Mortgage Blight

Meltdown and Bailout: Why Our Economic System Is on the Verge of Collapse

2008-09-22T21:41:00.000-07:00

Meltdown and Bailout: Why Our Economic System Is on the Verge of Collapse
By Joshua Holland, AlterNetPosted on September 22, 2008, Printed on September 22, 2008
The immediate cause of our financial meltdown is unchecked, unbridled greed. Mainstream newspapers and the business press are doing a fairly good job of explaining how the lack of regulatory oversight led us into this nightmare.
But you have to dig down one layer to find the cause of that situation. Under cover of the ideological euphemism known as the "free market" and with enormous cash investments over the past four decades, business elites have captured the regulatory organs of powerful democratic states -- nowhere more so than the United States -- and promoted their own narrow economic agendas for short-term gain.
There's an enormous amount of discussion about that in the independent media. But to drill down a layer deeper, to the bedrock of the crisis, you have to go to some deep thinkers who don't get much play in our mainstream economic discourse.
As foreign policy analyst Mark Engler notes in his new book, How to Rule the World, declining returns on traditional investments in manufacturing and industry since the 1970s go a long way toward explaining today's highly speculative economy -- pushing capital into developing countries and into bubble after speculative bubble in search of a better profit margin.
It's important to understand what's going on at all three levels, because we may have come to a fork in the road, a point at which the decisions made now may determine the future of the global economy.
We may or may not also be on the verge of another Great Depression.
The Bush Bailout: Privatizing Gains and Socializing Risk
On Saturday, hoping to stave off that dark possibility, the Bush administration proposed an unprecedented bailout for investors, a scheme that would authorize the Treasury Department to spend as much as $700 billion in tax dollars over the next two years to buy up bad securities, with little Congressional oversight save for a semiannual report on the process.
The move came after the federal government had already sunk a total of $900 billion into America's financial institutions this year, potentially bringing the total value of the Fed's tinkering to $1.6 trillion over three years.
The White House, Congressional leaders and Treasury officials are haggling over the details. Things are moving quickly, with a mammoth intervention that was unspeakable in economic circles a month ago now looking more and more inevitable.
The structure of the proposed bailout may change during those negotiations -- Democrats in Congress are pushing to save more homeowners and tie the package to some sort of limits on CEO pay for institutions that get a lifesaver -- but the deal outlined in the brief document released on Sept. 20 epitomizes the principle of privatizing gains while socializing risk. In other words, we're splitting an oil well with the Big Boys on Wall Street: They get the oil, we get the shaft.
It is, in short, a draft of what could be one of the greatest rip-offs in history. Bush, on the way out of power, is trying to create a publicly financed honeypot for the private sector on a scale never before imagined.
Those who played fast and loose with newer, ever shakier investment instruments in order to squeeze a few more bucks out of the markets' "irrational exuberance" about the housing sector would get a payday that would save their bacon. According to the New York Times, this huge pile of taxpayers' cash may even be available to foreign investors.
Home prices would continue to tank, though, as banks shed their bad loans at discounted prices to the government. Those subsidized assets would then be liquidated -- on the cheap because they're so overvalued -- to resuscitate the financial system. Rick Sharga, a senior officer with RealtyTrac, which monitors the housing market, told Reuters, "We've seen fewer and fewer properties go through the auction process because there's either little equity in them or even negative equity. So there's no incentive for people to buy them at the auctions."
Sharga added that "bank repossessions continue to grow at a pretty rapid clip," but an analyst told me recently that he knew of banks that simply weren't taking possession of foreclosed properties because they didn't want them on their balance sheets.
As those assets are disposed of, the value of all Americans' homes will continue to fall, because sales of comparable properties determine their worth. That would, in turn, leave a greater number of Americans with mortgages worth more than the amount of equity in their homes, and the cycle would continue. Things are already bleak on that front; the rate of U.S. foreclosures increased 75 percent in 2007 and 55 percent in the year ending this June. The Associated Press reported, "More than four million American homeowners with a mortgage, a record nine per cent, were either behind on their payments or in foreclosure at the end of June."
Many more will lose their homes, and all of us will get the tab: higher taxes, swelling deficits, higher interest rates and a moribund economy.
The plan doesn't specify what, if anything, U.S. taxpayers will get in return for their largesse. The government isn't spending more than a trillion dollars to nationalize failed institutions in order to protect stakeholders and liquidate those overvalued assets in an orderly manner. That might make a lot of sense, and it would essentially make Joe and Jane taxpayer owners of something that might rebound in value down the road.
Instead, Bush's proposal would take bad paper off the books of institutions that are ailing but haven't yet gone belly-up, and we wouldn't necessarily get a stake in those institutions; they'd only become "financial agents of the government," according to the draft released Saturday.
As Paul Krugman notes, "historically, financial system rescues have involved seizing the troubled institutions and guaranteeing their debts; only after that did the government try to repackage and sell their assets."
The feds took over S&Ls first, protecting their depositors, then transferred their bad assets to the (Resolution Trust Corporation, founded in the wake of that crisis). The Swedes took over troubled banks, again protecting their depositors, before transferring their assets to their equivalent institutions.
The Treasury plan, by contrast, looks like an attempt to restore confidence in the financial system -- that is, convince creditors of troubled institutions that everything's OK -- simply by buying assets off these institutions.
Making matters even worse is the fact that it's almost impossible to put a fair market value on this massive pile of bad debt. As Peter Goodman of the New York Times notes, "no one really knows what this cosmically complex web of finance will be worth, making the final price tag for the taxpayer unknowable. One may just as well try to predict the weather three years from Tuesday."
There will be a fight in Washington, and much debate, about which ideological direction the bailout should lean, and the version offered up by the Bush administration is -- no surprise here -- tilted heavily in favor of those at the top of the economic pile.
What's clear is that there is going to be a massive transfer of public wealth to the private sector, and at least the lion's share of that cash, if not all of it, will end up in the hands of an investor class whose recklessness got us into this mess in the first place.
Meltdown
This bailout is a desperate attempt to save the modern economic system from falling under the weight of its deep structural imbalances. As such, it's unlikely to work over the medium and long terms, even if it has the desired immediate effect of propping up creaky markets and restoring their (largely unjustified) sense of security.
The proximate cause of the financial system's meltdown is not all that hard to grasp. The decades-long supremacy of the ideology euphemistically called "free trade" resulted in capital being unmoored from national economies and freed to move around the world with few limitations (under the imperative of government not "intervening" in markets). Unconstrained by borders and investment rules, those dollars, yen, euros and what have you roamed the planet seeking a better rate of return. Investors moved in packs, rushing lemming-like to whatever hot up-and-coming market the Economist was writing about in a given month, and a series of bubbles resulted.
Those bubbles made some people incredibly rich, and hurt others badly.
Of late, real estate was the can't-miss investment, and as enormously overvalued housing bubbles sprang up, notably in the United States, Wall Street's financial whizzes started offering newer and more "creative" investment vehicles, bundling mortgages and selling them off to investors from around the globe.
That was driven by an era of relentless deregulation, both at home and abroad. Here in the United States, the trend of deregulation culminated in 1999 with the death of the Glass-Steagall Act, the New Deal-era legislation that had forced financial institutions to choose between investment banking and commercial lending. Meanwhile, international bodies like the WTO and the IMF were pressuring the governments of all countries to drop their controls on the flow of cash and goods.
Without fear of a regulatory backlash, the banks pushed their new investments hard, and investors gobbled them up with glee. Writing in the Columbia Journalism Review, Dean Starkman cited reports from the business press about loan agents at Ameriquest being ordered to watch "Boiler Room," the film about sleazy financial brokers pushing bad investments on gullible retirees (Ameriquest was a predatory subprime lender that went down last year). Starkman quoted an executive with Morgan Stanley's mortgage unit as saying, "It was unbelievable. We almost couldn't produce enough to keep the appetite of the investors happy. More people wanted bonds than we could actually produce."
In the end, investors were basically buying up paper that had only a distant relationship with anything concrete. The link that had long existed between homeowners and lenders was broken, and debt -- in this case debt tied to housing, but also commercial and consumer debt -- became a hot investment vehicle.
Convinced that the market would continue to grow indefinitely -- or maybe that they'd get bailed out if things headed south -- investors leveraged their assets further and further, in effect buying on margin just like the bad old days before the Crash.
The banks and investment houses worked hard to find new ways to make their own pounds or rubles, creating not only new types of debt-based securities, but also coming up with new forms of insurance to (supposedly) shield investors against the risk those loans represented.
That was all well and good for them, if not for the rest of us, until the housing market started to tank. Despite assurances from the government earlier this year that the disaster had been "contained" to the subprime market, it began to spread. As the Associated Press reported, the tanking real estate market "shifted from subprime loans made to borrowers with poor credit to homeowners who had solid credit but took out exotic loans with ballooning monthly payments." Bloomberg reported that 3 million American homeowners are holding prime (or, actually, semi-prime) "alt-A" loans (don't ask) worth about $1 trillion, or $150 billion more than the entire outstanding subprime market.
As those loans -- many of which were taken on investment properties by people expecting a nice, quick turnover -- started to go belly-up, a panic ensued. As the rot spread, banks started going down and investors essentially began a stampede on an already weakened financial sector. It was the modern-day equivalent of a bank run, but on a global scale.
That posed a risk to the mammoth and wholly unregulated market in insurance on bad loans that had grown up around these new kinds of investments. The market in what are known as "credit default swaps" is of unknown size, but it's estimated to be worth as much as $60 trillion, most of it essentially paper backed by too little in the way of hard assets.
The government knew that if that market tanked, it could take down the global economy. That threat was, in large part, the thinking behind the $85 billion dollar bailout of AIG less than a week ago -- AIG was a key player in this huge but hazy market, and it did business with banks around the world.
At that point, a feeling of panic was spreading, and lawmakers in Washington felt that they had to do something, anything, to stop the meltdown. The banking sector's crisis threatens the entire economy, as the capital needed for new investment and expansion has begun to dry up. Jared Bernstein of the Economic Policy Institute told the New York Times that "Wall Street isn't this island to itself" and warned that if the finance sector "gets worse, we're going to be stuck in the doldrums for a very long time, because that directly blocks healthy economic activity."
Global Capitalism's Crises of Poverty and Overproduction
The financial meltdown in the United States is huge, but it isn't unique. Think of the Asian financial crisis, Mexico's "peso crisis" or the dot com crash. All had one thing in common: an investor class that at one time valued thrift, limited risk and steady growth plunged trillions with almost suicidal abandon into one bubble after the next.
All of which begs the question of what it is about our modern economic system that creates this cycle of inflating and bursting bubbles.
The answer, in large part, comes down to a decline in profitability in investments in concrete things, which has sent investors scurrying for abstract financial instruments in search of a fat return.
That shift, in turn, results from a simple aberration: a small fraction of the planet's population is tied to an economic system in which productivity is effectively an end unto itself. It makes tons and tons of widgets, always seeking new widget markets (and sucking up most of the planet's raw materials). At the same time, the powerhouses of the global economy -- the United States, Europe, Japan and the "Asian Tigers" -- have given woefully low priority to economic development in the rest of the world. They've essentially relegated it to NGOs and an underfunded United Nations, and in their own development funding they've prioritized geopolitics -- their "national interests" -- over poverty relief.
That's left much of the rest of the world's population (and this includes people in the wealthiest countries as well as the poorest) with barely enough money to feed their families, much less buy all those widgets. According to the UN, 80 percent of the people on the planet live on $10 dollars a day or less, and they're not going to take many flights on Boeing's shiny new airplane, buy GE's dishwashers or use Nortel's broadband. Over just the past two years, the number of people living on the "edge of emergency" -- in imminent danger of starvation or death from disease epidemics -- has doubled, zooming from 110 million people to 220 million, according to CARE International.
In other words, at the heart of the current crisis, like those that preceded it in recent years, is a massive imbalance inherent in the modern system of capitalism. It is caused by twin crises inherent in the structure of our global economy: a crisis of overproduction in the "core" states with advanced economies, and soul-crushing poverty in much of the "periphery."
In the booming years after World War II, the wealthy countries, led by the United States, did very well manufacturing goods for the entire planet. But as Europe and Japan rose from the ashes, and later, as production in countries like Taiwan, South Korea and Singapore increased, the industrial world simply started making more crap than there were consumers to purchase it.
Capitalism's tendency toward overproduction has been something with which thinkers dating back to Karl Marx have wrestled. If, as one definition holds, capitalism is all about maximizing efficiency, what happens when meaningful production becomes so efficient that the system ends up cranking out more goods than the population needs -- more than it can absorb?
The answer is simple. Since the middle of the last century, investors' returns on real production -- manufacturing -- has been in steady decline. Economist Robert Brenner described it as a "long downturn" in the world's most advanced economies. He noted that the seven leading industrial economies grew by a steady rate of 5 percent or more annually from the end of World War II through the 1960s, but in the 1970s that fell to 3.6 percent, and it has averaged around 3 percent since 1980.
The social critic Walden Bello has arguably been the clearest voice connecting the problem of overproduction to the rush of speculation that has led to today's financial crash. Bello noted that in the 1990s, the heyday of corporate globalization, the "U.S. computer industry's capacity was rising at 40 percent annually, far above projected increases in demand."
The world auto industry was selling just 74% of the 70.1 million cars it built each year. So much investment took place in global telecommunications infrastructure that traffic carried over fiber-optic networks was reported to be only 2.5 percent of capacity. Retailers suffered as well, with giants like K-Mart and Wal-Mart hit with a tremendous surfeit of floor capacity. There was, as economist Gary Shilling put it, an "oversupply of nearly everything."
A report in the Economist, cited by Bello, found that the world of Clinton's "New Economy" was "awash with excess capacity in computer chips, steel, cars, textiles and chemicals," and noted that "the gap between capacity and output was the largest since the Great Depression."
An inevitable result of that imbalance was a massive migration of capital from real, productive industry to the "speculative sector" run by financial giants like AIG and Lehman Brothers. As Bello noted:
So profitable was speculation that in addition to traditional activities like lending and dealing in equities and bonds, the '80s and '90s witnessed the development of ever more sophisticated financial instruments such as futures, swaps and options -- the so-called trade in derivatives, where profits came not from trading assets but from speculation on the expectations of the risk of underlying assets.
Exacerbated by a relentless assault on public interest regulation and economic nationalism under the guise of "free trade," the increasingly speculative tendencies of global investors created fertile ground for the growth of that pile of bad paper to which the Bush administration is reacting with its trademark brand of top-down reverse socialism.
In a nutshell, our modern economic system has become divorced from what an "economy" is supposed to do in human terms. It was anthropologist Karl Polanyi who argued that the term "economics" has both a formal meaning -- a system of exchange of goods and services designed to maximize efficiency -- and a "substantive" one: the survival strategy of humans in their natural environment. It's a concept that transcends conventional economic concepts of supply and demand, markets and states, and it's one that we've ignored for too long.
As the financial sector threatens to fall apart around us, it's important to understand the crisis on all of these levels, or we run the risk of losing sight of the forest for the trees. One has to keep in mind that this is all happening during the era of the $100-plus barrel of oil, with the global economy integrated more than ever before and during a period of deep environmental peril due to global climate change and related problems of drought and desertification.
With the Bush administration pumping more than a trillion dollars into the private sector, Jim Bunning, the junior senator from Kentucky, lamented that the "free market for all intents and purposes is dead in America." As more mainstream economists talk about the possibility of sliding into a full-blown depression, we may well be in the grip of a kind of economic "Grotian Moment." The term, named for the 17th century Dutch legal philosopher Hugo Grotius, describes an event that has such a great impact that it results in fundamental changes to the prevailing system.
Slavoj Zizek wrote that "One of the clearest lessons of the last few decades is that capitalism is indestructible. Marx compared it to a vampire, and one of the salient points of comparison now appears to be that vampires always rise up again after being stabbed to death." That's true; for a generation, we've been constrained from even discussing the fundamental structures of the prevailing system -- its excesses and shortfalls. This may be a moment in which we can do so, and should.
If we are at such a juncture, then we as a society have a serious question to answer: Will we bail out the speculator class so that it can regroup and move on to the next bubble, precipitating the next crisis of capitalism, or will we address the underlying problems of underdevelopment and overproduction in a way that's adequately sustainable in an era of serious environmental peril?
So far, Bush and the Congress appear to have the wrong answer.
Joshua Holland is an AlterNet staff writer.
© 2008 Independent Media Institute. All rights reserved.View this story online at: http://www.alternet.org/story/99703/

“Economic 9/11,”

2008-09-21T21:20:00.000-07:00

With the September 15, 2008 “Economic 9/11,” Are We Facing Depression Like 1929?
© 2008 by Linda Moulton Howe

“This is a classic Titanic situation in the sense that what we saw with the Fannie and Freddie bailouts and the Bear Stearns bailouts and now the AIG request for more than forty billion more dollars from the federal government – it’s just like the Titanic where the rich and affluent were given the lifeboats and the rest of the people went under from steerage. The rich and powerful are too big to fail; the rest of us are too small to save.”- Gerald Celente, Editor and Publisher, The Trends Journal
“They (Republican Party) had begun to consider the Government of the United States as a mere appendage to their own affairs. We know now that Government by organized money is just as dangerous as Government by organized mob.” - Franklin Delano Roosevelt, 1936, quoted in The FDR Years © 1995 by William Leuchtenburg
Crowd at New York's American Union Bank during a bank runearly in the Great Depression that began in 1929. The bank opened in 1917,and went out of business on June 30, 1931. Image source Wikipedia.
Crowd at IndyMac Bank in Pasadena, California, on Friday, July 11, 2008, after the federal government took control in the second-largest bank failure in U. S. history. Financial experts predicted at least 50 to 100 bank failures in the United States after IndyMac Bank.

Updated 11:00 PM EDT September 17, 2008 - Dow closed 450 down today in continuing “Economic 9/11,” after Feds loan AIG $85 billion and oil and metals spiked upward. “Right now, citizens don't trust banks and bankers don't trust other bankers. The financial system is freezing up,” said a CNBC Business Network analyst.
Investors also considered a report on new home construction that showed that housing starts dipped to a 17-year low. Further, the FDIC website lists 11 bank failures in 2008 since April, the latest being Silver State Bank in Henderson, Nevada, on September 5, 2008. The Pasadena, California, IndyMac Bank FDIC takeover on July 11, 2008, was the second largest bank failure in American history.

September 15, 2008 Rhinebeck, New York - Back on December 21, 2007, I interviewed Gerald Celente, Editor and Publisher of The Trends Journal based in Rhinebeck, New York. Mr. Celente has been interviewed by network newscasters for years and his trend predictions are generally correct. Below is the December 21, 2007, Earthfiles Headline and report I filed.
Trends in 2008
© 2007 by Linda Moulton Howe
“In 2008, we’re going to see some major, giant financial firms fall as they get hit by an economic 9/11.” - Gerald Celente, The Trends Journal
Trends Research Institute, Rhinebeck, New York. Also see: 122107 Earthfiles “Trends in 2008.”
Today, September 15, 2008, I talked to him about his forecast for an “Economic 9/11” - ironically an interview on the same day, September 15, 2008, that Lehman Brothers declared bankruptcy, Merrill Lynch sold to Bank of America for $50 billion and AIG begged the federal government for a $40+ billion bailout. AIG is a huge insurance company doing business in 130 countries with a trillion dollar spreadsheet.
More falling financial dominos from banks to other companies are expected. Are we facing depression greater than the “Great Depression of 1929?” I took that question to Gerald Celente and began by asking him how he was so accurate back in December 2007?
Interview:
Economic 9/11
Gerald Celente, Editor and Publisher, The Trends Journal, Rhinebeck, New York
Gerald Celente, Editor and Publisher, The Trends Journal, Rhinebeck, New York:“Current events form future trends. If you saw the current events unfolding, you could have seen – if you looked at the data objectively – you could have seen where the future was headed. But what happens is that the business media keeps downplaying the seriousness of events. They are not looking at the real fundamentals of what is going on. They are stuck in their Wall Street and Washington worlds. They don’t see what is going on throughout society.
In 2007, our summer edition of The Trends Journal, we warned that between July and November 2007, we would see a major financial crisis. That was the so-called ‘sub-prime’ crisis. What people needed to understand that they would not understand was that it wasn’t only the little people who caused those problems by taking out mortgages they could not pay off. That was only a small part of it. The big part of it was that all of these leverage buyout firms, all of the commercial real estate people, all of the developers that were building on speculation.
You had companies in New York, for example, like The New York Times reported of one that had about $60 million that they leveraged into $60 billion worth of real estate. Look at all the buyout firms such as The Blackstone Group, Carlisle Real Estate, Carlyle Group, Cerberus that bought Chrysler and Hilton. It’s not like these guys put up a billion dollars each and twenty of them bought a company. They bought these companies with no money down based on leverage.
Then there all the financial manipulations: auction-raised securities, Compulsory Purchase Orders (CPOs), Structured Investment Vehicles (SIVs). I mean they make up this stuff and it’s really a Ponzi scheme.
[ Editor’s Note: Wikipedia – “A Ponzi scheme was named after Charles Ponzi, who emigrated from Italy to the United States in 1903 and became notorious for the following scam. A Ponzi scheme is a fraudulent investment operation that involves promising or paying abnormally high returns (alleged profits) to investors out of the money paid in by subsequent investors, rather than from net revenues generated by any real business. A Ponzi scheme usually offers abnormally high short-term returns in order to entice new investors. The high returns that a Ponzi scheme advertises (and pays) require an ever-increasing flow of money from investors in order to keep the scheme going. The system is doomed to collapse because there are little or no underlying earnings from the money received by the promoter. However, the scheme is often interrupted by legal authorities before it collapses, because a Ponzi scheme is suspected and/or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases.”]

It was all collapsing in front of us, but people did not want to believe it. We saw it coming. The top story in our Top 10 Trends of 2008 was the Panic of 2008 and Economic 9/11. We were precisely one week off in calling this the Economic 9/11 (September 11, 2008 was the seventh anniversary of the World Trade Center attacks). And it’s happened! This is the Economic 9/11. The Federal Reserve, the federal government, cannot save the day.

A Great 2008-2009 Depression? “The Feds cannot print enough money to save the day. We’re going into the worst depression that any living person has ever seen. It’s going to be worse than the Great Depression of 1929.”
Do you realize that Barack Obama recently said that he would not rescind the Bush tax cuts. He said this on ABC, September 7, 2008, IF the economy were in a recession. IF the economy is in RECESSION?! This is worse than a recession! We’re going into the greatest depression and people better beware.
I’ll tell you what I know other people are doing. They are taking their money out of the banks. People with a lot of money are moving it overseas into what they think are safer banks. There’s going to be a day here in the United States that the authorities are going to call a Bank Holiday. AIG is calling for more than $40 billion today. The Feds just bailed out Freddie Mac and Fannie Mac to the tune that could cost taxpayers up to $300 billion or more. Our national debt has been increased to at least $12 TRILLION! The Feds cannot print enough money to save the day.
So, we believe what the government is going to do is call a ‘bank holiday.’ You’re going to hear all those fat mouths out there that were saying that everything was OK, the FDIC was going to insure your money. But, Linda, no one is going to be able to get it out all at once. Just like they did in Argentina and they did it in Brazil when their economies collapsed and their currencies collapsed and their economies were sinking. You’re not going to be able to get all your money out at one time. Our government is going to say, ‘It’s insured. Don’t worry about it, but we need to pause. Take a deep breath.’ Oh, boy, do they love that phrase! ‘Take a deep breath.’
Take a look at this last Saturday’s (September 13, 2008) New York Times. The headlines story on the business page is to just pause and reflect. Don’t panic. Everything is OK. The ship is sinking and the best they can say is, ‘Doesn’t the band sound great!’

Implications for Future
WITH EVERYONE RUNNING TO TREASURIES AND INTERNATIONAL MARKETS ON SEPTEMBER 15, 2008, WHAT IS THE BOTTOM LINE TO THE IMPLICATION OF WHAT IS HAPPENING NOW?
We’re going into the worst depression that any living person has ever seen. It’s going to be worse than the Great Depression of 1929 and I’ll give you a some reasons why.
1) In the 1929 Depression, not many people owned homes, so they weren’t carrying that heavy mortgage load. The people who did have homes did not have something called ‘home equity loans,’ which is more money owed on top of the other money. They used to have something else back then called a ‘second mortgage.’ If you had one, you were a loser.
2) Back in the 1929 Depression days, people didn’t have things called ‘credit cards.’
3) The United States didn’t have $14 trillion worth of debt.
4) We still had a manufacturing base in the United States so that when WWII broke out and the economy improved afterwards, we were still able to produce more so than any other country in the world. But now, the U. S. off-shores so much manufacturing now.
5) Back in the Great Depression of 1929, the U. S. government was not $14 trillion in debt and they had a trade surplus, not a trade deficit.
6) We weren’t fighting two wars that have sapped already $2 trillion from our American treasury and it’s getting worse.

“Dragflation”
So, we’re going into a downturn as America is sinking. This is ‘dragflation,’ a term that we at The Trends Journal have coined. When you had stagflation you had a declining and stagnate economy; you had rising inflation. But you also had rising wages. People remember back in the 1970s, they got a 10% cost-of-living increase in our wages.
Now wages are declining, you’re lucky to have a job, the median American household income is below 1999 levels. So we’re in for a devastating crash and people are not prepared for it.

2008's Weak American Dollar
THE TOTAL AMOUNT OF GOLD BULLION IN THE UNITED STATES IN THE FEDERAL RESERVE AND AT FORT KNOX IS ONLY IN A FEW BILLION DOLLARS IF TRANSLATED INTO CURRENT MARKET VALUE. WITH A $14 TRILLION DEBT IN THE UNITED STATES, IT MEANS THAT THE DOLLAR IS NOT BACKED UP BY MUCH.
You’ve got it and it’s not only the dollar we are going to see problems with. We’re going to see all the paper currencies experience the same kind of problems. You’re looking at a global market unraveling. The Russian stock market is down almost 45% from the beginning of 2008. The Chinese and Indian are all down 40% to 50% from their highs. We’re going through a global crisis. We’ve been talking about this for a long time. I was just the keynote speaker at the International Diamond Conference in New York at the Waldorf Astoria on September 8. This is what we at The Trends Journal warned: the United States is going to go into a depression and the rest of the world into different levels of deep recession and depression.
If you look at the markets today, what’s going up and what’s going down? The softer commodities are retreating and the only thing going up in the markets today is gold. It’s coming off its lows where it’s been battered down, but it’s up some $17. We’re still firm believers that gold and diamonds and other precious gems and metals are going to be the things to invest in as the paper currencies collapse. There are no fiscal or monetary tools that can turn this around.
What people I know are doing is taking their money and putting it into other currencies, particularly the Swiss franc, and putting it into more secure international banks, and betting against America on every level. And we know it is only going to get worse. There is nothing to turn this around. What is the Federal Reserve going to do? Print more money?
On September 16, the Federal Reserve is going to decide whether or not to raise or lower interest rates. If they lower interest rates, you’re going to see the dollar plummet. If they keep interest rates the same, then we have the same situation we’re in now. They can’t raise interest rates. If they do, they will put the brakes on an already credit-squeezed economy and that will really push us into a really steep depression quicker than what we have seen. Looking across Europe, you can see the markets collapsing, along with the Russian market down 45%. There is no safety net. Ships do sink!
We like the Swiss franc because Switzerland always seems to survive at the worst of times, including back to World War II. But the Swiss banks are having problems, too. So, you have to be careful about which banks you put your money into. But what we’re saying is that people we know are hedging their bets by keeping some money in dollars and some money in Swiss francs, some money in Euros, so that if one goes down, others are up. So, you are preserving wealth. That’s the game right now. It’s not about making more money. It’s about preserving what you have.

Global Economic Depression?
In China, factory orders are plummeting. They have 1.2 billion people and millions of problems. So, they are not going to escape this global economic collapse either. There is no way out.
Remember the old fable about the grasshopper and the ant. The grasshopper played during the summer thinking it didn’t have to do anything to survive the cold winter coming. People are still acting like grasshoppers. What people are saying is, ‘I’m going to wait until after the elections to see what happens.’ To see what happens for what? The people running for office don’t have the economic skills.
AND WHOEVER IS ELECTED IN NOVEMBER 2008 IS INHERITING THE $14 TRILLION IN DEBT.
On top of that, government, corporate and private debt is over 200 times the gross domestic product, much worse than the Great Depression of 1929.
And Greenspan was saying as recently as May 2008 that the worst was behind us. So, too, was Hank Paulson, the U. S. Treasury Secretary. So, too, was the head of Lehman Brothers, Merrill Lynch and J. P. Morgan. They were all saying that the credit crisis was not as bad as it was because of the great bailouts of Countrywide and Bear Stearns. So, they were singing a different tune than now.
Never before have current events been so clear in front of us that spelled disaster. What is stopping people from admitting that the worst is yet to come and there are no plans to save it? This is a classic Titanic situation in the sense that what we saw with the Fannie and Freddie bailouts and the Bear Stearns bailouts and now the AIG request for $40 more billion from the federal government – it’s just like the Titanic where the rich and affluent were given the lifeboats and the rest of the people went under from steerage. The rich and powerful are too big to fail; the rest of us are too small to save. When we need to be saved, the government saves us with Katrina-quality rescue plans, which means that we drown.

United States Conditions in 2009?
“This Christmas 2008, you’re going to see major chains go bankrupt. If you can see Lehman Brothers go under – guess what? Macy’s, J. C. Penny, GAP and the rest of them could go down, too.”
IF THIS IS WORSE THAN THE GREAT DEPRESSION OF 1929, COULD YOU LAY OUT WHAT YOU EXPECT TO SEE HAPPEN OVER THE REST OF 2008 AND TO FALL 2009?
Let’s take retail sales, for example. This Christmas 2008, you’re going to see major chains go bankrupt. If you can see Lehman Brothers go under – guess what? Macy’s, J. C. Penny, GAP and the rest of them could go down, too.
All these companies, like the leverage buyout firms, have been built on an economic model of growth and expansion. That means opening new stores in new locations, but not necessarily increasing in store sales. You’re going to see major bankruptcies. We forecast this before. It’s going to happen.
You’re also going to see violence go to levels we’ve never seen before. You’re going to start to see gangland mentality that is running through Mexico start seeping up north into the United States. The Mexican government cannot control the level of violence. And we’re going to start to see it happening here: more gangs, more kidnappings, more violence and crime. The knee jerk reaction, of course, will be more police on the streets and that is not going to solve the problem.
We’re also going to see more movements for the break up of the American government – not necessarily in 2008, but we can certainly see the secessionist movements that have been gaining more strength because the federal government cannot fix this problem. It’s too big.

Alan Greenspan - Is Former Fed Chief Cause of Financial Dominoes Falling?
Greenspan is the guy that’s behind this whole collapse. By lowering interest rates during the dotcom bubble of 2000. They lowered the interest rates to 46-year-lows and created the situation that exists now for all this cheap money and all the financial games. Greenspan is the Prince of Destruction. The Federal Reserve is what is behind the destruction of this country and now Greenspan is warning us! He’s the one who caused all this!
Ron Paul (former candidate in 2008 presidential primary) has informed the people that the Federal Reserve is basically a rogue organization. It’s a private bank, it’s not a federal agency. They have taken the power of the money printing press out of the hands of Congress (Article 1, Section 8, Clause 5) that gives Congress the sole authority to print and regulate the money supply. And Alan Greenspan is the one that caused this Great Depression. He started it by bailing out the big guys following the 1987 Stock Market Crash, following the 1997 Asian currency crisis, following the 1998 long-term capital management bailout. I had an Op Ed piece in The New York Times in 1998 that I called ‘Capitalism for Cowards.’ This is what keeps happening – bailing out the big guys by printing cheap money because their friends are too big to fail.
WHAT HAPPENS THIS TIME IF THE UNITED STATES DOES NOT BAIL OUT AIG AND GIVE THEM THE $40 BILLION THEY ARE ASKING FOR?
It’s not going to make any difference whether they bail them out or not.
BUT IT’S IN MORE THAN 130 COUNTRIES WITH A TRILLION DOLLAR BALANCE SHEET.
Yes, but there are other huge ones that are going to be collapsing right along with it. What is going to happen when Blackstone goes under? Or Ceberus goes under? Or the Carlyle Group goes under? We’ve already eliminated the big names of Lehman Brothers and Merrill Lynch. Merrill Lynch was the nation’s largest brokerage firm and they were just gobbled up by Bank of America that was just gobbled up by the failing Countrywide. Who is going to bail out them? There is not enough money to bail them out. Where is the money going to come from? Americans are working two or three jobs already. Do you think they could do four jobs to bail these big people out? Impossible! We’re looking at the collapse of Empire America.
The 9/11 attack happened and it was the greatest military strike in history, much greater than the Trojan Horse. It brought down the financial pillars of the United States figuratively and literally.
The United States as not recuperated from the great strike of 9/11 and the debacle of the dotcom crash. It was temporarily ameliorated by Greenspan by putting interest rates at 46-year-lows and creating the credit bubble. So, it’s over now.
The United States looks like to me what you see when a third world country starts going into chaos like any other failing empire. It’s going to be a very ugly scene. As I said, we’re going to see more crime. We’re going to see more federal intrusion into our lives. We are going to see more geopolitical turmoil. We’re going to start seeing our minds diverted from the financial crisis into more geopolitical affairs. We can also see by Election Day 2008 that the United States is involved in a major geopolitical confrontation, whether it is Iran or Russia.

Geopolitical Tensions Add to Dominoes Falling?
You know, the Russians are really angry at America right now because of Georgia invading South Oscettia and Russia’s response. Since then the Russian stock market has collapsed 45% and Russians are blaming the United States. We’re going to see a lot of dirty dealing going on in a lot of different markets in a lot of different ways.
[ Editor’s Note: Wikipedia – “The 2008 South Ossetia War was a land, air and sea war fought between Georgia, on one side, and the separatist regions, South Ossetia and Abkhazia, and the Russian Federation, on the other. The Ossetians are an Iranian people whose ethnogenesis lies along the Don River. They came to the Caucasus after being driven out of their homeland in the Mongol invasions of the 13th century. Most clans settled in the territories today known as North Ossetia-Alania (currently part of Russia) and South Ossetia (currently northern part of Georgia).]

