Bloomberg.com reports on the apologists for fiscal insanity surrounding the Fannie/Freddie bailouts in Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case:
“Republicans and Democrats love putting Americans in houses, and there’s no getting around that,” Holtz-Eakin said.
‘Safest Place’
With no solution in sight, the companies may need billions of dollars from the Treasury Department each quarter. The alternative -- cutting the federal lifeline and letting the companies default on their debts -- would produce global economic tremors akin to the U.S. decision to go off the gold standard in the 1930s, said Robert J. Shiller, a professor of economics at Yale University in New Haven, Connecticut, who helped create the S&P/Case-Shiller indexes of property values.
“People all over the world think, ‘Where is the safest place I could possibly put my money?’ and that’s the U.S.,” Shiller said in an interview. “We can’t let Fannie and Freddie go. We have to stand up for them.”
To Dr. Holtz-Eakin, my response is that there is a way around it. It's called leadership and avoidance of money-printing. To Dr. Shiller, I would point out that any investor who is not yet aware that Fannie/Freddie obligations are not full faith and credit obligations of the Federal Government deserve losses. No, taxpayers don't have to "stand up" for these badly-run behemoths.
It's all about the inflation game (or, anti-deflation, which eventually amounts to something very similar though probably not identical). Dr. Shiller, who actually praises the money illusion in the book he co-authored titled "Animal Spirits", believes that rising prices and rising wages are good things for psychological reasons. So the U. S. government (with the Fed's assistance) writes off/monetizes the losses, thus eradicating the debt and converting debt-based finance into helicoptering money onto the people.
Until the debt is canceled or monetized, it is not inflationary. By "standing up" for Fannie and Freddie, bad debts all through the chain can be cancelled or written down, but the credit money issued by banks, such as to mortgagees, has been spent, and more is on the way to justify current prices.
It is a cynical game in which Republicrats and Demopublicans work hand in glove with the financial/building interests to put people into houses they cannot afford, that produce no foreign exchange revenue, that cost money to maintain, and that are backed by the misperception that the U. S. is a safe place to invest. No matter that over the past 25 years, the U. S. may have had more bank failures than any country anywhere, that the U. S. is the obvious home of global Ponzi finance, and that the housing scheme is at the root of it all.
What makes the U. S. "safe"? Broad oceans, militarily unaggressive neighbors, and its global military presence. Fundamentally, the Fannie/Freddie/AIG/Lehman month late August to beginning of October 2008 has never had official explanation or serious action at reform.
With Establishment stalwarts such as Drs. Holtz-Eakin and Shiller banging the gong loudly for ongoing Fannie/Freddie bailouts, you can expect more of the same-old same-old going forward.
Copyright (C) Long Lake LLC 2010
Showing posts with label Freddie Mac. Show all posts
Showing posts with label Freddie Mac. Show all posts
Monday, June 14, 2010
Tuesday, April 20, 2010
SIGTARP on Housing: Exposing the "One-Off" Shell Game
The special inspector general for TARP, appointed by Democrats, is reported in "The Hill" as saying:
The administration program, "risks being remembered not for catalyzing a recovery from our current housing crisis, but rather for bold announcements, modest goals, and meager results," the report said.
Last month, "The Hill" also reported that Mr. Barofsky said:
The Obama administration's $75 billion program to help homeowners risks failure by, "merely spreading out the foreclosure crisis," a top government watchdog said Tuesday.
The profits and economic recovery is happening in part simply from the government bailouts of Fannie and Freddie, abetted to an unmeasurable degree by people walking away from debts in favor of spending money elsewhere. Just as corporations claim "one-time" non-recurring expenses that nonetheless hit the assets statement, the government wants us to believe that these socialized housing expenses are one-off expenses, but the private sector's performance is the real deal. A "sustainable" recovery is the MSM's current buzzword. Believe all this one-time stuff if it you will. I don't.
Copyright (C) Long Lake LLC 2010
The administration program, "risks being remembered not for catalyzing a recovery from our current housing crisis, but rather for bold announcements, modest goals, and meager results," the report said.
Last month, "The Hill" also reported that Mr. Barofsky said:
The Obama administration's $75 billion program to help homeowners risks failure by, "merely spreading out the foreclosure crisis," a top government watchdog said Tuesday.
The profits and economic recovery is happening in part simply from the government bailouts of Fannie and Freddie, abetted to an unmeasurable degree by people walking away from debts in favor of spending money elsewhere. Just as corporations claim "one-time" non-recurring expenses that nonetheless hit the assets statement, the government wants us to believe that these socialized housing expenses are one-off expenses, but the private sector's performance is the real deal. A "sustainable" recovery is the MSM's current buzzword. Believe all this one-time stuff if it you will. I don't.
