the risks of a double-dip recession in 2010.”

Referring to the debt-purge policy of US Treasury Secretary Andrew Mellon in the early 1930s, he added: “The pressure on banks to de-risk and to de-leverage is the modern version of liquidationism: it is potentially just as dangerous.”

US banks are cutting lending by around 1pc a month. A similar process is occurring in the eurozone, where private sector credit has been contracting and M3 has been flat for almost a year.

Mr Congdon said IMF chief Dominique Strauss-Kahn is wrong to argue that the history of financial crises shows that “speedy recovery” depends on “cleansing banks’ balance sheets of toxic assets”. “The message of all financial crises is that policy-makers’ priority must be to stop the quantity of money falling and, ideally, to get it rising again,” he said.

He predicted that the Federal Reserve and other central banks will be forced to engage in outright monetisation of government debt by next year, whatever they say now.

All I can say is WOW, Socialize the losses x 10 right???

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