The Housing Bubble

China in Midst of ‘Greatest Bubble in History,’ Rickards Says
March 17 (Bloomberg) — China is in the midst of “the greatest bubble in history,” said James Rickards, former general counsel of hedge fund Long-Term Capital Management LP.

The Chinese central bank’s balance sheet resembles that of a hedge fund buying dollars and short-selling the yuan, said Rickards, now the senior managing director for market intelligence at McLean, Virginia-based consulting firm Omnis Inc.

“As I see it, it is the greatest bubble in history with the most massive misallocation of wealth,” Rickards said at the Asset Allocation Summit Asia 2010 organized by Terrapinn Pte in Hong Kong yesterday. China “is a bubble waiting to burst.”

http://www.bloomberg.com/apps/news?pid=20601087&sid=aNZe4JWeV1aw

7,500 South Floridians receive mortgage breaks through Obama program
by Kim Miller
The Obama administration’s Making Home Affordable foreclosure rescue program has provided permanent loan modifications for 7,532 people in Palm Beach, Broward and Miami-Dade counties, according to a Treasury Department report released last week.

Statewide, 21,111 borrowers in financial distress received reductions in their monthly mortgage payment through the $75 billion program. Another 102,033 are on trial modifications waiting to hear if they will receive a permanent price break.

The reductions, made by lenders, are completed mostly by lowering a borrower’s interest rate. About 40 percent of the loans were extended, probably to 40 years, while 28 percent were given principal forbearance. This usually means cutting the principal amount owed, but tacking it onto the back of the loan.

I listened to the guy who wrote the Big Short on NPR the other day. I know he has been interviewed there at least once since then and on other shows. This is classic propaganda, IMO. When he was asked about prosecutions, he adamantly stated how counter-productive it would be and that we need “simple reforms.”

He uses words like “doomsday machine”, but then attributes it to a “handful” of people on wall street. This guy is an establishment tool, and the media is (predictably) lapping it up.

The $810,000 Home You Can’t Live In

http://voiceofsandiego.org/survival/article_9e08c31e-316a-11df-8ccc-001cc4c002e0.html

“Remember that half-built Leucadia subdivision called Nantucket I wrote about in 2008?  Somebody bought a home there last month at a foreclosure auction for $810,000, and apparently didn’t know that the city of Encinitas has not granted the property a certificate of occupancy, meaning no one can live there. Homes sold at trustee’s sale — usually auctioned off on the courthouse steps — are sold as-is without any of the disclosures you would get if you went to buy a house from a normal seller. It’s a big risk. This case yields a good look at why you should do everything you can to research the property you’re planning to buy.”

“When Barratt submitted plans to build the luxury development, the company signed an agreement with the city of Encinitas to build two price-restricted affordable homes, for sale or rent to a household earning 50 percent or less of the area median income. For a family of five, that’s $44,600.  To make sure they followed through on that deal, the city withheld one certificate of occupancy from the development, meaning Barratt couldn’t sell that one house until it built the affordable unit.”

“On Feb. 4, Little Point LLC purchased the house for $810,000, according to public records — paying less than half what the investors had initially hoped to sell the house for.  About a month ago, Kline got a phone call from someone who said he was the new owner. The man on the phone said he understood Kline knew some things about the Nantucket house.
He told Kline he’d paid $807,000 cash for the house at the auction, but had learned later that the house doesn’t have the certificate of occupancy. He asked Kline what his chances were of persuading the city to grant the certificate.  “I told him, ‘Slim to none,’” Kline said. “He said, ‘You’re making me sick. I’m so sick to my stomach. I feel like I’m going to throw up.’”  “I guess it’s buyer beware when you buy a foreclosure,” Kline said. “Even the sophisticated ones — this guy had $800,000 cash! He just put $800,000 into a dark hole, thinking he got a smoking deal.”

Looks like he caught a falling ICBM.  Does this “savvy” investor also have to pay property tax on his new trophy house?

Golden Sacks “shocked” we’ve been clocked…

Evidence of a Financial Coup in America
The devastating Lehman Brothers bankruptcy report 3/17/10 Global Research

http://www.globalresearch.ca/index.php?context=va&aid=18147

How much more evidence of a financial coup and the THEFT of TRILLIONS of DOLLARS do we need before the media and our politicians do something, anything, to restore a rule of law in this nation? What is it going to take?

And now comes the devastating Lehman Brothers bankruptcy report/indictment, which, once again, proves the all-out fraudulent activities that led to the THEFT of TRILLIONS of OUR DOLLARS.