Copyright (C) Long Lake LLC 2010
Friday, February 19, 2010
Fannie and Freddie: A Review
Peter Wallison has a nice review of the possible future for Fannie Mae and Freddie Mac. A prior piece of his from 2005 ended as follows (discussing possible Congressional legislation):
The Critical Final Step
After years of trimming around the edges of the GSE problem, Congress--with the help of Chairman Alan Greenspan--has finally come to the nub of the issue. If Congress can bring itself to overcome the furious political opposition of the GSEs and their supporters, it will direct the new GSE regulator to reduce the size of Fannie's and Freddie's portfolios and endorse a workable standard by which to measure the proper size of the smaller portfolios that result. This will solve, finally, the problem of two entities using their implicit government backing to control the residential mortgage market, which creates massive risks for the taxpayers and the economy in general.
If Congress cannot take this essential step, however, no amount of additional authority--given to a purported "world class regulator"--will significantly change the course of events. Fannie and Freddie will continue to grow, and one day--as Alan Greenspan has predicted--there will be a massive default with huge losses to the taxpayers and systemic effects on the economy. We should be grateful that Congress finally has before it a serious proposal that is equal to the seriousness of the problem. But we should also worry about whether Congress can find within itself the political will necessary to see the task through to its logical conclusion.
Pretty good.
Here is a link to the PDF of his current writeup, titled The Dead Shall Be Raised: The Future of Fannie and Freddie.
It's a full-length write-up, but the abstract and conclusion may be sufficient for many readers. Here is the abstract:
The renewed interest in Fannie Mae and Freddie Mac is premature. They are currently the mainstays of the U.S. housing market--more important now than they were before being placed in a government conservatorship in September 2008. Many observers do not believe the two government-sponsored enterprises (GSEs) can survive the immense losses they will cause taxpayers, but this is far from true. For Fannie and Freddie to be eliminated, a new mortgage-financing system must take their place, but there is not even a hint of a replacement on the horizon. Once the housing market recovers, the GSEs will still be the only game in town, and supporting them will continue to be the course of least resistance for Congress. Moreover, it will not be easy to implement any of the alternatives to reestablishing Fannie and Freddie as GSEs. Nationalizing or reorganizing them as public utilities would both have significant drawbacks, while privatizing the GSEs--the most sensible approach--would require a major change in public attitudes about securitization. Sadly, in the absence of viable alternatives, their restoration as GSEs seems the most likely outcome.
When talking heads comment on debt-to-GDP ratios and similar metrics, they are often shilling for their own interests. Not only do they generally ignore unfunded liabilities such as Social Security, they assign a present value of zero to this sort of GSE obligation.
The U. S. once had a Federal Government that was serious about financial responsibility. Those days are long gone. One way or another, however, bookkeepers and accountants have their day. The road down which cans get kicked is not smooth, straight and downhill forever.
Copyright (C) Long Lake LLC 2010
The Critical Final Step
After years of trimming around the edges of the GSE problem, Congress--with the help of Chairman Alan Greenspan--has finally come to the nub of the issue. If Congress can bring itself to overcome the furious political opposition of the GSEs and their supporters, it will direct the new GSE regulator to reduce the size of Fannie's and Freddie's portfolios and endorse a workable standard by which to measure the proper size of the smaller portfolios that result. This will solve, finally, the problem of two entities using their implicit government backing to control the residential mortgage market, which creates massive risks for the taxpayers and the economy in general.
If Congress cannot take this essential step, however, no amount of additional authority--given to a purported "world class regulator"--will significantly change the course of events. Fannie and Freddie will continue to grow, and one day--as Alan Greenspan has predicted--there will be a massive default with huge losses to the taxpayers and systemic effects on the economy. We should be grateful that Congress finally has before it a serious proposal that is equal to the seriousness of the problem. But we should also worry about whether Congress can find within itself the political will necessary to see the task through to its logical conclusion.
Pretty good.
Here is a link to the PDF of his current writeup, titled The Dead Shall Be Raised: The Future of Fannie and Freddie.
It's a full-length write-up, but the abstract and conclusion may be sufficient for many readers. Here is the abstract:
The renewed interest in Fannie Mae and Freddie Mac is premature. They are currently the mainstays of the U.S. housing market--more important now than they were before being placed in a government conservatorship in September 2008. Many observers do not believe the two government-sponsored enterprises (GSEs) can survive the immense losses they will cause taxpayers, but this is far from true. For Fannie and Freddie to be eliminated, a new mortgage-financing system must take their place, but there is not even a hint of a replacement on the horizon. Once the housing market recovers, the GSEs will still be the only game in town, and supporting them will continue to be the course of least resistance for Congress. Moreover, it will not be easy to implement any of the alternatives to reestablishing Fannie and Freddie as GSEs. Nationalizing or reorganizing them as public utilities would both have significant drawbacks, while privatizing the GSEs--the most sensible approach--would require a major change in public attitudes about securitization. Sadly, in the absence of viable alternatives, their restoration as GSEs seems the most likely outcome.