RUSSIA'S PUTIN WANTS TO BOTH EMBARRASS AND HURT THE UNITED STATES, SO THE NEXT STEP MIGHT BE WHAT BETWEEN RUSSIA AND THE U. S.?
We’re looking to the winter. People have to understand other cultures look at things in a different way than our knee jerk reactionary responses in the United States. Start watching the gas spicket being turned going into the Ukraine and Europe. I’m not certain of the number, but I believe it is 40% to 60% of the natural gas that Europe uses comes out of Russia. You’re going to start seeing Russia turn off spickets. You’re going to see the same thing happen in Venezuela. Those countries are going to start making energy really difficult to get. They aren’t going to give their product away. At the end of the day, Russia and Venezuela are going to get more money for their petroleum products.
DOES THE U. S. HAVE ANY LEVERAGE WITH ANYONE NOW?
The U. S. has no leverage with anybody now. We’re leveraged out. We used to be able to play the financial card. We can’t play that anymore. We used to play the military card. We can’t play that anymore. The United States is losing third world street fights in Afghanistan and Iraq. I don’t care about people telling me the surge is working. That is fairy tale language. As soon as there is a little rest, they are going to attack again. There were major bombings again this last week and they are not going to stop until the United States is thrown out. So, now you have all these countries that have weapons of mass destruction. They are not going to bow to America. It’s not like the old days of Venezuela or Chile or Argentina or Bolivia getting out of hand and the United States sends down gunboat diplomacy.
They are going to fight back and not with bows and arrows and little weaponry. They are armed to the teeth. So, the U. S. has lost its military supremacy and its economic supremacy. Yes, the United States could obliterate any country and bomb them into the Stone Age. But that country, what’s left of it, will retaliate again.
There is still a hole in the ground after the 9/11 attacks. That’s a metaphor. If anybody thinks the American government has the wherewithal, the intelligence or the integrity to get anything done, there is still a hole in the ground seven years later, there are still levees that have not been properly re-built after Katrina and people still can’t vote in the United States and have their vote properly counted because the voting machines don’t work. That’s America now.
IS IT IRONIC THAT BECAUSE OF WHAT HAS HAPPENED IN AMERICA, THE ENTIRE GLOBAL ECONOMY IS BEING DRAGGED DOWN AT THE SAME TIME?
It’s ironic in the fact that the international community bought into the same myths as everyone else. It’s greed that ruined this country and it’s greed that is ruining others. They all played the quick money game.
Another irony is that people could thrive in these times because as the old is dying, something new is being born. If there is intelligence, integrity and dignity behind the next movement, we could move into a new Renaissance, a brighter time and not a dark one.
HOW LONG DO YOU THINK IT WOULD TAKE TO GET OUT OF A DEPRESSION?
As long as it took 1929 and that was a war. And unfortunately, that’s the way authorities will start thinking. The only thing more I can say for this country is that the American people need to regain their dignity and look at their own moral base and what they are accepting as truth and lies. The only thing that will save us is enlightened leadership. I think it has to come from the individual and move up.
And unless people change the way they are living their lives, nothing is going to change. These people, Obama, McCain, Biden and Palin aren’t my leaders. They couldn’t lead me across the street! When are the American people find their own strength and become their own leaders? Until individual people find their own greatness within, nothing is going to change.
To everybody out there, make provisions now like the ant did for a cold, brutal winter wherever you live. Things are going to get very tough. Don’t waste a dime you don’t need to waste. Buy local and support your local community. Start by doing everything locally to preserve and save.”
More Information:
For further reports about trends research, please see other reports below in the Earthfiles Archive :
• 12/21/2006 — Top Trends for 2007 by Gerald Celente• 02/03/2006 — Trends 2006• 12/31/2000 — Top Trends 2001• 01/02/2000 — New Trends for 21st Century• 01/03/1999 — Trends in 1999 with Gerald Celente

The Point of No Return

2008-09-19T10:43:00.000-07:00

Harry Reid: "No One Knows What to Do"
The Point of No Return
By MIKE WHITNEY
Following another erratic day of trading on the stock market, Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke convened an emergency meeting of the Senate Banking Committee and other congressional leaders to request fast-track authority for a sweeping plan to buy back illiquid assets and other complex securities from distressed and under-capitalized banks. The turbulence in the financial markets has intensified and there is every indication that the situation will get worse before it gets better.
There are a number of signs that the financial system is at the brink of collapse and that Wall Street is headed for a 1929-type crash. Depositors have begun to withdrawal their savings from money market funds alarmed by the gyrations in the market and the daily deluge of bad economic news. According to the Washington Post, funds dropped "by at least $79 billion, or about 2.6 per cent" on Wednesday alone. The withdrawals are the equivalent of a slow bank run just at the time when stressed commercial banks need access to cheap capital to finance daily operations and provide loans for a steadily weakening economy. There's also been a surge of panic-buying of US Treasurys which is considered the safest of investments. According to the Wall Street Journal, during Wednesday's market-rout, "investors were willing to pay more for one-month Treasurys than they could expect to get back when the bonds matured. Some investors, in essence, had decided that a small but known loss was better than the uncertainty connected to any other type of investment. That's never happened before." (Wall Street Journal) Also, the VIX, or "fear gauge", has soared to levels not seen since the crisis began in August just over a year ago.
On Tuesday, interbank lending rates spiked upwards causing banks to abruptly stop lending to each other. When banks stop lending to each other, they cannot perform their primary function of transmitting credit to consumers and businesses, and the economy shuts down. That is why the Fed and other members of the western banking cartel made a surprise announcement at 3 AM (EST) Wednesday morning.
From the Fed:
"Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets....The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks."
Before the end of the day, the Fed had quadrupled the amount of dollars (to $247 billion) that central banks around the world could access in an effort to loosen up trading between the banks and resume lending to loan applicants and businesses. According to Bloomberg: "The Fed will spray dollars around the world via swap lines with other central banks. They can then auction them in their own markets." At first, the stock market reacted positively to the Fed's announcement, but by noon the market was 200 points down and losing altitude fast. It took another surprise announcement by the Treasury Dept -- of a massive government intervention to remove the bad loans and withering mortgage-backed securities from banks' balance sheets -- of to jolt the market out of its funk and send it climbing 410 points higher on the day.
Paulson's emergency session with Congress last night was characterized by lawmakers who attended as "chilling". The situation is much worse than government officials have let on so far. The resurrecting of the Resolution Trust Corporation (RTC) is a desperate attempt to address the banking systems troubles head-on by providing a taxpayer-funded clearinghouse for illiquid assets and toxic mortgage-related securities for which there is presently no market. The taxpayer is being asked to pay up to $1 trillion for the speculative excesses of Wall Street investment banks and their fraudulent securities scam. Homeowners who are likely to lose their homes through foreclosure will not benefit from Paulson's RTC. Both presidential candidates have already declared their support for the plan.
According to the New York Times: "Rumors about the Bush administration’s new stance swept through the stock markets Thursday afternoon. By the end of trading, the Dow Jones industrial average shot up 617 points from its low point in mid afternoon, the biggest surge in six years, and ended the day with a gain of 410 points or 3.9 percent."
If ever there was proof of Plunge Protection Team activity; Thursday's market is it. The market was sinking fast at midday even though the Fed just added nearly $250 billion in liquidity to the global system. Investors were buying short-term Treasurys in record numbers, the VIX "fear gauge" was soaring, money markets were collapsing, and the aftershocks from defaulting AIG and Lehman were still being felt around the world. Were investors really that eager to buy back battered investment bank stocks or was the PPT busy panic-buying up futures and forcing the market upwards 617 points?
Bloomberg News: "Options under consideration (by congress) include establishing an $800 billion fund to purchase so-called failed assets and a separate $400 billion pool at the Federal Deposit Insurance Corp. to insure investors in money-market funds, said two people briefed by congressional staff who spoke on condition of anonymity because the plans may change."
Not a dime of public money is provided for over-extended mortgage-owners trying to stay in their homes. Not one congressman or senator at Thursday's meeting rejected the bailout plan or called for a criminal investigation of to establish whether laws were broken in the sale of fraudulent securities which have clogged the global system; pushed banks, hedge funds, insurance companies and homeowners into default, and precipitated the greatest financial crisis in the nation's 230 year history.
Ironically, the very people who created this mess, are the ones who will decide how to resolve it; the Federal Reserve and the US Treasury. Where else, but Washington would such massive failure be rewarded with more power and authority.
The investment giants and the Federal Reserve are entirely responsible for the current meltdown. Currency deregulation brought foreign capital flooding into the equities and bond markets while the real economy suffered. Businesses were off-shored while good paying manufacturing jobs were moved overseas. Wall Street gorged itself on foreign capital while America was transformed into a nation of construction workers and service industry workers. Now those jobs are vanishing by the millions and unemployment lines are swelling.
The ratings agencies, prevaricating mortgage applicants, and appraisers all played a part, but it's Wall Street that's really to blame. They lobbied to deregulate the system so investment banks could merge with commercial banks and allow the world's biggest risk takers to have unrestricted access to the cheapest capital available; deposits. They even crafted a bogus ideology, "market fundamentalism"; touting trickle-down, free market, Voodoo economics that was entirely designed to further enrich the wealthy and savage the middle class. Earlier this week, former Senator Jack Kemp appeared at a whistle-stop with John McCain in Jacksonville, Florida. Kemp was one of the primary architects of "supply side" economics, the thoroughly discredited Reagan-era doctrine which has led us to our present economic catastrophe. Kemp's theories fit with Milton Friedman's "greed is good" Chicago School mumbo jumbo. Both Friedman and Kemp believe that what is good for the stock market is good for America, ignoring the shocking economic polarization that has divided the nation. Now, more and more people are beginning to see that Friedman was a charlatan who provided ideological cover for obscenely rich financiers and their dodgy investment scams.
Economist and author Henry Liu summed it up brilliantly in a recent article in the Asia Times:
"The collapse of market fundamentalism in economies everywhere is putting the Chicago School theology on trial. Its big lie has been exposed by facts on two levels. The Chicago Boys' claim that helping the rich will also help the poor is not only exposed as not true, it turns out that market fundamentalism hurts not only the poor and the powerless; it hurts everyone, rich and poor, albeit in different ways. When wages are kept low to fight inflation, the low-wage regime causes overcapacity through over investment from excess profit. And monetary easing under such conditions produces hyperinflation that hurts also the rich. The fruits of Friedman test are in - and they are all rotten."
Whatever headwinds the country now faces economically can be directly attributed to the inherently flawed ideology of market fundamentalism.
Tuesday's 449 point bloodbath on Wall Street is the beginning of an unavoidable market crash. Regardless of Paulson's plan, there's more pain on the way. According to Bloomberg: "More than $19 trillion has been wiped off global stock market value since a high on Oct. 31 as the worst U.S. housing recession since the Great Depression and a resulting global credit crisis slowed the world economy." All of the economic indicators point to greater losses. Once the system begins to deleverage, there's nothing anyone can do to stop it. Paulson can place himself in front of a market avalanche if he chooses, but it won't change the outcome. Market corrections are as inexorable as the force of gravity. That's why equity bubbles cannot be allowed to develop without interest rate intervention. Responsible action by the Central Bank could have prevented the present crisis.
On Wednesday, Forex.tv reported that the net long-term TIC flows came in below the consensus forecast, totaling $6.1 billion in July, while total TIC flows for the month fell to $74.8 billion, according to data released by the U.S. Treasury on Tuesday morning. Economists had been expecting net long-term flows to rise to $55.0 billion compared to the previous month's previously reported figure of $53.4 billion.
$6.1 billion does not meet the requirements of our current account deficit of $700 billion. The dollar is headed for a fall.
On Wednesday, New York Mayor Michael Bloomberg warned that the "next wave" of financial pain may come from overseas if foreign entities stop buying U.S. debt." It's not clear who's going to be buying our debt," said Bloomberg. "It may very well be that the next wave is going to come back and bite us."
The New York Times tells a similar story except this time about Asia:
"Asia’s savings have, in essence, bankrolled American spending for decades (but) Asian interest in American assets is wilting, a trend that seems to have started over the summer...Little-noticed data released by the Treasury Department on Tuesday showed that a sharp shift in international capital movements began in July. Private investors pulled a net $92.9 billion out of the United States, after putting $46.8 billion into American securities in June. ("Asia rethinks American Investments Amid Market Upheaval", Keith Bradsher, New York Times)
Foreign central banks and investors have turned off the tap. They can see that the US financial system is teetering and that the dollar is weakening. "The perceived risk of U.S. government debt, long held to be absent of any default risk, also climbed to a record yesterday as the government's involvement in bailing out financial markets weighed on its own balance sheet." (Bloomberg News) The "full faith and credit" of the United States government is slipping. US debt will be downgraded. Triple A is no longer guaranteed. America's stock just moved to Level 3 assets. The US is now a subprime economy on life support.
Presently, "there is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion." (Mish's Global Economic Trend Analysis)
$273.7 Billion is a paltry sum, insufficient to meet the needs of even a minor run on the banking system. The storm hasn't even touched ground yet in middle America, and already the system is buckling. 2009 will be bleak, indeed.
The battered and over-leveraged US financial system is facing its greatest challenge in the months ahead. The frantic search for capital has already begun, but with predictably disappointing results. Neither China nor the Saudi princes are buying any more failing investment banks. They'll leave that for the US taxpayer. What started off as a brilliant plan to pedal garbage mortgage-backed paper to gullible investors around the world has suddenly backfired and now threatens to bring the entire system crashing down and change the geopolitical power paradigm for the forseeable future.
On Monday night, Senate Majority Leader Harry Reid was briefed on the gravity of the situation in a secret meeting with the Treasury Secretary and Federal Reserve Chairman. Reid's remarks are the best summary yet of the events of the last 14 months. He said, ""We are in new territory, this is a different game...No one knows what to do."
Mike Whitney lives in Washington state. He can be reached at fergiewhitney@msn.com

How the Chicago Boys Wrecked the Economy

2008-08-30T17:10:00.000-07:00

An Interview with Michael Hudson
How the Chicago Boys Wrecked the Economy
By MIKE WHITNEY

Michael Hudson is a former Wall Street economist specializing in the balance of payments and real estate at the Chase Manhattan Bank (now JP Morgan Chase & Co.), Arthur Anderson, and later at the Hudson Institute (no relation). In 1990 he helped established the world’s first sovereign debt fund for Scudder Stevens & Clark. Dr. Hudson was Dennis Kucinich’s Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the U.S., Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002
Mike Whitney: The United States current account deficit is roughly $700 billion. That is enough "borrowed" capital to pay the yearly $120 billion cost of the war in Iraq, the entire $450 billion Pentagon budget, and Bush's tax cuts for the rich. Why does the rest of the world keep financing America's militarism via the current account deficit or is it just the unavoidable consequence of currency deregulation, "dollar hegemony" and globalization?Michael Hudson: As I explained in Super Imperialism, central banks in other countries buy dollars not because they think dollar assets are a “good buy,” but because if they did NOT recycle their trade surpluses and U.S. buyout spending and military spending by buying U.S. Treasury, Fannie Mae and other bonds, their currencies would rise against the dollar. This would price their exporters out of dollarized world markets. So the United States can spend money and get a free ride.
The solution is (1) capital controls to block further dollar receipts, (2) floating tariffs against imports from dollarized economies, (3) buyouts of U.S. investments in dollar-recipient countries (so that Europe and Asia would use their central bank dollars to buy out U.S. private investments at book value), (4) subsidized exports to dollarized economies with depreciating currency, and similar responses that the United States would adopt if it were in the position of a payments-surplus country. In other words, Europe and Asia would treat the United States as its Washington Consensus boys treat Third World debtors: buy out their raw materials and other industries, their export plantations, and their governments.
MW:Economist Henry Liu said in his article "Dollar hegemony enables the US to own indirectly but essentially the entire global economy by requiring its wealth to be denominated in fiat dollars that the US can print at will with little in the way of monetary penalties.....World trade is now a game in which the US produces fiat dollars of uncertain exchange value and zero intrinsic value, and the rest of the world produces goods and services that fiat dollars can buy at "market prices" quoted in dollars." Is Liu overstating the case or have the Federal Reserve and western banking elites really figured out how to maintain imperial control over the global economy simply by ensuring that most energy, commodities, and manufactured goods are denominated in dollars? If that's the case, then it would seem that the actual "face-value" of the dollar does not matter as much as long as it continues to be used in the purchase of commodities. Is this right?
Michael Hudson: Henry Liu and I have been discussing this for many years now. We are in full agreement. The paragraph you quote is quite right. His Asia Times articles provide a running analysis of dollar hegemony.
MW:What is the relationship between stagnant wages for workers and the current credit crisis? If workers wages had kept up with the rate of production, isn't it less likely that we would be in the jam we are today? And, if that is true, than shouldn't we be more focused on re-unionizing the labor force instead looking for solutions from the pathetic Democratic Party?Michael Hudson: The credit crisis derives from “the magic of compound interest,” that is, the tendency of debts to keep on doubling and redoubling. Every rate of interest is a doubling time. No “real” economy’s production and economic surplus can keep up with this tendency of debt to grow faster. So the financial crisis would have occurred regardless of wage levels.
Quite simply, the price of home ownership tends to absorb all the disposable personal income of the homebuyer. So if wages would have risen more rapidly, the price of housing would simply have risen faster as employees pledged more take-home pay to carry larger mortgages. Stagnant wages merely helped keep down the price of houses to merely stratospheric levels, not ionospheric ones.
As for labor unions, they haven’t been any help at all in solving the housing crisis. In Germany where I am right now, unions have sponsored co-ops, as they used to do in New York City, at low membership costs. So housing costs only absorb about 20% of German family budgets, compared to twice that for the United States. Imagine what could be done if pension funds had put their money into housing for their contributors, instead of into the stock market to buy and bid up prices for the stocks that CEOs and other insiders were selling.
MW:When politicians or members of the foreign policy establishment talk about "integrating" Russia or China into the "international system"; what exactly do they mean? Do they mean the dollar-dominated system which is governed by the Fed, the World Bank, the IMF, and the WTO? Do countries compromise their national sovereignty when they participate in the US-led economic system?
Michael Hudson: By “integrating” they mean absorbing, something like a parasite integrating a host into its own control system. They mean that other countries will be prohibited under WTO and IMF rules from getting rich in the way that the United States got wealthy in the 19th and early 20th centuries. Only the United States will be permitted to subsidize its agriculture, thanks to its unique right to grandfather in its price supports. Only the United States will be free from having to raise interest rates to stabilize its balance of payments, and only it can devote its monetary policy to promoting easy credit and asset-price inflation. And only the United States can run a military deficit, obliging foreign central banks in dollar-recipient countries to give it a free ride. In other words, there is no free lunch for other countries, only for the United States.
Other countries do indeed give up their national sovereignty. The United States never has adjusted its economy to create equilibrium with other countries. But to be fair, in this respect only the United States is acting fully in its own self-interest. The problem is largely that other countries are not “playing the game.” They are not acting as real governments. It takes two to tango when one party gets a free ride. Their governments have become “enablers” of U.S. economic aggression.
MW:What do you think the Bush administration's reaction would be if a smaller country, like Switzerland, had sold hundreds of billions of dollars of worthless mortgage-backed securities to investment banks, insurance companies and investors in the United States? Wouldn't there be litigation and a demand that the responsible parties be held accountable? So, how do you explain the fact that China and the EU nations, that were the victims of this gigantic swindle, haven't boycotted US financial products or called for reparations? Michael Hudson: International law is not clear on financial fraud. Caveat emptor is the rule. Foreign investors took a risk. They trusted a deregulated U.S. financial market that made it easiest to make money via financial fraud. Ultimately, they put their faith in neoliberal deregulation – at home as well as in the United States. England is now in the same mess. The “accountability” was supposed to lie with U.S. accounting firms and credit rating agencies. Foreign investors were so ideologically blinded by free market rhetoric that they actually believed the fantasies about “self-regulation” and self-regulating markets tending toward equilibrium rather than the real-world tendency toward financial and economic polarization.
In other words, most foreign investors lack a realistic body of economic theory. The United States could simply argue that they should take responsibility for their bad investments, just as U.S. pension funds and other investors are told to do.
MW:The Congress recently passed a bill that gives Treasury Secretary Henry Paulson the unprecedented authority to use as much money as he needs to keep Fannie Mae and Freddie Mac solvent. Paulson assured the Congress that he wouldn't need more than $25 billion but, the 400 page bill allows him to increase the national debt by $800 billion. How will the Fannie/Freddie bailout affect the dollar and the budget deficit? Are interest rates likely to skyrocket because of this action?
Michael Hudson: The Fed can flood the economy with money, Alan Greenspan-style, to prevent interest rates from skyrocketing. Nobody really knows what will happen to FNMA and Freddie Mac, but it looks like the mortgage and financial crisis will get much, much worse over the coming year. We are just heading into the storm where adjustable-rate mortgages (ARMs) are scheduled to reset at higher rates, and where U.S. banks have to roll over their existing debts in a market where foreign investors fear that these banks already have no net worth left.
So the principle here is “Big fish eat little fish.” Wall Street will be bailed out, and banks will be allowed to “earn their way out of debt” as they did after 1980, by exploiting retail customers, above all credit-card customers and individual borrowers. There will be a lot of bankruptcies, and people will suffer more than ever before because of the harsh pro-creditor bankruptcy law that Congress passed at the behest of the bank lobbyists.
MW: A few months ago, the Wall Street Journal ran an editorial which said that they could imagine two nightmare scenarios if the current credit crisis was not handled properly; either there would be a run on the dollar causing a sudden plunge in its value, or the unexpected failure of a major financial institution could send the stock market crashing. Last week, the former head of the IMF Kenneth Rogoff triggered a sell-off on Wall Street when he said, "We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a whopper; we’re going to see a big one — one of the big investment banks or big banks." What happens if Rogoff is right and Merrill, Citi or Lehman go belly up? Is that enough to send the stock market freefalling?
Michael Hudson: Not necessarily. Citibank would be nationalized, then sold off. The principle should be that if a bank is “too big to fail,” it should be broken up.
This should start with a repeal of the Clinton Administration’s repeal of Glass-Steagall.
As for Lehman, that would be given the Bear Stearns treatment, and also sold off – probably to a hedge fund. Merrill is much larger, but it also could be parceled out, I suppose. The stock market’s financial index would plunge, but not necessarily industrial stock prices.
MW:According to MarketWatch: "In the three months from April to June, banks posted their second worst earnings performance since 1991.... Earnings for the quarter totaled just $5 billion, compared with $36.8 billion a year ago, a decline of 86.5%." Also, according to a front page article in the Wall Street Journal: "financial institutions will have to pay off at least $787 billion in floating rate notes and other medium term obligations before the end of 2009." How are the banks going to pay off nearly $800 billion ($200 billion by December!) when they only earned a measly $5 billion in the quarter!?! And how in the world is the Federal Reserve going to keep the banking system functioning when earnings can't even cover current liabilities? Do the banks have some secret source of revenue we don't know about or is the system headed for disaster?
Michael Hudson: The traditional way to pay debt is with yet MORE debt. The interest due is simply added on to the principal, so that the debt grows exponentially. This is the real meaning of “the magic of compound interest.” It means not only that savings left to accumulate interest keep on doubling and redoubling, debts do to, because the savings that are lent out on the “asset” side of the creditor’s balance sheet (today, that of America’s wealthiest 10%) become debts on the “liabilities” side of the balance sheet (the “bottom 90%”).
The banks don’t have a secret source of revenue. It’s right out in the open. They will take their junk mortgages to the Federal Reserve and borrow the money at full face value. The government will be left with the junk.
It then can either take over the bank, as the Bank of England did with Northern Rock when it went bankrupt early this year, or it can let the bank “earn” money by stiffing its customers some more.
MW: From 2000 to 2006, the total retail value of housing in the United States doubled, going from roughly $11 trillion to $22 trillion in just 6 years. For the last 200 years, housing has barely kept pace with the rate of inflation, usually increasing 2 to 3% per year. The Federal Reserve's low interest rates were the main cause of this unprecedented housing bubble and, yet, ex-Fed chief Alan Greenspan still denies any responsibility for what "The Economist" calls "the largest bubble in history". Did Greenspan understand the problems he was creating with his "loose" monetary policies or was there some ulterior motive to his actions?
Michael Hudson: He simply didn’t care about the problem. He saw his job as a cheerleader for people who were able to get rich fast. These always had been his major clients in his years on Wall Street, and he saw himself as their servant – sort of like a pilot fish for sharks.
Mr. Greenspan’s idea of “wealth creation” was to take the line of least resistance and inflate asset prices. He thought that the way to enable the economy to carry its debt overhead was to inflate asset prices so that debtors could borrow the interest falling due by pledging collateral (real estate, stocks and bonds) that were rising in market price. To his Ayn-Rand view of the world, one way of making money was as economically and socially productive as any other way of doing so. Buying a property and waiting for its price to inflate was deemed as productive as investing in new means of production.
Ever since his days as co-founder of NABE (the National Association of Business Economists), Greenspan has long looked only at GNP and the national balance sheet as an economic indicator, being “value-free.” This is his intellectual and conceptual limitation. He wanted to provide a way for savvy investors to get rich, and the easiest way to get rich is to be passive and get a free lunch. His ideology led him to believe the “free market” ideology that the financial sector would be self-regulating and hence would act honestly. But he opened the floodgates to financial crooks. His set of measures did not distinguish between Countrywide Financial getting rich, Enron getting rich, or General Motors or industrial companies expanding their means of production. So the economy was being hollowed out, but this didn’t appear in any of the measures he looked at from his perch at the Federal Reserve.
So just as journalists and the mass media proclaim every market downturn as “surprising” and “unexpected,” he was as clueless as a lemming running headlong over the cliff. It’s an inherent instinct for free-market boys.
MW: The housing market is freefalling, setting new records every day for foreclosures, inventory, and declining prices. The banking system is in even worse shape; undercapitalized and buried under a mountain of downgraded assets. There seems to be growing consensus that these problems are not just part of a normal economic downturn, but the direct result of the Fed's monetary policies. Are we seeing the collapse of the Central banking model as a way of regulating the markets? Do you think the present crisis will strengthen the existing system or make it easier for the American people to assert greater control over monetary policy?
Michael Hudson: What do you mean “failure”? Your perspective is from the bottom looking up. But the financial model has been a great success from the vantage point of the top of the economic pyramid looking down? The economy has polarized to the point where the wealthiest 10% now own 85% of the nation’s wealth. Never before have the bottom 90% been so highly indebted, so dependent on the wealthy. From their point of view, their power has exceeded that of any time in which economic statistics have been kept.
You have to realize that what they’re trying to do is to roll back the Enlightenment, roll back the moral philosophy and social values of classical political economy and its culmination in Progressive Era legislation, as well as the New Deal institutions. They’re not trying to make the economy more equal, and they’re not trying to share power. Their greed is (as Aristotle noted) infinite. So what you find to be a violation of traditional values is a re-assertion of pre-industrial, feudal values. The economy is being set back on the road to debt peonage. The Road to Serfdom is not government sponsorship of economic progress and rising living standards; it’s the dismantling of government, the dissolution of regulatory agencies, to create a new feudal-type elite.
The former Soviet Union provides a model of what the neoliberals would like to create. Not only in Russia but also in the Baltic States and other former Soviet republics, they created local kleptocracies, Pinochet-style. In Russia, the kleptocrats founded an explicitly Pinochetista party, the Party of Right Forces (“Right” as in right-wing).
In order for the American people or any other people to assert greater control over monetary policy, they need to have a doctrine of just what a good monetary policy would be. Early in the 19th century the followers of St. Simon in France began to develop such a policy. By the end of that century, Central Europe implemented this policy, mobilizing the banking and financial system to promote industrialization, in consultation with the government (and catalyzed by military and naval spending, to be sure). But all this has disappeared from the history of economic thought, which no longer is even taught to economics students. The Chicago Boys have succeeded in censoring any alternative to their free-market rationalization of asset stripping and economic polarization.
My own model would be to make central banks part of the Treasury, not simply the board of directors of the rapacious commercial banking system. You mentioned Henry Liu’s writings earlier, and I think he has come to the same conclusion in his Asia Times articles.
MW:Do you see the Federal Reserve as an economic organization designed primarily to maintain order in the markets via interest rates and regulation or a political institution whose objectives are to impose an American-dominated model of capitalism on the rest of the world?
Michael Hudson: Surely, you jest! The Fed has turned “maintaining order” into a euphemism for consolidating power by the financial sector and the FIRE sector generally (Finance, Insurance and Real Estate) over the “real” economy of production and consumption. Its leaders see their job as being to act on behalf of the commercial banking system to enable it to make money off the rest of the economy. It acts as the Board of Directors to fight regulation, to support Wall Street, to block any revival of anti-usury laws, to promote “free markets” almost indistinguishable from outright financial fraud, to decriminalize bad behavior – and most of all to inflate the price of property relative to the wages of labor and even relative to the profits of industry.
The Fed’s job is not really to impose the Washington Consensus on the rest of the world. That’s the job of the World Bank and IMF, coordinated via the Treasury (viz. Robert Rubin under Clinton most notoriously) and AID, along with the covert actions of the CIA and the National Endowment for Democracy. You don’t need monetary policy to do this – only massive bribery. Only call it “lobbying” and the promotion of democratic values – values to fight government power to regulate or control finance across the world. Financial power is inherently cosmopolitan and, as such, antagonistic to the power of national governments.
The Fed and other government agencies, Wall Street and the rest of the economy form part of an overall system. Each agency must be viewed in the context of this system and its dynamics – and these dynamics are polarizing, above all from financial causes. So we are back to the “magic of compound interest,” now expanded to include “free” credit creation and arbitraging.
The problem is that none of this appears in the academic curriculum. And the silence of the major media to address it or even to acknowledge it means that it is invisible except to the beneficiaries who are running the system.
Michael Hudson can be reached via his website, mh@michael-hudson.com
Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com

Tail Wagging the Dog

2008-03-28T09:14:00.000-07:00

March 27, 2008
Tail Wagging the Dogby Randy
The Fed is trying to consolidate its power base
March 27 (Bloomberg) -- America's financial system faces its biggest overhaul since the Great Depression as officials weigh lessons from the credit-market rout and the near collapse of Bear Stearns Cos.
Federal Reserve policy makers are redefining which companies are vital to the flow of credit, an area once the sole domain of commercial banks, and which institutions pose risks to the entire economy if they fail. Treasury Secretary Henry Paulson said in a speech yesterday that the Fed should broaden its oversight to include Wall Street investment firms, now regulated by the Securities and Exchange Commission.
Former regulators predict the changes will see the Fed accrue influence at the expense of the SEC, which was created by President Franklin Roosevelt to make rules for dealers and stock exchanges. The Fed is taking almost $30 billion in assets off Bear Stearns's balance sheet to encourage JPMorgan Chase & Co. to buy the firm, even though Bear's main supervisor is the SEC.
"This is tectonic," said Ralph Ferrara, a former general counsel at the SEC, and now a partner at Dewey & LeBoeuf LLP in Washington. "We no longer want to have a balkanized response to a national crisis."
My Thoughts:
The Federal Reserve, a private banking institution authorized by Congress to loan money created from nothing and charge interest for doing so, is already a powerful, rouge institution that operates without Congressional oversight. Should we now hand them more power?
The Fed's latest "unprecedented" act of lending of money directly to investment banks (swapping treasuries for valueless garbage) and their recent creation of the a) Term Auction Facility b) Term Securities Facility and c) Primary Dealer Credit Facility are all confirmation as to where their loyalties lie (not the people) -- and their mischievous, manipulative, rouge ways of supporting their brethren.
Additionally, the bailout of a private company (Bear Stearns) with US taxpayer money, without Congress's approval, is unfathomable -- Who is in control of these guys (shareholders? -- see my note towards bottom of post)
So, the question of the day: does the dog (our government) wag the tail (fed) or does the tail (fed) wag the dog (government)? I think the answer is crystal clear...
If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation,(i.e., the "business cycle") the banks and corporations that will grow up around them will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered.
Thomas Jefferson, President of the United States 1801-1809
I believe that banking institutions are more dangerous to our liberties than standing armies.
Thomas Jefferson,1816
We have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world - no longer a government by free opinion,no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men.
Woodrow Wilson, President of the United States 1913-1921
(Note: Federal Reserve's controlling stock is owned by: Rothschild Banks of London and Berlin, Lazard Brothers Bank of Paris, Israel Moses Sieff Banks of Italy, Warburg Bank of Hamburg and Amsterdam, Lehman Brothers Bank of New York, Kuhn Loeb Bank of New York, Chase Manhattan Bank of New York and Goldman Sachs Bank of New York)
I think Dr. Schoon said it best in his latest, must read article: The Die Is Cast The Cast Will Die
"The banker's credit money system is now everywhere as are their resultant unsustainable debts; and those who profit by that system, the bankers (and the corporations that grew up around them) now control the media, the political process, and the agencies charged with overseeing and regulating the economy - the US Federal Reserve Bank, the SEC, the US Treasury, and indeed the US government itself: the Presidency, the Congress, and the Supreme Court."