It has been only a few days since the report was released and the coverage is already dropping off into the cesspool of “reporting” that masquerades as modern “journalism.”

First up, Dylan Ratigan, the one person on US television that actually reports on this. I couldn’t agree with him more, as he puts it: “The bottom line: While many Americans and many in our government would love for you to believe that the financial crisis and the transfer of wealth in this country was an accident, this report comes just short of suggesting this is by no means an accident, but instead one of the greatest crimes ever perpetrated against a group of people. This crime: an accounting fraud perpetrated by bank CEOs against the American taxpayer and enabled by the US government.”

Lehman bankruptcy report exposes Wall Street criminality

The Lehman report demonstrates that workers’ jobs, homes, wages and life savings, as well as their access to health care, education and even such rudimentary necessities as light and heat, are being sacrificed to pay for the criminality of the financial elite, which has further enriched itself from the catastrophe of its own making.

In the wake of the report’s release, major Wall Street firms such as Goldman Sachs and JPMorgan Chase have expressed shock over the Lehman revelations and averred that they never employed the accounting dodges used by their former competitor. One is reminded of the film Casablanca, in which Captain Renault declares his “shock” at discovering gambling in Rick’s casino.

How Lehman, With The Fed’s Complicity, Created Another Illegal Precedent In Abusing The Primary Dealer Credit Facility…Frank Partnoy: Lehman Examiner Punted on Valuation…NY Fed Under Geithner Implicated in Lehman Accounting Fraud Allegation…Hank Paulson’s recent book mentions repeatedly that Lehman’s valuations were phony as if it were no big deal…Lehman Brothers, Fraud and the New York Fed…Repo 105: Lehman’s ‘Accounting Gimmick’ Explained…What killed Lehman is alive and kicking…The most alarming element of the report may not be what it says about Lehman, but what it reveals about the rottenness and risks that still endanger the financial services industry and the global economy.

JPMorgan, Citigroup helped trigger Lehman collapse, report argues

The scumballs just wont quit at $hi**tybank

I just looked at my CC and my payment is due on March 21…..a Sunday!

I guess if it gets credited on Monday Sh*tty can say its late….and jack up your interest…nice

I see the political tektonic intersecting of Pelosi/Obama backroom-style “governing” with the States Rights movement.We’ll soon find out if the USA is TBTF.

We are living in interesting times.

Professor Bear told yesterday something about Michael Lewis, author of “Liar’s Poker”.”The Big Short” is a new book by Michael Lewis; it is about how small insiders, smelling something fishy, helped prod investment banks like GS to get AIG into the market of selling counter party risk insurance policies for the subprime mortgage market; called Credit Default Swaps.

CDSs had existed before, but March thru May of 2005, they were offered tied to MBS and subprime for the first time, according to Lewis in the NPR interview. This was a move that was instigated by the help one small investor who was prodding the investment banks to provide a way to bet against subprime. AIG sold these CDS’s in subprime to GS, who then sold them at a markup to this investor, while investing in them themselves.

Credit Default Swaps actually double the risk out there, according to Lewis as they somehow insure against failing of financial instruments. So when the securities fail, people from the investment bank are out the money, and the insurance policies written by AIG, for one, called CDS also have to pay out similar money.

I don’t really understand beyond the superficial, but AIG wanted in on writing CDS policies on the subprime mortgage market and its bundled securities(MBS). These had not been offered on subprime before, but the prodding by one investor was instrumental in getting them written by the ilk of AIG, sold to GS, then resold to this small investor at 10x markup, according to Lewis in a NPR interview yesterday.in the subprime mortgage market before the urging of one of the small investors involved in this book.
Another two men started a hedge fund from their garage, turning 100k into 120 million.

Although they made a mint shorting, and they tried to whistle blow but were ignored, and are all now suffering from various physical and mental ailments varying from heart problems, anxiety and panic issues.

These three letter words are the new four letter words, I guess I gotta understand to understant today’s system properly.

Sounds like Adibi missed the memo that San Diego’s unemployment rate just bounced up to 11 percent?

The fact that the rate at which homes are selling is unchanged over the past two Februarys seems telling…

Home prices up for 6-county region
Southern California still sees sluggish sales

Originally published March 16, 2010 at 12:22 p.m., updated March 16, 2010 at 10:29 p.m.

Led by San Diego County, Southern California home prices rose in February even as sales stagnated, MDA DataQuick reported yesterday.

The median for the six-county region rose 1.5 percent from January to $275,000, with San Diego up the most, 5.6 percent, to $322,000 as earlier reported. On a year-over-year basis, the regional increase was 10 percent, with San Diego up by 13 percent.