When talking heads comment on debt-to-GDP ratios and similar metrics, they are often shilling for their own interests. Not only do they generally ignore unfunded liabilities such as Social Security, they assign a present value of zero to this sort of GSE obligation.
The U. S. once had a Federal Government that was serious about financial responsibility. Those days are long gone. One way or another, however, bookkeepers and accountants have their day. The road down which cans get kicked is not smooth, straight and downhill forever.
Copyright (C) Long Lake LLC 2010
Tuesday, January 19, 2010
Helluva Job, Brownie
The checking and balancing of American electoral politics has occurred in a manner too fanciful for Hollywood. A triathlete, military-trained, former model turned attorney has, only 14 months after Barack Obama's sweeping victory, become the first Republican elected to the Kennedy seat in Massachusetts since 1946.
Small business sentiment will likely improve with the knowledge that at least if the Republican party is unified, then one-party rule in the Senate has ended. The market had a bit of a celebration today and may well do so tomorrow. We should consider the possibility that the 2010 election could be similar to the 1994 election that brought gridlock to Washington and that catalyzed the stock bubble and economic boom of the second half of the 1990s.
The big picture is, however, muddled and schizophrenic. Fannie and Freddie are losing hundreds of billions of dollars, and those losses are income of a sort for the public or corporate America. How are Fannie and Freddie losing this money? By Fed money-printing to buy mortgages.
Large, international companies may well represent good "value" in a generally overvalued market. Domestic companies are chancier. I continue to like dollar stores. (Reluctantly)
The arguments for gold remain unchanged. Gold and other precious metals are in bull markets that are not bubbles by conventional analyses. For gold ETF buyers, the Canadian ETF "GTU" has had enough underperformance lately vs. "GLD" to be, in my humble opinion, a "buy".
In any case, Mr. Brown has relatively single-handed run on opposition to the Obama healthcare "reform" effort. The political and investment worlds have changed. In that one-party rule has been diminished, this represents a return toward normalcy and therefore will be taken well by the investment community.
Copyright (C) Long Lake LLC 2010
Small business sentiment will likely improve with the knowledge that at least if the Republican party is unified, then one-party rule in the Senate has ended. The market had a bit of a celebration today and may well do so tomorrow. We should consider the possibility that the 2010 election could be similar to the 1994 election that brought gridlock to Washington and that catalyzed the stock bubble and economic boom of the second half of the 1990s.
The big picture is, however, muddled and schizophrenic. Fannie and Freddie are losing hundreds of billions of dollars, and those losses are income of a sort for the public or corporate America. How are Fannie and Freddie losing this money? By Fed money-printing to buy mortgages.
Large, international companies may well represent good "value" in a generally overvalued market. Domestic companies are chancier. I continue to like dollar stores. (Reluctantly)
The arguments for gold remain unchanged. Gold and other precious metals are in bull markets that are not bubbles by conventional analyses. For gold ETF buyers, the Canadian ETF "GTU" has had enough underperformance lately vs. "GLD" to be, in my humble opinion, a "buy".
In any case, Mr. Brown has relatively single-handed run on opposition to the Obama healthcare "reform" effort. The political and investment worlds have changed. In that one-party rule has been diminished, this represents a return toward normalcy and therefore will be taken well by the investment community.
Copyright (C) Long Lake LLC 2010
Saturday, December 19, 2009
What Chinese Pig Farmers Have to Do with Fannie Mae, AIG and Goldman Sachs
The New York Times is running a concise review of financial companies that are to one degree or another wards of the Feds. It is horrifying. Here are excerpts from 4 Big Mortgage Backers Swim in Ocean of Debt:
Even as the biggest banks repay their government debt in what is being heralded as a successful rescue program, four troubled giants of the financial world remain on government life support.
These companies, the American International Group, Fannie Mae, Freddie Mac and GMAC, are not only unable to repay the government, they are in need of continuing infusions that make them look increasingly like long-term wards of the state.
And the total risk they pose to the taxpayer far exceeds that of the big banks. Fannie and Freddie, in the final days of the year, are even said to be negotiating with the Treasury about greatly expanding the money available to them. . .