Randycontrarian2day

Blame abounds for housing bust

2007-12-26T14:38:00.000-08:00

Blame abounds for housing bust
December 26, 2007 By Patrice Hill - First of three parts This year's housing bust is shaping up to be one of historic proportions. Sales and construction have sunk to levels not seen since the 1990 savings and loan crisis, while foreclosures and price drops are the largest since the Great Depression — and expected to get worse next year. Many parallels can be seen with earlier housing debacles. Each episode had some combination of easy money, loose lending, greed and fraud that turned a housing boom into a speculative bubble. But few housing bubbles have ended so badly as the one today, when the nation is confronting the prospect of mass foreclosures and family dislocations. John Stumpf, president of Wells Fargo & Co., the second-largest U.S. mortgage lender and a survivor of the housing busts of the 20th century, blames today's crisis on unscrupulous lending practices, which joined in a toxic mix with outright greed and extraordinarily low interest rates to send house prices soaring 90 percent between 2000 and 2006. When the bubble burst, house prices collapsed by 5 percent to 20 percent in cities nationwide. "We have not seen a nationwide decline in housing like this since the Great Depression," Mr. Stumpf told investors in New York last month as major banks and securities firms reported an accumulated $80 billion of losses on their portfolios of mortgage investments and widely cut back on lending as a result. Now the country faces a vicious cycle: As house prices fall, homeowners lose equity in their homes, which makes it more difficult or impossible for them to sell or refinance. Many are not able to refinance their adjustable-rate loans when the starter interest rates expire and reset to reflect higher market rates, and so they are faced with sharply higher mortgage payments they cannot afford to pay. The dilemma has sent defaults and foreclosures to historic levels — with potentially millions more in train in the next two years as more than $1 trillion in mortgages reset nationwide. As homes are sold under pressure, prices drop further and cast a pall over entire neighborhoods, driving down the value of homes of even creditworthy Americans and undermining their biggest source of wealth and security. State and local governments also have been hit hard by the declining revenues from property taxes and real-estate transactions, and the housing slump is dragging down the manufacturing and construction sectors. The whole mess threatens to sink the broader economy the longer it wreaks havoc on consumer confidence and spending power. While Americans have grappled with ballooning mortgages and adjustable interest rates in the past, the epidemic of resetting loans today is unprecedented and is the result of a bewildering array of mortgage options for consumers that banks and securities firms developed and mass marketed for the first time this decade. Consumers often were given the option of not paying principal on their loans and even deferring some interest. Many seemed unaware of the consequences of postponing their obligations and chose to make only minimal payments during the first few months or years, backloading their loans so that the payments increased sharply and even doubled after the interest rates reset. The complexity of the loans was exceeded only by the complicated schemes banks developed to package the loans and market them to sophisticated investors, which involved setting up off-balance-sheet investment vehicles and slicing mortgage securities into segments that supposedly allocated the risk of default away from top-rated tiers to junk-rated bottom tiers. Mr. Stumpf, a 30-year industry veteran, said even he was surprised when he read newspaper articles about what some banks were doing. Wells Fargo avoided the riskiest practices and, as a result, is not suffering the major losses that are crippling top lenders such as Countrywide and Citigroup, though it, too, made some unwise investments in home-equity loans, Mr. Stumpf said. "It's interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine," he joked. Easy money While the unprecedented wave of creative and sometimes questionable loans was a key cause of the housing bubble and ensuing bust, lenders were aided greatly by the lenient policies set by the Federal Reserve from 2000 to 2004, economists say. The housing boom started in the wake of the technology-stock bubble that burst in 2000, which ushered in the 2001 recession and prompted the Fed to dramatically cut interest rates. Housing was just beginning to emerge from a long slumber in the 1990s, as it took much of the decade to recover slowly from the preceding housing bust of 1990-91. As the economy slumped and financial markets sank in the wake of the September 11, 2001, terrorist attacks, the Fed accelerated its rate cuts, adding fuel to the budding housing boom. By mid-2003, the Fed had driven interest rates to the lowest in a generation, with rates on 30-year fixed-rate loans falling to a 40-year low, around 5 percent. The even lower short-term rates set by the Fed drastically cut rates on adjustable-rate mortgages as well as borrowing costs for banks and Wall Street firms, enabling them to invent an array of new mortgage products with irresistibly low starter rates, which appealed to home buyers. While the Fed's actions under former Chairman Alan Greenspan were applauded at the time, many economists now blame the central bank for nurturing the housing bubble. "The Fed played an important role" by encouraging people to shift resources to real estate speculation, said Michael D. Larson, analyst with Weiss Research. "The Fed replaced one bubble, mostly confined to the technology sector, with another, far-larger bubble, encompassing most of the housing market." Mr. Greenspan forcefully rejects such accusations. He contends the housing bubble and credit bubble that accompanied it were worldwide phenomena. Moreover, he maintains the only way the Fed could have stopped the bubble was to have raised interest rates sharply, which would have not only deflated the bubble, but brought down the economy with it. Mr. Larson also blames global investors — including many international banks and hedge funds — for misjudging the risks of the securities. And Wall Street firms, by setting minimal standards on the loans and then securitizing them for sale to distant investors, also "removed, minimized and postponed the consequences of poor lending decisions," he said. Global investors were thirsty for the high returns on subprime and exotic mortgages that were packaged as "collateralized debt obligations," and they trusted the high ratings assigned to most of the debt by Wall Street ratings agencies Moody's Investors Service and Standard & Poor's Corp. The global market "stressed quantity over quality" on loans, making it "easier and more profitable" for mortgage brokers and banks to convince consumers to take inappropriate loans, Mr. Larson said. Loose lending With their low introductory monthly payments and easy terms, the loans were easy to sell to the public. In many ways, mortgage brokers followed the playbook of auto dealers, who swamped their showrooms with people on car-buying binges in 2002 and 2003 by advertising zero-interest loans on their cars. As they did with the car loans, many borrowers who acquired subprime and exotic mortgages with low starter rates rarely looked at the loan's overall costs or terms other than the initial monthly payments that were loudly trumpeted in ads and brochures. Loans with introductory rates as low as 1 percent made the obligations of owning expensive houses appear to be easy or manageable and had the effect of driving up home prices as buyers armed with such loans surged into the market and bid up prices. Home sellers found they were able to raise prices by thousands of dollars from one sale to the next with seemingly no resistance. Even the highest-priced homes at the height of the boom in 2005 and 2006 sold quickly, sometimes within minutes with multiple bids. The new-found wealth for homeowners was just as intoxicating as the easy-money loans that transformed millions of former renters, even those with shaky credit ratings, into proud homeowners. Consumers didn't need to sell their homes to cash in on the double-digit gains in their home values; they used home-equity loans and cash-out refinancings instead. Many people used their homes like ATMs, refinancing once or twice a year to take out equity and using the cash to buy cars, go on vacations and make down payments on second homes or investment properties. By 2005, nearly every homeowner in America had refinanced at least once. The cash-outs, which typically extracted $20,000 to $30,000 from home equity, were an elixir for both consumers and the economy, enabling homeowners to supplement stagnant incomes while stimulating consumer spending, the biggest source of economic growth. Loans came not only with minimal payments but often required no down payments or income documentation, enticing millions of people to jump into the market for second homes and investment properties. Coastal resorts and Sun Belt cities like Miami and Las Vegas became lucrative profit centers for "flippers" who weren't interested in owning properties but only wanted to make quick profits buying and selling them. Cable television offered 24-hour housing channels and TV shows demonstrating how anyone could become a "flipper," putting down as little as $5,000 on a condominium and then reselling at a profit before construction was even finished. Greed stokes craze By the height of the housing boom in late 2005 and early 2006, millions of people had been pulled into real-estate speculation, which had become the new "Internet craze," said Stefan Swanepoel, author of the Swanepoel Trends Report on housing. Tales of making quick money in housing became a hot topic at cocktail parties, while cab drivers offered housing tips. "Anything containing the words 'home or real estate' seemed to be as hot as anything with a dot-com during the late 1990s," Mr. Swanepoel said. "The consumers' hunger seemed to have no end," he said, noting that the buying frenzy was nurtured not only by "a plate full of new mortgages," but "bullish customer confidence" and steady employment and income gains. Thomas Martin, president of the National Mortgage Complaint Center, which has heard from hundreds of homeowners stuck with mortgages they can't afford, said the phenomenon of the housing bubble can be summed up in one word: "Greed." "It was a game of musical chairs," he said. "At some point, the music would stop, and someone would get left without a chair," he said, including the banks, homeowners and pension funds experiencing losses today. Besides the "greedy mortgage industry" and the "suicidal" loans they peddled, Mr. Martin blames regulators and legislators in Congress who were "all asleep at the switch with respect to ridiculous mortgage products." Regulators did not seriously clamp down on questionable lending practices until last week, when the Fed approved tough new rules for lenders nationwide, cracking down on dangerous practices like offering loans to subprime borrowers with no income documentation, often called "liar loans." Congress until this year was largely uncritical of the wave of questionable mortgages and sought only to nurture home sales by heaping more subsidies on the industry. One of the last acts of Congress before it adjourned in 2006 was to accede to the wishes of the mortgage industry by enacting a new tax deduction for mortgage insurance. "The housing boom was good politics, " Mr. Martin said, noting the housing and lending industries are among the biggest campaign contributors to legislators. Moreover, Congress since the 1990s has pushed lenders to offer more credit to blacks, Hispanics and other minorities — a drive that led to an explosion of subprime mortgages that went disproportionately to minorities during the housing boom. The "democratization" of mortgage credit appeared to be a shining success until this year, when the subprime crisis emerged and precipitated a much broader credit crunch and retrenchment from loose lending practices. Widespread fraud also fed the crisis, Mr. Martin said, particularly the inflating of house assessments by appraisers under pressure from mortgage brokers, developers and real-estate agents eager to make sales at ever-higher prices. "The combination of blackmailing real-estate appraisers into inflated valuations, combined with insane mortgage products, creates the perfect storm for a real-estate disaster that could be our nation's most costly real-estate meltdown in history," he said. The Fed moved to ban such coerced appraisals as well as the "liar loans" that were the most widespread fraud perpetuated by individual borrowers. The FBI is pursuing 1,000 cases of mortgage fraud and estimates there were close to 36,000 instances of fraud nationwide. States' attorneys general also are pursuing hundreds of cases. In one notable case, New York Attorney General Andrew M. Cuomo is investigating reputed appraisal fraud in deals done by Washington Mutual, the largest savings and loan in the country and an aggressive marketer of subprime and exotic loans. Back to basics As the sordid tales of tainted loans and gigantic losses emerged this year, borrowers and lenders have returned to the basic practices that once made the U.S. mortgage market one of the safest investment havens on earth. Traditional 30-year, fixed-rate mortgages are back in style, with borrowers now shunning exotic mortgages such as "option ARMs" that they snapped up during the housing craze. Lenders require higher credit scores, larger down payments and bigger fees to cover their losses. To securitize the loans, banks are turning again to the federal lending agencies — Fannie Mae, Freddie Mac and Ginnie Mae — which had fallen out of favor and lost market share during the housing boom. While agency-sponsored loans constituted only 45 percent of the mortgage market in 2005 and 2006, they surged to 72 percent of the market this year. Subprime borrowers now are applying for help from the Federal Housing Administration, the federal home insurer created during the Great Depression to address that earlier housing crisis. The housing saga is far from over, many analysts say. With millions more mortgages resetting in the next two years, many more people could lose their homes. Banks, securities firms and investors could foot another $300 billion in losses, by some estimates. If consumers are daunted by bleak housing news and their loss of wealth and spending power, they could capitulate and send the economy into a recession, economists say. Already, consumer borrowing for home purchases and cash-out refinancings has plummeted from a $1.2 trillion annual rate in the first quarter of 2007 to $691 billion in the last quarter, according to Fed figures. David A. Levy of the Levy Forecasting Center said he expects the economy to muddle through, despite the Ponzi finance schemes that led to the housing collapse, and despite further drops in housing prices that could accumulate to 30 percent or more nationwide. "So far, the housing decline has occurred prior to serious weakness elsewhere in the economy," and that has prevented the problems from being even worse, Mr. Levy said.

The Unintended Consequences of the Housing Bubble Bursting

2007-12-09T20:29:00.000-08:00

The Unintended Consequences of the Housing Bubble Bursting (December 10, 2007) As the housing bubble pops with a reverberating shockwave heard round the world, we can be sure the players who inflated it did not intend or anticipate the ramifications now unfolding. Just as the teenagers racing down the cliffside highway with bellies full of alcoholic beverages did not intend to lose control of their vehicle and plunge off the cliff to their deaths, the mortgage brokers, investment bankers and their partners-in-fraud, the rating agencies, did not really intend to bring down the entire economy. Yet this is indeed the "unintended consequence" of the housing bust. Let's consider two "unintended consequences" which are emerging as the housing and mortgage-derivative markets break through the safety barrier and descend in a slow-motion cliff-dive. 1. As risk is "re-priced" higher, the cost of borrowing will rise. Frequent contributor Albert T. explains:
The problem with the bailout is that it devalues money by diluting the weighted average of money outstanding through bailing out people/firms whom shouldn't have got it. Ergo, stupid banks who took stupid risks and stupid borrowers. While we won't notice it right away, when the rate freeze is in effect in actuality it will reprice all new risk with a higher implied rate to compensate for the future freeze possibility, hence we will all pay higher rates to subsidize the current "crack addicts". (emphasis added-CHS) Once this happens two things will occur: five years from now instead of losing 30% on the loan, the bank will lose 70% except that 70% will be insured by the gov't as a thank you for the freeze. Hence we will have the doubling of our money supply on loans that weren't supposed to create it. In effect the gov't will allow banks to print money in the future to make up for the loss today. Albert sent in this link Homeowner bailout is a lousy idea (John Markman, MSM Money) and called attention to the following excerpt as evidence of another kind of risk repricing is already underway:
"Indeed, everywhere you look now is evidence that the subprime-debt crisis is morphing and expanding like a creature in a horror movie. Just this week, we learned from hearings in Congress that strapped credit card companies such as Capital One Financial (COF) and Bank of America (BAC) had begun to soak customers by jacking up interest rates on balances for the slightest changes in their credit profiles." "If you so much as apply for a new credit card, according to testimony gathered at the hearing, your current card provider can boost your rates as high as 30% per year." In other words: since lenders now know the government may "freeze" the rates they've charged customers, they'll be re-pricing those rates higher to compensate for that possibility. If the government might step in and freeze the rates I am charging my customers, then it behooves me to raise rates on all customers now, not just the riskiest ones because, well, it's not longer a "risk-free world." The government might freeze all interest rates, or "low-risk customers" might soon become "poor-risk." How does this re-pricing hurt the economy? Since borrowing is the grease which lubricates the entire economy, re-pricing risk means higher borrowing costs for everyone-- regardless of Fed-Speak or the Fed dropping the Fed Funds Rate. This chart reveals how the ratio of mortgage debt to disposable income has risen far above the last housing bubble top in 1990. Simply put: people are spending more on debt service and this has reduced their remaining disposable income. The rubber band of debt service has already been stretched to extremes unseen in 30 years; so the question becomes, how much more can the rubber band be stretched before it snaps? Just to refresh our awareness of how critical debt/borrowing is to our current "prosperity," take a look at this chart: 2. As non-U.S. investors realize they have been handed hundreds of billions in losses, they will be wary of buying more U.S. debt. We are already hearing that the market for SIVs, CDOs and MBS (mortgage backes securities) is dead, over, gone, dried up, history. And just to refresh our awareness of how debt-based derivatives like CDOs and credit swaps have grown, look at this chart: How dependent is the U.S. on foreign/non-U.S. buyers of debt? Very. The standard number tossed around is the U.S. needs to offload $2 billion a day onto non-U.S. investors just to keep the U.S. debt/borrowing/spending machine humming. But now, as this article from the San Francisco Chronicle details, we have ripped off our non-U.S. investor friends and are busily shredding all evidence of fraud --even though we all know every step of the housing bubble, from appraisals to mortgage funding to securitizing of the mortgages to the rating agencies' "AAA stanp of approval" on those securitized loans was riddled with "wink-wink-nudge-nudge" fraud: MORTGAGE MELTDOWN Interest rate 'freeze' - the real story is fraud
But unfortunately, the "freeze" is just another fraud - and like the other bailout proposals, it has nothing to do with U.S. house prices, with "working families," keeping people in their homes or any of that nonsense. The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth. The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process. And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it. I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse." I can hear it all now--as no doubt you can, too. The non-U.S. pension or township or sovereign fund, realizing its supposedly "safe" U.S.-based investments are now worth 50% or 20% or perhaps 0% of the purchase price, now go to New York and hire a razor-sharp law firm to force the investment bank which sold them the garbage to buy it back, based on the fraud which permeates the entire pool of mortgages and debt. But oh my gosh, we didn't know it was fraudulent. Proving fraud, after all the emails have been deleted and the hard-drives crushed and the paper trails shredded will be very difficult, indeed. The "innocent" bankers will point to the rating agencies like Moodys, who will point to the mortgage underwriters and brokers, who will point to the originators and the appraisers, who will promptly declare bankruptcy or point to the realtors who forced them to support inflated valuations. And after all the attorneys' fees have been deducted from the paltry settlements reached years from now, there will be pennies left for the non-U.S. investors. We all know how this works because we've seen the play before in the aftermath of the dot-com debacle: investors lose $200 million due to fraud, the company settles for $11 million, the attorneys take $5 million for their work and the investors get a whopping 3% compensation. So how does this massive, seamless, trillion-dollar fraud hurt the U.S. economy? Just ask what happens when non-U.S. players tire of getting ripped off or become wary of "AAA low-risk" U.S.-based debt. What happens is this: when non-U.S. buyers of new debt vanish, then the great debt-churn-spending machine that is the U.S. economy grinds to a halt--or at least loses $700 billion a year in non-U.S. funding. Anyone who is an investor (as opposed to a "pusher" who needs to "fund the junkie's habit" so he can afford to buy more "product", i.e. the central banks of China and Japan) will turn away from U.S. debt (other than Treasuries) in complete disgust. Ask yourself this: if a national government might arbitrarily "freeze" or lower the interest rate being paid on a security, thereby lessening its value, how anxious are you to buy more of that nation's debt? If you do, you'll want a hefty risk-premium to compensate you for the unknown risks that the government will gerrymander your return in order to placate their banker buddies and restive domestic voters. Bottom line: as risk rises, so do borrowing costs. As non-U.S. investors shun new U.S. commercial and mortgage debt, those markets dry up. Since debt can no longer be sold to unwary non-U.S. "marks" (suckers), then who's left to fund $5 trillion in new mortgages? Essentially bankrupt U.S. banks? Negative-equity U.S. households? Negative savings rates Americans? If this sounds bleak, please consider this chart:

Foreclosures Hit a Snag for Lenders

2007-11-18T11:25:00.000-08:00

Foreclosures Hit a Snag for Lenders
By GRETCHEN MORGENSON
A federal judge in Ohio has ruled against a longstanding foreclosure practice, potentially creating an obstacle for lenders trying to reclaim properties from troubled borrowers and raising questions about the legal standing of investors in mortgage securities pools.
Judge Christopher A. Boyko of Federal District Court in Cleveland dismissed 14 foreclosure cases brought on behalf of mortgage investors, ruling that they had failed to prove that they owned the properties they were trying to seize.
The pooling of home loans into securities has been practiced for decades and helped propel real estate prices in recent years as investors sought the higher yields that such mortgage trusts could provide. Some $6.5 trillion of securitized mortgage debt was outstanding at the end of 2006.
But as foreclosures have surged, the complex structure and disparate ownership of mortgage securities have made it harder for borrowers to work out troubled loans, in part because they cannot identify who holds the mortgage notes, consumer advocates say.
Now, the Ohio ruling indicates that the intricacies of the mortgage pools are starting to create problems for lenders as well. Lawyers for troubled homeowners are expected to seize upon the district judge’s opinion as a way to impede foreclosures across the country or force investors to settle with homeowners. And it may encourage judges in other courts to demand more documentation of ownership from lenders trying to foreclose.
The ruling was issued Oct. 31 by Judge Boyko, and relates to 14 foreclosure cases brought by Deutsche Bank National Trust Company. The bank is trustee for securitization pools, issued as recently as June 2006, claiming to hold mortgages underlying the foreclosed properties.
On Oct. 10, Judge Boyko, 53, ordered the lenders’ representative to file copies of loan assignments showing that the lender was indeed the owner of the note and mortgage on each property when the foreclosure was filed. But lawyers for Deutsche Bank supplied documents showing only an intent to convey the rights in the mortgages rather than proof of ownership as of the foreclosure date.
Saying that Deutsche Bank’s arguments of legal standing fell woefully short, the judge wrote: “The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate.”
A spokesman for Deutsche Bank declined to comment on the ruling. But the inability of Deutsche Bank, as trustee for the pools, to produce proof of ownership at the time of the foreclosures will fuel borrowers’ concerns that they are being forced out of their homes by entities that may not even hold the underlying loans.
“This is the miracle of not having securities mapped to the underlying loans,” said Josh Rosner, a specialist in mortgage securities at Graham-Fisher, an independent research firm in New York. “There is no industry repository for mortgage loans. I have heard of instances where the same loan is in two or three pools.”
The process of putting together a mortgage pool begins when a home loan is originated by a bank or mortgage lender. That loan is typically sold to a Wall Street firm that pools it with thousands of others. Once a pool is packaged, it is sold to investors in different slices, based on risk. A trustee bank oversees the pool’s operations, ensuring that payments made by borrowers go to the appropriate investors.
Lawyers who represent troubled borrowers complain that trustees overseeing home loan pools often do not produce proof, usually in the form of a mortgage note, that their investors own a foreclosed property. And a recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership. Such proof gives a creditor standing to foreclose against a borrower and is required by law.
“The big issue in all these cases, whether we are dealing with a bankruptcy court, a state court or a federal court, is who really owns the mortgage note, and that is allegedly what they securitized,” said O. Max Gardner III, a lawyer who represents borrowers in foreclosure in Shelby, N.C. “A collateral question is, has that mortgage note really been transferred and assigned to the securitization trust? If not, then they really don’t have standing. It’s Law School 101.”
When a loan goes into a securitization, the mortgage note is not sent to the trust. Instead it shows up as a data transfer with the physical note being kept at a separate document repository company. Such practices keep the process fast and cheap.
Because most foreclosures proceed without challenges from borrowers, few judges have forced trustees like Deutsche Bank and Bank of New York to prove ownership by producing a mortgage note in each case.
Borrower advocates cheered Judge Boyko’s ruling.
The plaintiff’s argument that “‘Judge, you just don’t understand how things work,’” the judge wrote, “reveals a condescending mindset and quasi-monopolistic system where financial institutions have traditionally controlled, and still control, the foreclosure process.” The cases could be filed again in state court, however.
April Charney, a consumer lawyer at Jacksonville Area Legal Aid in Florida, who has been practicing foreclosure law since the late 1980s, said she rarely sees proof of ownership in cases involving securitization trusts. Her group has 30 to 50 such cases and not one of the lenders’ representatives has produced proof of ownership predating the foreclosure action.
“We see a trend toward judges having enough of this trampling of the rules and procedure and care and reverence with which lawyers and litigants and participants in the judicial process should comply,” Ms. Charney said. “Hopefully this will convince everybody that the time to work out these home loans is now.”

Paul vs. Bernanke on Value of the Dollar

2007-11-08T15:18:00.001-08:00

Paul vs. Bernanke on Value of the Dollar
Candidate Rep. Ron Paul Faces Off With Fed Chairman
ESSAY By Z. BYRON WOLF
Nov. 8, 2007 —
When you are Ron Paul, your public enemy No. 1 is the chairman of the Federal Reserve.
Because when you are Ron Paul, although you are technically a Republican, you are really a libertarian, and your strict adherence to the gospel of the Constitution leads you to question why the Federal Reserve -- the consortium of 12 reserve banks that acts as the U.S. central bank -- even exists.
It doesn't say anything about any central bank in the Constitution. Not only that, the primary responsibility of the Federal Reserve -- to control the money flow and availability of currency on the open market -- is something that you, Ron Paul, find incorrigible. The government, you believe, creates inflation when it prints money and moves it willy-nilly into the market to control the very inflation you think it's causing by moving that money around in the first place. Counterpoint: The gold standard was too inflexible, and the average citizen suffers when the government can't give the markets more fuel in the form of money. (And for your information, here's a Fed-produced interactive feature on the Fed.)
But you, as Ron Paul, have your druthers. You'd get right on back to the gold standard, where each dollar represents a set amount of gold. This whole artificial currency is maddening to you (and it's a lot of the reason you're running for president, although you get more press for being the only Republican candidate openly in opposition to the Iraq War). In fact, if you became president, one of the many pieces of the federal government you'd work to abolish, along with the Internal Revenue Service and the Department of Education, is the Fed.
So, when you're not out on the stump running for president but back at your day job in Washington, D.C., a job you plan to keep should you fail in your quest for the White House, it's a good thing for you, as congressman Ron Paul, to sit on the Joint Economic Committee, which from time to time hears testimony from Ben Bernanke, chairman of your hated Federal Reserve.
During today's testimony questions from most senators and representatives on the committee had to do with the housing crisis and whether a recession was in the offing.
But when Paul squared off with Bernanke, things were a bit different. More like Bernanke was dealing with a combative grad student during office hours at Princeton.
After a diatribe about how the government and the Fed are trying to patch up market woes without addressing core problems, Paul pointed out, "Nobody says, 'Where does it come from?' And what is the advice that you generally get, and that is inflate the currency. They don't say inflate the currency, they don't say debase the currency, they don't say devalue the currency, they don't say cheat the people. They say lower the interest rates.'"
But when people crow to the Fed to lower interest rates and make larger sums of money more accessible, argued Paul, they're not really asking for the interest rates to be lowered; they're asking for the government to print more money.
"But they never ask you, and I don't hear you say too often, 'The only way I can lower interest rates is I have to create more money. I have to lower the discount rate, I have to make it generous, I have to increase reserves, I have to lower the interest rates and fix the interest rates.'"
Later, Paul called it "a fallacy" that made the dollar "weaker" and "invites inflation."
"It is that not only have we had a subprime market in housing; the whole economic system is sub prime," Paul railed. "We artificially lower interest rates. And it wasn't under your tenure in office; it's been going on for 10 years and longer and now we're bearing the fruits of that policy."
Paul argued the government shouldn't be concerning itself with deceptive lending practices but with its deceptive monetary policy.
"The real deception is when we distort the value of money, when we create money out of thin air. We have no savings. Yet there's so-called capital. There's money available. But it comes from what you have to do and the pressures put on you.
Several minutes into his questioning, Paul got to a question for Bernanke, though it was more of an entree to a larger debate: "How in the world can we expect to solve the problems of inflation, that is, the increase in the supply of money, with more inflation?"
Bernanke answered saying, in the parlance of an average economist, he's just doing what Congress created the Fed to do.
"What we're trying to do is follow the mandate that Congress gave us," Bernanke said. "And the mandate that Congress gave us is to look at employment and inflation as measured by domestic price growth. And as I talked about today, and I think you would agree that we do see risk to inflation and we are taking those into account and we want to make sure that prices remain as stable as possible in the United States."
Paul countered that by putting more money on the market, Bernanke and the Federal Reserve are devaluing the dollar and robbing from Americans.
"There's a dollar crisis out there and people's money is being stolen; people who have saved, they're being robbed. I mean, if you have a devaluation of the dollar at 10 percent, people have been robbed at 10 percent. But how can you pursue this policy without addressing the subject that somebody's losing their wealth because of a weaker dollar? And it's going to lead to higher interest rates and a weaker economy."
Bernanke argued that since Americans use dollars to buy their goods here in America, a devalued dollar will make imported goods more expensive.
Paul shot back, rounding out his five minutes of questions, "Yes, but not if you're retired and elderly and you have CDs and their cost of living is going up no matter what your CPI says. Their cost of living is going up and they are hurting."
It was an interesting exercise in theory, but Paul, even if he were to be elected president, probably would not have the votes in Congress to revamp the financial system, much less abolish the Fed.
A reason perhaps why none of this made wire or newspaper accounts of the hearing, all of which focused on Bernanke's contention that despite an intensifying slump in the housing market, slower than expected growth and higher inflation, he does not believe the country is headed for a recession and tried to divine where Bernanke's testimony signaled another interest rate cut.
Copyright © 2007 ABC News Internet Ventures

Foreclosure wave sweeps America

2007-11-06T11:47:00.000-08:00

Foreclosure wave sweeps America
By Steve Schifferes BBC economics reporter, Cleveland, Ohio
A wave of foreclosures and evictions is about to sweep the United States in the wake of the sub-prime mortgage lending crisis.
This could destabilise the US housing market and may also lead to further turmoil in financial institutions, who collectively own $1 trillion (£480.6bn) worth of sub-prime debt.
Cleveland, Ohio, is an industrial city on the banks of Lake Erie in the US "rust belt".
It is the sub-prime capital of the United States. One in ten homes in the city is now vacant, and whole neighbourhoods have been blighted by foreclosed, vandalized and boarded-up homes.
Families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighbourhoods Michael J Calhoun Center for Responsible Lending
Many of these homes are now owned by the banks and investment pools owning the mortgages, and the company making the most foreclosures in Cleveland is Deutsche Bank Trust, which acts on behalf of such investment pools.
Cleveland is facing a rising crime wave, and the cost of demolishing the vacant houses alone will cost the city $100m of its tax base.
According to Jim Rokakis, the County Treasurer for Cleveland's Cuyahoga County, "Wall Street strategies that made the cycle of no-money-down, no-questions-asked lending possible have sucked the life out of my city".
Sub-prime crisis growing
Sub-prime lending is spreading across the United States, especially in the booming housing markets of Southern California, Florida, Washington, DC, and New York City.
One in five US mortgages now falls in this category. As the credit crunch continues to bite "families all over the country continue to lose homes in record numbers, stripping families of their wealth and destroying entire neighbourhoods," says Michael Calhoun of the Center for Responsible Lending, which tracks these issues.
Sub-prime mortgages carry a much higher risk of default by the borrower than other kinds of mortgage lending.
That is because most of them are "balloon" mortgages (technically known as hybrid-adjustable rate mortgages, or ARMs), which offer the borrower a fixed-rate loan for two or three years, and then switch to a much higher adjustable rate after that.
HAVE YOUR SAY Everyone is going to feel this credit crunch to some extent Turned Worm
Many of them are set to switch in the next two years, leaving borrowers unable to afford the higher payments.
There have already been 1.7 million foreclosure proceedings in the US in the first eight months of 2007, and up to 2 million families are expected to lose their homes over the next two years, according to estimates by the US Congress's Joint Economic Committee.
Crisis origins
But why have so many people in the US taken out sub-prime mortgages?
The sub-prime lending market started as a way of lending to people with poor credit history - as long as they had collateral like a house that could be used to guarantee the loan.
It was particularly prevalent in inner-city areas, especially among black and Hispanic borrowers.
Many of these mortgages were sold by unscrupulous and little regulated mortgage brokers, who received handsome commissions for selling expensive and unsuitable products.
Some customers were not told that their interest rates would go up sharply after two years; others were promised they could refinance their home before higher rates took effect.
Others found that when they had difficulties paying, huge unexplained fees were added to their bills, putting them further in debt.
Marion's story
One person hard hit is Marion Gardner, who lives in one of the worst affected sub-prime lending areas of Cleveland, known as Slavic Village.
A single parent, she had worked hard to buy a house where she could raise her two children and escape from the misery of the inner-city housing projects.
Two years ago Marion fell ill, and found she could not manage the stairs in her house.
She decided to refinance her home, using some of the money to buy an apartment where she could more easily manage.
She gave her old house to her two sons, expecting they would contribute to paying for the property she had struggled so hard to obtain. But the sons fell behind in their payments.
Marion went to her lender - Countrywide, the biggest sub-prime lender in the US - and offered to pay off all the arrears.
She said they accepted her offer, and began sending them $1,000 every month, using up her retirement savings.
But after six months she discovered that instead of clearing her arrears, her home was going to be foreclosed by Countrywide.
She still visits the house every day, trying to protect if from drug dealers and burglars, and leaves her dog in the backyard.
But she can see all along her street dozens of foreclosed properties that have been vandalised, boarded up, or gutted.
Now she has learned that a date has been set for the sheriff to come and evict her.
Deceptive practices?
Mark Seifert, the director of the East Side Organising Project (ESOP) in Cleveland, which has played a leading role in helping people affected by the sub-prime crisis, says Marion's story is typical.
SUB-PRIME CRISIS SERIES
Special reports on why bad US home loans are affecting us all
Friday: US housing crash
Monday: Financial meltdown
He says lenders engaged in deceptive practices and clients found it difficult to get any information at all when they got into arrears.
Mr Seifert says that ESOP - using protest tactics - has managed to get a few mortgage companies to sign a deal agreeing a uniform set of criteria to decide whether someone's mortgage qualifies for renegotiation rather than foreclosure.
But he says they have been unable to reach such an agreement with Countrywide, the nation's largest sub-prime lender - although its boss has promised to meet them.
Spreading to the suburbs
The crisis has spread beyond the inner city to the suburbs of Cleveland.
Last month over 200 people turned up at a church meeting to seek ESOP's help in avoiding foreclosure.
Some, such as Ron Todd, who lives in a suburb just south of the city, are in danger of losing their home after being made redundant by Northwest Airlines, a big local employer.
Others are worried that their neighbourhoods - and the property values of their own houses - will be ruined by the foreclosures all around them.
According to Claudia Coulton, co-director of the Centre for Urban Poverty at Case Western Reserve University in Cleveland, over 10,000 families - one in eight of all owner occupiers in Cleveland - will face eviction this year - and the number is expected to rise.
She says the crisis is threatening to "overwhelm the government agencies and community organisations that address the problem".
Nationwide problem
Cleveland's situation is not unique.
All around the country, aid agencies report a "tidal wave" of foreclosure cases, says Sarah Gerecke, director of New York City's Neighborhood Housing Services.
PREDATORY LENDING PRACTICES
Ninja Loans: no income, no job, no assets
2/28: Mortgages that change from a fixed to a much higher adjustable rate after first two years
Prepayment penalties: High fees for trying to change terms of mortgage
She now employs six people full-time to provide mortgage debt counselling, up from one just two years ago, and could use another 12.
Her concern is that many recently regenerated neighbourhoods in New York will soon be blighted by crisis again.
Some people argue that the sub-prime lending crisis has been caused by irresponsible borrowers who lied about their income to cash in on the housing boom. Ms Gerecke disagrees. She says few of her clients would knowingly put their home at risk.
Many sub-prime borrowers report that mortgage brokers misrepresented the kind of mortgage they were being offered, their annual income, and even the value of their home.
Working together?
President George W Bush's administration wants to solve the foreclosure crisis by getting lenders and borrowers to renegotiate the terms of loans.
There is a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works Robert Steel US Treasury Under Secretary for Domestic Finance
It is pledging more money for advice services, and has been urging key lenders to take a more sympathetic approach.
Robert Steel, the US Treasury Under Secretary for Domestic Finance, told the BBC that the government's role was "to ensure that lenders and servicers are being flexible with regard to working with borrowers".
He added that no policy could eliminate foreclosures altogether because there was "a natural level of foreclosures that goes on in an economy in good times and bad... it's part of the nature of how our economy works."
But according to Mark Zandi, chief economist for Moody's, only 1% of sub-prime mortgages have been renegotiated rather than foreclosed so far.
Ms Gerecke says a piecemeal approach involving millions of individual renegotiations will not work. Each case takes hours of negotiations, and the mortgage companies' loan loss departments are overwhelmed by the crisis.
A way out?
The only way out, says Ms Gerecke, would be national loan terms agreed for the whole industry.
One such plan has been proposed by Sheila Bair, head of the Federal Deposit Insurance Corporation (FDIC), one of the key banking regulators.
She told the BBC that sub-prime interest rates should not be reset if the borrower has kept up all payments and is not in arrears.
But such a deal is proving extremely difficult to reach, given that thousands of investors around the world own a share of these sub-prime mortgages.
Meanwhile Marion still sits in her Cleveland home every day, trying to stop it being vandalised even though she knows it is merely a matter of time before she will be evicted.
"I am just really working for the banks now, protecting their property from damage," she says.
Story from BBC NEWS:

Mortgage Security Bondholders Facing a Cutoff of Interest Payments

2007-10-22T10:50:00.000-07:00

Mortgage Security Bondholders Facing a Cutoff of Interest Payments
By VIKAS BAJAJ
For all the pain in the mortgage market, investors who hold bonds backed by risky home loans have continued to receive their monthly interest payments — until now.
Collateralized debt obligations — made up of bonds backed by thousands of subprime home loans — are starting to shut off cash payments to investors in lower-rated bonds as credit-rating agencies downgrade the securities they own, according to analysts and industry executives.
Cutting off the cash flow, which is governed by rules and mathematical formulas that vary by security, is expected to accelerate in the months ahead.
Such a cutoff would be the latest blow to financial markets as investors try to anticipate the next problem that might shake confidence.
The stock market, which ended down sharply on Friday across the board, in a week that the Standard & Poor’s 500-stock index dropped 3.92 percent, has been battered by renewed concerns over the credit crisis and about some weak earnings reports.
With such a re-evaluation, owners of collateralized debt obligations — investment banks, hedge funds, insurance companies and public pension funds — may be forced to write down mortgage investments beyond the billions they have already written off. Some bonds, for example, may go from being valued at, say, 70 cents on the dollar to becoming largely worthless overnight, bankers and analysts say.
The adjustment could further erode the availability of credit to consumers and businesses.
Though many people in the mortgage market expect a shut-off of payments, the broader financial market has not focused on it. “At this point, it’s fair to say that everybody expects this shoe will drop,” said Mark Adelson, an independent mortgage securities consultant and analyst. “It’s a foregone conclusion. But when it happens, there will be a market reaction to it.”
From the period since July, the stock market has fallen, then posted several weeks of advances and, most recently, dropped back as investor sentiment about the weakness in housing and its broader effect on the economy waxed and waned.
A re-evaluation of payments by trustees who oversee the debt obligations is part of a long, complex chain reaction that is caused by the surge in mortgage delinquencies and home foreclosures. As more homeowners fall behind on payments and lose their homes, the pressure builds on large pools of mortgages that issue bonds to investors. Many of the riskiest of those mortgage bonds have been bought by the C.D.O.’s, which issue bonds of their own.
On Friday, Standard & Poor’s lowered the ratings on $22 billion in bonds backed by mortgages made to people with weak credit in 2006, citing the continued deterioration in the housing market. Another credit rater, Moody’s Investors Service, lowered a similarly large group of bonds earlier in the month.
It is unclear exactly how many bonds will be affected and how quickly. Investment banks issued some $486 billion in debt obligations linked to mortgages in 2006 and the first half of 2007. A majority of the bonds have high credit ratings, and the trustees of the debt obligations typically shut off lower-rated bonds first to accelerate payments to investors holding higher-rated debt.
When ratings on the bonds directly backed by mortgages are lowered, it forces the trustees to discount the value of their holdings in a calculation performed once a month. Some C.D.O.’s also hold bonds issued by other debt obligations, so it can take months for ratings downgrades to work their way through the system.
“It’s still the early stages of a very significant stress,” said John Schiavetta, a group managing director at Derivative Fitch, which rates the debt obligations.
He noted that C.D.O. deals varied significantly. In some, interest payments continue on all bonds regardless of their rating, which means that higher-rated bonds may be more vulnerable to losses. Fitch has downgraded 30 percent of the debt obligations in its rating portfolio and has put 15 percent more on watch for possible downgrading.
In the last two weeks, leading investment banks have written down about $20 billion, much of it in collateralized debt obligations and mortgage-related securities. Merrill Lynch wrote down $4.5 billion in debt linked to home loans and ousted two senior executives in charge of its bond division. UBS wrote down $3.4 billion and ousted the chief financial officer. Citigroup wrote down $1.3 billion from the deterioration in the value of mortgage-related securities.
Investment banks still hold billions more that could be under threat by the recent downgradings and a continued deteriorating in the mortgage market, said Brad Hintz, an analyst at Sanford C. Bernstein & Company. UBS, for instance, still holds about $20 billion in subprime securities.
But Mr. Hintz said it was difficult to determine how much more of the banks’ portfolios is vulnerable because the institutions have not disclosed many details about their holdings. The size of the recent write-downs surprised many analysts and investors because data provided by the banks earlier in the year suggested there was little to worry about.
“In the case of Merrill Lynch,” Mr. Hintz said, “when you analyzed the financials based on the second-quarter numbers, it didn’t look like they had a lot of exposure. There has been a breakdown in risk management.”
It is unclear what portion of the collateralized debt obligations issued by the investment banks is still on their balance sheets because they could not sell them to other investors. Merrill Lynch was by far the biggest issuer, underwriting $54 billion last year, almost twice as much as in 2005, according to Asset-Backed Alert, a trade publication.
A group of financial enterprises called structured investment vehicles also hold C.D.O.’s, although bankers say that subprime debt makes up only a small percentage of their assets. Problems with these investments has led big banks including Citigroup, Bank of America and JPMorgan Chase to develop a $75 billion rescue fund that could be used to buy risky mortgage securities and other assets from them, a move intended to ease pressure on an important part of the credit markets.
Yet for all the damage that has already been done, the real stress for investors in these securities lies ahead, industry officials say.
Most mortgage securities have not yet had significant losses, which are only recorded when homes are foreclosed and sold. Up to two years can pass between a borrower’s falling behind on payments and an auction. Each mortgage security has a reservoir of excess cash to draw upon to pay bondholders when borrowers do not make monthly payments.
“As far as the security is concerned, it’s only once the property is effectively sold that a loss is recorded,” said Nicholas Weill, chief credit officer at Moody’s. “The process of foreclosure is a long process. It doesn’t just happen overnight.”