Sales totaled 15,361, two fewer transactions than in January and 0.8 percent higher than in February 2009. Some real estate analysts called the sluggish sales a reflection of the relatively low inventory of homes on the market.

Economists interpreted the numbers as a sign that the market is shifting from domination by low-end, foreclosure sales to one with more higher-priced but discounted sales of move-up homes.

“I don’t believe a single home has appreciated by 10 percent over this time,” said Esmael Adibi at the Gary Anderson Center for Economic Research at Chapman University in Orange. “It’s due mostly to changes in the mix.”

Adibi said the starter-home market, generally below the median in any area, has largely reached bottom and is stabilizing. The top end is losing value as owners, suffering from job losses and investment reversals, sell for less than they had hoped.

“Anything above the median and the farther away you go, the more the problem,” Adibi said. “The reason is because potential buyers of relatively expensive homes are absent. Who’s going to buy a million-dollar home? They’re usually self-employed, and their profits and revenues are under pressure, or they’re CEOs, officers of big companies, and bonuses and raises are not there.”

He forecast an overall increase in the median for this year at 5 percent but a decline of around 10 percent for the $1 million-plus market. Adibi said he advised his daughter to buy a median-priced home in Orange County if she plans to stay there for seven years.

“But if somebody wants to buy something expensive, a $1 million to $2 million home, I’d tell them to wait. It’s premature,” he said. “As you go from $350,000 to $2 million, your knees should start shaking more.”

Adibi based his predictions on an end to job losses by midyear with job gains in a few sectors thereafter. Prices could rise more if employment recovers sooner, but, he said, “I very much doubt that, based on what I see.”

Adibi said San Diego seems to be ahead of the rest of Southern California, in that it hit bottom first — the cyclical median low of $280,000 occurred in January 2009.

“San Diego is the first one coming out; it hit bottom first,” he said, and job losses aren’t as bad as elsewhere in the region. “San Diego fared better than anyone else in the recession.”
…

Does anyone have the “alternative” consumer demand indicator that was posted here a few days ago?

I looked for the link but couldn’t find it.

I like that ceridian diesel consumption indicator but this other one tracked sales using a methodology different from us statistics.

March 17 (Bloomberg) — Wholesale prices in the U.S. fell in February more than anticipated, led by a drop in fuel costs and signaling there are few inflation pressures building in the early stages of the economic recovery.

The 0.6 percent decrease in prices paid to factories, farmers and other producers was the biggest since July and followed a 1.4 percent January increase, according to figures from the Labor Department in Washington. Excluding food and fuel, so-called core prices climbed 0.1 percent.

Companies will probably continue to hold the line on prices as the expansion has yet to soak up enough excess capacity or create jobs. The report bears out forecasts by Federal Reserve policy makers, who yesterday retained a pledge to keep the main interest rate near zero for an “extended period,” and said “inflation is likely to be subdued for some time.”

“Disinflation is going to be with us for a while,” Julia Coronado, a senior U.S. economist at BNP Paribas in New York, said in a Bloomberg Radio interview. “That’s going to allow the Fed to stay on hold for a lot longer than the market is expecting.”

– Harvard University Professor Martin Feldstein, who warned almost two decades ago that the euro would prove an “economic liability,” said Greece’s austerity plan will fail and the country may quit the single currency to fix its fiscal crisis.

Under pressure from investors and fellow policy makers, Prime Minister George Papandreou’s government is striving to knock four percentage points off its budget gap this year from 12.7 percent of gross domestic product and has vowed to meet the EU’s 3 percent limit in 2012 for the first time since 2006.

“The idea that Greece can go from a 12 percent deficit now to a 3 percent deficit two years from now seems fantasy,” Feldstein, an adviser to U.S. presidents since Ronald Reagan, said in a March 13 interview in Geneva. “The alternatives are to default in some way or to leave, or both.”

His diagnosis clashes with that of European Central Bank President Jean-Claude Trichet, who calls Greece’s strategy “convincing” and rejects as “absurd” any speculation it might leave the euro zone. Investors nevertheless aren’t ruling out Feldstein’s analysis. Billionaire George Soros said last month that the euro “may not survive,” and credit default swaps indicate a 22 percent chance Greece will default within five years, up from 16 percent a year ago.

The future of medicine

March 16 (Bloomberg) — The rising cost of cancer research and care, which helped reduce death rates by 16 percent over 40 years, is straining the U.S. health system and needs to be restrained, commentators said in a special edition of the Journal of the American Medical Association.