It’s Time for the Banks to Face the Hangman

2007-10-19T10:54:00.000-07:00

It’s Time for the Banks to Face the Hangman

by Mike Whitney / October 19th, 2007
How can one defend a system that creates wealth by making the majority poor?
– Henry C. K. Liu
Officials in the Treasury Department — working with their colleagues at Citigroup, J.P. Morgan and Bank of America — have concocted a scheme to rescue the banks from their massive losses in mortgage-backed securities. The group is planning to set up a $100 billion emergency fund that will purchase non-performing assets for short-term debt. In truth, the fund is a bailout that provides the financial giants with an excuse for not reporting their enormous losses from bad bets.
The story first appeared in Saturday’s Wall Street Journal and was followed on Monday with a second headline piece:
“RESCUE READIED BY BANKS IS BET TO SPUR MARKET”
WSJ: “The high stakes plan to RESCUE BANKS FROM LOSSES on mortgage securities amounts to a big bet that a consortium of financial giants — AT THE PRODDING OF THE US GOVERNMENT — can PERSUADE INVESTORS TO POUR MORE MONEY INTO THE TROUBLED CREDIT MARKET.”
That’s right. The Treasury Dept is directly involved in a scam that saves the banks while trying to “persuade” investors to “pour more money” into toxic mortgage-backed sludge. Treasury Department officials clearly have a different idea of “moral hazard” than the rest of us.
The banks are presently holding hundreds of billions of dollars in mortgage-backed securities (MBSs) that they cannot sell — because there are no buyers — and don’t want to take back on their balance sheets because they’ll be forced to increase their capital reserves. So they’ve decided to launch a public relations campaign to promote some goofy sounding fund, called the “Master-Liquidity Enhancement Conduit” or M-LEC, which will allow the banks to place their unwanted bonds in Limbo until some future date when the public appetite for garbage improves.
The WSJ does a good job of disguising the real motive behind the new “Super-Conduit” (a.k.a. the Bailout fund) but in the last paragraph, buried in Section C-3, they reveal the truth:
“The goal is to reassure investors and make them more willing to buy its short-term debt.” So, the fund is really just a way of rearranging the marketplace until the next crop of gullible investors sprouts up and buys more mortgage-backed garbage.
Bloomberg’s Mark Gilbert puts it like this:
“It seems the way to reassure investors that it’s safe to buy the repackaged junk that has torpedoed credit markets in recent months is to repackage the least-junky bits of the junk into more palatable securities. The pyramid just grew another layer. . .
I can’t decide whether the Treasury’s willingness to patronize such a misguided effort is evidence that the situation is more desperate than anyone thought, or a positive sign that financial markets will continue to evolve and innovate and might eventually wrestle the subprime demon to the ground.”
Indeed.
Where are the regulators? The SEC and Treasury should be forcing the banks to be straightforward with the public and let them know about the hanky-panky they’ve been up to with their risky SIVs (structured investment vehicles) Citigroup alone has nearly $80 billion in off-balance sheets operations which are in distress. The bank accounts for “25% of the global SIV market. As of August, assets held by SIVs totaled $400 billion”.
SIVs are set up as a way to make money without taking the risk onto their balance sheets. “They issue their own short-term debt, usually at relatively low rates …then use the proceeds to buy higher yielding assets such as securities tied to mortgages.” (WSJ)
Ever since Bear Stearns blew up in late July, investors have been steering clear of any securities connected to real estate, which means the SIVs are getting the Double Whammy — they can’t sell their asset-backed commercial paper (because it’s mortgage-backed) and they find buyers for their collateralized debt obligations. (CDOs) To a large extent, the market is still frozen despite the upbeat cheerleading on the business pages. Clearly, the worst is yet to come.
How bad is it?
An article in yesterday’s Financial Times of London said that, “Only $9.9 billion of home equity loan securitizations have come to market since July 1 — A 95% DECLINE FROM THE $200.9 BILLION IN THE FIRST HALF OF THIS YEAR AND A ROUGHLY 92% DECREASE FROM THE SAME PERIOD LAST YEAR.”
The banks are in trouble. Big trouble. Main sources of revenue have dried up overnight and they’re stuck with hundreds of billions of debt. That’s why the papers broke the story on Saturday when there was NO chance of triggering a stock market crash.
Imagine the horror of investors around the world when they discover that the major investment banks are running these shabby “off-balance sheets” operations while concealing their real financial condition from their investors. Consider the disgust the public feels when they see Treasury officials bailing out the banks instead of ordering them to report their losses and get on with business.
Still, Wall Street nonchalantly leaps from one swindle to the next never considering the damage it’s doing to the credibility of the market.
Susan Pulliam summed it up like this in the Oct 12 edition of The Wall Street Journal:
“Since the invention of the ticker tape 140 years ago, America has been able to boast of having the world’s most transparent financial markets. The tape and its electronic descendants ensured that crystal-clear prices for stocks and many other securities were readily available to everyone, encouraging millions to entrust their money to the markets. These days, after a decade of frantic growth in mortgage-backed securities and other complex investments traded off exchanges, that clarity is gone. Large parts of American financial markets have become a hall of mirrors.”
“Hall of mirrors” is an understatement. The system is thoroughly opaque and crooked as a ram’s horn. The market’s new architecture, “structured finance,” is a dismal rip-off from start to finish. Consider the mentality of the hucksters who dreamed up “securitizing” subprime mortgages and selling them off as precious jewels in the secondary market. This was a blatant con job. How can the liabilities of “borrowers with bad credit” be traded to foreign investors and pension funds like they were valuable assets? And where were the regulators while this scam was going on?
Isn’t this sufficient evidence that the system is totally out of whack?
Wall Street avoids transparency like the plague. That is to be expected. But what about the government? It’s the government’s job to protect the investor and maintain the integrity of the system. Is that what Treasury Dept is doing or are they “LURING investors to buy debt issued by the rescue fund as part of the plan”? (Wall Street Journal)
“Luring”? Is that how Paulson sees it; like luring turkeys to the chopping block with a trail of breadcrumbs?
The idea of protecting the little guy has never occurred to anyone in the Bush administration. Their job is to shift wealth from one class to the other via equity bubbles and government bailouts — anything that advances the corporate agenda.
Presently, the banks are sitting on $200 billion in non-performing mortgage-backed securities (MBSs) and collateralized debt obligations. (CDOs) They are also holding another $300 billion in collateralized loan obligations (CLOs) from mergers and acquisitions that stalled after the Bear Stearns meltdown. If the present bailout doesn’t materialize, we’re likely to see bank closures and a plummeting stock market.
Shouldn’t the regulators have considered the probability of a crash before they allowed trillions of dollars of radioactive bonds to flood the market when no one had any idea of their real value? Wouldn’t that have been the prudent thing to do?
Now we know what they are worth. They’re worth nothing. That’s why the banks are running scared and refusing to put them up for auction. They’d rather sleaze them into a lofty-sounding superfund that masks their true value.
In the last two weeks the stock market soared on the news that the banks were reporting billions of dollars in losses. Investors were hoodwinked into believing the banks were being honest and had “come clean” about their financial condition. What a joke. In reality, the banks only reported roughly 5% of their potential losses; the rest were hidden in their off balance sheets operations.
Equities skyrocketed to new heights. Wall Street was euphoric.
Now we know the truth. It was all baloney.
The Wall Street Journal: “The new fund is designed to stave off what Citigroup and others see as a threat to the financial markets world-wide: the danger that dozens of huge bank-affiliated funds will be forced to unload billions of dollars in mortgage-backed securities and other assets, driving down their prices in a fire sale . . . . The ultimate fear: If banks need to write down more assets or are forced to take assets onto their books, that could set off a broader credit crunch and hurt the economy. It could make it tough for homeowners and businesses to get loans.”
It could “hurt the economy” and “make it tough for homeowners and businesses to get loans?” Ahhh, yes. It’s all clear now. The banks only cooked up this colossal bailout to make things better for us common people. How is it that we didn’t notice that before? Our problem is that we don’t see the magnanimity and altruism which drives the corporate agenda.
From the New York Times:
“The conduit (The bailout fund) is expected to start operating in 90 days and will stay in place for a few years until it has disposed of the assets it buys, according to people familiar with the negotiations. . . . To maintain its credibility with investors from whom it would raising money, the conduit will not buy any bonds that are tied to mortgages made to people with spotty, or subprime, credit histories. Rather, it will buy debt with the highest ratings — AAA and AA — and debt that is backed by other mortgages, credit card receipts and other assets.”
We already know about the problems with the ratings agencies and how they are in bed with the investment banks. We also know that the whole purpose of the new fund is to off-load mortgage-backed tripe which is no longer sellable on the market. What we didn’t know is that the New York Times eagerly provides the peppy public relations narrative to assist big business in dumping its failing assets.
New York Times: “The conduit will pay market prices for the securities it buys. But it remains unclear how officials will determine the price of some bonds that have not been actively traded since August, because the difference between what buyers are willing to pay and what sellers want has widened significantly.”
Of course, they’ll pay full price because they want to be “made whole” again. The truth is, however, that these derivatives will probably only fetch pennies on the dollar unless they get another Wall Street PR face-lift.
Christian Stracke, market analyst from the research firm CreditSights, said the effort appears to be “an attempt to soothe tense investors in the debt market, rather than to provide substantive relief to the worst-hit mortgage securities.”
Stracke added, “For me, this is more of a P.R. blitz.”
Bingo.
The announcement of the forthcoming Master-Liquidity Enhancement Conduit or M-LEC further underlines the gravity of the problems facing the banking system. The fund creates a “buyer of last resort” so that these dubious assets won’t be sold on the market at fire-sale prices.
Citigroup appears to be the greatest beneficiary of the current plan. They have a number of Enron-type SIVs that could be at risk.
Again, the problems that are surfacing in the banking sector today are the direct result of Greenspan’s loose monetary policies coupled with the dismantling of the regulatory regime that was created following the 1929 stock market crash. We are now back to Square 1. All of the various scams and swindles which permeated that hyper-inflated market are now back in full-force foreshadowing a steep decline in investor confidence, increased market manipulation, and an unavoidable economic calamity.
“Structured finance” has transformed US markets into a carnival sideshow. Productivity and real growth have been replaced with never-ending credit expansion and speculative abuses. Reckless monetary policies and the behemoth current account deficit have destabilized the global economy a set the stage for a fiscal Armageddon.
The subprime mortgage crisis and subsequent shrinking of asset-backed commercial paper (ABCP) has thrown a wrench in the funding of daily corporate operations. These are the harbingers of an impending recession. As mortgages continue to default at a record pace; the aftershocks will continue to rumble through the credit markets where subprime loans have been “securitized” into bonds and leveraged at maximum levels. It’s just one domino knocking down the next.
The financial system is at greater risk now than any time in the last 80 years. Regrettably, the only remedies coming from the Fed are more currency-destroying rate cuts or hundreds of billions of dollars in repos to remove mortgage-backed bonds from the banks’ balance sheets. Neither of these solutions addresses the critical issues; they do not stabilize the market, reinvigorate lending, or restore investor confidence. They are merely band-aids on a sucking chest-wound. They won’t stop the bleeding.
The Fed’s monetary policies promote financial speculation that inevitably leads to equity bubbles. Under Greenspan’s stewardship, the country has lurched from the 1990’s bond bubble, to the dot.com bubble, to the subprime meltdown, to the liquidity crisis, to the credit crunch — all engineered at the Federal Reserve with ancillary assistance from the charlatans in the banking industry.
An article in China Worker, “Credit Crunch threatens Global Downturn” summarizes our present predicament it like this:
“Financial globalization has rebounded on the system. Capitalist leaders boasted that the near total integration of financial markets across the globe would provide lenders and borrowers everywhere with instant access to a completely liquid money market. New types of financial securities and sophisticated derivatives would spread the risk of borrowing so widely that it would eliminate risk entirely. While economies were growing and bubbles inflating, it appeared that — through derivatives trading — losses would be widely diffused among speculators, reducing risk to very low levels. Not even the most astute financial analysts could predict what would happen in the event of recession. The unanswerable question was: Who would ultimately bear the risks arising from widespread defaults or bankruptcies? The veteran investor, Warren Buffet, warned that derivatives would prove to be ‘weapons of mass destruction’.
The fantasy of financial alchemy transforming high risk gambling into low risk money-making has now been shattered.”
The author is right. “Structured finance” is a fraud. Risk has not been eliminated. In fact, it has exploded and become a system-wide problem. The dead wood is everywhere.
The banks are being crushed by a debt-load they generated through “securitization”. They need to accept responsibility for their poor judgment (or greed?) and report their losses. The Super-Conduit is just a dodge to put off the unavoidable day of reckoning. The whole wretched plan should be scrapped. No amount of financial chicanery will eradicate billions of dollars in bad bets. It’s time for the banks to face the hangman.
Mike Whitney lives in Washington state. Read other articles by Mike.
This article was posted on Friday, October 19th, 2007 at 5:02 am and is filed under Economics, Capitalism, Housing and Finance. Send to a friend.
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Douglas D. said on October 19th, 2007 at 5:20 am #
Whatever happened to “personal responsibility”? These banks need to pull themselves up by their bootstraps! See, my friends, this is the “soft bigotry of low expectations”! The Fed is creating a dependency cycle that will trickle down from generation to generation.
Tyler said on October 19th, 2007 at 6:12 am #
Great article. Even though, according to Paulson, “No taxpayer money” will be used to fund this new vehicle, the fact that the fundwas created at the behest or with the encouragement of the Treasury Department certainly provides an implicit guarantee from the US Government-much like Fannie and Freddie. If /when this fund fails miserably, and becomes a drag on the banks, then in a year some could claim that this was an invention of the government, so it needs to be bailed out to prevent it from destroying major banks.

Era of Global Financial Instability

2007-09-21T12:07:00.000-07:00

The Era of Global Financial Instability

Written by
Friday, 21 September 2007

by Mike Whitney

"Give me control over a nation's currency and I care not who makes its laws."
-Baron M.A. Rothschild

Wall Street loves cheap money. That’s why traders were celebrating on Tuesday when Fed chief Ben Bernanke announced that he’d drop interest rates from 5.25% to 4.75%. The stock market immediately zoomed skyward adding 336 points before the bell rang. The next day the giddiness continued. By mid-morning the Dow was up another 110 points and headed for the stratosphere.

Everyone on Wall Street loves Bernanke. He brings them candy and sweets and lets the American worker pay the bill.So far, the scholarly-looking Bernanke has shown that he is no different than his predecessor Alan Greenspan. Facing his first crisis, the new Fed chief chose to reward his fat-cat friends at the hedge funds and investment banks by savaging the dollar. As soon as he announced his plan to cut the Fed funds rate by .50 basis points; gold soared to $736 per ounce, oil shot up to $82 per barrel, and the euro climbed to a new high of $1.40. These are all the predictable signs of inflation. Food and energy prices will surely follow. The bottom line is that the investor class has been bailed out at the expense of everyone else who trades in dollars.Bernanke invoked the “Greenspan put”, which means that he used his power to protect his friends from the losses they should have incurred from their bad bets. Now, the big market players know that he can be counted on to bail them out whenever they make poor investment decisions. He’s also lived up to his nickname, “Helicopter Ben”; ready to deal with every new calamity by tossing trillions of freshly-minted US greenbacks into the jet-stream over the NYSE so elated traders can jack-up their PEs and fatten their bottom line . We think Bernanke should abandon the helicopter altogether and personally deliver pallet-loads of $100 bills to Wall Street’s doorstep, just like Bush does with contractors in Iraq. That way the fund managers can keep stoking the market with cheap cash without dawdling at the Fed’s Discount Window.

Despite the merriment on Wall Street, there is a downside to Bernanke’s actions. The Fed chief has shown foreign investors that he WILL NOT DEFEND THE DOLLAR. That is a powerful message to anyone who hopes to profit by investing in the US. It alerts them to the fact that the “strong dollar” policy is a fraud and that they’re better off getting out of US Treasuries and dollar-backed assets. Apparently, many have already gotten the message. Last month, foreign central banks and investors dumped $9.4 billion of US Treasuries and bonds compared to net purchases in June of $24.7 billion. That means that foreigners have stopped buying our debt which is currently $800 billion per year. That’s the last leg holding up the wobbly greenback. The dollar will undoubtedly fall precipitously.So, why would Bernanke weaken the dollar even more by lowering rates 50 basis points?Is he crazy or did he panic?We don’t know, but we do know that this is the beginning of Capital flight — -the sudden exodus of foreign investment from US debt and equities. Most likely, it will be accompanied by the hissssing sound of gas escaping from a punctured equity bubble followed quickly by a painful round of deflation, massive unemployment and the gnashing of teeth.

The size of the current account deficit, which peaked in 2005 at 6.8% of GDP, has dropped to 5.5% by the end of the second quarter of 2007. This is an indication that the maxed-out American consumer is running out of gas and that our foreign trading partners are slowing their intake of US dollars. Now comes the painful part. As the trade deficit shrinks, foreign investment will become scarcer and the dollar will tumble. That means interest rates will have to go up and American’s will face an agonizing economic downturn.This is all part of the Federal Reserve’s master-plan for reorganizing the US economy and political system. Since Bush took office in 2000, the dollar has been deliberately weakened; losing more than 40% of its value when compared to the euro. (from $.85 per euro in 2000 to $1.40 per euro in 2007) It has fared even worse against gold. The Fed “rubber stamped” Bush’s $400 billion per year tax breaks for the wealthy and looked on approvingly while $4 trillion of national wealth was transferred to foreign investors and banks via the current account deficit (the result of currency deregulation) Also, we now know that Alan Greenspan supported the plan to invade Iraq. He even shamelessly admitted that the war was really about oil which suggests that he was attempting to preserve the dollar’s link to petroleum. That linkage is what maintains the dollar’s position as the world’s “reserve currency”. These things indicate that the Central Bank plays a vital role in the policy decisions which are reshaping American life. We assume that the Fed’s members are equally supportive of the repressive police-state measures which have been put in place in anticipation of problems that will undoubtedly arise from the economic meltdown they have painstakingly engineered.The rate cuts tell us that the Fed is now planning to balance the current account deficit on the backs of the American middle class. Prices at the supermarket and gas pump will rise immediately; probably within the next few months if not weeks. It will be harder to get credit. Wages and living standards will decline. Stocks will fall. Consumer spending will shrivel.Surprisingly, Bernanke’s rate cuts don’t even address the underlying problems they are supposed to cure. Millions of homeowners who took out subprime and Alt-a loans are headed for foreclosure. Only a small percentage of these will benefit from the rate cuts and avoid default because of lower “resets” on their loans. Most of them will not qualify for refinancing UNDER ANY TERMS because they don’t meet the new standards for securing a loan. Banks and mortgage companies have become much stricter in their lending practices.
Paul Grignon's 47-minute animated presentation of "Money as Debt" tells in very simple and effective graphic terms what money is and how it is being created. It is a painless but hard-hitting educational tool and for all groups concerned with the present unsustainable monetary system in Canada and the United States.

The rate cuts don’t really help the banks or hedge funds either. Their stocks may lurch upward for a day or two, but that won’t last. Money is getting tighter and spending is down. It’s not a good time to be holding hundreds of billions in mortgage-backed liabilities (CDOs) which may have been levered many times their original-value. There’s no market for these CDOs. They’re turkeys. The debt will either have to be written off or the companies will be forced into bankruptcy.Rate cuts won’t stem the tide of insolvencies or fix the deeply-ingrained problems in the financial markets. All they will do is forestall the impending recession by sustaining abnormal levels of liquidity. But as consumer spending contracts and unemployment continues to rise; the Fed’s “band-aid” approach to these systemic problems will prove to be ineffective. Bernanke is sacrificing the one thing he’ll need most in the bumpy months ahead; his credibility.As economist and author Henry Liu says:

“A market that catches on to the impotence of central-bank intervention can go into free fall.”The most compelling argument for interest rate cuts was made by economist Martin Feldstein in a Wall Street Journal article “Liquidly Now”. Feldstein summarized the issue like this:

“Three separate but related forces are now threatening economic activity: a credit market crisis, a decline in house prices and home building, and a reduction in consumer spending. These developments compound the general weakening of the economy earlier in the year, marked by slowing employment growth and declining real spendable income.”“The subprime mortgage defaults have triggered a widespread flight from risky assets, with a substantial widening of all credit spreads, and a general freezing of credit markets. Official credit ratings came under suspicion. Investors and lenders became concerned that they did not know how to value complex risky assets.In some recent weeks credit became unavailable. Loans to support private equity deals could not be syndicated, forcing the banks to hold those loans on their own books. Banks are also being forced to honor credit guarantees to previously off-balance-sheet conduits and other back-up credit lines, further reducing the banks' capital available to support credit of all types.The inability of credit markets to function properly will weaken the overall economy in the coming months. And even when the credit market crisis has passed, the wider credit spreads and increased risk aversion will be a damper on economic activity.In addition to these general credit market problems, the decline of house prices and home building will be a growing drag on the economy….Falling house prices would not only cause further declines in home building but would also shrink household wealth and thus consumer spending.”Feldstein has a good understanding of the problem, but backpedals on the rsolution. He says:
“Fed action to lower interest rates cannot solve the credit market problems, but it would help the economy: by stimulating the demand for housing, autos and other consumer durables; by encouraging a more competitive dollar to stimulate increased net exports; by raising share prices to increase both business investment and consumer spending; and by freeing up spendable cash for homeowners with adjustable-rate mortgages”.Feldstein paradoxically wants rate cuts even though he admits that “lower interest rates cannot solve the credit market problems” but will just stimulate more wasteful “consumer spending”.That’s not a cure. That’s just more Greenspan snake oil.“Too much liquidity” is the problem not the solution. The reason the markets are so volatile and likely to implode at any minute is because every asset-class has been foolishly inflated by a monetary policy that followed Feldstein’s prescription. Now he wants to avoid the consequences of these misguided policies by reflating the bubble and destroying the dollar in the process. It’s a bad idea. The Fed’s cuts coincide with the dismal earnings reports from Wall Street’s investment giants; Lehman Brothers, Morgan Stanley, Bear Stearns and Goldman Sachs. The four banks have taken a combined 22% haircut in the last quarter and are expected to sustain heavy losses from the billions of dollars of subprime CDOs they’ll have to either downgrade or write-off. So far, Bernanke’s rate cuts have diverted attention from the grim news and falling profits from America’s investment core.The big financials aren’t the only one’s feeling the pinch from the housing meltdown either. There are many others including Bank of America that announced “unprecedented dislocations” in credit markets will have a “meaningful impact” on third-quarter results at its corporate investment bank. “Chief Financial Officer Joe Price told investors at a conference in San Francisco, ‘These are quite challenging financial times, and I cannot remember when credit markets in particular have been as volatile and unpredictable as they have been for the last few months.”’ (Bloomberg News) Bernanke’s rate cuts are “thin gruel” for the banks bottom line, but they do offer a welcome distraction from the relentless drumbeat of bad economic news. The subprime sarcoma has spread to every part of the financial markets. It’s not just the steady up tick of foreclosures and mushrooming real estate inventory. The banks are also hoarding capital to cover their losses on unmarketable CDOs and leveraged buyouts (LBOs) which means that new mortgages will slow to a crawl even to credit-worthy applicants. An article in Bloomberg News gives us some idea of how quickly the market for housing-related bonds has deteriorated:

“Sales of US asset-backed securities, such as bonds that repackage subprime loans or credit card debts as well as collateralized debt obligations., FELL73% FROM A YEAR EARLIER to $30 billion last month, according to estimates from analysts at Deutsche Bank AG”. (Bloomberg News)Bernanke is just prolonging the pain by not allowing the market to complete its cycle so that bad debts to be written off and industry can retool for the future. He’s buying time for his banker-friends, but doing considerable damage to the dollar in the process. Jim Rogers, the chairman of Beeland Interests Inc. summed up the rate cuts like this:

"Every time the Fed turns around to save its friends on Wall Street, it makes the situation worse. The dollar's going to collapse, the bond market's going to collapse. There's going to be a lot of problems in the U.S.''Rogers is not alone in his conclusions.Even foreign leaders, like Venezuelan President Hugo Chavez, have commented recently on the worrisome state of US markets. Three days ago Chavez said on public television that we may be facing a "global financial earthquake" as the result of "irresponsible" US economic policies. Chavez quoted Nobel Laureate Joseph Stiglitz’s warning that we may be facing a major economic disaster which could lead to “widespread misery, hunger and severe unrest. And the United State is to blame.”Chavez added that the Bush administration "has had to inject $300 US billion into the private banks this month to avoid a collapse of the dollar and the world economy ….The dollar is going down, they don't see that it isn't supported by reality” and because it is "because its fiscal deficit is the largest in history."Chavez’s predictions appear to be accurate as we can see that gold has suddenly skyrocketed while the dollar continues to fall.The firestorm that began with the Fed’s low interest rates in 2002-2003 and evolved into the subprime-lending crisis of 2006-2007 is now threatening the stability of the entire financial system and the broader global economy. The reason for this is that mortgage debt is the foundation upon which all manner of bizarre-sounding debt-instruments are now resting. These debt-instruments (derivatives) greatly magnify the leverage on the underlying asset which is often is nothing more than a shaky subprime loan.According to Satyajit Das, a respected authority on derivatives trading, “A single dollar of "real" capital supports $20 to $30 of loans. This spiral of borrowing on an increasingly thin base of real assets, writ large and in nearly infinite variety, ultimately created a world in which derivatives outstanding earlier this year stood at $485 trillion — or eight times total global gross domestic product of $60 trillion.” (Are We Headed for an Epic Bear Market” Jon Markman)We are now seeing the first signs that this enormous debt-bubble is beginning to unwind. There’s very little the Fed can do to affect the inevitable crash that (we believe) they engineered. As defaults in housing continue to rise; the swaps and derivatives in the secondary market will implode. Trillions in market capitalization will vanish in a flash.US GDP for the last 6 years has largely depended on transactions involving the exchange of massively over-levered assets.

Production in the real economy has remained flat. The investment banks are at the epicenter of this controversial new system called “structured finance”. We continue to believe that the banks that depended on mortgage-backed securities (MBSs) and collateralized debt obligations (CDOs) (as well as asset-backed commercial paper) for the bulk of their income; are in deep trouble. Robert E. Lucas alluded to potential bank-woes in an article in the Wall Street Journal,

“Mortgages and Monetary Policy”:“There is an immediate risk of a payments crisis, a modern analogue to an old-fashioned bank run. Many institutions — not just banks – HAVE PAYMENT OBLIGATIONS THAT ARE FAR IN EXCESS OF THE RESERVES TO WHICH THEY HAVE IMMEDIATE ACCESS. Against these obligations they hold short-term securities that they believed could be liquidated on short notice at little cost. If some of these securities turn out not to be liquid in this sense (and especially if no one is sure who holds them) then everyone wants to get into Treasury bonds.”It‘s rare when we are in agreement with the far-right viewpoints of the WSJ’s Editorial page, but in this case, Lucas nailed it. The banks have “obligations that are far in excess of the reserves to which they have immediate access.” This is a direct result of the new market architecture of “structured finance” which stacks debt on debt until the whole system is pushed to the breaking point. Low interest rates can’t fix this “systemic” problem. Only fiscal policy can soften the blow of a deflating credit bubble. Economist Henry Liu offers this constructive “New Deal-type” proposal which is a sensible (and ethical) way to address the prospect of growing unemployment and increasing economic hardship for the middle and lower classes: “A case can be made that what is needed under current conditions is not more cheap money from the Fed, but full employment with rising wages by government fiscal stimulants to boost consumer demand. The US government should make use of the money that the banks cannot find worthy borrowers to lend to, with money-cautious investors seeking to lend to the government, creating jobs for infrastructure rehabilitation and upgrading education to get the economy moving again off the destructive track of privatized systemic financial manipulation.” (“Either Way, It could be an Unkind Cut” Henry C K Liu, Asia Times)Liu is right. We should be enacting the policies which reflect our values on social justice and the equitable distribution of wealth. Instead, the system is being manipulated by an oligarchy of racketeers who have savaged the currency, drained our treasury, and paved the way for a painful cycle of deflation.

The US consumer is now being blamed for the massive current account deficit; as if shopping at Walmart for the lowest prices was a crime. But the Fed is the real culprit. They have been opposed to protective tariffs or currency regulation from the very beginning. No country in the history of the world has ever allowed its industrial base to be so ruthlessly decimated (offshoring, outsourcing, factory closures) just to feed the insatiable avarice of its criminal elites.The current account deficit is the logical upshot of “free trade”. And, free trade is the Orwellian moniker used to describe the millions of decent paying jobs which are sacrificed on the altar of globalization.

The workers had no part in creating this destructive self-aggrandizing system.Nor did they have any say-so in the design of the modern market, which is often referred to as “structured finance”. Structured finance has been promoted as a way of using capital more efficiency by distributing risk more evenly throughout the system. In fact, it has turned out to be a colossal swindle which is now threatening to break the banks and bring the stock market crashing down. It is essentially mortgage-laundering scheme concocted by the investment banks; winked-at by the so-called regulators, facilitated by the ratings agencies, and exploited by the hedge funds. The victims of this scam are the insurance companies, foreign investors, pension funds and over-leveraged homeowners. Their losses are liable to soar into the trillions of dollars.Fed chief Alan Greenspan enthusiastically endorsed every dodgy “structured finance” idea; including subprime lending, ARMs, Mortgage-backed securities, currency deregulation, credit expansion and structural changes to the financial services industry. These are the pavers on the road to perdition carefully put in place by the Federal Reserve.Author Gabriel Kolko summed up “structured finance” in a recent article “The Predicted Financial Storm Has Arrived”:“We are at an end of an era…Now begins global financial instability. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level…..

Greed's only bounds are what makes money. Existing international institutions-of which the IMF is the most important — or well-intentioned advice will not change this reality.”The people must take over control of their own currency again.

The Federal Reserve must be abolished.

Shocked, Shocked

2007-09-20T11:15:00.000-07:00

Shocked, Shocked! James Howard Kunstler

Written by
Thursday, 20 September 2007
by James Howard Kunstler

Alan Greenspan's memoirs are being flogged across the airwaves, bandwidths and printing presses, and the cohort of those who comment on public affairs in these media are shocked by the Maestro's confessions — first, that a housing bubble emerged out of his leadership in the banking sector, and second that the Iraq war is about oil. As usual, they're getting it all wrong — about as wrong as Al himself got it. But that is the way of things in this age of cultural dissipation and gross cognitive dissonance. Greenspan claims he had no idea that his cutting of interest rates to near zero would produce any irregularities in the US economy. Apparently he hadn't noticed that the Big Fund Boyz called him "Easy Al" for a reason. Or that when you introduce nearly free "money" (as in "available for lending") into a system of financial trade, the recognition of risk tends to evaporate. As the nation's chief bank regulator, Greenspan also apparently failed to notice the upsurge in dodgy lending practices previously only seen among mafia loan sharks, drug dealers, or twelve-year-olds playing Monopoly.But the really funny part of all this is that the media columnists are acting as though the American public got hoodwinked by Al. Which raises the question: just what the fuck was the public thinking when they bought half-million dollar houses on salaries under 60-K, taking out no-money-down, interest-optional balloon mortgages and other tricked-up contracts? The answer is: they walked into these arrangements with their eyes open because they thought they could get something for nothing. They thought the trend of steeply rising house prices would continue indefinitely and enable them to wiggle free of any hazard by flipping their houses to an endless supply of greater fools who would be there waiting to turn the very same trick. And the smoothies downstream in the mortgage and banking rackets were no less guided by avarice when they cooked up their formulas for bundling half-baked mortgages into tranches of tradeable securities. Easy Al may have failed to notice what was going on here, but then so did everybody else from The Wall Street Journal to the Securities and Exchange Commission.This, of course, represents an insidious psychology. It could only happen in a culture that has come off the rails mentally, so to speak, as ours has in the sense that nobody has any sense of consequence, neither the leaders nor those who affect to follow the leaders. The leading religion in America is not evangelical Christianity, it is the worship of unearned riches, and its golden rule is the belief that is is possible to get something for nothing. Its holy shrines are Las Vegas and Wall Street. (And, by the way, has anybody heard the evangelical Christians complain about Las Vegas? They complain about a lot of things, but are themselves among the greatest believers in unearned riches — given their preference for prayer over earnest effort in the service of solving life's problems.)
No, the American public, including the cheerleaders in the media, have only themselves to blame for the bitter harvest now underway in the asset and credit markets. And thus it would be a salutary thing for Baby Jeezus, or the forces of nature, or whatever powers guide the universe, to now kick the shit out of them, so to speak, financially, because that is exactly what the American public is full of, from top to bottom, from George W. Bush at his lonely desk on Pennsylvania Avenue to the pitiful, bankrupt householders of Orange County and Boca Raton.Now, as to the shock of Al's revelation that the Iraq war is about oil — the media and the public have got this all wrong, too. The logic here seems to be that because the Iraq war is about oil it is therefore unnecessary, optional, a mistake, an indulgence, something we should not dirty our hands in. In fact, the Iraq war is not about oil, per se, so much as it is about America's behavior here at home, about the choices we make for how we live on this continent. None of those who complain most loudly about our military presence in Iraq have advanced any proposals for reforming how we live here — and hence for our enslavement to oil, much of the world's remaining supply of which happens to be in the neighborhood of Iraq. When these complainers start complaining about the ubiquitous acceptance of suburban sprawl and abject car-dependency — and this includes the environmental boy scouts out there who want to get merit badges for buying hybrid cars — then they will deserve to be taken seriously. Until then, the American people have got exactly the grinding war that they deserve. Let them whine about it all the way to the Nascar tracks, and let them console themselves with giant plastic bottles of Pepsi Cola and buckets of chicken raised on corn grown with oil byproducts.On CBS's "60-Minutes" show last night, Greenspan, in his new role as a private sector economic consultant made predictions for the coming months in the US economy. He declared that the financial sector would get over the current credit squeeze as if it were a mild case of indigestion brought on by one too many fried won-tons at the all-you-can-eat buffet, a mere burp, allowing the public to move on to the crab Rangoon and a helping of General Tsao's chicken. This gets back to the previous point about the Iraq war and oil in particular. Al doesn't get it. CBS's sycophant reporters don't get it. Nobody gets it. We are entering the zone of the long emergency in which the primary resource needed to run the industrial economies will become scarce, expensive, and profoundly destabilizing to markets and to normal life, such as it is known in this country. And the current problem in the markets is a reflection of the resource bankruptcy we are facing. Our problems are not about credit, they are about permanent insolvency. In his old age, Alan Greenspan's face — once darkly handsome in his youthful years as a jazz musician — has taken on the strange appearance of a circus clown. Something about the way his lips have settled into a kind of thick fatuous smile, even when he is apparently not amused by anything. Is it one of God's clever little tricks to leave him looking like a clown in his valedictory years, or has his face just resolved into the perfect embodiment of leadership for a clown nation?

U.S. Banks Brace for Storm Surge as Dollar and Credit System Reel

2007-09-18T11:40:00.000-07:00

U.S. Banks Brace for Storm Surge as Dollar and Credit System Reel

Tuesday, 18 September 2007
Written by Mike Whitney

By now, you’ve probably seen the photos of the angry customers queued up outside of Northern Rock Bank waiting to withdraw their money. This is the first big run on a British bank in over a century. It’s lost an eighth of its deposits in three days. The pictures are headline news in the U.K. but have been stuck on the back pages of U.S. newspapers. The reason for this is obvious. The same Force 5 economic-hurricane that just touched ground in Great Britain is headed for America and gaining strength on the way. On Monday night, desperately trying to stave off a wider panic, the British government issued an emergency pledge to Northern Rock savers that their money was safe. The government is trying to find a buyer for Northern Rock.This is what a good old fashioned bank run looks like. And, as in 1929, the bank owners and the government are frantically trying to calm down their customers by reassuring them that their money is safe. But human nature being what it is, people are not so easily pacified when they think their savings are at risk. The bottom line is this: The people want their money, not excuses.But Northern Rock doesn’t have their money and, surprisingly, it is not because the bank was dabbling in risky subprime loans. Rather, NR had unwisely adopted the model of “borrowing short to go long” in financing their mortgages just like many of the major banks in the U.S. In other words, they depended on wholesale financing of their mortgages from eager investors in the market, instead of the traditional method of maintaining sufficient capital to back up the loans on their books.It seemed like a nifty idea at the time and most of the big banks in the US were doing the same thing. It was a great way to avoid bothersome reserve requirements and the loan origination fees were profitable as well. Northern Rock’s business soared. Now they carry a mortgage book totaling $200 billion dollars.$200 billion! So why can’t they pay out a paltry $4 or $5 billion to their customers without a government bailout?It’s because they don’t have the reserves and because the bank’s business model is hopelessly flawed and no longer viable. Their assets are illiquid and (presumably) “marked to model”, which means they have no discernible market value. They might as well have been “marked to fantasy”,it amounts to the same thing. Investors don’t want them. So Northern Rock is stuck with a $200 billion albatross that’s dragging them under.A more powerful tsunami is about to descend on the United States where many of the banks have been engaged in the same practices and are using the same business model as Northern Rock. Investors are no longer buying CDOs, MBSs, or anything else related to real estate. No one wants them, whether they’re subprime or not. That means that US banks will soon undergo the same type of economic gale that is battering the U.K right now. The only difference is that the U.S. economy is already listing from the downturn in housing and an increasingly jittery stock market. That’s why Treasury Secretary Henry Paulson rushed off to England yesterday to see if he could figure out a way to keep the contagion from spreading.Good luck, Hank.It would interesting to know if Paulson still believes that “This is far and away the strongest global economy I’ve seen in my business lifetime”, or if he has adjusted his thinking as troubles in subprime, commercial paper, private equity, and credit continue to mount?
For weeks we’ve been saying that the banks are in trouble and do not have the reserves to cover their losses. This notion was originally pooh-poohed by nearly everyone. But it’s becoming more and more apparent that it is true. We expect to see many bank failures in the months to come. Prepare yourself. The banking system is mired in fraud and chicanery. Now the schemes and swindles are unwinding and the bodies will soon be floating to the surface.“Structured finance” is touted as the “new architecture of financial markets”. It is designed to distribute capital more efficiently by allowing other market participants to fill a role which used to be left exclusively to the banks. In practice, however, structured finance is a hoax; and undoubtedly the most expensive hoax of all time. The transformation of liabilities (dodgy mortgage loans) into assets (securities) through the magic of securitization is the biggest boondoggle of all time. It is the moral equivalent of mortgage laundering. The system relies on the variable support of investors to provide the funding for pools of mortgage loans that are chopped-up into tranches and duct-taped together as CDOs (collateralized debt obligations). It’s madness; but no one seemed to realize how crazy it was until Bear Stearns blew up and they couldn’t find bidders for their remaining CDOs. It’s been downhill ever since.The problems with structured finance are not simply the result of shabby lending and low interest rates. The model itself is defective.John R. Ing provides a great synopsis of structured finance in his article, “Gold: The Collapse of the Vanities”:"The origin of the debt crisis lies with the evolution of America's financial markets using financial engineering and leverage to finance the credit expansion…. Financial institutions created a Frankenstein with the change from simply lending money and taking fees to securitizing and selling trillions of loans in every market from Iowa to Germany. Credit risk was replaced by the "slicing and dicing" of risk, enabling the banks to act as principals, spreading that risk among various financial institutions….. Securitization allowed a vast array of long term liabilities once parked away with collateral to be resold along side more traditional forms of short term assets. Wall Street created an illusion that risk was somehow disseminated among the masses. Private equity too used piles of this debt to launch ever bigger buyouts. And, awash in liquidity and very sophisticated algorithms, investment bankers found willing hedge funds around the world seeking higher yielding assets. Risk was piled upon risk. We believe that the subprime crisis is not a one off event but the beginning of a significant sea change in the modern-day financial markets.”The investment sharks who conjured up “structured finance” knew exactly what they were doing. They were in bed with the ratings agencies — -off-loading trillions of dollars of garbage-bonds to pension funds, hedge funds, insurance companies and foreign financial giants. It’s a swindle of epic proportions and it never would have taken place in a sufficiently regulated market.When crowds of angry people are huddled outside the banks to get their money, the system is in real peril. Credibility must be restored quickly. This is no time for Bush’s “free market” nostrums or Paulson’s soothing bromides (he thinks the problem is “contained”) or Bernanke’s feeble rate cuts. This requires real leadership.The first thing to do is take charge, alert the public to what is going on and get Congress to work on substantive changes to the system. Concrete steps must be taken to build public confidence in the markets. And there must be a presidential announcement that all bank deposits will be fully covered by government insurance.The lights should be blinking red at all the related government agencies including the Fed, the SEC, and the Treasury Dept. They need to get ahead of the curve and stop thinking they can minimize a potential catastrophe with their usual public relations mumbo jumbo.Last week, an article appeared in the Wall Street Journal, “Banks Flock to Discount Window”. (9-14-07) The article chronicled the sudden up-tick in borrowing by the struggling banks via the Fed’s emergency bailout program, the “Discount Window”:“Discount borrowing under the Fed’s primary credit program for banks surged to more than $7.1 billion outstanding as of Wednesday, up from $1 billion a week before.”Again we see the same pattern developing; the banks borrowing money from the Fed because they cannot meet their minimum reserve requirements.WSJ: “The Fed in its weekly release said average daily borrowing through Wednesday rose to $2.93 billion.”$3 billion.Traditionally, the “Discount Window” has only been used by banks in distress, but the Fed is trying to convince people that it’s really not a sign of distress at all. It’s “a sign of strength”. Baloney. Banks don’t borrow $3 billio unless they need it. They don’t have the reserves. Period.The real condition of the banks will be revealed sometime in the next few weeks when they report earnings and account for their massive losses in “down-graded” CDOs and MBSs.Market analyst Jon Markman offered these words of advice to the financial giants"Before they (the financial industry) take down the entire market this fall by shocking Wall Street with unexpected losses, I suggest that they brush aside their attorneys and media handlers and come clean. They need to tell the world about the reality of their home lending and loan securitization teams' failures of the past four years — and the truth about the toxic paper that they've flushed into the world economic system, or stuffed into Enron-like off-balance sheet entities — before the markets make them walk the plank.”….” Since government regulators and Congress have flinched from their responsibility to administer "tough love" with rules forcing financial institutions to detail the creation, securitization and disposition of every ill-conceived subprime loan, off-balance sheet "structured investment vehicle," secretive money-market "conduit" and commercial-paper-financing vehicle, the market will do it with a vengeance."Good advice. We’ll have to wait and see if anyone is listening. The investment banks may be waiting until Tuesday hoping that Fed-chief Ken Bernanke announces a cut to the Fed’s fund rate that could send the stock market roaring back into positive territory.But interest rate cuts do not address the underlying problems of insolvency among homeowners, mortgage lenders, hedge funds and (potentially) banks. As market-analyst John R. Ing said, “A cut in rates will not solve the problem. This crisis was caused by excess liquidity and a deterioration of credit standards….A cut in the Fed Fund rate is simply heroin for credit junkies.”The cuts merely add more cheap credit to a market that that is already over-inflated from the ocean of liquidity produced by former-Fed chief Alan Greenspan. The housing bubble and the credit bubble are largely the result of Greenspan’s misguided monetary policies. (For which he now blames Bush!) The Fed’s job is to ensure price stability and the smooth operation of the markets, not to reflate equity bubbles and reward over-exposed market participants.It’s better to let cash-strapped borrowers default than slash interest rates and trigger a global run on the dollar. Financial analyst Richard Bove says that lower interest rates will do nothing to bring money back into the markets. Instead, lower interest rates will send the dollar into a tailspin and wreak havoc on the job market.“There is no liquidity problem, but a serious crisis of confidence," Bove said:"In a financial system where there is ample liquidity and a desire for higher rates to compensate for risk, the solution is not to create more liquidity and lower the rates that are available to compensate for risk. ... (The Fed) cannot reduce fear by stimulating inflation…"It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value. By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs. It will crash the currency, stimulate inflation, and weaken the economy and the job markets".Bove is right. The people and businesses that cannot repay their debts should be allowed to fail. Further weakening the dollar only adds to our collective risk by feeding inflation and increasing the likelihood of capital flight from American markets. If that happens; we’re toast.Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. If Bernanke cuts rates, we’re likely to see oil at $125 per barrel by next spring.Inflation is soaring. The government statistics are thoroughly bogus. Gold, oil and the euro don’t lie. According to economist Martin Feldstein, “The falling dollar and rising food prices caused market-based consumer prices to rise by 4.6 per cent in the most recent quarter.” (WSJ)That’s 18.4 per cent a year, and yet Bernanke is still considering cutting interest rates and further fueling inflation.What about the American worker whose wages have stagnated for the last six years? Inflation is the same as a pay-cut for him. And how about the pensioner on a fixed income? Same thing. Inflation is just a hidden tax progressively eroding his standard of living. .Bernanke’s rate cut may be boon to the “cheap credit” addicts on Wall Street, but it’s the death-knell for the average worker who is already struggling just to make ends meet.No bailouts. No rate cuts. Let the banks and hedge funds sink or swim like everyone else. The message to Bernanke is simple: “It’s time to take away the punch bowl”.The inflation in the stock market is just as evident as it is in the price of gold, oil or real estate. Economist and author Henry Liu demonstrates this in his article “Liquidity Boom and the Looming Crisis”:"The conventional value paradigm is unable to explain why the market capitalization of all US stocks grew from $5.3 trillion at the end of 1994 to $17.7 trillion at the end of 1999 to $35 trillion at the end of 2006, generating a geometric increase in price earnings ratios and the like. Liquidity analysis provides a ready answer".(Asia Times)Market capitalization zoomed from $5.3 trillion to $35 trillion in 12 years? Why?Was it due to growth in market-share, business expansion or productivity?No. It was because there were more dollars chasing the same number of securities; hence, inflation. If that is the case, then we can expect the stock market to fall sharply before it reaches a sustainable level. As Liu says, “It is not possible to preserve the abnormal market prices of assets driven up by a liquidity boom if normal liquidity is to be restored.” Eventually, stock prices will return to a normal range.Bernanke should not even be contemplating a rate cut. The market needs more discipline not less. And workers need a stable dollar. Besides, another rate cut would further jeopardize the greenback’s increasingly shaky position as the world’s “reserve currency”. That could destabilize the global economy by rapidly unwinding the U.S. massive current account deficit. The International Herald Tribune summed up the dollar’s problems in a recent article, "Dollar's Retreat Raises Fear of Collapse.""Finance ministers and central bankers have long fretted that at some point, the rest of the world would lose its willingness to finance the United States' proclivity to consume far more than it produces - and that a potentially disastrous free-fall in the dollar's value would result."The latest turmoil in mortgage markets has, in a single stroke, shaken faith in the resilience of American finance to a greater degree than even the bursting of the technology bubble in 2000 or the terror attacks of Sept. 11, 2001, analysts said. It has also raised prospect of a recession in the wider economy."This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar".Other experts and currency traders have expressed similar sentiments. The dollar is at historic lows in relation to the basket of currencies against which it is weighted. Bernanke can’t take a chance that his effort to rescue the markets will cause a sudden sell-off of the dollar.The Fed chief’s hands are tied. Bernanke simply doesn’t have the tools to fix the problems before him. Insolvency cannot be fixed with liquidity injections nor can the deeply-rooted “systemic” problems in “structured finance” be corrected by slashing interest rates. These require fiscal solutions, congressional involvement, and fundamental economic policy changes.Rate cuts won’t help to rekindle the spending spree in the housing market either. That charade is over. The banks have already tightened lending standards and inventory is larger than anytime since they began keeping records. The slowdown in housing is irreversible as is the steady decline in real estate prices. Trillions in market capitalization will be wiped out. Home equity is already shrinking as is consumer spending connected to home-equity withdrawals.The bubble has popped regardless of what Bernanke does. The same is true in the clogged Commercial Paper market where hundreds of billions of dollars in short-term debt is due to expire in the next few weeks. The banks and corporate borrowers are expected to struggle to refinance their debts but, of course, much of the debt will not roll over. There will be substantial losses and, very likely, more defaults.Bernanke can either be a statesman — and tell the country the truth about our dysfunctional financial system which is breaking down from years of corruption, deregulation and manipulation — or he can take the cowards-route and buy some time by flooding the system with liquidity, stimulating more destructive consumerism, and condemning the nation to an avoidable cycle of double-digit inflation.We’ll know his decision soon enough.
Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com

Spectre of the Great Depression haunts America's top banker

2007-09-17T14:20:00.000-07:00

Spectre of the Great Depression haunts America's top banker

He made his name on campus; now Fed chief Ben Bernanke must pluck the global economy from the abyss, writes Heather Stewart Sunday September 16, 2007The Observer
Ben Bernanke, the Federal Reserve chairman, is like a man who, after spending a lifetime playing with train sets, finally gets to drive the real thing - only to find it hurtling towards the edge of a cliff. Having honed his reputation in Ivy League classrooms, analysing the links between central banks and the real world, Bernanke now has the challenge of guiding the US economy through its most serious crisis for many years.

On Tuesday, under extraordinary scrutiny, Bernanke and his colleagues on the Fed's decision-making board will hold their regular meeting to set interest rates. Investors on Wall Street and around the world, and politicians in Washington, are pinning their hopes on the 53-year-old former Princeton professor preventing the world's biggest economy from heading into recession.
'One of Bernanke's main claims to academic fame is his study of the Great Depression, and how the failure to respond to the collapse of financial institutions turned a market crash into a bad economic problem,' says Andrew Scott, of London Business School. 'From that point of view, he's a fantastic person to have in charge.'
In Bernanke's analysis, the Fed was to blame for the Depression, for failing to realise the enormousness of the situation facing it. He won't want today's Fed to make that mistake - and is almost certain to heed Wall Street's squeals this week by cutting rates, perhaps by as much as half a percentage point. But, with many of the respected blue chip financial institutions lumbered with billions of dollars of toxic mortgage debts, bundled up in illiquid and fearsomely complex packages, the fallout from the credit crunch will be felt for many months, whatever Bernanke's response.
Hank Paulson, the US Treasury Secretary, has warned that the current turmoil will take longer to resolve than the market pain that followed the Russian debt default in the late 1990s, or the Latin American credit crisis in the 1980s.
Bernanke was appointed last year, after less than a year as chairman of George Bush's Council of Economic Advisers, which many observers had seen as probation for the Fed job. During his time at the White House he made few headlines - although the President was apparently much amused by his donnish penchant for wearing pale socks with dark suits.
Few observers could quibble with his impeccable academic CV; but there was some disquiet, on Wall Street at least, about his inflation-fighting credentials. He had been nicknamed 'helicopter Ben' after a speech in 2002 when he warned that the Fed should be alert to the risk of deflation, reminding his audience of Milton Friedman's proposal of a 'helicopter drop' of free cash, to keep prices from falling. This led some Fed-watchers to fret he was an interest-rate dove, more worried about deflation than inflation.
The other doubt expressed by investors was that as an academic, not a money man, he didn't possess the sure touch of his revered predecessor Alan Greenspan with either Wall Street or the White House. Less than a hundred days after his appointment, in May last year, he apparently let slip to a CNBC presenter at a dinner that he was worried the markets might see him as too dovish. Maria Bartiromo duly publicised his remarks, and the markets dropped sharply.
The political sensitivity of his job is immense, as shown by the fact that, as the crisis was unfolding last month, he was hauled in for a meeting with Paulson and the chairman of the Senate banking committee, Christopher Dodd, who said afterwards the Fed governor had pledged to use 'all tools available'.
Ironically, though, many economists believe that it was his predecessor's propensity for appeasing the Wall Street barons that created the nasty legacy Bernanke now has to live with. By cutting interest rates at the first sign of trouble, Greenspan is accused of encouraging investors to take excessive risks, in the belief the Fed would ride to the rescue.
'This is a very, very difficult one, and in some sense it is partly Greenspan's doing, because he bailed out the system in 1987, and 1998,' says Ken Rogoff, Harvard economics professor and former chief economist at the International Monetary Fund. 'He left a legacy where, even after a decade and a half of spectacular productivity gains, inflation was still at the high end of the range and rising. And there was a huge credit bubble.'
Despite the Bank of England's unprecedented bailout of Northern Rock last Thursday, governor Mervyn King has been careful to distance himself from a policy of emergency rate cuts, or cut-price lending to the banks. In a letter to the Treasury select committee last week, he said that approach 'penalises those financial institutions that sat out the dance, encourages herd behaviour and increases the intensity of future crises'.
But unlike King - and Chancellor Alistair Darling, who also laid into the banks for their imprudence last week - Bernanke doesn't have the luxury of a relatively robust economy behind him. The credit crunch was triggered by a downturn in the US housing market, which was already causing collateral damage in the rest of the country's economy.
Bernanke faces a dilemma. If he cuts rates too far, too fast, he will be accused of caving in to Wall Street's Masters of the Universe. If he fails to act, and America's housing crash, combined with a tightening of credit conditions, tips the economy into a full recession, he will take much of the blame. Disentangling the impact of the mess the banks are in, and the housing market slowdown, would flummox even the most adept number-cruncher.
'I'm sure he realises that this is an extremely delicate moment,' says Rogoff. 'He's well prepared for this.'
Bernanke is less inscrutable and more democratic than Greenspan, Rogoff says, and he's a good person to have in charge during a crisis. 'He responds very quickly, he thinks very quickly, and he's a very good listener. This isn't someone who is shutting himself into a room and trying to work out what's going on.'
With the sub-prime crisis far from over, and signs that the housing market downturn may , Bernanke will need all those skills, and perhaps a dose of good luck, to avoid becoming the kind of case study in bad policy-making on which he built his academic career.
The CV
Name Ben Shalom Bernanke
Born 13 December 1953, Augusta, Georgia; grew up in South Carolina
EducationBA in economics from Harvard, 1975; PhD from MIT, 1979
Career 1979-1985, teaching posts at Stanford University; 1985-2005, professor of economics at Princeton; June 2005-February 2006, chairman of George Bush's Council of Economic Advisers; February 2006, chairman of the Federal Reserve
Family Married to Anna, two children

Economic Crisis: The U.S. Political Leadership Has Failed

2007-09-15T11:49:00.000-07:00

Economic Crisis: The U.S. Political Leadership Has Failed

Saturday, 15 September 2007
by Richard C. Cook As the 2007 economic collapse picks up speed, it’s time to take a hard look at the performance of the U.S. national political leadership in meeting some of their most fundamental responsibilities. It’s time to face the fact of serious failure over the last quarter century. During this time, the leaders of both political parties and of major institutions such as the Federal Reserve have presided over the abandonment of some of the most solemn obligations of constitutional government. They have done this in order to embrace an agenda favorable mainly to the financial, corporate, and government elites. On January 20, 1981, a full generation ago, President Ronald Reagan said in his first inaugural address, "Government is not a solution to our problem, government is the problem."Reagan was both right and wrong. The problem the U.S. was facing then was the collapse of the nation’s manufacturing base through a recession that happened when the Federal Reserve raised interest rates to over the twenty percent level. It did so almost a decade after President Richard Nixon removed the gold peg for the dollar, leading to the inflation of the 1970s when our currency flooded world markets through the oil trade. Reagan’s statement that "government is the problem" was correct to the extent that failed financial policies and the out-of-control actions of a Federal Reserve beholden to private financial interests combined in the worse economic downturn since the Great Depression to wreck the world’s greatest industrial powerhouse.But he was wrong in thinking that the solution was deregulation of the economy, particularly deregulation of financial and investment institutions which took place during his two terms. The result was enormous growth in the power and influence of Wall Street and the big banks over the rest of the economy. The era of leveraged mergers, acquisitions, and buyouts was the predecessor of the disaster of today with the unfolding fiasco of equity, hedge, and derivative funds in the process of collapse.

After Reagan came President George H.W. Bush. By the end of his term, the loss of manufacturing jobs had produced another recession. Within a couple of years of Bill Clinton’s election in 1992, action by Secretary of the Treasury Robert Rubin to strengthen the dollar attracted enough foreign investment to create the dot.com bubble. Clinton then cut the federal budget enough by reducing federal employment that he was able to achieve a budget surplus. This lessened the drag on the economy from the national debt which Reagan had left behind from his tax cuts and trillion dollar military build-up. But the over-leveraged dot.com bubble burst with the stock market collapse of 2000, leaving us in recession again.Enter President George W. Bush. Despite the "achievement" of Federal Reserve Chairman Alan Greenspan in creating another bubble — the housing one — big enough to float the U.S. economy for four consecutive years — 2002 to 2005 — the economic fundamentals today are horrendous. We are living in an economy that has begun to crash, with the Federal Reserve, the Treasury Department, and Congress cobbling together bail-outs of various descriptions which they hope will right what is obviously a sinking ship. We can only hope they will succeed to some extent, because it would be heartless to wish disaster on the ones who suffer the most from the consequences of the greed and stupidity of people in power — namely the ordinary people who work for a living and who honestly try to raise their families and hold to a decent standard of living. But life is becoming very hard for the vast majority of Americans who have been bearing the brunt of our failed economic and monetary polices of the last three decades. Our political leadership has let us down in the following critical respects:
Going back to the 1930s, President Franklin D. Roosevelt established an economic system — the New Deal — that pulled the U.S. out of the Great Depression, enabled us to fight World War II, and created the world’s greatest industrial democracy. He did this largely through programs that, taken together, were based on the principle of low-cost credit treated as a public utility. This persisted into the 1960s and 70s, when it was replaced with the system of monetarism, whereby the economy is now regulated by the Federal Reserve through raising and lowering of interest rates. This system, with interest rates much higher, on average, than during previous decades, has been catastrophic for the U.S. economy. It has enriched the financial industry at the expense of everyone else through what can only be called institutionalized usury. Under this system, every period of economic growth since 1983 has been a bank-created bubble, while the general population has become steadily poorer. The Federal Reserve claims that it raises interest rates to reduce inflation, when in fact higher interest rates cause inflation by making every transaction more expensive. Under the reign of monetarism, the U.S. dollar has lost over eighty percent of its value. In fact, government policies are designed to generate inflation, because this makes it cheaper to pay down the national debt and while augmenting tax revenues.
It has been well-documented that since the early 1980s the federal government has acquiesced in every respect to economic policies that have resulted in the steady erosion of our manufacturing base, elimination of millions of skilled industrial jobs, creation of a crushing burden of household and individual debt, crumbling of our physical infrastructure, privatization or elimination of public services, failure to meet such crises as the Katrina disaster, export of jobs to low-cost foreign labor markets, unfair distribution of taxation, and toleration of the influx of millions of illegal aliens who keep wages low within the domestic economy.
Since the Clinton administration, the government has misled the public through distortion of economic indicators. Calculations of the GDP are too high and exaggerate the growth of the economy. The consumer price index on which government cost-of-living adjustments are based has eliminated such items as food, fuel, and home buying. Actual inflation is running at a rate of three times what the government estimates; i.e. closer to ten percent than the three percent which is claimed. Regarding the money supply, the Federal Reserve has stopped reporting one of the most important indicators, which is M3 — the amount of money available to the largest institutional investors. Data which are available today show without question that the producing economy — that is, the everyday world of people who work for a living — has been in recession for over a year. Meanwhile, the financial economy that lives off the producers as a parasite continues to float on rollovers of mega-loans originating with the Federal Reserve and its policy of allowing banks to capitalize the massive amounts of repurchase agreements generated by electronic funds transfer.
Insufficient attention has been paid to the disastrous effects of NAFTA in destroying family farming in the U.S., Canada, and Mexico. On top of this has been the diversion of agricultural products into bio-fuel production with the attendant inflationary effects. Meanwhile, our food supply has been taken over by agribusiness and the financial markets at the same time that two-thirds of the nation has been in the grip of long-term drought. The high interest rates of the monetarist regime have worked to make farming at the local level impossible and have destroyed the production of entire regions, such as the once-great Idaho potato industry. Unless local farming can be revived, there is a real-danger of massive food shortages breaking out under a prolonged economic crisis.
Finally, there are our failed foreign and military policies. After the U.S. lost the Vietnam War, we had reason to believe that our political leaders might have learned a lesson about military adventures abroad, particularly land wars on the continent of Asia. Instead, starting in earnest with the "Reagan doctrine" of endless proxy conflicts on every continent, the U.S. has embarked on a policy of world military conquest. The Iraq War, the planned permanent occupation of that country, and the designs being formulated against Iran, are part of a policy of military control of the Middle East that has been ongoing for almost twenty years. The dual objectives of this policy are to control Middle Eastern oil and advance the interests of Israel. Talk of the "surge," troop drawdown, etc., are nonsense, because the U.S. plans to occupy permanent bases and control the remaining oil reserves in the region. These wars are being paid for by sale of Treasury bonds to possible future adversaries such as China, while the U.S. bubble economy that is backing up our military forces overseas is deflating. Clearly something has to give, either through exhaustion of our military capability abroad, economic collapse at home, or the catastrophe of a world war. The denouement seems to be drawing closer as foreign governments dump their U.S. dollars which are declining in value due to the twin trade and fiscal deficits. What our leaders should now be doing is recognize the fact that we live in a multilateral world where conflicts can only be resolved by nations acting as equals under the umbrella of the U.N. So many mistakes have been made over the last several decades that it is difficult to see how real change could take place without a revolutionary transformation of American society. Those who worked for change in the 1960s through opposition to the Vietnam War hoped for such a transformation, but the opposite has happened. The cause has been the assertion of influence by the corporate-financial-government elites, who have essentially negated the ability of the people through their elected representatives to manage affairs for the sake of the general welfare as stated in the preamble to our Constitution. The government under the leadership of both political parties has even violated some of its basic constitutional mandates.Congress, for instance, has failed to exercise its duties with respect to oversight and control of the monetary system, having ceded its authority to the private banking industry through the Federal Reserve Act of 1913. Congress has also failed to provide effective regulation of the financial industry under the interstate commerce clause of Article One, as the subprime mortgage debacle and other abuses have clearly demonstrated. The government as a whole has failed to provide for equal protection of the laws as specified in the Fourteenth Amendment by allowing so much of the wealth of the nation to be transferred to the upper income brackets who manipulate the corporate and financial systems to their advantage. It could also be argued that the passivity of the government in standing by while millions of people have lost their homes, jobs, or pensions due to fraudulent financial practices or speculative bubbles violates the Fifth Amendment provision which specifies that "no person shall be…deprived of life, liberty, or property, without due process of law." Finally, it could be argued that many of our economic and tax policies violate the Thirteenth Amendment which states that, "Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction." We’re used to interpreting the Thirteenth Amendment as applying only to chattel slavery, but economic servitude can be almost as onerous. Certainly the provision of the 2005 bankruptcy reform legislation which makes student loan debt and unpaid taxes a lifetime obligation, not subject to bankruptcy write-off, constitutes "involuntary servitude." So too may a cumulative tax burden where up to fifty percent of an individual’s income goes for taxes at the federal, state, and local levels. It is obvious that the elite intend to make every effort to ride out the current crisis. This is what the so-called "soft landing" is about. At the point in time when it may become possible to have real change, it can only be done effectively as it was accomplished during the New Deal — through control of credit as a public utility. This is because the causes of social distress are economic, and the economy is controlled through the monetary system. The essence of monetary policy is who controls credit and for what ends.It would not be difficult to create programs, institutions, and systems to develop an updated New Deal to meet present conditions. The knowledge is there, as is the technology. What is lacking is political recognition and will. Today most individuals are passive spectators to the ongoing train wreck, and none of the leading presidential candidates is addressing basic policy issues. Ninety-five percent of what they are saying is media fluff. As an example of what could be done, it would be possible immediately to place all pubic infrastructure programs within the U.S. under a funding mechanism whereby a federal infrastructure bank could be self-capitalized by special Treasury infrastructure bonds with lending at zero percent interest for a multitude of long-term projects. A new money supply would thereby come into being that would completely by-pass the Federal Reserve System. This could be supplemented by a citizens’ basic income guarantee and a National Dividend, similar to the Alaska Permanent Fund, which would reduce poverty and inject purchasing power at the grassroots level. The denial of purchasing power except through more debt in a country where the wage and salary base has stagnated is an economic crime. One purpose is doubtless to create an impoverished underclass as a source of military recruitment. Such measures would revolutionize local economies and restore the ability of the general population to participate in the economic life of the nation. But until enough people wake up to what is going on and the fact that they have the power within themselves to make a difference, nothing will change. They will continue to be fleeced by the rich and powerful as they have been throughout most of history.
Richard C. Cook is a retired federal analyst, whose career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, and NASA, followed by twenty-one years with the U.S. Treasury Department. His articles on monetary reform, economics, and space policy have appeared on Global Research, Economy in Crisis, Dissident Voice, Atlantic Free Press, and elsewhere. He is the author of "Challenger Revealed: An Insider’s Account of How the Reagan Administration Caused the Greatest Tragedy of the Space Age." His website is at http://www.richardccook.com/.