Cancer research has cost the U.S. government $100 billion since 1971 and the price of care, accounting for inflation, has more than doubled to $90 billion since 1990, according to six journal reports that raise key questions about the past and future success of the U.S. “War on Cancer,” announced by then- President Richard Nixon in 1971.

The reduced death rates result from anti-smoking campaigns, early disease detection and new drugs, led by Roche Holding AG’s Avastin and Eli Lilly & Co.’s Erbitux, which can cost individual patients as much as $100,000 a year. The price of the drugs, and the care tied to their use, can be lowered by shifting to a system in which the cost of drugs, tests and other care are combined in a single provider payment, researchers said.

Such a system would push doctors to “shop carefully for the services” patients need, wrote the researchers from the Memorial Sloan-Kettering Cancer Center in New York, led by Elena Elkin in a commentary that was among those included in the special issue. “The expanding financial burden of cancer” including rising incidence rates “cannot be ignored,” the authors wrote.

The Sloan-Kettering researchers also suggested in their commentary that doctors and hospitals should be grouped into accountable-care organizations. That would nudge physicians to act more cohesively, and could be rewarded by payers for providing care that delivers good results.

Or, rather than putting individual hospitals in charge and giving them incentives to not treat patients (ie a capped rate per dx), we should have a national health plan that will only allow treatments that have a certain cost benefit ratio. Then if you want more you buy a private plan or enroll in a study to see if an unproven treatment works.

Cancer …..The surgeon recommends surgery …the chemo doctor recommends chemo…the radiologist recommends radiation …the herbalist recommends herbs ……the drug companies recommend
hormone treatment …the insurance companies recommend no treatment
and stall .

But I think that they have come a long way with Cancer treatment in some regards because I know lots of people who have beaten one form of cancer or another . I would like to see them actually come up with a “cure” that would actually reduce the price of treating cancer …a magic pill that just destroys it for good …is that to much to ask ?

This is the first article on the foreclosure crisis I have seen which invokes Kafka.

March 17, 2010, 12:08 p.m. EDT

One family’s nightmare struggle to keep their home
Banks say they’ll modify loans, but even needy families don’t always get help

Related stories

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* Cutting through the red tape of home short sales (March 15)
* New short sale push may speed up bank loan losses (March

By Alain Sherter

This is the first part in a two-part series.

NEW YORK (MarketWatch) — Marianne Gentry, 66, lives with her disabled husband and desperately ill son. And they’re about to get kicked out of their home.

Gentry, a customer-service representative for Home Depot, faces foreclosure on the four-bedroom house in Fountain Valley, Calif., that her family has occupied since 1996.

Their lender, OneWest Bank, denied the Gentrys’ application to have their mortgage altered through the Home Affordable Modification Program, under which the federal government effectively pays banks to help keep people in their homes. They were given until March 9 to clear out. Read more about HAMP.

If Marianne Gentry’s calamitous personal circumstances are unusual, her experience trying to save her home is anything but. Indeed, such stories often have a depressing sameness: bewildered borrowers; a Kafkaesque loan-modification process; indifferent or even hostile lenders.

In 2009, 2.8 million homeowners lost their properties in foreclosure, according to market research firm RealtyTrac. Millions more face the same fate this year. Nationwide, one in four borrowers owes more on their home than it’s worth, according to the Mortgage Bankers Association.
…

Bernanke Says Fed Doesn’t Want to Be ‘Too Big to Fail’ Overseer

By Craig Torres

March 17 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said the central bank shouldn’t be relegated to the role of regulating only the largest financial firms.

“We are quite concerned by proposals to make the Fed a regulator only of the biggest banks,” Bernanke told the House Financial Services Committee today. “It makes us essentially the too-big-to-fail regulator. We don’t want that responsibility. We want to have a connection to Main Street as well as to Wall Street. We need to have insights into what is happening in the entire banking system.”

Taking a page from the House Democrats’ playbook, I have decided I am going to “deem” to have overpaid on my 2009 Federal income tax and apply for a refund.

March 16, 2010, 6:34 p.m. EDT

8 Things To Consider Before Walking Away From Your Mortgage
By Brett Arends , The Wall Street Journal

Last week I received an email from a desperate couple in Illinois. Here’s the edited version of their note:

“My wife and I have been struggling, morally, with what to do. We have two interest-only, adjustable-rate mortgages with two different lenders coming due in May of 2011. I currently can handle paying all my bills–but just barely, with nothing left over for replenishing of the emergency fund, or even my kids’ college savings.