Countrywide Caught in Mortgage Spiral

2007-09-15T11:25:00.000-07:00

Countrywide Caught in Mortgage Spiral
Saturday September 15, 5:42 am ET
By Alex Veiga, AP Business Writer
Countrywide Financial Tries to Regain Footing As Housing Market Turn From Boom to Bust
LOS ANGELES (AP) -- Countrywide Financial Corp. grew from a two-man startup in 1969 to become the nation's leading mortgage lender by deftly riding out housing boom-and-bust cycles. This time around, however, the ride has been a lot rougher, leaving the company in a scramble to regain its footing as the housing market has turned from boom to bust.
To survive, it's been forced to borrow billions of dollars, announce thousands of job cuts and dramatically restructure its lending practices to nearly eliminate risky subprime loans to borrowers with shaky credit that have led to massive foreclosures and defaults wracking the housing market.
"In an absolute level sense, this is the biggest challenge" Countrywide has ever faced, said Frederick Cannon, an analyst with Keefe, Bruyette & Woods Inc.
Several analysts believe Countrywide will survive the crisis, based on the strength of its retail banking operation, track record in the industry and operating changes made in recent weeks.
But they said it could see deeper cutbacks and lose ground to competitors while weathering a housing crisis expected to last at least 18 more months.
"At the end of the day, in this environment, Countrywide is not in as strong a position as its biggest competitor, Wells Fargo," Cannon said.
Stan Ross, chairman of the Lusk Center for Real Estate at the University of Southern California, said Countrywide will face intense competition as big and small lenders move to focus on prime loans, a sector once dominated by Countrywide.
"It's going to take time, and I think their cutbacks are going to be greater than perhaps we anticipate," Ross said.
Countrywide dominated the industry when interest rates began to plummet at the start of the decade and competitors rushed to make subprime loans.
The company didn't lead the charge to make those loans, "but as an industry leader, they were right there," said Robert Napoli, an analyst with Piper Jaffray.
"They have an effect on the market. They have to, being the biggest," he said.
The Calabasas, Calif.-based company's loan production last year totaled $468 billion and it accounted for more than 13 percent of the loan servicing market as of June 30, according to the mortgage industry publication Inside Mortgage Finance.
Countrywide and the rest of the mortgage industry also got caught up in the frenzy to make nontraditional loans then resell the mortgages for hefty profits to Wall Street banks.
Fortunes dove when demand for those loan packages plummeted amid rising defaults. The resulting credit crunch that tore through the markets has left Countrywide and others holding loans they couldn't sell and hurting for cash to keep funding new ones.
"The market changed very quickly on them ... they just underestimated how rapidly the market changed," Napoli added.
A report in The New York Times cited unnamed former Countrywide employees saying the company used financial incentives to encourage employees to steer borrowers into subprime loans to boost profits.
The allegations prompted North Carolina Treasurer Richard Moore to send a letter dated Tuesday to Countrywide asking for an explanation. Moore is the trustee of a pension fund that holds more than $11 million in Countrywide shares.
"Countrywide has sacrificed long-term sustainability for short-term profits," Moore wrote. "As an investor, I expect assurances that these practices have ceased and that the company is returning to a business model that both respects consumers and protects shareholder value."
Countrywide has strongly refuted the report, noting its business processes are designed to prohibit pushing customers who qualify for prime loans into subprime loans, and that its loan officers do not receive higher commissions for selling subprime loans.
During a conference call with Wall Street analysts in January, Countrywide Chairman and Chief Executive Angelo Mozilo said the company expected rising delinquencies and a weak housing market but was "well positioned and extremely optimistic about our prospects to continue generating growth and superior returns over future cycles."
Since then, Countrywide stock has dropped about 60 percent and is now trading around $19 a share.
In a recent letter to employees announcing as many as 12,000 layoffs, he characterized the current housing market cycle as "the most severe in the contemporary history of our industry."
Countrywide didn't return calls seeking an interview with Mozilo.
The son of a butcher, he has guided Countrywide through a number of housing cycles.
He co-founded the company nearly four decades ago with fellow New Yorker David Loeb, taking the fledgling company public only six months after it launched.
Trading at less than $1 a share, the startup failed to generate much investment capital, so Mozilo and Loeb headed West in the fall of 1969 and set up shop in suburban Los Angeles, a housing hotbed.
Its rise was part of a broader trend in which banks and traditional savings and loans lost market share as borrowers turned to more market-savvy mortgage firms offering a wider variety of loan programs.
Countrywide's expansion was also fueled by its move to sell conventional mortgage loans that were then resold to government-sponsored mortgage companies the Federal National Mortgage Association, also known as Fannie Mae, and the Federal Home Loan Mortgage Corp, or Freddie Mac.
The strategy helped Countrywide weather the crash of the high-flying housing market at the end of the 1980s. In 1990 the company reported its loan production totaled more than $3 billion.
The interest rate upheaval during the 1990s had a mixed impact on the company. Low rates at the start of the decade helped boost business amid a surge in refinancing.
But when rates eventually kicked back up, the company and other mortgage lenders saw loan production fall off.
Countrywide coped with that downturn by diversifying into more financial services, eventually opening its retail bank.
When interest rates began to plunge at the start of this decade, Countrywide joined the rest of the industry in rushing to feed an unprecedented demand on Wall Street for home loans.
Last fall, Wall Street investors began to sour on mortgage loans, particularly subprime loans.
While Countrywide was less exposed to subprime loans than the rest of the market, it had stepped up high-yield loan products such as pay option loans, which give borrowers the option to make a lower payment but can result in the unpaid portion being added to the principal balance.
In recent weeks, the company has drawn down on an $11.5 billion line of credit and raised $2 billion by selling a stake to Bank of America.
This week, it boosted its borrowing capacity by another $12 billion through new or existing credit agreements.
To further help reassure investors of the company's stability, management has implemented layoffs and shifted its loan production through its banking arm.
It's also closed the door to all subprime loans except for those it can sell back to U.S. government-backed lenders.
"Countrywide is quickly adjusting to market conditions and ... now has the breathing room to do so," said Bart Narter, senior analyst at Celent, a Boston-based financial research and consulting firm. "One sees glimmers of hope."

Northern Rock shares plunge 32%

2007-09-14T11:54:00.000-07:00

Northern Rock shares plunge 32%

Shares in one of the UK's largest mortgage lenders, Northern Rock, have fallen 32% after it had to ask the Bank of England for emergency funding.
But experts and officials insist that Northern Rock, which has £113bn in assets, is not in danger of going bust.
Despite the reassurances lines of customers formed outside many Northern Rock branches around the UK.
The bank has struggled to raise money to finance its lending ever since money markets seized up over the summer.
Stock market hit
NORTHERN ROCK FACTS
Founded in 1965 after merger of Northern Counties Permanent Building Society and Rock Building Society
Headquarters in Newcastle
Became a public company in 1997
Has 6,400 staff
Has 18.9% share of new UK lending
Loans and assets of £113bn
Deposits from customers of £24bn
Other bank shares fell, with Bradford & Bingley, Alliance & Leicester and HBOS down nearly 8%, 7% and 4% respectively.
House builders were also hit, with companies like Persimmon, Taylor Wimpey, Bovis Homes and Berkeley Group falling around 6% and more.
The London stockmarket's benchmark index, the FTSE 100, at one point dropped more than 2.2% before recovering during the afternoon. The index closed at 6,289 - a loss of 74 points or 1.17%.
Northern Rock said that its profits for 2007 would be hit, but that it remained solvent.

Unlike most banks, which get their money from customers making deposits into savings accounts, Northern Rock is built around its mortgage business.
It raises most of the money which it provides for mortgages by borrowing from banks and other financial institutions.
Speaking on BBC Radio 4's Today programme, Chancellor Alistair Darling said: "The problem here is there is a lot of money in the system but they are reluctant to lend it to each other at the moment."
Queues at branches
Mr Darling said that "in order to create a stable banking system, the Bank [of England] steps in and it makes facilities available to the Northern Rock."
It is much more exposed than its rivals to this distaste for mortgage debt Robert Peston BBC Business Editor
"Northern Rock can draw on them when it requires, but it means it can carry on trading, people can use their accounts in the normal way, they carry on making their mortgage payments in the usual way, Northern Rock will be able to carry on its business."
Angela Knight, chief executive of the British Bankers' Association, said that anybody who was "either a saver with Northern Rock or has got a mortgage... can be absolutely confident that they have got their money with or they have borrowed from a very sound financial institution."
All the calming words did not stop some Northern Rock customers to move some or all of their many to accounts with other banks.
Several customers showed BBC reporters slips that suggest some did withdraw sums of £100,000 and more.
Dozens of Northern Rock customers have contacted the BBC to complain that the bank's website was inaccessible, while all the bank's phone lines were jammed.
Emergency reserve untouched
The emergency lending facility to Northern Rock was agreed by Mr Darling, on advice from Mervyn King, governor of the Bank of England.
Northern Rock chief executive Adam Applegarth said that it had not yet borrowed any of the "unlimited" funds available.
He urged customers to remain calm, and stressed that it was "business as normal".
However he indicated that it may, in future, be more expensive worldwide for institutions to borrow money, and that in turn could mean that mortgages generally become more expensive.
'Lender of last resort'
On the assumption that the current conditions remain until the end of 2007, there will clearly be an impact on Northern Rock's 2007 asset growth and, therefore, on profits Northern Rock statement
The decision for the Bank of England to become the "lender of last resort" is extremely rare - and also comes after consultation with the Financial Services Authority (FSA).
It is an unlimited facility, with interest rated at a "penal rate" of more than 1% above Bank base rate.
To obtain the money, the Northern Rock will have to deposit some of its customers' mortgages as collateral, which are regarded by the Bank of England as sound.
In a statement, Northern Rock said it had "agreed with the Bank of England that it can raise such amounts of liquidity as may be necessary by either borrowing on a secured basis from the Bank of England or entering into repurchase facilities with the Bank of England".
"On the assumption that the current conditions remain until the end of 2007, there will clearly be an impact on Northern Rock's 2007 asset growth and, therefore, on profits."

An FSA statement said Northern Rock "exceeds its regulatory capital requirement and has a good quality loan book".
WHAT'S HAPPENING AT NORTHERN ROCK?
Mortgage lending Northern Rock lends a large amount for mortgages, and finances this with money from banks and savers
Savings Northern Rock receives a relatively small amount of money from savers
Money markets Have stopped lending money to Northern Rock due to the crisis in the US sub-prime mortgage market
Bank of England Steps into the breach to give Northern Rock an emergency loan Images: PA, Getty

Fed Officials Suggest Division Over Interest-Rate Cut

2007-09-10T14:40:00.000-07:00

Fed Officials Suggest Division Over Interest-Rate Cut (Update3)
By Scott Lanman and Vivien Lou Chen

Sept. 10 (Bloomberg) -- Federal Reserve bank presidents suggested they are divided on how much to cut interest rates, offering a range of views on the economy after the first decline in payrolls in four years.
Janet Yellen, head of the San Francisco Fed, today cited ``significant downward pressure'' on growth because of housing and financial-market turmoil. Dallas Fed President Richard Fisher said he's ``generally encouraged'' about the economy, while Atlanta's Dennis Lockhart backed off remarks he made four days ago that the housing slump was having a limited impact.
The scope of remarks may reflect a debate inside the central bank over whether to lower the benchmark rate on Sept. 18 by a quarter-percentage point, or a half-point as some investors expect, Fed watchers said.
``It sounds like everyone's marked down their growth outlook, and everyone realizes the credit-market events are something that require a Fed response,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York who used to work at the Fed. ``It's just a question of magnitude.''
Treasuries rallied as traders interpreted the officials as confirming a reduction in borrowing costs to preserve the six- year expansion.
The job market began slowing in June, data now indicate, Lockhart told an audience in Atlanta today. Employers cut 4,000 workers in August, the Labor Department said Sept. 7. Revised figures showed job gains diminished from a 188,000 pace in May to 69,000 in June and 68,000 in July.
Main Indicators
Payrolls are one of the main indicators, along with sales, wages and production, which help determine the start of economic contractions.
``It is critical to take a forward-looking approach -- gauging the effects of recent developments on the outlook, and, importantly, the risks to that outlook,'' Yellen, 61, said in a speech to a conference in San Francisco. Declining home prices and rising unemployment may cause ``significant'' risks to consumer spending, she said.
Lockhart and Yellen both vote on rates in 2009, and Fisher votes next year, though they participate in the FOMC discussions. Officials gather in Washington on Sept. 18. Fed Governor Frederic Mishkin speaks later today.
`Real Debate'
``The real debate in the end, although nobody's saying this, is whether they're going to cut 25 or 50'' basis points, said Nariman Behravesh, chief economist at researcher Global Insight Inc. in Lexington, Massachusetts. ``They should do 50, but I think they'll do 25, precisely because they've got a bit of a debate going on.''
A basis point is 0.01 percentage point.
Gains in Treasuries sent the yield on the benchmark two-year note down to the lowest since September 2005. The yield fell to 3.85 percent at 5:30 p.m. in New York, below the Fed's 5.25 percent target rate for overnight loans between banks. The Standard & Poor's 500 Index fell 0.1 percent.
``Last Thursday, I said in a speech that I have not seen conclusive signs of weakness in the broader economy,'' Lockhart, 60, said at an event sponsored by the Atlanta Business Chronicle. ``Friday's data, however, shows employment was beginning to soften back in June. This news should be evaluated with recently positive reports in retail sales.''
Fisher, speaking in Laredo, Texas, said that ``our economy appears to be weathering the storm thus far.''
No `Major Impact'
``As yet, tighter credit conditions do not appear to have had a major impact on overall economic activity outside of real estate,'' said Fisher, 58, the bank's president since 2005.
Speaking with reporters afterward, Fisher said he was ``not necessarily'' taking a different position from Yellen. He said he hadn't read Yellen's remarks.
Charles Plosser, 58, who took his post in August 2006, said at the weekend that policy makers shouldn't put too much stress on the loss of jobs in August, and that he hadn't made up his mind yet on a rate cut.
``We want to be careful not to overweight one piece of information,'' Plosser said in an interview after a speech in Waikoloa, Hawaii, on Sept. 8. While the employment drop ``was not encouraging,'' he said ``there's a lot of conflicting data out there,'' noting gains in retail sales.
Economists and investors expect the Federal Open Market Committee to lower its main interest rate by at least a quarter- percentage point from 5.25 percent next week.
After the Fed on Aug. 7 said inflation was still its ``predominant'' concern, the central bank revised its outlook on Aug. 17 to say that economic risks had risen ``appreciably.''
That assessment ``apparently is similar to that of market participants,'' Yellen said in her first speech on the economic outlook in almost two months. ``Investors' perceptions of increased downside risks have resulted in a notable decline in the rates on federal funds futures contracts,'' she said.
Still, market turmoil sometimes has little effect on the economy, Yellen cautioned. In 1998, when forecasters feared the implications of a Russian debt default and the Fed lowered rates three times, ``growth turned out to be robust,'' she said.
To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net ; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net . Last Updated: September 10, 2007 17:31 EDT

Countrywide Reaps What It Sowed

2007-09-08T19:06:00.000-07:00

Countrywide Reaps What It Sowed
MSNMoney is reporting Countrywide to reduce workforce by 10,000 to 12,000.
Countrywide Financial Corporation CFC today announced a plan of action to address changing market conditions that positions the Company for continued growth and success.The Company presently estimates a total workforce reduction of 10,000 to 12,000 over the next three months representing up to 20 percent of its current workforce. Based on current interest rate levels, Countrywide presently expects that total market origination volumes will decline approximately 25 percent in 2008 compared to 2007 levels.Product guideline revisions have been made to ensure that all loans which the Company produces can be sold into the secondary market or are high quality prime loans to be held in Countrywide Bank's investment portfolio. This includes the Company's recent decision to no longer originate any subprime loans other than those eligible for sale or securitization under programs supported by Fannie Mae, Freddie Mac or the FHA.[Mish comment: So with no Alt-A, no jumbos, no subprime, no nonconforming loans of any sort, and with increased competition for prime loans, Countrywide is only expecting loan volumes to drop by 25%!?]Growth plans will continue in areas of opportunity. Countrywide's retail and wholesale lending divisions plan to continue aggressively pursuing the increased opportunities presenting themselves in the current environment for profitable market share growth.[Mish comment: Growth plans? Yeah right. Let's talk growth while firing 20% of the workforce and reducing the types of loans you are willing to do?]"Each employee at Countrywide is considered an important member of the Countrywide family," said David Sambol, President and Chief Operating Officer. "While workforce reductions are therefore always very difficult, these decisions are being made with the utmost attention and sensitivity to the impact they will have on our Company and our people."
Inside the Countrywide Lending SpreeBut how and why did countrywide get so bloated in the first place? In case you missed it, the New York Times recently published a stunning look Inside the Countrywide Lending Spree.
On its way to becoming the nation's largest mortgage lender, the Countrywide Financial Corporation encouraged its sales force to court customers over the telephone with a seductive pitch that seldom varied. "I want to be sure you are getting the best loan possible," the sales representatives would say.Instead, potential borrowers were often led to high-cost and sometimes unfavorable loans that resulted in richer commissions for Countrywide's smooth-talking sales force, outsize fees to company affiliates providing services on the loans, and a roaring stock price that made Countrywide executives among the highest paid in America.Countrywide's entire operation, from its computer system to its incentive pay structure and financing arrangements, is intended to wring maximum profits out of the mortgage lending boom no matter what it costs borrowers, according to interviews with former employees and brokers who worked in different units of the company and internal documents they provided. One document, for instance, shows that until last September the computer system in the company's subprime unit excluded borrowers' cash reserves, which had the effect of steering them away from lower-cost loans to those that were more expensive to homeowners and more profitable to Countrywide.Homeowners, meanwhile, drawn in by Countrywide sales scripts assuring "the best loan possible," are behind on their mortgages in record numbers. As of June 30, almost one in four subprime loans that Countrywide services was delinquent, up from 15 percent in the same period last year, according to company filings. Almost 10 percent were delinquent by 90 days or more, compared with last year's rate of 5.35 percent.Many of these loans had interest rates that recently reset from low teaser levels to double digits; others carry prohibitive prepayment penalties that have made refinancing impossibly expensive, even before this month's upheaval in the mortgage markets."In terms of being unresponsive to what was happening, to sticking it out the longest, and continuing to justify the garbage they were selling, Countrywide was the worst lender," said Ira Rheingold, executive director of the National Association of Consumer Advocates.In a mid-March interview on CNBC, Mr. Mozilo said Countrywide was poised to benefit from the spreading crisis in the mortgage lending industry. "This will be great for Countrywide," he said, "because at the end of the day, all of the irrational competitors will be gone."But Countrywide documents show that it, too, was a lax lender. For example, it wasn't until March 16 that Countrywide eliminated so-called piggyback loans from its product list, loans that permitted borrowers to buy a house without putting down any of their own money. And Countrywide waited until Feb. 23 to stop peddling another risky product, loans that were worth more than 95 percent of a home's appraised value and required no documentation of a borrower's income.As recently as July 27, Countrywide's product list showed that it would lend $500,000 to a borrower rated C-minus, the second-riskiest grade.The company would lend even if the borrower had been 90 days late on a current mortgage payment twice in the last 12 months, if the borrower had filed for personal bankruptcy protection, or if the borrower had faced foreclosure or default notices on his or her property.Such loans were made, former employees say, because they were so lucrative — to Countrywide. The company harvested a steady stream of fees or payments on such loans and busily repackaged them as securities to sell to investors. As long as housing prices kept rising, everyone — borrowers, lenders and investors — appeared to be winners.One former employee provided documents indicating Countrywide's minimum profit margins on subprime loans of different sizes. These ranged from 5 percent on small loans of $100,000 to $200,000 to 3 percent on loans of $350,000 to $500,000. But on subprime loans that imposed heavy burdens on borrowers, like high prepayment penalties that persisted for three years, Countrywide's margins could reach 15 percent of the loan, the former employee said.One reason these loans were so lucrative for Countrywide is that investors who bought securities backed by the mortgages were willing to pay more for loans with prepayment penalties and those whose interest rates were going to reset at higher levels. Investors ponied up because pools of subprime loans were likely to generate a larger cash flow than prime loans that carried lower fixed rates.As a result, former employees said, the company's commission structure rewarded sales representatives for making risky, high-cost loans. For example, according to another mortgage sales representative affiliated with Countrywide, adding a three-year prepayment penalty to a loan would generate an extra 1 percent of the loan's value in a commission. While mortgage brokers' commissions would vary on loans that reset after a short period with a low teaser rate, the higher the rate at reset, the greater the commission earned, these people said.Persuading someone to add a home equity line of credit to a loan carried extra commissions of 0.25 percent, according to a former sales representative."The whole commission structure in both prime and subprime was designed to reward salespeople for pushing whatever programs Countrywide made the most money on in the secondary market," the former sales representative said.When borrowers tried to reduce their mortgage debt, Countrywide cashed in: prepayment penalties generated significant revenue for the company — $268 million last year, up from $212 million in 2005. When borrowers had difficulty making payments, Countrywide cashed in again: late charges produced even more in 2006 — some $285 million.The company's incentive system also encouraged brokers and sales representatives to move borrowers into the subprime category, even if their financial position meant that they belonged higher up the loan spectrum. Brokers who peddled subprime loans received commissions of 0.50 percent of the loan's value, versus 0.20 percent on loans one step up the quality ladder, known as Alternate-A, former brokers said. For years, a software system in Countrywide's subprime unit that sales representatives used to calculate the loan type that a borrower qualified for did not allow the input of a borrower's cash reserves, a former employee said.A few weeks ago, the former sales representative priced a $275,000 loan with a 30-year term and a fixed rate for a borrower putting down 10 percent, with fully documented income, and a credit score of 620. While a F.H.A. loan on the same terms would have carried a 7 percent rate and 0.125 percentage points, Countrywide's subprime loan for the same borrower carried a rate of 9.875 percent and three additional percentage points.The monthly payment on the F.H.A. loan would have been $1,829, while Countrywide's subprime loan generated a $2,387 monthly payment. That amounts to a difference of $558 a month, or $6,696 a year — no small sum for a low-income homeowner.Independent brokers who have worked with Countrywide also say the company does not provide records of their compensation to the Internal Revenue Service on a Form 1099, as the law requires. These brokers say that all other home lenders they have worked with submitted 1099s disclosing income earned from their associations.One broker who worked with Countrywide for seven years said she never got a 1099."When I got ready to do my first year's taxes I had received 1099s from everybody but Countrywide," she said. "I called my rep and he said, "We're too big. There's too many. We don't do it."Few borrowers of any sort, even the most creditworthy, appear to escape Countrywide's fee machine. When borrowers close on their loans, they pay fees for flood and tax certifications, appraisals, document preparation, even charges associated with e-mailing documents or using FedEx to send or receive paperwork, according to Countrywide documents. It's a big business: During the last 12 months, Countrywide did 3.5 million flood certifications, conducted 10.8 million credit checks and 1.3 million appraisals, its filings show. Many of the fees go to its loan closing services subsidiary, LandSafe Inc.According to dozens of loan documents, LandSafe routinely charges tax service fees of $60, far above what other lenders charge, for information about any outstanding tax obligations of the borrowers. Credit checks can cost $36 at LandSafe, double what others levy. Some Countrywide loans even included fees of $100 to e-mail documents or $45 to ship them overnight. LandSafe also charges borrowers $26 for flood certifications, for which other companies typically charge $12 to $14, according to sales representatives and brokers familiar with the fees.A different broker supplied an e-mail message from a Countrywide official stating that it was not company practice to submit 1099s. It is unclear why Countrywide apparently chooses not to provide the documents.A former sales representative and several brokers interviewed for this article were granted anonymity because they feared retribution from Countrywide.
Closing Thoughts
It's really hard to know where to begin with this but for starters I hope the IRS cracks down good and hard on Countrywide over the 1099's.
I have been wanting to comment on the sleaze at Countrywide for a week but tonight it finally seems appropriate.
Certainly there are allegations of what can be construed as fraud and I would love to see Mozilo have a day of reckoning in court over this but I doubt that ever happens.
And while I have a hard time cheering for the demise of others, at a minimum it's certainly hard to feel sorry for anyone losing their job who was involved in such sleaze.
But what sums it up best is this: As Ye Sow, So Shall Ye Reap.Addendum:Here is Countrywide's Letter To Employees, addressing both the layoffs as well as taking exception to the New York Times article. You can choose to believe Countrywide's innocence if you choose. I don't.

Countrywide to cut up to 12,000 Jobs

2007-09-07T14:44:00.000-07:00

Countrywide Announces Plan to Address Changing Market Conditions Including Workforce Reductions

Friday September 7, 5:30 pm ET
CALABASAS, Calif., Sept. 7 /PRNewswire-FirstCall/ -- Countrywide Financial Corporation (NYSE: CFC - News) today announced a plan of action to address changing market conditions that positions the Company for continued growth and success. Central elements of this plan include:
-- Reductions in workforce which will occur in areas most impacted by
lower mortgage market origination volumes. The Company presently
estimates a total workforce reduction of 10,000 to 12,000 over the next
three months representing up to 20 percent of its current workforce.
Actual reductions could be lower should the interest rate environment
and related market volume outlook improve. Based on current interest
rate levels, Countrywide presently expects that total market
origination volumes will decline approximately 25 percent in 2008
compared to 2007 levels.
-- Migration of the Company's residential lending business into its
federally chartered thrift entity, Countrywide Bank, FSB, will
continue. This is expected to enhance and strengthen Countrywide's
business model by delivering greater and more stable liquidity, reduced
borrowing costs and greater operational efficiencies. By September 30,
2007, the Company expects that almost all residential loan production
will be originated within the Bank.
-- Product guideline revisions have been made to ensure that all loans
which the Company produces can be sold into the secondary market or are
high quality prime loans to be held in Countrywide Bank's investment
portfolio. This includes the Company's recent decision to no longer
originate any subprime loans other than those eligible for sale or
securitization under programs supported by Fannie Mae, Freddie Mac or
the FHA. In spite of these changes, it is important to emphasize that
Countrywide continues to offer among the broadest and most competitive
product menus in the industry.
-- Growth plans will continue in areas of opportunity. Countrywide's
retail and wholesale lending divisions plan to continue aggressively
pursuing the increased opportunities presenting themselves in the
current environment for profitable market share growth. Countrywide
Bank, in addition to housing the Company's mortgage banking activities,
will also focus on growing its residential and commercial loan
investment portfolio and expanding its financial centers and deposit
franchise. Countrywide's insurance segment will continue to grow both
its institutional and personal lines insurance businesses.
"We are taking decisive action to ensure that Countrywide continues to be well-positioned for further success," said Angelo Mozilo, Chairman and Chief Executive Officer. "As we carry out our plan, the Company's overarching focus is exactly where it has always been: to remain an industry leader in the U.S. residential lending business, to deliver value and world-class service to our customers and business partners, to enhance shareholder value, and to provide career opportunities for our people."
"Each employee at Countrywide is considered an important member of the Countrywide family," said David Sambol, President and Chief Operating Officer. "While workforce reductions are therefore always very difficult, these decisions are being made with the utmost attention and sensitivity to the impact they will have on our Company and our people."
About Countrywide
Founded in 1969, Countrywide Financial Corporation is a diversified financial services provider and a member of the S&P 500, Forbes 2000 and Fortune 500. Through its family of companies, Countrywide originates, purchases, securitizes, sells, and services residential and commercial loans; provides loan closing services such as credit reports, appraisals and flood determinations; offers banking services which include depository and home loan products; conducts fixed income securities underwriting and trading activities; provides property, life and casualty insurance; and manages a captive mortgage reinsurance company. For more information about the Company, visit Countrywide's website at http://www.countrywide.com.
This Press Release contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, regarding management's beliefs, estimates, projections, and assumptions with respect to, among other things, the Company's future operations, business plans and strategies, as well as industry and market conditions, all of which are subject to change. Actual results and operations for any future period may vary materially from those projected herein and from past results discussed herein. Factors which could cause actual results to differ materially from historical results or those anticipated include, but are not limited to: increased cost of debt; reduced access to corporate debt markets; unforeseen cash or capital requirements; a reduction in secondary mortgage market investor demand; increased credit losses due to downward trends in the economy and in the real estate market; increases in the delinquency rates of borrowers; competitive and general economic conditions in each of our business segments such as slower or negative home price appreciation; changes in general business, economic, market and political conditions in the United States and abroad from those expected; reduction in government support of homeownership; the level and volatility of interest rates; changes in interest rate paths; changes in debt ratings; changes in generally accepted accounting principles or in the legal, regulatory and legislative environments in which Countrywide operates; the judgments and assumptions made by management regarding accounting estimates and related matters; the ability of management to effectively implement the Company's strategies; and other risks noted in documents filed by the Company with the Securities and Exchange Commission from time to time. Words like "believe," "expect," "anticipate," "promise," "plan," and other expressions or words of similar meanings, as well as future or conditional verbs such as "will," "would," "should," "could," or "may" are generally intended to identify forward-looking statements. The Company undertakes no obligation to publicly update or revise any forward-looking statements or any other information contained herein.

Housing Bubble Bloodbath

2007-09-05T10:28:00.000-07:00

Housing Bubble Bloodbath
Written by Mike Whitney
Sunday, 14 January 2007
by Mike Whitney

“The crash of the housing bubble will not be pretty. Millions of people stand to lose their homes and life savings. However, it was inevitable. The bubble created a fantasy world that could not continue. At the peak of the bubble, 160,000 people a week were buying a home, most at bubble inflated prices. The longer the bubble persists, the larger the group of people who paid way too much for their home. While it is not good that so many dreams had to be ruined, the number will be even larger if the bubble deflates slowly. So I make no apologies about hoping for the hasty demise of the bubble.”

Dean Baker, “Slow Motion Train Wreck” The American Prospect, Aug 2, 2006

“No question about it, the housing downturn is here now, and it’s big.” Jim Hamilton “New Home Sales continue to Fall”, Econbrowser Aug 25, 2006

I wonder if Alan Greenspan takes a copy of the business page along with him on the chair-lift at the Aspen, so he can read about the plummeting housing market before swooshing down the well-groomed bunny-slopes at his favorite ski resort. After all, no one played a larger role in inflating (what the “Economist” called) the “biggest equity bubble in history” than the retired Fed-master. His low interest-rate bonanza triggered a stampede of speculation in the real estate market sending prices through the stratosphere and setting the stage for the biggest economic bust in American history.

The whole catastrophe was cooked up Sir Alan and his coterie of brandy-drooling elites at the Federal Reserve.

Thanks, guys.

Greenspan has undoubtedly taken note of the sudden spike in foreclosures which have set off alarm bells from Wall Street to the American heartland. The effects of his “cheap money” policies are finally sending tremors through America’s fragile economic landscape. In September, 2006 the US Foreclosure Market Report released a statement that over 112,000 homes had entered some stage of foreclosure “a 63% increase from September 2005!?! September was the second straight month in which more than 110,000 new foreclosure filings were reported nationwide, evidence that the spike in August was not just a one-month anomaly.”

No, it is not a “one-month anomaly” and it is bound to get considerably worse as $1 trillion of ARMs (Adjustable Rate Mortgages) reset in 2007. The rising foreclosure numbers are the result of rising monthly payments on the new-fangled loans which have low introductory interest rates, but can unexpectedly double after a two or three year period.

Imagine mortgage payments that suddenly jump from $1,300 per month to more than $2,000 on a $129,000 house. That’s what many people will be facing in 2007 when their loans reset and they are suddenly forced out of their homes and onto the streets.

The housing bubble is actually an extension of the stock market bubble; Greenspan’s earlier swindle which cost American investors $7 trillion in retirement and life-savings. Both equity balloons can be attributed to the shabby and exploitative monetary policies of the Federal Reserve. By expanding credit and money supply via low interest rates, the Fed has kept the economy whirring along creating the impression of prosperity when it’s all just smoke and mirrors. America’s opulence is built on a mountain of debt that’s piled a mile high. Regrettably, that mountain is about to cascade-down on the American people sometime in 2007-2008. There’ll be no escaping the fallout from the $4.5 trillion dollars of new mortgage debt that’s built up in the last 7 years. By the end of 2007 we should be able to identify many of the painful trends that accompany a deep recession; prices of homes will steeply decline, GDP will fall, and Greenspan’s mighty Temple of Debt will crash to earth.

Don’t believe me?

The New York Times reported last week that “about 2.2 million borrowers that took out sub-prime loans from 1998 to 2006 are likely to lose their homes”. That translates into about 10 million people! But that, of course, is just the beginning of the bloodbath. The real fun begins when the whole, ugly ball-o-corruption starts to unwind and we get an insider’s-view of a system that is rotten to the marrow. The housing industry is saturated with fraud; the banks, the mortgage lenders, the Fed and the homeowners themselves have all played a major role in this sordid confidence game.

Consider this, for example:

In 2006 the Mortgage Brokers Association for Responsible Lending (MBARL) said that “Liar’s Loans” (those based on what you TELL the bank you are earning, rather than what you are REALLY earning) “shot up to an estimated 62% of mortgage originations…A recent sampling of 100 stated income loans by an auditing firm in Virginia (based on IRS records) found that 90% of the income statements were exaggerated by 5% or more, WHILE ALMOST 60% OF THE STATED AMOUNTS WERE EXAGGERATED BY MORE THAN 50%”!?! (Dan Dorfman New York Sun)

Are you kidding me? A majority of loan applicants are grossly exaggerating their income and the banks are handing out hundreds of thousands of dollars WITHOUT EVEN CROSS-CHECKING IRS STATEMENTS?

It’s mind-boggling!

The question is, how many of these “liars” will be unable to meet their mortgage obligations when the bill comes due in 2007-2008? And, how will their (myriad) defaults affect housing prices for everyone else?

Another indication of hanky-panky appeared in the back-pages of the New York Times last week under the appropriate title “A Phantom Rebound in the Housing Market” by Daniel Gross. The article points out that while the Commerce Dept was celebrating the latest rise in new home sales (in Nov) the reality was quite different. In fact, the government is overstating sales “by up to 20%”. The Commerce Dept failed to subtract the thousands of people who signed contracts but “simply walked away from their deposits when they realized they couldn’t flip the houses for a quick profit.”

Ooops! So the government is falsifying the figures to make things look better than they really are?

You bet. And, most of the high-end home builders like Toll Bros are reporting cancellations in the neighborhood of 37%!

The Times adds that, “Mr. Zandi of Economy.com estimates that the differential is even greater. ‘Given the rise in cancellation rates, it suggests that between 150,000 and 200,000 home sales are being counted that actually did not occur.’”

“Did not occur”! So, the government is beefing up their stats with an extra 200,000 homes a month!?!

Gadzooks!

Okay, so the homeowners are lying on their loans, and the government is lying about the sales (and inventory) figures; is that it?
No. In an earlier article (The Fed’s role in the Housing Crash of ’07) we already covered how the banks are loaning out as much money as possible through all kinds of “untested” Mickey Mouse mortgages so that unqualified borrowers can get-on-board the housing gold rush. These are the ARMs; the “no-down payment, “interest-only” loans which Business Week magazine called “the riskiest and most complicated home loan product ever created”. Many of these ARMs are timed to explode sometime in the next 2 years and the aftershocks from the defaults are expected to be felt throughout the economy.
Of course, the banks never would have exposed themselves to such extraordinary risk if they weren’t able to bundle-up these dubious loans and ship them off to Wall Street. Fund managers have been more than eager to take this “collateralized debt” and use it in the booming hedge fund industry. No one really knows what will happen to the stock market when foreclosures begin to skyrocket and the banks and hedge funds are unable to recoup their losses. But a major “correction” (meltdown) is certainly not out of the question.

Once again, all of these problems originated at the Federal Reserve where interest rate manipulation and the loosey-goosey approach to money supply have created the potential for an economic firestorm.

Bubble, bubble; toil and trouble

So, what can we expect when interest rates tighten up and the market begins to slump.

Well, first off, according to the Wall Street Journal, lenders will get “more cautious in initiating new loans and have been setting aside more reserves for potential loan losses.” The banks are battening down the hatches and preparing for the worst. This just confirms that the real hurricane hasn’t even touched down yet and that America’s over-leveraged consumers should try to straighten out their financial affairs as swiftly as possible. (Get out of debt, pronto!)

A USB study indicates that a “high percentage of borrowers with delinquent, defaulted and foreclosed loans have second mortgages. These borrowers are so overburdened by the added debt that THEY HAVE TROUBLE MAKING THE PAYMENTS ON THEIR FIRST MORTGAGES. This is an ominous development since 34% of all mortgages in 2006 were second mortgages.”

In other words, it’s not simply people in the sub-prime market who are feeling the pinch. Millions of Americans either have loans that will reset at significantly higher monthly rates (which they won’t be able to pay) or they are completely maxxed-out financially after draining every last farthing out of their home equity. In fact,falling prices have decreased the amount of money that homeowners are able to take out of their home equity. (Equity withdrawals decreased by 70% in the last year alone!) That means that there is $525 billion less fueling the overall economy (GDP). As housing prices steadily decline, we can expect that America’s growth will shrink accordingly.

The American consumer is hobbled by debt and has no way to increase his revenueas long aswagesremain stagnant. Additionally, US households are now showing negative savings. (minus .2%) When the home equity “punch bowl” dries up, it’ll be hard times for the average over-leveraged American consumer. He’ll have nothing left for his buying sprees but the plastic in his wallet. (Credit card debt is soaring)

It’ll be tough on the banks and Wall Street, too. After all, over 50% of all mortgages since 2003 have been these shaky, non-conventional loans which have ignored the standard criteria for loaning money (20% down payment, fixed interest rate, sufficient collateral and earnings) Now they’ll have to “pay the piper” and accept the dismal aftereffects of their profligate lending.

The banks should have spotted this disaster a mile away. Instead, they decided to improvise on mortgages so they could keep the money flowing and maximize profits. Now, there’s not a life boat big enough on Planet Earth to bail us out.
Glub, glub.

Once again, we need to remind ourselves that the housing boom was not created by market forces, but by cheap money pumped into the system (via the “creative financing” rip-off) by our friends at the Federal Reserve. They are responsible for this whole bloody boondoggle.

When the Fed cut short-term interest rates from 6.5% to 1% in 2001, they knew that they were simply leaping from one equity-bubble to another. In the next 5 years, total mortgage debt increased by a whopping 82% and total real estate value nearly doubled to $21 trillion dollars.

These are huge numbers and, of course, the Fed knew exactly where the money was going, just as they knew what the outcome would be in the long term. The effects of low interest rates and increases to the money supply are like the immutable laws of science. In this case, they act like gravity pulling the whole battered US economy into a bottomless black hole. It was entirely predictable.
So, what happens now?

What can we expect from the architects of this colossal rip-off in the next year or two?
Well, the Fed, the US Treasury and the Bush administration--the real axis of evil--would like to forestall the inevitable recession-depression until they carry out their forthcoming attack on Iran. That’s why Bush is sending another carrier group to the Gulf as well as a squadron of F-16s to Turkey. (It also explains why the US forces seized 5 Iranian hostages in Irbil, Iraq yesterday) The US is clamping down on transactions with Iran’s main banks (“unilateral sanctions”) and has coerced the Saudis into “discounting their top-line sweet crude by $1.75 to US customers” (Jim Willie “Golden Jackass.com”) to put additional pressure on Iranian oil exports. As Willie says, “This is the real story behind the falling (Gas) prices, not the silly (East Coast) weather”.

Uncle Sam is gearing up for another Middle East dust-up in Iran and the lower gas prices are (temporarily) averting a US recession.

The longer term prospects, however, are not so rosy. The “sunny Jim” reports in the media about a “soft landing” will have no affect on the impending housing collapse or on America’s downward economic spiral; the numbers are simply too enormous. By spring 2007, the Fed will have to lower rates to stop the hemorrhaging and to avoid a full-blown depression. When that happens, the last wobbly bit of scaffolding that’s propping up the greenback willbekicked-out and the dollar will slip into oblivion.
As long as the Fed keeps rates fixed, the pressure on housing will continue to intensify; pushing prices lower and inventories higher. GDP and home equity will continue to shrivel.

It’s all bleak, bleak, bleak.

I’ll leave you with a final comment from Michael Hudson’s “The New Road to Serfdom: an Illustrated Guide to the Coming Real Estate Collapse” (Harpers May 2006) Hudson, who may well be the foremost authority on the housing bubble says:
“Although home ownership may be a wise choice for many people, this particular real estate bubble has been carefully engineered to lure homebuyers into circumstances detrimental to their own best interests. The bait is easy money. The trap is a modern equivalent to peonage; a lifetime spent working to pay off debt on an asset of rapidly dwindling value. Most everyone involved in the real estate bubble thus far has made at least a few dollars. But that is about to change. The bubble will burst, and when it does, the people who thought they’d be living the easy life of a landlord will soon find that what they really signed up for was the hard servitude of debt serfdom…America holds record mortgage debt in a declining housing market. Even that might first seem okay—we can just whether the storm in our nice new houses. And in fact things will be okay for homeowners who bought long ago and have seen the price of their homes double and then double again. But for more recent homeowners, who bought at the top and now face decades of payments on houses that soon will be worth less than they paid for them, serious trouble is brewing. And they are not an insignificant bunch. The problem for recent homeowners is not just that prices are falling; it’s that prices are falling even as the buyer’s total mortgage remains the same or even increases. Eventually, the price of the house will fall below what the homeowners owe, a state that economists call negative equity. They can’t sell—the declining market price won’t cover what they owe the bank—but they still have to make those (often growing) monthly payments. Their only “choice” is to cut back spending in other areas or lose the house—and everything they paid for in it—in foreclosure. Free markets are based on choice. But more and more homeowners are discovering that what they got for their money is fewer and fewer choices. A real estate boom that began with the promise of “economic freedom” will almost certainly end with a growing number of workers locked into a lifetime of debt servitude that absorbs every spare penny.”

It can't be stated more succinctly than that.

Thanks, Michael Hudson, for your insightful analysis, but it may be too late.

Is the USA a Giant Enron?

2007-09-04T20:22:00.000-07:00

Is the USA a Giant Enron? (August 7, 2007) I finally got around to watching the documentary Enron: The Smartest Guys in the Room which is based on the book The Smartest Guys in the Room by Bethany McLean and Peter Elkind. As a refresher, recall that Enron was the 7th largest corporation in the U.S. (by market cap) in its heyday. From those lofty heights it fell rapidly into bankruptcy in late 2001. Indictments of its top officers were finally issued in 2004, and trials were finally held in 2006 which resulted in long prison sentences for the white-collar perps who destroyed 20,000 jobs, $2 billion in employees' pensions and $60 billion in stock market investors' holdings. While its shenanigans were in full swing behind closed doors and cooked books, Enron was recommended as a "buy" by dozens and dozens of analysts. Considering the fraud, mismanagement and lies propping up our entire economy and financial system, I wonder if the U.S.A. is more or less a giant Enron, clinging desperately to a precipice of deception which is rapidly crumbling. The standard media line is that "we've learned from Enron, Worldcom, et. al." I would submit that is true, but not in the way the mainstream media suggests: the financial Powers That Be learned how to lie and deceive from the masters at Enron. Bottom line: nothing was as it seemed at Enron. How is our entire financial system any different? There are three trades which assume what is being presented on the surface is either deceptive or distorted by half-truths: marriage counselors, reporters and intelligence officers ( i.e. spies). Perhaps we should take a professional skeptics' view of the "facts" reported by our financial system's handlers. How is our financial system based on cooked books, lies and deceptions? Let me count the ways: I. Bogus inflation numbers. I have covered this at length over the past few years; please refer to the links in this entry for more: Inflation/Deflation II: Is The Answer How We Measure? (January 9, 2007) The best single source for information on the "real" rate of inflation (roughly 6-7%, not the phony 2% cited by our government agencies and the Fed) is John Williams' Shadow Government Statistics Analysis Behind and Beyond Government Economic Reporting. The site has in-depth analysis of just how the CPI etc. is manipulated: GOVERNMENT ECONOMIC REPORTS: THINGS YOU'VE SUSPECTED BUT WERE AFRAID TO ASK! A deceptively low rate of inflation is the essential Big Lie behind our economy and financial system. As Fed Chairman Bernanke often reminds us, inflation lies (pun intended) in the mind: once inflationary expectations are built into citizens' minds, inflation becomes a reality. So the key job of the government's "factoid" factories is to create the illusion of low inflation. How can anyone be foolish enough to doubt their own experience? Hasn't anyone else noticed that gasoline prices that used to start with 2 now start with 3? Has no one else seen the costs of milk, meat, grain, education, medical care, drugs, government fees (hidden taxes) skyrocket, even as the Fed crows about the fake PCE and "core" inflation rates remaining at 1.9%? Unfortunately, we all have the ability to ignore experience in favor of "official reality." This was starkly and sadly illustrated last year when a techie and his family became lost in the backroads of Oregon. Despite the fact that the road was unlit and unpaved and progressively becoming more primitive, the man continued to place his faith in a map he'd printed off the Web. Thus do we deny the reality in front of our noses because the "official and therefore trusted" Fed claims inflation is minimal. Of course the deceptive practice of breaking out "core inflation" began in the high-inflation early 70s as a method of masking the inflation everyone was seeing with their own eyes. The deception worked so well that it remains a key tool in the "Emperor has no clothes" toolbox. Want to keep that pesky entitlement spending down? Make sure the inflation/ cost-of-living adjustment to those millions of checks remains artificially low. 2. The Unemployment rate is also manipulated down. The Big Picture had a good comment on August 6 Closer Look at July NFP (or, true UR = 5.4%) which covers the completely phony "birth death model" which is a "black box" calculation used to create jobs out of thin air. Mish has an excellent account of this chicanery: Martian Economists and BLS Moonbats. Bottom line: "discouraged workers" are not counted as unemployed. You'd think not having a job when you used to have one would mean you were unemployed. But if you're laid off and don't find work within the 6 months you report to the State Unemployment office, then you cease being unemployed. Is there any possible reason for this other than artificially suppressing the unemployment rate? And the purpose of that, of course, it to fool the people into believing everything is just fine and they can continue to spend money they don't have in fasle confidence. 3. GDP is back-adjusted lower every quarter. This is like a magic trick performed for people with short-term memory loss: we seem to fall for the same trick every 3 months. GDP is announced on page One or as a Yahoo headline as surging, strong, up, etc. and then a few months later, a downward revision is buried on Page C-17. 4. Balance sheets of corporations, pension funds and government agencies massively understate liabilities and overstate assets/future earnings. The Federal Governmewnt alone faces unfunded liabilities of between $49 and $59 trillion which is a heap of cash: How Large Is the Federal Government’s Debt? Elsewhere, corporate and public pension plans routinely extrapolate the outsized returns of the past 20 years Bull Market in stocks and bonds into the future, as if returns which are historically higher than the norm are sure to continue indefinitely. On what basis are these rosy projections made and swallowed? Pardon my skepticism, but this sounds like Enron announcing it's "broadband on demand" business was set to take off. The reality behind the lies was that the company's broadband business was a huge money pit from Day One. 5. Visibly laughable lies are mouthed by top officials with a straight face. Treasury Secretary Paulson never tires, apparently, of announcing that the subprime meltdown is "contained" and won't affect the resilient, stupendous, ever-growing U.S. economy, even as evidence piles up that it is indeed affecting the larger credit markets and thus the economy. So how is the U.S. financial system any different from Enron? Cooked books, bogus announcements, bald-faced lies offered to calm any public skepticism: welcome to the United States of Enron.

Boom and Bust in the Housing Market

2007-09-04T18:14:00.000-07:00

September 3, 2007
Boom and Bust in the Housing Market
Redefining the American Dream
By MATT REICHELLast Thursday, President Bush unveiled new plans to help stem the current financial crisis. His objective is to give sufficient help do delinquent borrowers without providing a complete "bail out," while also assuring that home ownership would remain "at the center of the American Dream."
The problem is that home ownership represents an extreme commodity fetish that is rapidly driving the economy into the tank. The current crisis is far more serious than the busting of the tech sector seven years ago because it goes to the core of what makes capitalism work: confidence in the market. Investment banks and lenders have lost confidence in the American debt system because Adjustable Rate Mortgages were dished out with reckless abandon to thousands of unqualified applicants over a five-year span that coincided with the so-called "housing boom."
Many economists will come to the defense of the American juggernaut, and note that recently released growth indicators have the economy chugging along at a greater than 4% clip in the second trimester of 2007. The expected 3.4% rating was exceeded largely thanks to efforts to shorten up trade in-balance in the commercial sector, with exports going up 7.6% and imports going down 3.2%. This has opened up enough capital for enterprises to increase investment by 11.1%.
Of course, growth is not so awesome a measure of human well-being. In fact, it is largely decided by demand and consumption of goods and services, so that, if anything, high growth confirms that a society is materialistic more so than "well off." It is a self-fulfilling prophecy of sorts: countries with an assured degree of wealth and material desire will continue to grow because they continue to desire to show off their wealth. This has an entire society focused on the upward slope: the stocks go up, the GNP goes up, and we all go up!!!
In fact, Americans are not well off, and haven't been well off since the destruction of all forms of social democracy in the country. The poverty rate remains above 12%, dwarfing those of all of the major Western European powers. Meanwhile, 47 million Americans, about 18%, are without health insurance. And, as Michael Moore elegantly demonstrated, the other 82% are grossly under-insured.
Furthermore, as I have seen during my summer holiday to visit family and friends, the country is not culturally well off. After one has spent enough time in Europe, it becomes difficult to return home. One is transported into a culture of capitalistic simplicities, where people have entire telephone conversations about their new car and flat-screen televisions. They carry on about their rich and satisfied life, as if they were all little princes and princesses spattered throughout the empire, believing themselves to be gorgeous in spite of their sub-par attire and bloated belly.
Even Johnny Depp went running, raising his family in southern France alongside Belle pop star Vanessa Paradis. His slam, not quite stated so elegantly, went as thus: "America is dumb, is something like a dumb puppy that has big teeth - that can bite and hurt you, aggressive . . . like it's a kind a toy - a broken toy maybe. Investigate a little bit, check it out, get this feeling and then get out." This cuts to the important theme of the aggressive nature of Americans: a constructive criticism offered by many of the most respectful European intellectuals who have spent time in the states. It's as if the critics of the aggressive and cocky America, once plentiful in earlier epochs, have been locked up and penned somewhere. Perhaps they are just afraid to critique out of fear of sounding anti-American in a time of "national emergency." Or maybe they find it taboo to lash out at the great American Dream.
I, for one, find it revealing that the president has spoken of protecting the "American Dream of home ownership." This is a moment of truth for the empire, as even the emperor has admitted that the American dream has nothing to do with liberty and justice. And, of course, it would be tough for him to toot the horn of these greater ideals during a summer in which they were jubilantly signed away by congress, who has invited the Gestapo into our private phone conversations and emails. And sure my language can be shunned as irrationally strong, but I have spent years away only to recently return to experience first hand the horrible state of affairs in the Land of the Free.
People are paranoid: a paranoia fed by irrational illusions of grandeur, wherein every last citizen finds him and herself so important that they most certainly will be the next attacked. This is despite the fact that plenty of innocent Americans are attacked everyday: 4,000 troops have come back in body-bags, over 2 million Americans are sitting behind bars as I type, and nearly 300 million together are made to actively participate in the destruction of the planet through an irrational dependence on the automobile. Of all the reasons to be paranoid in this country, from overly aggressive cops, to lack of social protections, to a congress ready to unleash the hounds on its own citizens, people are fearful of Arabs blowing up buildings. They got two of our buildings, and we got them back with two of their countries.
Many more buildings in the U.S. will rest vacant or see the wrecking ball as the foreclosures continue to mount. Eventually, banks will tighten mortgage-lending practices, perhaps requiring that applicants have no outstanding student debt: a requirement that would preclude, what, 99.9% of Americans? As the defaults continue to pour in and the wrangling over asset value terrorizes international markets, the next great victim will be the almighty dollar. Already at record lows, the American currency will lose another half of its value in the next year, thus deepening the stock market crisis and trashing the value of American goods and services. Then, one great thing will change. Americans will see what the rest of the world has already perceived for years: they are living in a "third world country." The terminology is not so nice, but it was American economic and political leaders who invented the phraseology, so I find it quite appropriate in this case. In my mind, "first world countries" are those that have developed the economic and social sophistication to provide all of their citizens with health care and a free system of high quality education. If you haven't developed these two great social institutions, you have no right to make claims to first world grandeur. Americans have made this claim because of their cute Hollywood pizzazz that has left the impression that great wealth lingers here. Surely, there is wealth to be found, but the "American dream" has consistently prevented it from enriching the entire populace.
So when George W Bush calls for the protection of the American dream in his vain effort to save the American economy, the left should reply by re-defining the American dream. I think there is a left here somewhere hidden behind a rock. I used to know some people, usually on the payroll of an organization getting the bulk of its funding from folks like the Macarthur foundation. Perhaps they have been so chained by the orthodoxy of the not-for-profit left that they forgot about how to think for themselves and take a stand for the America they love. Take a Stand for Mark Twain's America, Eugene Debs' America, Albert Parsons' America, Mario Savos' America, Kurt Vonnegut's America, Upton Sinclair's America, and Martin Luther King Jr's America! Let's start talking about the Other American Dream: the dream of providing life, liberty and happiness for all, even if a big suburban abode can't be part of the equation.
Matt Reichel is an American English teacher and diplomacy student living in Paris. He can be reached at: reichel_matt@yahoo.fr

No Quick Action Expected on Mortgages

2007-09-03T14:42:00.001-07:00

No Quick Action Expected on Mortgages
By JESSE J. HOLLAND
WASHINGTON (AP) — Want government help to get out of a bad subprime mortgage? Don't look for Congress to come to your rescue anytime soon.
Lawmakers have lots of ideas and plans — as well as hearings to share their concerns and assess blame — but there's no consensus on how to stop the foreclosures. The only thing everyone has agreed on is that something must be done.
"We may have as many as 1 million to 3 million people who could lose their homes, not because they lost their jobs, not because the economy collapsed, but because they got bad deals on mortgages," said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking, Housing and Urban Affairs Committee.
House and Senate lawmakers are working on different plans to help Americans out of the mortgage crisis, none of which seems ready for a prime-time signing by President Bush. Dodd acknowledged as much last week as he urged the White House to take action, despite all the mortgage-related legislation his committee has planned for the fall.
"Those matters will take a little more time," Dodd said.
Time may be running out. Financial markets in the U.S. and around the globe have been shaken by fears about spreading credit problems that started with home mortgages. It began with rising defaults in subprime mortgages — home loans made to people with weak credit histories.
The rising delinquencies have jolted global credit markets because big hedge funds and other investors poured lots of money into risky subprime mortgages because of their higher returns and now face the prospect that they will not be repaid.
The House and Senate are working on different tracks but the plan furthest down the road is in the Senate, where senators will vote in September on the Transportation-Housing and Urban Development departments spending bill. Inside that bill is $100 million earmarked for nonprofit housing groups to help homeowners in refinancing.
Many mortgages are no long held at banks, so people don't know where to go when they start getting in trouble, senators said.
"First and foremost, we need people on the ground to help innocent mortgagors, innocent homeowners refinance when they're on the edge of foreclosure and yet they have the wherewithal for refinancing," said Sen. Charles Schumer, D-N.Y., who sits on the Senate Banking Committee. "Somebody's got to fill that void."
While the Senate is working on that, Rep. Barney Frank, chairman of the House Financial Services Committee, will hold a Sept. 5 inquiry on credit ratings agencies like Standard & Poor's Corp., Moody's Investors Service Inc. and Fitch Ratings. Such rating agencies have been criticized for not properly evaluating the risks of bonds backed by mortgages given to borrowers with weak credit.
President Bush, meanwhile, urged Congress on Friday to concentrate on reforming the Federal Housing Administration, a Depression-era agency created to help low and moderate-income Americans afford homes. The House passed a bill last year that would modernize the FHA, but a companion bill has yet to make it through the Senate.
That legislation is one of Dodd's priorities for the fall.
"We're looking at ways to deal with the credit rating agencies and FHA, which I had hoped we would have completed in July," Dodd said. "We'll hopefully bring that up as soon as we can with the return of the Congress in September."
However, even if it passes the Senate it would have to be reconciled with the House legislation before it can go to the White House for Bush's signature, a process that could take months.
Some Democrats also would like to see mortgage giants Fannie Mae and Freddie Mac — which are recovering from accounting scandals — play a larger role in the mortgage market. Some want to see the two companies buy "jumbo" mortgages of more than $417,000 in high cost areas in areas of the country where home costs are higher.
The House in May passed legislation that would do that. But the situation has worsened since then, and the legislation must be reworked, Frank said. "The current crisis in the mortgage market demonstrates we should raise it to a higher level," he said.
Most of the other bills are still in planning stages, like numerous measures to regulate and penalize mortgage lenders who engage in predatory lending. Schumer acknowledged, however, that it won't help anyone already suffering with a bad mortgage.
"This won't do anything about what happened in the past, but it will prevent the present crisis from getting worse, because mortgage brokers are still preying on these people," Schumer said.
On the Net:
House Financial Services Committee: http://financialservices.house.gov/index.shtml
Senate Banking Committee: http://banking.senate.gov/

Broadband Spurs "techno commuters" rise

2007-09-03T14:34:00.000-07:00

Broadband spurs ‘techno-commuters’ rise

By Andrew Bolger, Scotland Correspondent
Published: September 2 2007 22:54 Last updated: September 2 2007 22:54
A burgeoning breed of ‘techno-commuters’ is using fast, newly affordable broadband connections to hold down city jobs without sacrificing rural isolation.
Homeworkers, defined as “people who work mainly in their own home, or in different places using home as a base”, made up 11 per cent of the total workforce in 2005, according to the Office of National Statistics. Some 8 per cent were defined as teleworkers, using the ONS definition of homeworkers who use both a telephone and a computer.
Work Wise UK, a not-for-profit initiative backed by the CBI employers’ body and the Trades Union Congress to promote wider adoption of smarter working practices, believes that this can be extended to up to 50 per cent of the workforce within five years.
Phil Flaxton, chief executive of Work Wise UK, said: “There are numerous reports indicating the UK's poor productivity compared with competitors. But we would not need to work such long hours, to the detriment of family and personal life, if we used the smarter working practices.”
The UK leads the world in the availability of affordable broadband connections, with 99.6 per cent of the population having access to terrestrial broadband – ahead of South Korea, Japan, France and the US, according to international league tables.
Work Wise UK argues such practices could improve productivity and reduce traffic congestion, overcrowding and pollution. But the Equal Opportunities Commission recently warned the UK was significantly lagging behind its European competitors on allowing such practices.
Mr Flaxton said in Germany and Sweden, the percentage of companies practising flexi-time was, at 90 per cent, almost double that in the UK at just 48 per cent. In Germany, Sweden and Denmark, 40 per cent of employers had staff involved in teleworking – compared with 20 per cent in the UK.
“UK management needs to stop making excuses and modernise. Smarter working practices are not only infinitely better for the workforce, they actually improve productivity. BT, a major employer in the UK, has reported productivity improvements of 20 per cent where it has introduced smarter working practices,” said Mr Flaxton.
But John Philpott, chief economist at the Chartered Institute of Personnel and Development, believes there is a long way to go before teleworking becomes widespread. “Though the phenomenon may be growing ... it is far from as widespread as popularly perceived,” he said.
Using the ONS definition of teleworking, just under 2.4m people in the UK fell into that category in 2005 – roughly 8 per cent of all people in employment. Mr Philpott said: “This is admittedly double the proportion in 1997 – the first year for which comparable statistics are available – but still quite small given all the hype surrounding the phenomenon.”
The ONS figures show 62 per cent of teleworkers were self-employed. Some 41 per cent of self-employed people, but only 4 per cent of employees, were teleworkers.
Mr Philpott said: “The greatest concentration of teleworkers is found in construction (23 per cent) followed by agriculture (16 per cent) and business, finance and insurance (15 per cent). A typical teleworker is more likely to be a mature male, white-van-driving, self-employed, jobbing plumber or bricklayer than ... a techno-savvy post-modern-style worker who looks to have just stepped off the set of The Matrix.”
The benefits of remote working are also being curtailed by outdated management, according to a recent report from City & Guilds and the Institute of Leadership and Management. It found 37 per cent of all managers surveyed were looking after teams who were either entirely or predominantly based away from the office. Of those surveyed, 44 per cent said they were adequately prepared for the supervision of remote teams and only 25 per cent had received any training on how to manage such a team.
Chris Humphries, director general of City & Guilds, said: “With the introduction of flexible working legislation, a growing awareness of the environmental impacts of travel and a realisation among the business community of the cost benefits of flexible working, employment away from the office has never been so popular. However, managers are finding it less comfortable to lead and motivate flexible teams.”
Background
• Homeworkers made up 11 per cent of the total workforce, according to the Office of National Statistics in 2005, the most recent figures available
• Some 99.6 per cent of the UK population has access to terrestrial broadband. This is ahead of South Korea, Japan, France and the US, according to international league tables
• Nine out of 10 companies in Germany and Sweden practise flexitime. This is compared with just 48 per cent in the UK. In Germany, Sweden and Denmark, 40 per cent of employers had some staff involved in teleworking – compared with just 20 per cent in the UK
• Some 62 per cent of teleworkers are self-employed. Some 41 per cent of self-employed people, but only 4 per cent of employees, were teleworkers
• The construction industry contains the most teleworkers at 23 per cent followed by agriculture (16 per cent) and business, finance and insurance (15 per cent)
Case study: Russian aerospace service at home on Tiree
Steve Thomson is a former investment banker who runs an online business information service about the Russian aerospace industry - from the Scottish Hebridean island of Tiree.
From the former Met Office near the island's airport, Concise Aerospace co-ordinates reports for clients such as America's Central Intelligence Agency, the Foreign and Commonwealth Office, Ministry of Defence, Rolls-Royce, Boeing and Aeroflot.
Mr Thomson relocated to Tiree from Cheltenham three years ago with his wife and three young children after falling in love with the island on long family holidays there. Mr Thomson had previously worked as an investment banker in both America and Russia. He discovered Concise Aerospace could be operated quite easily from the island and made the decision to move. "Our employees are in Russia and America, so it does not really matter where we are," he said.
"Coming to Tiree has been excellent for my family at all levels. Our children are happy and my wife and I both love it here. We have lived in Tokyo, New York, London and Zurich during our 20 years together but this is better than any of them. The winters can get a bit hairy, but the summers are fantastic." Mr Thomson's wife, Diana Prestt, a former merchant banker, has studied jewellery-making and plans to open a silversmith's workshop on the island.
Mr Thomson secured a £3,200 grant from the Argyll and Islands arm of Highlands and Islands Enterprise, the development body, to install an online payments scheme – vital for a worldwide customer base likely to require immediate access.
He can keep in constant touch with his main computer server in Oregon and keeps his customers updated with three or four daily bulletins. Mr Thomson has employed a Tiree crofter, Willie MacLean, to market the business to new customers during the winter, complementing Mr MacLean's own summer time occupation as proprietor of the island's Wild Diamond Kite Surfing.
Ken Abernethy, chief executive of HIE Argyll and the Islands, said: "Concise Aerospace is an excellent example of the kind of innovative, global companies which can be run from any number of fantastic locations in Argyll."
Copyright The Financial Times Limited 2007

Labor Day: 38,000 Jobs Lost

2007-09-03T13:05:00.000-07:00

Labor Day: 38,000 mortgage jobs lost
Good morning, Joe Hill, and Happy Labor Day. You won't read much today about the 38,000 mortgage industry workers who have lost their jobs already -- there's no union to speak for them, nobody will march for them today. Some of you believe the work they did was tainted -- they worked in an industry that made some bad choices and sold some bad products. True. But most of them worked hard and honestly, and their lives have been turned upside down. Here's an email we received recently:
"I worked at my company 10 yrs. I knew my job inside & out & could do it better than anybody.
"All of us were so confident that we would survive because our branch in always met or exceeded our monthly goals. But this last 3 to 4 months or so has been a real trial. We watched alot of our coworkers be layed off. We were a family in a sense because we all spent so much time together. It wasn't unusual to see people greet each other in the morning with a hug and a kiss on the cheek. Not one of those fake Hollywood hug-hug-kiss-kiss things, a real hug & a little kiss on the cheek.
"We had baby showers, birthday parties, bridal showers etc...right there in the conference room. We all helped each other. We listened to each others baby/kid/teenager problems, relationship drama, gave advice or sometimes you just had to take them to the bar for a couple of tequila shots.
"This close down came as a surprise. We actually thought that we would be ok and that they would close other lower producing branches. Oh....little did we know. Alot of our mortgage brokers heard about it on CNN and the financial websites before we even knew in the branch. Our acct execs were getting phone calls from brokers & then our inside people were and 20 min's later we got an email telling us to go to the conference room for a meeting. We all knew by then. The president of our company got on the phone & told us himself. And I can honestly say that he was genuine. He was struggling to talk and you could tell he had a lump in his throat & he was close to crying. It wasn't an act. That company was his baby & he'd been there from the very beginning. It was hard.
"I think we all knew that it wouldn't last with some of the crazy loan programs that were out there. Creative finance was the PC term for it. What goes up, must come down sometime.
"We will be there until 9/30. Then we are done. The next 4 weeks should be interesting."
Thoughts? Comments? Email story tips to LALandblog@yahoo.com

Waiting for signs of a Fed rate cut

2007-09-03T13:00:00.000-07:00

Waiting for signs of a Fed rate cut

From the Associated Press
September 3, 2007
NEW YORK -- Wall Street investors left for Labor Day weekend pleased about the prospects of an interest rate cut, but they're likely to come back wanting more evidence that rates are indeed about to come down.The market has been in better spirits, for the most part, over the last two weeks than in midsummer, when stocks tumbled as fears intensified about a deepening credit crunch. Although the Federal Reserve on Aug. 17 lowered the discount rate -- the rate it charges commercial banks for loans -- Wall Street's worries haven't been completely assuaged.The Dow Jones industrials and Standard & Poor's 500 index lost modest ground last week amid another bout of volatility. The Nasdaq composite gained for the five days.Fed Chairman Ben S. Bernanke has not come right out and declared that a cut in the benchmark federal funds rate will happen, but many investors believe he telegraphed it Friday by saying the central bank would "act as needed." Overall, traders who bet on the Fed's next move are counting not only on a quarter-point rate cut at policymakers' Sept. 18 meeting but also on a similar move in October.The Fed has not reduced the federal funds rate since 2003, when it declined from a low 1.25% to 1%. Starting in 2004, the central bank made gradual rate increases until the summer of 2006, when it began holding the benchmark rate at 5.25%.Investors will be curious to see what policymakers at the Bank of England and European Central Bank do with interest rates when they meet separately Thursday. Many analysts say the two banks are likely to hold rates steady, which would give the Fed more leeway to cut its own rate.Investors also want to know whether the U.S. job market, which has been one of the more stable parts of the economy, is holding up. The Labor Department's report comes out Friday. Economists surveyed by Thomson Financial believe that nonfarm payrolls rose in August, that the unemployment rate held steady at 4.6% and that hourly earnings ticked up 0.3%.Friday's job report is probably the most anticipated of the four-day week, but there will be some notable pieces of data coming in before then.Wall Street will return to work Tuesday and read the Institute for Supply Management's measure of U.S. manufacturing. It is expected to have weakened slightly in August compared with July.On Wednesday, investors will examine the National Assn. of Realtors' report on pending sales of existing homes, as well as the Fed's so-called beige book report, which details conditions in various parts of the country.