In one year, when those adjustable rate mortgages adjust, it’s a different story. The home is now worth about 70% of the loan values. We do not want to stay in the home and have been trying to be proactive about doing something before the rates adjust. My lenders both said that if I do a short sale they would definitely make me sign a promissory note (for the deficiency). That defeats our purpose, so it is not an option for us. Bankruptcy attorneys have told me I make too much money to file for Chapter 7. I am currently employed. Last June I lost my previous job, and squandered our savings to stay above water with bills and the mortgages. Hindsight is 20/20 and at the time I should have filed for Chapter 7.

So, I am considering just letting the home go to foreclosure, saving my money, paying off other smaller debts (such as credit cards, and car loan), but am hesitant. I want/need to do the right thing fiscally for my family, but am wavering on the fence as to just take the plunge or not in a strategic foreclosure.

What should we do?”

These people are far from alone. Millions of middle-class Americans today are in a similar situation. They are struggling with their mortgage payments, and cannot sell because they are a long way underwater, owing more on their home than it is worth. They have wiped out their savings trying to keep up. One worker in six is either unemployed or underemployed, and there is a tsunami of rate resets coming in the next two years.

No one forced them to borrow –but no one forced the banks to lend either. More important right now is how they get out of it. I took this conundrum to two experienced bankruptcy attorneys–Richard Nemeth in Cleveland and Jeffrey Tromberg in Ft. Lauderdale, Fla.–for their advice. Here are some thoughts they offered.
…

I thought breaking and entering and theft were felony crimes punishable by jail time. Perhaps when the perpetrator is one of America’s largest banks, it is different, since they operate above the rule of law?

* March 16, 2010, 9:32 AM ET

BofA Breaks Into Another House but Finds No Parrot

By James R. Hagerty

Can this be a coincidence, or is something seriously wrong with Bank of America Corp.’s procedures for dealing with other people’s real estate?

Last week we told you about Angela Iannelli and her parrot, Luke. The bank erroneously concluded that Ms. Iannelli, a mortgage-loan customer, had vacated her house. So the bank sent contractors to her house to “secure” it. They changed the lock, cut off utilities and confiscated Luke. It took Ms. Iannelli more than a week to get her bird back.

Now Scott D. Kassing, a doctor in the Phoenix area, has had a similar experience, though it didn’t involve the abduction of any pets.

Dr. Kassing says he has been a BofA customer for years and on Feb. 25 completed the purchase of a foreclosed home from the bank in the Phoenix suburb of Buckeye. The Kassing family has been renovating the house and hasn’t yet moved in.

One day last week, he says, “we arrived at the house on our daily visit to discover… the locks on the house changed. A sign in the window basically [stated] that the property had been secured by Bank of America to protect its interest and prevent entry by unauthorized individuals. A call to the emergency number resulted in no callback after two attempts.”

Dr. Kassing then spent a couple of hours at the office a BofA branch manager: “She spent most of the time on the phone being transferred around Bank of America phone lines and waiting on hold. It was finally acknowledged that an error occurred and the house was incorrectly seized. It was agreed that a locksmith would be sent out to open up my property again.”

Once he got inside, the doctor found that the possessions he had put in the house were gone: “About $2,000 worth of property was taken, including a new microwave still in the box, multiple tools, and various other items.”
…

Behold, I bring you tidings of other bubbles in the works:

1. Education. Specifically, higher education.
2. Health Care. Which is already starting to look, walk, and quack a lot like our beloved housing bubble-duckie.

Once he got inside, the doctor found that the possessions he had put in the house were gone: “About $2,000 worth of property was taken, including a new microwave still in the box, multiple tools, and various other items.”

I think it is time a dinky little bank breaks into the BoA CEO’s house, trashes it and replaces the locks. Leave a sign on it to call 1-800-EAT-SH*T

I would contribute to the legal defense fund…

Muggy-
I posted a list of links from your “paging wipeout” yesterday (under your request), but this one is the most direct information.
http://www.scribd.com/doc/23500034/New-Guidelines-for-Short-Sales-HAMP-Supplemental-Directive-09-09

Southern California home prices rise 10% in February
http://www.latimes.com/business/la-fi-home-sales17-2010mar17,0,1618841.story
(The comment section dissects the misleading headline)
Just last week, I compared a local paper’s housing article to a CAR press release, and it was almost verbatim.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/7467500/Dutch-pension-fund-sues-Bank-of-America-for-100m.html

Bank of America is being sued for $100 million by one of their many bagholders: A Dutch pension firm. I hope this starts a cascade of similar lawsuits. The fools who ran these pension funds can color their money gone, but at least they can put these bankster scum under oath and grill them, for what it’s worth.

Ok folks….. where is the zero interest mortgage products…. you know…30 year fixed rate stuff….

Florida’s foreclosure backlog among nation’s worst

By Kimberly Miller
Palm Beach Post Staff Writer
Posted: 5:41 p.m. Wednesday, March 17, 2010

A crushing backlog of foreclosure cases has pushed Florida’s courts to request a one-time payment of $9.6 million to help purge the system and quicken a market recovery.

The Florida State Courts Administration estimates 500,000 property foreclosures are pending, including 55,000 in Palm Beach County.

Without additional resources to clear the cases, judges fear the bottleneck will continue to drag down home values, which aren’t expected to stabilize until the glut of foreclosures moves through the system.

It’s routine in Florida for foreclosures to take more than a year to settle, leaving deteriorating homes, unpaid association fees, and families facing uncertain futures.

“We want to be good partners in the economic recovery, not part of the problem,” said Peter Blanc, chief judge of the 15th Judicial Circuit Court in Palm Beach County. “We want to get properties through the courts and back onto the market. The numbers are just overwhelming.”

A Barclays Capital report last week found Florida has one of the highest foreclosure backlogs nationally, even singling out South Florida — Miami-Dade, Broward and Palm Beach counties — saying it is “remarkable” that the area may only be 18 percent finished with liquidating its delinquent property loans through foreclosure

Foreclosure court backlog

Miami-Dade County, 80,100
Palm Beach County, 55,000
Broward County, 36,880
St. Lucie County, 11,220
Martin County, 2,530

Whitman releases her agenda for California

Republican gubernatorial candidate Meg Whitman released a detailed policy agenda Tuesday at an appearance at Leisure World in Seal Beach.

Among the new proposals:

• Provide a $10,000 tax credit for purchasers of new and existing homes.

I Wasn’t Going To Buy This House Until I Saw The Realtor’s Headshot On The Sign

Buying a house is one of the biggest decisions a person can make, so when I set out to purchase my first home, I didn’t take the matter lightly.

Am I going overboard with cynicism, or is this move by the Fed to grab a bigger regulatory role mainly about protecting Megabank, Inc from scrutiny of actions during the expansion phase of the bubble which may appear like white collar crimes through the lens of the rear view mirror? After Madoff and Enron, I would think there would be wider interest in exploring which other corporate behemoths might have committed white collar crime over the past decade, and prosecuting the perpetrators to the full extent of the law.

These are just my opinions, of course…

The Financial Times
Fed chief defends role as watchdog
By Tom Braithwaite in Washington

Published: March 17 2010 15:20 | Last updated: March 18 2010 00:03

Ben Bernanke, chairman of the Federal Reserve, appealed to Congress to preserve the central bank’s supervision of the financial system as lawmakers consider removing some of the Fed’s powers.

The Fed would lose oversight of banks with less than $50bn in assets in a bill by Chris Dodd, chairman of the Senate banking committee, which was introduced this week and will go to a mark-up next week.

“It makes us essentially the ‘too-big-to-fail’ regulator,” Mr Bernanke told a congressional hearing. “We don’t want that responsibility. We want to have a connection to Main Street, as well as to Wall Street.”

The $50bn threshold is a compromise from Mr Dodd, offered after his earlier proposal to remove all of the Fed’s bank supervision was roundly rejected by the Treasury, the Fed and some senators.

Paul Volcker, the former Fed chairman, appeared alongside Mr Bernanke to describe the idea of hiving off all of the bank’s oversight as a “grievous mistake” that would harm the conduct of monetary policy and financial stability by limiting the Fed’s understanding of the financial system.

The hearing in the House financial services committee was set up to provide a counterblast to Mr Dodd’s original, more far-reaching proposal that would have moved the Fed’s responsibility for 5,000 bank holding companies and 850 state- chartered banks to a single regulator. Barney Frank, chairman of the House committee, does not favour the shift in duties.

But the Fed faces a harder challenge in preserving the entirety of its supervision, with Mr Dodd and allies on the Senate banking committee determined to hold the line, arguing that the Fed gains nothing from regulating small banks and the job would be better performed by other regulators.

“There’s a reputational risk in having your central bank do too many things,” said Vincent Reinhart, a scholar at the American Enterprise Institute, and former director of the Fed’s division of monetary affairs.

Mr Volcker argued: “The Fed’s regional roots would be weaker and a useful source of information lost.”