Countrywide's message of confidence turned to crisis

2007-09-03T12:53:00.000-07:00

Countrywide's message of confidence turned to crisis

By Michael A. Hiltzik, Los Angeles Times Staff Writer September 3, 2007

CEO forecast the lender would 'shine' as the industry changed. Later, he said the firm knew the bubble would burst.
By Michael A. Hiltzik, Los Angeles Times Staff Writer September 3, 2007
A year ago, Countrywide Financial Corp. Chairman and Chief Executive Angelo R. Mozilo was boasting that the looming shakeout in home prices and hike in mortgage interest rates would usher in a period of remarkable prosperity for his company."I have 53 years of experience. . . and this is nothing compared to 25% prime and 17.5% mortgage rates and 10% unemployment," he told a conference of bond investors last September, pooh-poohing the effect of rising rates.He assured his audience that Countrywide's "proprietary technology" would help it meet its goal "to avoid any foreclosure." Countrywide invariably kept to "prudent underwriting guidelines," he said, to ensure that its adjustable-rate borrowers could handle the highest interest rates that might kick in during the life of their mortgage."This is when we shine," he said, calling Calabasas-based Countrywide "an industry leader" and "a role model to others in terms of responsible lending."Today, the picture looks much different. Countrywide's financial reports and recent comments by Mozilo and other executives show that the company, the nation's largest mortgage lender, has been less a role model in the home-loan market than a prisoner of competitive trends. Delinquency and foreclosure rates have soared on many Countrywide loans, including mortgages that were thought to be relatively sound, such as home-equity lines of credit.The tone of executives' comments has gone from complacent to almost apocalyptic. "We are experiencing home price depreciation almost like never before, with the exception of the Great Depression," Mozilo said in a July 24 conference call with securities analysts.The company's traditional frames of reference for the performance of its loan portfolio, he added, may no longer be "a fair comparison in light of what is happening to real estate values."As for his claims that Countrywide's broad mix of revenue-producing activities would allow it to beat back competition from investment banks and other rivals -- "we had them surrounded," he said last year -- more recently the company has been in the role of supplicant. On Aug. 22, it accepted a $2-billion infusion from Bank of America Corp. on terms that will allow the bank to acquire as much as a 16% stake in Countrywide at a cut-rate price of $18 a share. Analysts are still debating whether the investment in preferred stock -- paying BofA a dividend of 7.25% until it is converted into common stock -- is a vote of confidence or a sign of Countrywide's weakness.BofA "wasn't willing to own it now at $18," said Frederick Cannon, a banking analyst at Keefe, Bruyette & Woods. "That would have been a much greater vote of confidence." He acknowledged, however, that BofA hadn't received approval from federal regulators to make such a purchase.One reason Countrywide finds itself in a predicament is that it needed to offer the same variety and pricing of mortgage products as the overall market. Asked during the July conference call if Countrywide would have done anything differently had it known a year or two ago what would happen to home prices, Mozilo replied that the firm knew the housing bubble would soon burst, but could not have made different choices."Our whole place in the industry would have changed dramatically because we would have arbitrarily made a decision that was contrary to what everything appeared to be," he said. Among other problems, mortgage brokers would have stopped offering the company high-grade or prime mortgages if it would not also accept lower-quality sub-primes.Countrywide suggests that mortgage pricing and underwriting standards during the housing boom were set by the most aggressive -- that is, least rigorous -- lenders, and that it was all but powerless to impose its own standards. "Most of the large bank lenders, as well as Countrywide, were limited, slow, reluctant followers behind the lenders who most aggressively relaxed underwriting guidelines," the company said in a written response to a question from The Times.If Countrywide had set its own mortgage rates higher to reflect its judgments of risk, it said, "borrowers would simply have chosen one of a myriad of other lenders offering more competitively priced products."Mortgages "are a commodity business," said Cannon, the banking analyst. "You have to pretty much accept what the market gives you." Countrywide, consequently, chased the same kinds of loans as other lenders. Beginning in 2004, it stepped up its origination of two products: sub-prime mortgages (made to borrowers with poor credit, minimal down payments or both) and home-equity lines of credit. Many of the latter were "piggyback" loans at fixed interest rates to cover all or much of a borrower's down payment, thus bringing the total mortgage close to 100% of a home's value. Piggyback home-equity loans, which fall delinquent at as much as twice the rate of conventional floating-rate home-equity lines, accounted for roughly 40% of Countrywide's $60-billion home-equity loan portfolio as of June 30, the company says.Sub-prime loans constituted 4.6% of Countrywide's total originations in 2003 by dollar volume. That jumped to 10.9% in 2004 before slipping to 8.9% in 2005 and 8.7% last year. Home-equity loans rose from 4.2% of volume in 2003 to 8.5% in 2004, 9% in 2005 and 10.2% in 2006.Conventional conforming loans -- those under $417,000, which can be sold to the government-sponsored mortgage agencies Fannie Mae and Freddie Mac and therefore are regarded as the safest mortgages for investors -- dropped from 53.9% of Countryside's total production in 2003 to 37.1% in 2004. By last year, they had fallen to 31.9%.These changes in Countrywide's portfolio occurred just before delinquency and foreclosure rates on lower-quality loans began to rise. Just over 13% of sub-prime loans were delinquent or facing foreclosure in 2004, but that rate climbed to 22.56% in 2006 and 24.11% by June 30 of this year. In the home-equity category, the combined delinquency and foreclosure rate was 0.82% in 2004, 3.05% in 2006, and 3.82% on June 30.Countrywide executives say the deterioration of the home-equity portfolio is one of their biggest surprises and has caused an unexpectedly highshare of charge-offs and delinquencies among their borrowers. However, they say they anticipated that these would be troublesome loans, and to cover the risk, they charged borrowers as much as 2 percentage points over the prime rate. (Conventional revolving home-equity lines are often made at less than prime.) Of course, that high interest burden has only intensified the financial pressure on some strapped borrowers.Mozilo said in July that it was traditionally "very common" to make home-equity loans, piggyback and otherwise, that brought a homeowner's indebtedness close to 100% of the property's value, "and in an ordinary market, it worked fine." But the "sudden and severe and deep deterioration" in home values has thrown many borrowers into delinquency because homeowners with little or no equity have been unable to refinance their mortgages to reduce their rates.Countrywide pursued other lending practices typical in the industry and has suffered the same financial problems as a result. In a letter to federal bank regulators in May, the company acknowledged that it often judged its customers' creditworthiness for sub-prime adjustable mortgages on whether they could afford payments at a loan's low initial "teaser" rate, not at the much higher rates that might kick in two or three years after the loan was made.The letter appears to contradict Mozilo's claim last September that the company's underwriting standards required borrowers of adjustable loans to qualify at the higher rate.The letter from Mary Jane M. Seebach, Countrywide's managing director for public affairs, said that in the fourth quarter of 2006, about 60% of its borrowers of sub-prime adjustable mortgages would not have qualified for their mortgages based on the higher rate. Nearly 25%, she said, would not have qualified for any other mortgage offered by Countrywide.Seebach acknowledged that Countrywide, like the rest of the industry, had cut back sharply on the most default-prone mortgages -- loans to borrowers with poor credit histories and no income documentation and minimal or no down payments. "The market," she wrote, "once again realizes that it is reasonable to expect a down payment from borrowers who have not proven their ability to manage their credit."Countrywide says it has taken steps to tighten lending standards, along with the rest of the mortgage industry. Among other things, it has eliminated piggyback home-equity lines and no-down-payment mortgages and requires income verification from borrowers with down payments of 10% or less.But those steps may have come too late, as loans already on the books threaten to bring greater losses. Countrywide says it expects its 2006 crop of sub-prime loans to be "one of the worst performing vintages ever." Many such loans reset at higher interest rates two or three years after they are made. In the past, such borrowers customarily would refinance before the rates reset, often at fixed rates. The company says that 60% of the sub-prime loans scheduled to reset in 2008 -- meaning loans made in 2006 and 2005 -- have not been refinanced. Given the tighter standards facing sub-prime borrowers today, refinancings are likely to be harder to come by. That's troubling, because sub-prime loans that can't be refinanced before the reset tend to have "much higher delinquency rates," Countrywide says, than those that are refinanced.As for loans that the company has packaged and sold to investors in the bond market and on which it retains some liability for defaults, executives said in July that it was too early to say what those losses will be. David Sambol, the company's president, told analysts in July that it was "providing for future losses [in its mortgage portfolio] at a level that is greater than anything that we have ever seen." Countrywide also concedes that its vaunted proprietary system for estimating loss probabilities and delinquency rates was bamboozled by real-world conditions in 2006 and 2007."There really had not been for our models. . . very much in the way of historical empiricals" to help Countrywide compile accurate predictions, Sambol said in July. At the same meeting, the company said its automated underwriting system had been "recalibrated."michael.hiltzik@latimes.com

Bush Offers Help to Overwhelmed Mortgage Holders

2007-08-31T17:12:00.000-07:00

Bush Offers Help to Overwhelmed Mortgage Holders
by Chris Arnold
All Things Considered, August 31, 2007 · Responding to the growing wave of mortgage foreclosures, President Bush announced measures Friday that could help some troubled borrowers keep their homes. Democrats have criticized the president as being slow to act.
Economists estimate that up to 2 million people around the country could lose their home in the ongoing turmoil surrounding so-called subprime mortgages.
Adjustable Loans Go Through the Roof
The president started his Rose Garden speech on a glass-half-full note, saying that changes in the mortgage industry in recent years created a record level of homeownership.
But President Bush then noted that there also have been "some excesses in the lending industry." He said one of the most troubling developments has been the increase in adjustable-rate mortgages, which start with a low interest rate and adjust higher after a few years.
Many of these exotic adjustable loans are rising — to 11 percent or higher — and are adding hundreds of dollars to borrowers' monthly payments.
President Bush said that the growth in adjustable-rate mortgages has led some homeowners to take out loans that are larger than they can afford. Some borrowers may have been overly optimistic about home prices, while others may have been confused by the terms of their loans or misled by irresponsible lenders.
No Bailout
The president said he does not want to "bail out" homebuyers or lenders who were reckless. But he said he wants to help responsible homeowners who got stuck.
One measure that goes into effect right away uses the Federal Housing Administration to help people refinance into loans with better terms.
Most lenders won't offer new loans to borrowers who have fallen behind in payments after their loans adjusted higher. But if the FHA insures a new loan, the borrower can refinance.
Another measure that needs congressional approval would waive a tax that homeowners pay if a lender forgives part of their loan.
Proposals Help Only Small Fraction of Those in Trouble
The FHA estimates that the Bush proposal would help an additional 80,000 homeowners to refinance.
Mike Calhoun, president of the nonprofit, nonpartisan Center for Responsible Lending, says that number might sound like a lot, but it underestimates the full extent of the problem.
"Even the Bush administration acknowledges that several million homeowners face large payment shocks and the threat of foreclosure in the upcoming year," he says.
Calhoun says the administration's response would need to increase by at least ten- or twentyfold in order to address the full problem.
The Holy Grail: Loan Modifications
Calhoun says the real hope for the bulk of the homeowners in trouble is for the lenders and servicing companies to renegotiate the loans to make them affordable.
President Bush strongly urged lenders to work with homeowners.
"I believe lenders have a responsibility to help these good people to renegotiate so they can stay in their homes," Bush said.
But housing advocates say such statements alone don"t have a lot of teeth. And they say the president and others in Washington need to do more than just ask lenders to work with homeowners.
Bruce Marks heads up the Neighborhood Assistance Corporation of America. The group is working with borrowers who Marks says are stuck in unfair loans.
He says his group has submitted more than a thousand requests for loan modifications to major lenders and loan servicers, asking them to restructure the loans to make them more affordable.
"They're not doing it," Marks says. "Right now, the lenders are only giving lip service. The regulators are giving lip service, and the president and Congress are letting them off the hook."
Stronger Medicine May Be Coming
Much of what the president set forth Friday has already been proposed in the House and the Senate. Housing advocates say much stronger measures are emerging in Congress. Some would make it harder for lenders to foreclose without first working in good faith with borrowers.

Mortgage Crisis will be extended, Fed chief says

2007-08-31T13:18:00.000-07:00

US mortgage crisis will be extended, Fed chief says
Washington - More US homeowners are likely to default on risky loans over the coming months, extending uncertainty about US economic growth, Federal Reserve head Ben Bernanke said Friday.
The US central bank "stands ready to take additional actions as needed" to fight turmoil in financial markets caused by the meltdown of much of the US subprime mortgage market, the Fed chief said."Global financial losses have far exceeded even the most pessimistic projections of credit losses on those loans," he said in a speech in Wyoming.In a strong indication of government worry over the roiling US mortgage crisis, US President George W Bush was preparing later Friday to propose a federal aid programme for high-risk borrowers and low-income homeowners.Bernanke made plain there would be no Fed bailout for failing lenders or investors stuck with losses, saying that "is not the responsibility of the Federal Reserve."He gave no sign of whether the Fed might cut its benchmark interest rate to help boost the US economy"Inevitably, the uncertainty surrounding the outlook will be greater than normal," he said at an economic conference.Lenders have pushed subprime loans to the least creditworthy borrowers, helping many Americans buy homes and driving up home prices in the last few years.A sharp slowdown in US homebuilding, a drop in home values and rising interest rates have forced many of those homeowners to default on their mortgages, squeezing the financial companies that made the loans and leading to a broader, global credit crunch.Bernanke warned that the crisis was far from over."With many of these borrowers facing their first interest rate resets in coming quarters, and with softness in house prices expected to continue to impede refinancing, delinquencies among this class of mortgages are likely to rise further," he said.And the number of unsold new US homes remains high, "suggesting that further declines in homebuilding are likely," he said. dpa

Tough Love from Bernanke as Bush unveils Band-Aid

2007-08-31T13:09:00.000-07:00

'Tough love' from Bernanke as Bush unveils crisis mortgage aid

WASHINGTON (AFP) — Federal Reserve chief Ben Bernanke pledged Friday to act to limit the spillover of a credit crunch on the broader economy as the White House unveiled aid to homeowners facing foreclosure.
The two separate announcements were aimed at easing a housing crisis that some fear could derail the US economic expansion by causing credit markets to freeze up further.
Bernanke, in his first public remarks since global markets were roiled by fears of a liquidity crisis, said the Fed wants to avoid "further tightening of credit conditions," which could have "adverse effects on consumer spending and the economy more generally."
Markets viewed the remarks as opening the door to a potential interest rate cut that could lower overall borrowing costs and stimulate credit markets.
"The (Fed) continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets," Bernanke said.
Stephen Gallagher, economist at Societe Generale in New York said the Fed "continues to embrace the market with tough love, but will do what is necessary," including a cut in the federal funds rate if necessary, on September 18.
Analysts said Bernanke does not want to be too quick to cut rates, for fears of sparking inflation and to be seen as bailing out investors who made risky bets.
But Robert DiClemente, economist at Citigroup, said he believes that "the speed and magnitude by which the overall financial setting has deteriorated are consistent with downside risks ... that justify policy (rate) action."
Meanwhile, President George W. Bush outlined a series of actions aimed at averting foreclosure for distressed homeowners, many of whom are facing a crisis as adjustable-rate mortgages are reset to reflect higher rates.
One measure announced by Bush would allow homeowners with a good credit history but who cannot afford their current payments to refinance into federally insured mortgages, likely at lower rates.
He also encouraged lenders to try to work out payment arrangements with financially strapped homeowners and urged Congress to pass additional relief measures.
However analysts said the measures would only affect a small fraction of the estimated two million homeowners facing foreclosure.
Bush insisted the federal government has only a "limited" role to play in helping millions of people now struggling to hold onto their homes amid rising interest rates and was not promoting "a federal bailout" of speculators and unscrupulous lenders.
Bernanke, speaking at a Fed symposium in Jackson Hole, Wyoming, did not directly speak about the next move on interest rates, but appeared to be aiming to allay concerns that the Fed would do nothing to prevent a broader credit crunch that drags down the economy.
But DiClemente said Bernanke's comments "reinforced expectations of an upcoming reduction in the funds target."
The bank has kept its main federal funds rate at 5.25 percent for over a year but on August 17 cut the discount rate for direct loans from central bank a half-point to 5.75 percent in an effort to promote credit flows.
Bernanke said incoming reports suggest the world's biggest economy "continued to expand at a moderate pace" as the third quarter began.
But he noted that the outlook has become somewhat murkier in view of the financial market turmoil of recent weeks.
Data released Thursday showed the US economy grew at a solid 4.0 percent pace in the April-June quarter, but analysts say they expect a sharp slowdown in view of the credit tightening.
Because of the tight credit conditions, Deutsche Bank economists Joseph LaVorgna and Carl Riccadonna said in a note to clients that the Fed is likely to cut its base rate by a quarter-point in September and by the same amount in October.
"The current medicine (of easier discount window lending) has not worked," they said.
"The asset-backed commercial paper market has remained completely frozen. If this situation continues a much broader credit crunch could develop, which would have serious negative consequences for the economy. The Fed will not take this chance."

Sub Prime Lending and Shady Mortgages

2007-08-31T13:01:00.000-07:00

Hooray for the Market!
Subprime Lending and Shady Mortgages
By MATT VIDAL
Does anyone remember corporate ethics? This was the big economic issue after the collapse of Enron, WorldCom and other major companies at the beginning of the 21st century. Books were cooked, winks and nods acknowledged.
Enron and WorldCom used a range of fraudulent accounting practices: hiding debts, lying about profits, backdating contracts, understating costs, etc. Ultimately, both the energy and telecommunications sectors each saw one of their largest companies go bankrupt. The WorldCom bankruptcy was the biggest in US history.
We've gotten over that. The problem was one of corporate ethics, and it has been fixed some corporate governance legislation, criminal prosecution and moral outrage.
But the bad apples are back, this time in mortgage lending rather than accounting. Financial markets are currently reeling from a meltdown in the mortgage lending market, following shady financial dealings in the so-called subprime market, which serves borrowers with bad credit history.
The story in the mortgage lending sector is largely the same as in the earlier accounting scandals: shysters using opaque, complex financial instruments to conduct transactions, pump up markets, and manipulate hard working people.
The financial instruments in the subprime lending market are numerous and often esoteric. In the category of straight-up manipulation, we have questionable lending tactics that include offering home loans to borrowers who have no down payment, interest rates with low introductory levels that soon shoot to double digits, and prepayment penalties.
As recently reported by the New York Times, the country's largest mortgage lender, Countrywide Financial, steered subprime borrowers into higher-cost loans -- more profitable for Countrywide and more expensive than necessary for homebuyers -- by using a computer system that excluded the cash reserves of borrowers.
At Countrywide and many of its competitors, mortgage lenders repackaged these shady loans and used them to back securities sold to investors. These mortgage-backed securities, which contributed to the housing market bubble, have come to wreak havoc in the credit markets. The crisis has intensified in recent weeks as major Wall Street hedge funds that had invested in mortgage-backed securities began to flop.
Questionable lending in the subprime market grew in a context of soaring real estate prices that gave a false sense of security to potential borrowers and homeowners. A steady stream of hot air fueled the housing markets, while seasoned investors happily bet away.
The warning signs were there -- the explosion of dubious mortgages followed by increasing bankruptcies -- and, indeed, a few hedge fund managers predicted the mortgage market meltdown and accordingly bet against subprime loans. Most investors, however, went along for the ride.
Countrywide was able to continue its subprime-driven strategy in large part because it was backed by banks and investors willing to give it a seemingly endless supply of money. After the contradictions of purely credit-driven growth came to a head, Countrywide's share prices began to tumble and it had to secure over $11 billion in emergency loans.
What should be made of all this? For starters, consider the recent attempts to privatize social security. The current regime of goons in the White House tried to implement the long-standing conservative goal of taking the retirement security of the majority of the country's workers and throwing it to the vicissitudes of the market.
The example of the mortgage market is instructive. It reminds of what capitalist markets consist: wild fluctuations, bubbles and drops, caused by extremely complex interdependencies in the political economy that are hard to understand, even for experts.
Schemers and cheaters trying to find opportunities to screw hard working people are an inevitable part of the system. But they distract attention from the economic system's structural problems.
At an immediate level, the mortgage market crisis provides a reminder that turning social security over to the market is a bad idea.
At a deeper level, we can see that it's not really the free market after all. Sure, people are exchanging things and the forces of supply and demand are felt.
But many of the forces behind these market fluctuations are institutional: Very complex financial instruments; winks and nods from regulators, analysts and auditors; and a whole range of economic transactions that are based on social conventions, unwritten rules, and long-term relations between key organizations and individuals.
More importantly, a key lesson here is not simply that "the market" is actually constituted at many levels by social institutions. Much of market behavior is driven more by the dynamics of capitalist organizations, rather than supply and demand creating efficient outcomes through price signals.
Why did major capitalist organizations such as Countrywide delve so aggressively into the subprime market? Quite simply, because the profit margins on subprime loans were higher than loans to prime investors. This is why we should expect schemers and cheaters, because at the end of the day, the name of the game is not efficiency-enhancing markets but profit-seeking organizations and individuals.
We are told, over and over, that it's really all about the market, that this is the governing institution. But as left critics have been saying since Karl Marx, this line is simply part of the bourgeois ideology that works to mystify true workings of the economy.
The action is in organizations (and individuals) competing for profits. And whether these organizations seek their profits in the financial, manufacturing or service sector, they are the building blocks of an economic system that, in its regular workings, leaves not only scandal, but unemployment, underemployment, inequality and poverty in its wake.
Matt Vidal is pursuing his doctorate at the University of Wisconsin in Madison. He can be reached at: mvidal@ssc.wisc.edu

Helping Homeowners

2007-08-27T14:27:00.000-07:00

As a member of the California Association of Mortgage Brokers, I am concerned about the state of the industry and the public perception of our members.

Our members are feeling the pain of this blight on the industry. This is a systemic crisis, not a momentary 'correction'. Looking at the amount of devastation that could happen, I call upon members of the industry to look forward to solutions to this mess. It is not going to happen overnight. What we need are ways to bring sanity back and resolve the situation.

State of the Housing Market

2007-08-27T14:22:00.000-07:00

State of the Housing Market: Update From Schahrzad Berkland
Jun 04, 2007 -- In an effort to bring quality information to our growing readership about the state of the housing market, we will be featuring a series of interviews with various housing market experts around the nation. Each expert will be commenting on their respective market. Our first update on the housing market comes from Southern California housing expert Schahrzad Berkland.

Sick and tired of inaccurate housing reports, Schahrzad Berkland started The Berkland Group, a consulting firm which provides straight talk about the Southern California housing market. You can see Schahrzad's housing forecasts on californiahousingforecast.com.
Thank you for taking time to complete this interview, Schahrzad. We are very excited to share your views and data on housing with our readers. Can you let everyone know how long you have followed the housing market in Southern California?
Since October of 2005.
In your opinion, what are the biggest problems in the So Cal housing market right now?
Excess prices and risky loans: CA's prices are far removed from their fundamentals of wage and rent multiples. A large percentage of the population lives in California, and the banks are very exposed to CA real estate--so there is a lot of paper profits and risky bank loans, whose collapse will ripple through the entire country.
Wages: Salaries here are not high enough to truly afford the homes, so in CA we resorted to risky financing. In San Diego, 68 percent of all mortgages in 2005 and 2006 were IO or ARMs. People cannot afford their homes, so they are renting them from the bank, thinking they own them. This is happening in California more than anywhere else, which means the dollar amounts involved in overpriced homes and loans-about-to-go-bad is so much higher. For this reason, California is where you'll find the most risky loans, the highest mortgage equity withdrawal, and the greatest impact of all that consumer spending from the housing ATM.
Population loss: The cost of housing is so high that people are leaving in droves, moving inland or to cheaper states. (See #1 below.)
Job growth: Employment growth is too dependent on real estate.
Looming foreclosure crisis: With no skin in the game, people in foreclosure now are not even listing their homes for sale. They don't even have 6 percent equity to hire a realtor. So they live rent free for 7 - 9 months until evicted after auction. Foreclosures will go through 2 waves through 2012. For more info, see the chart on my homepage: californiahousingforecast.com
Some recently published news stories have lead readers to believe that wealthier neighborhoods in California are not experiencing the same housing market issues as other neighborhoods. Are the problems really limited to a specific group of people, i.e. the poor to middle class?
Even the wealthy are in over their heads, with rising property tax liens, cash-out refinancing, and foreclosures. I'll just give you one example of each. In Maderas golf course community, where some of the Padres players live, we've got a half dozen 2004 tax liens on $2 - $3 million homes. A guy on the water in Encinitas took out a $1 mil HELOC last year...
I go through hundreds of listings through the MLS, foreclosure.com, and ForeclosureRadar.com. One thing is clear: the more expensive the home, the more cash was taken out. It is rare to see anyone who abstained from the housing ATM. Last, foreclosures are rising all over the city. While they are highest in new subdivisions (because you had entire communities who got 100 percent financing at the peak of the market with short-term teaser rate loans that are resetting), they are rising in middle and upper income areas too.
Is there anyone in particular to blame for these problems?
The Federal Reserve created and nurtured the housing bubble. They ignored all the Homeowner Relief Acts and other banking legislation, all predatory lending guidelines. They wanted the stimulus of cash-out refinancing, to avoid a recession in 2001 from getting worse. So who knows what they have in store for an encore. Just like the housing bubble covered up the stock bubble collapse, what is the next bubble? The Fed is printing money at 10 percent per year, creating high inflation is anything that is not imported from Asia. So consumer goods are cheap, but prices are rising for US services like education, healthcare, oil, and food. What's next?
Do you think what we are seeing now is normal bubble behavior? For example, do you think the current bubble in California is similar to the housing bubble that occurred in Japan?
I have not studied Japan, but Dr. John Talbott discusses this in his book Sell Now. Their prices kept going up, but then reached a maximum when their elderly population reached 12 percent of the total. Also, Japan's Ministry of Finance didn't want the banks to write off all their bad mortgage loans, so they kept it covered up, letting the losses be offset by income over a 10 year period. With all those losses to cover, banks had to be more conservative, and lending really dried up. Too much saving means low consumer spending.
Do you see the same thing happening in California?
CA economy will stall as cash out refis dry up, property tax and sales tax falls. House prices will fall further once reality sets in after the recession is realized. We are already in a recession, but it is not yet reported in the media. Q1 GDP growth for US was 0.6 percent. This quarter could be well negative already.
Can the Fed balance everything out?
The Fed will panic and lower interest rates. They will do the wrong thing. They don't want to learn anything or make a long-term solution. I am sure they are terrified of a banking crisis and credit crunch, as our entire economy is addicted to ever rising access to credit. If you take away credit cards from Americans, our economy will melt down immediately. People just don't have money from their productivity or savings to even pay their basic living expenses. So the Fed is worried, but they won't learn a thing. They will just keep printing money at 10 percent a year and create another asset bubble.
Remember, the Fed is not a government agency, but a consortium of private banks. This would be a good research project for a media organization: who are the shareholders of the private banks making up the Fed, and what is their mission? The Fed is operating outside the Constitution. Our Founding Fathers explicitly stated that only gold and silver could be legal tender, because they had used paper money before and it caused such severe depressions that they did not want us to go through that again. So the interests of the shareholders of these huge banks, which by the way is secret (nobody knows who they are), are not aligned with the interests of the American citizen...so they will do what makes them richer.
So the right thing to do is...?
The right thing to do is stop printing so much money, and only spend what we earn. We have to pay down our debt and stop making entitlement promises that cannot be kept.
There are optimists who think Southern California will defy the housing downturn because the area is such a desirable place to live. What do you think of this view?
Two things:
One: CA has always been desirable, but just because people want something doesn't mean they can afford it. After all, if it's so desirable, why are people leaving in droves? CA houses now cost over twice as much as they used to compared to salaries. Despite all that exotic financing, people are simply priced out. Wages have not kept up. So people are voting with their feet, and walking away from 'desirable CA'. So they are leaving high-priced cities in CA in droves. Last year, per the US Census Dept, 40,000 people left San Diego, 229,000 left LA, 42,000 left San Francisco, 6,800 people left Santa Barbara, and 8,400 left Ventura County. In contrast, 63,000 moved to the Inland Empire last year.
I have a good one for you: whiskey is so desirable among alcoholics, that grocers can charge whatever they want...people will pay it. Guess what! Alcoholics switch to wine or tequila or beer. So people only pay what they can afford or are willing to pay, and then they switch products. In the case of housing, they buy a house in Kansas. My realtor friend was showing 5 houses one weekend, and every seller was planning to leave and buy a mansion with his CA sale proceeds, in a cheaper place.
Two: Stricter lending puts a cap on what people can pay. That forces prices down. People are getting turned away by lenders, so they can't buy, even if they want to. Now we have lower demand as buyers are priced out, turned away by lenders, or leaving the area. So sales are way down. To make matters worse, sellers keep adding more homes for sale. Foreclosures are projected through 2012, so we're going to have lots of homes for sale for many years to come.
If half of all buyers could get $600,000 loans with no money down, but now half of all buyers can only get $250,000 loans because they need a down payment, anyone who wants to sell must lower their price down to that $250,000 level. So prices will need to drop to the point where a teacher can buy a small single family home on 2.5x her income.
Exactly how far do you think prices will drop in each of the following counties: Los Angeles, Orange, San Diego, and San Bernardino?
Prices will fall in half. We'll go back to 1999 prices. It could be worse. Don't be surprised by my statement. Let's just look at what happened in the 1980s and 1990's downturns. It's easy enough to look up at the County Recorder Office, or on the MLS, but neither the County Recorder, nor the realtors, wants to advertise the ugly truth: CA has 15 year housing cycles and prices fall 30 percent to 50 percent in a downturn.
I have many examples. I'm talking about homes in Laguna Niguel, Encinitas, Del Mar, La Jolla, Poway, Pacific Palisades.....the most desirable properties, which are still rising now by the way, fell 40 percent in the last downturn. The media needs to start asking realtors this tough question: 'How much did superior properties fall in the last housing downturn?' When I posed this question on a Carlsbad realtor's blog, he blocked my internet address.
So it's not a question of what I think will happen to prices. It's a matter of fact what actually does happen to prices. History tells us.
Your estimates probably aren't far off from what many people think, but they are quite a bit different than the estimates presented in the media. Is there something they're not telling us?
Nobody is going to give you the straight scoop on CA's housing bubbles. Realtors and mortgage brokers need their commissions; journalists are English majors and don't even have access to the MLS so they rely on realtor salesspeak; economists are paid by governments or investment banks so they have to keep quiet; and local municipalities try to promote growth of their region.
Gregory Smith, the San Diego County Assessor, is promoting real estate purchases...he's encouraging more fools to enter the pyramid scheme. This housing market is in a bubble, and no public official should be encouraging anybody to buy homes right now. Of course, he might be worried about falling property tax revenue, but the rising tax default rates are worse in the long run. In the 1990's, our property tax default rate was near 5 percent. This time housing prices climbed much higher.
There has been talk of a recession caused by housing, but for the most part, the mainstream media has been quoting economists who don't think there will be a recession. Is this another case of not getting the straight scoop or are economists optimistic for the most part?
Economist Dr. Dean Baker wrote that economists never predict a recession, saying 'I happened to get a copy of the Blue Chip top 50 forecasters' projections for 2001, dated Sept. 2000. Not one forecaster in this group projected a recession. In fact, the lowest growth projected by any of them for 2001 was 2.4 percent. Keep in mind, the stock market had already begun to unravel at that point, so it shouldn't have been too hard to imagine that there would be some economic impact.'
What about median home price tracking-a method most media outlets use to report the market? You mention on your website, californiahousingforecast.com, that median prices, average prices, and $/sq ft measurements are useless indicators of what is really going on in the market. Can you tell us why?
The median, average, and $/sq ft measure the prices of homes which sold that particular month. First time buyers are priced out, or they can't qualify for a loan, so now we have fewer cheap homes selling. The snapshot of sold homes has really changed. How can we measure the median or average price of a basket of produce when one month people are buying mainly apples, and the next month they are buying mainly mangoes and blueberries? We can't! The high end homes are 50 percent more of the market, so they are skewing the data up. They used to be around 6 percent of sales, and are now around 9 percent of sales.
The $/sq ft is falling for the same reason that the median is going up. I know that sounds backwards, but it's correct as written. Remember, our sales mix has a smaller portion of starter homes now. The low end is priced out and can't get loans. The rich are still buying, so they are skewing all the data.
Big homes cost a lot less per square foot, because land is a fixed cost and due to economies of scale. A 1000 sq ft house is $400/sq ft, while a 3000 sq ft house is $300/sq ft. See what happens when you have more homes at $300/sq ft? The $/sq ft goes down when you sell more big homes. So we are measuring the distribution mix again. Some people think they are analysts, because they see a number go down and jump to the conclusion they finally found a way to measure the price drops. This is why I scolded Rich Toscano publicly. You may know, or not, that I emailed him privately several times before going public. But anyway, it's a distribution number.
Here's another problem: any method which uses sold homes to measure the prices of all homes, will always be wrong. You cannot know the price of a house that didn't sell, because it has not sold yet. And in this market the homes that didn't sell will have to be severely discounted. So you can't know the price of homes not on the market, or those languishing on the market, based on those that sold. The homes that sold are the cream of the crop.
How can you know the price of the 2000 sq ft house on the highway that ain't gonna sell in this market where buyers have a ton of choices, based on the price of the 2000 sq ft house with a stunning kitchen, next to a park in the beautiful subdivision down the street? They are both 2000 sq ft homes, on the same size lot. The buyers are going for the good one, and leaving the bad one behind. The spreads between good and bad are getting bigger. Mr. Highway has to take a huge deduction if he wants to sell.
In a hot market, everything sold, so the sales prices accurately reflected the value of the entire market. But in a weak market like we have now, only the good homes sell. So by measuring only the sold homes, now we've shifted our data collection to the good homes. We don't know the value of the bad homes, because they are not selling. If you want to improve the median, then make every homeowner lower his price to the place that his house would sell, and then see how much the median drops.
What about the Office of Federal Housing Enterprise Oversight? They claim that their house price index provides more information and is more accurate than other indices.
The OFHEO index has problems too, which I explained on my site. Just one: it does not measure the huge amount of remodels. Every one of my friends tore out her kitchen or put in a backyard barbeque with those nice Viking outdoor barbeques and refrigerator. Of course the house will sell for more now than 5 years ago! But it's not because housing prices are rising! The OFHEO and Case-Shiller indices are not adjusting for that at all, they can't. They're just using county sales records. So again, the house with the $60,000 kitchen upgrade will sell, but the one next door with original 1980 kitchen will not. So it seems like the housing price is going up, but really you are paying more for that kitchen.
All housing metrics use data from sold homes...so that is a lot cheaper than hiring appraisers to do walk-throughs on thousands of homes. I doubt anyone is going to devise an appraisal methodology. Where is the incentive? Who would pay for it?
The ONLY way to measure housing prices is an appraisal method. Someone needs to design a sample set of homes and appraise them every quarter. The appraiser must do a walk-through appraisal, so he can adjust for remodeling. This would be expensive.
What indicators should investors and the everyday homebuyer be using? Where can they get reliable info?
What people need to do is watch the number of homes listed and sold in their neighborhood. As long as listings are increasing and sales are falling, prices will come down. Only 10 percent of homes are selling, so people who want to sell, have to lower their price, and inevitably, will set the new price for the area.
You can get home sale and listing info from your realtor. Don't let them sweet talk you into buying a home. Insist on knowing this data:
How low did housing prices fall in the last downturn? You have to see samples of homes which sold in two specific time periods: 1989-1990 and again 1995. There will be some. You need to see those.
Figure out months supply. Ask your realtor for sales and inventory data for that area. Sales/inventory = months supply. As long as that is above 4, prices have to come down.
Wait to see how badly the foreclosure wave pummels the market. Do not buy any real estate until the ARM resets are behind us. The bulk of ARM resets ends in 2008, so a one year lag means the highest REOs will be at the end of 2009. You might get a great buy then. But the foreclosure wave will continue, as the prime borrowers hit their resets on their 7 year IO loans in 2011. I am waiting to see how much prices get pummeled after my friends in their $1.5 - $2 million homes have their loans reset. So wait to buy until after the REO wave is over.
When do you think the market in So Cal will finally bottom out?
Not before 2012. CA real estate cycles are 15 years long: 5 - 7 years up, 5 - 7 years down.
There is not one clear month for the top of the housing bubble, since the top happens in waves, starting with the lowest end and working up, over 3 years. Condos peaked in the spring of 2004, single family homes peaked in the spring of 2005, and the prime properties in Carlsbad and on the water are still rising.
How can people watch for the bottom? Or more precisely, how will they know when to buy?
People should keep reading blogs and my forecast. Watch for the foreclosure wave to end, and when panic is high and nobody wants anything to do with real estate, then go in and buy. I bet all the people reading this, who are waiting for prices to drop, won't want to buy once prices have dropped. The people reading blogs are priced out...they are not market timers like me. Some sold and are renting, like me. Many are first time buyers, who are waiting for prices to come down to their comfort level. But those same people will be scared to death to buy after prices have gone in half...foreclosures are everywhere, as they will be afraid of further price drops.
When I see sales pick up after the foreclosure wave is finished, then it' time to buy. Look for the market to completely wither and die, and then start showing signs of life.
On the other side of the coin, what can sellers do to avoid losing their shirts?
Sellers are hurting themselves with false pride. They really need to look at the comps and go look at other homes in their price range. They'll find they are overpriced, and their home won't sell. When they are overpriced, they won't even get anybody to come through the door to look at the home. So no traffic means no sale. If you can't get traffic, how can you sell? If every seller would lower their price by 10 percent to get to where they need to be, they could have a chance at selling their homes.