Supervision of state banks “provides useful information” that “greatly assists in the making of monetary policy”, Mr Bernanke testified.
…
EDITOR’S CHOICE
US consumer protection proposals attacked - Mar-17
Text: Ben Bernanke testimony - Mar-17
Blog: Money Supply - Oct-07
View from the Top: Paul Volcker - Mar-09
In depth: US banks - Nov-18
In depth: Central banks - Nov-16

I am thinking the final stage of U.S. housing bubble deflation may be driven from without by forces beyond the Fed’s control. For instance:

The Financial Times
China and Germany unite to impose global deflation
By Martin Wolf
Published: March 16 2010 22:59 | Last updated: March 16 2010 22:59

“Chermany” spoke last week and the world listened. Was what it said coherent? No. Was what it said self-righteous? Very much so. Was what it said dangerous? Yes. Will wiser views still prevail? I doubt it.

You may have heard of Chimerica – a neologism invented by Niall Ferguson, the Harvard historian, and Moritz Schularick of the Free University of Berlin, to describe a supposed fusion between the Chinese and American economies. You may also have heard of Chindia, invented by Jairam Ramesh, an Indian politician, to describe the composite new Asian giant. Let me introduce you to Chermany, a composite of the world’s biggest net exporters: China, with a forecast current account surplus of $291bn this year and Germany, with a forecast surplus of $187bn (see chart).

China and Germany are, of course, very different from each other. Yet, for all their differences, these countries share some characteristics: they are the largest exporters of manufactures, with China now ahead of Germany; they have massive surpluses of saving over investment; and they have huge trade surpluses. (See charts.)

Both also believe that their customers should keep buying, but stop irresponsible borrowing. Since their surpluses entail others’ deficits, this position is incoherent. Surplus countries have to finance those in deficit. If the stock of debt becomes too big, the debtors will default. If so, the vaunted “savings” of surplus countries will prove to have been illusory: vendor finance becomes, after the fact, open export subsidies.

I am beginning to wonder whether the open global economy is going to survive this crisis. The eurozone may also be in some danger. Last week’s interventions by Wen Jiabao, China’s premier, and Wolfgang Schäuble, Germany’s finance minister, illuminate these dangers perfectly.
…

Sounds like the Dodd plan sucks just as bad as many of us suspected…and there is no better alternative in sight so far as I can tell!

* OPINION
* MARCH 17, 2010, 10:14 P.M. ET

If You Liked Fannie and Freddie…
… You’ll love Chris Dodd’s latest reform proposal. It would make many more companies too big to fail and lead to far greater financial consolidation.

By PETER J. WALLISON

Think ObamaCare for the financial system. That’s one way to understand Sen. Chris Dodd’s bill to reform financial regulation. If passed in its current form, the bill would give the government control over the financial system in roughly the same way, and to the same extent, that ObamaCare would take over the nation’s health care. There isn’t a public option, exactly, but the private firms involved would be so heavily regulated that they would be effectively controlled by the government.

The threat comes primarily from the new powers granted to the Federal Reserve and a new regulatory grouping called the Financial Stability Oversight Council (FSOC). Although the Fed failed to anticipate the financial crisis, missed the significance of the developing housing bubble, and did not prevent our largest banks from taking excessive risks, it is rewarded in the bill with authority to control the rest of the financial system.

Not only will the Fed retain its regulatory authority over banks and bank holding companies with assets of more than $50 billion, but the FSOC will be authorized to place under the Fed’s supervision any other large nonbank financial institutions—insurance companies, securities firms, finance companies, hedge funds and others—that the FSOC believes could “pose risks to the financial stability of the United States.”

The Fed’s authority over all these firms will extend to setting standards for capital, liquidity, leverage and risk management. If this isn’t enough to remove the threat to U.S. financial stability, the Fed may order a company to terminate one or more activities, impose conditions on how the company operates, or require the company to sell or transfer assets to unaffiliated parties.

It’s easy to imagine how these extensive authorities confer practical control over every policy and every action of the firms that come under the Fed’s supervision. The innovation and risk taking that have always characterized the American financial system will be stifled beneath the Fed’s bureaucratic blanket. The center of gravity of the U.S. financial system will move to Washington, where large firms will have to go hat in hand to gain Fed approval for every significant move. Moreover, by designating these firms as potential threats to financial stability, the bill clearly identifies them as too big to fail. This will ensure their competitive survival since it’s unimaginable that the Fed will allow them to fail while under its control.

Although Sen. Dodd apparently believes that the only significant question about too big to fail is whether taxpayer money is used to bail out a large firm, this is far from true. The real significance of the too-big-to-fail designation, as every small banker knows, is that the implicit protection of the government confers a lower cost of funds and thus significant competitive advantages.

We’ve seen this movie before, and it wasn’t pretty. Fannie Mae and Freddie Mac were too big to fail, and their lower cost of funds allowed them to drive all competition from the part of the secondary mortgage market where they were allowed to operate. They grew to multitrillion dollar size and took multitrillion dollar risks. Some time in the next few years, American taxpayers will receive a bill for more than $400 billion to clean up the losses that are now baked in the Fannie and Freddie cake.
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Iceland Debt Small Part of Global Debt Crisis
Written by Charles Scaliger
Tuesday, 09 March 2010 21:00

Iceland flagIceland’s recent vote not to repay billions of dollars owed to Britain and the Netherlands underscores the growing risk involved in bailing out sovereign debtors. When Icesave, an Iceland-based Internet bank, collapsed back in 2008 along with most of Iceland’s banking sector, the tiny North Atlantic nation nearly collapsed along with it. Fortunately for the short term, Britain and the Netherlands agreed to bail out Iceland’s depositors in Icesave.

Now, however, voters have resoundingly rejected (by a margin of 93 percent to about two percent) a government plan to repay the British and Dutch by having $135 garnished from every paycheck monthly for the next eight years. Although Iceland’s leaders continue to insist that Icelanders are obligated to repay the money, ordinary Icelanders, understandably reluctant to accept responsibility for the actions of politicians and central bankers, are balking.

The problem with sovereign debt, including debt incurred by the U.S. government, is that responsibility for it is diluted. While pundits may insist in the abstract that every American owes tens of thousands of dollars in his share of the national debt, millions of Americans — especially those who (like this writer) have long deplored the unconstitutional and illegitimate profligacy of politicians in Washington and state governments — are unlikely to comply when America’s creditors begin demanding that Americans be shaken down for decades of irresponsible government borrowing and spending.

When American taxpayers are no longer willing or able to pay for the party that the politicos have thrown for themselves, Washington will have little recourse except to try to print its way out of debt. But that too will be difficult when creditors refuse to purchase any more government debt (since issuing debt, primarily through “open-market operations,” is the primary way that central banks like the Fed create new money). When the day of reckoning finally dawns, Washington with little choice besides outright default.
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Why would Thornberg assume that home prices will ever return to their bubble peaks? Fourteen years seems way too soon, given that Japanese home prices dropped for two straight decades right up to the present with no clear sign that a bottom is in place.

More homeowners are opting for ’strategic defaults’

Underwater on their mortgages and angry at banks, more borrowers are choosing to hand over the keys, even if they can afford the payments.

Wynn Bloch bought her Palm Desert house for $385,000 in 2006. Now she says it will never be worth anywhere near the amount of her mortgage, so she stopped paying on her loan and moved out. (Bret Hartman / For The Times / March 4, 2010)

By Alana Semuels

March 17, 2010

Wynn Bloch has always dutifully paid her bills and socked away money for retirement. But in December she defaulted on the mortgage on her Palm Desert home, even though she could afford the payments.

Bloch paid $385,000 for the two-bedroom in 2006, when prices were still surging. Comparable homes are now selling in the low-$200,000s. At 66, the retired psychologist doubted she’d see her investment rebound in her lifetime. Plus, she said she was duped into an expensive loan.

The way she sees it, big banks that helped fuel the mess all got bailouts while small fry like her are left holding the bag. No more.

“There was not a chance that house was ever going to be worth anywhere near what my mortgage was,” said Bloch, who is now renting a few miles away after defaulting on the $310,000 loan. “I haven’t cheated or stolen.”

Time was when Americans would do almost anything to hang on to their homes. But that commitment appears to be fraying as more people fall behind on their loans while watching the banks and lenders that helped trigger the financial crisis return to prosperity.

Nearly one-quarter of U.S. mortgages, or about 11 million loans, are “underwater,” i.e. the houses are worth less than the balance of their loans. While home values are regaining ground — median prices rose 10% in Southern California last month to $275,000 compared with a year earlier — they remain far below the July 2007 peak of $505,000.

Many homeowners are just coming to grips with the idea that prices will take years to reach the pre-crash peak: as long as 14 years in California, according to economist Chris Thornberg.

Stuck with properties whose negative equity won’t recover for years, and feeling betrayed by financial institutions that bankrolled the frenzy, some homeowners are concluding it’s smarter to walk away than to stick it out.

“There is a growing sense of anger, a growing recognition that there is a double standard if it’s OK for financial institutions to look after themselves but not OK for homeowners,” said Brent T. White, a law professor at the University of Arizona who wrote a paper on the subject.
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