Fannie Mae recently warned, for example, that it could not pay the dividends it owes the Treasury, so “future dividend payments will be effectively funded with equity drawn from the Treasury.”
It would appear that Fannie Mae is involved in a Ponzi scheme with the Treasury.
All the above and almost all of the point of the entire article relates to the old Irving Fisher/Austrian economics point of too much aggregate debt. As debt levels in the West relative to the size of the economy have risen over the past 3 decades, secular economic growth has slowed and Treasury borrowing rates have fallen concomitant with decreased private demand for funds (e.g., decreased perceived real investment opportunities for the private sector).
From an investment standpoint, the opposite of debt is ownership, and an opposite of paper money is hard money AKA gold (and silver?), and by extension other physical goods known as commodities. But what happens when ownership of hard money occurs due to borrowing paper money (in electronic form)? One has a confusing situation. The mistrusted fiat money sector is used, on the margin with leverage, to purchase a form of insurance against itself. Logical? I think not. Yet ultimately gold is gold, nothing more or less. It just sits there, not tarnishing even after centuries at the bottom of the sea. It can't pull an AIG and have one obscure division ruin the entire entity or morph from an auto manufacturer to a finance company with a manufacturing subsidiary, as GM effectively did. It also can't become Apple Inc. Gold should be the ultimate non-get rich quick asset, a topic addressed next.
Mish has a compelling, must-read article that addresses this in China Faces Crash Scenario, which in turn references what strikes me as a credible article by a man named Brent Cook titled Pig Farmers are Making Brent Nervous. Here are excerpts from the latter:
Before getting into to the relationship between copper and pork products, I want to draw your attention to what makes me nervous, have a look at these photos from China. They are excerpted from a China Central Television Channel (CCTV) program documenting private speculation and hoarding of metals throughout the country. According to an associate of mine at an Asia-focused hedge fund who was just in China, “It’s pervasive; people are piling this stuff up in their backyards."
He Jinbi from Maike (metal trading company). He told CCTV they saw many farmers in Guangdong province stocking more than 100 tonnes of aluminium at home. These people used to raise geese for living.
Because the interest rate is too low in China. Many farmers could make hundreds of RMB profits per tonne, with dozens of Rmb per tonne cost of interests. They use their existing inventories to borrow more from banks. Banks are very 'happy' to lend to them. . .
A September 17 Bloomberg story by Singapore-based Glenys Sim reports that “Private investors in China, the world’s largest metals user, have stockpiled ‘substantial’ quantities of copper as the government ramps up stimulus spending to spur the economy.” The article points out that pig farmers and other speculators have amassed in the order of 50,000 tonnes of copper. That is about half the level of inventories tallied by the Shanghai Futures Exchange."
Mr. Cook goes on to state flatly:
What is obvious is that gold and now base metals have become speculative investments that in addition to being bought as hedges against inflation and a falling US dollar are the latest get rich quick scheme. . .
I remain cautious and somewhat concerned by what appears to be hot and fickle money jumping into a sector that is apparently taking its cue from pig farmers.
Only for reasons of space have I ignored the rest of Mish's article, which has several linked articles.
The Brent Cook article states that banks are happy to lend to pig farmers for commodity speculation. Here is an online dictionary's definition of a bank:
"an institution for receiving, lending, exchanging, and safeguarding money and, in some cases, issuing notes and transacting other financial business."
Note the word "safeguarding". Your "money" in the "bank" is not safe except at the most conservative institutions. It would appear that much of the global economy has been, through overt governmental and business policy and by governmental neglect as well, subjugated to the traders, middlemen and salespeople who benefit from volatility with government bailouts as a given.
When what should be an uncorrelated asset--gold--trades up hard and down hard due to the same leverage that it should be insurance against, what you have is a mess. My guess--just a guess-- is that central banks need "money" and those in countries that have lots of gold, such as the U. S., France and Germany are more than happy to see gold's price trend higher, because this provides a larger capital base on which to continue to support the economic basket cases of their economies, so that unlike past years, official policy may work in favor of gold owners, not against them.
On the other hand, every other commodity, including silver and platinum, are for official purposes all the same: industrial commodities. They are imports for the powers in the G7 and G20 and all things being equal, lower prices are better for their economies than are higher ones.
To summarize, the post-Cold War economic stability of the West of the 1990s is definitely gone.
Whatever price gold and stocks had then is mostly of historical relevance. The U. S. is going the route of Japan with weak, giant financial institutions, politically-motivated infrastructure spending paid for with borrowed funds and a carry trade currency. The economy built on outsourcing, China, may well be in the late stages of a complex financial bubble, and the world's largest economy is being propped up by taxpayers borrowing in part at zero percent interest rates (but with massive re-financing risk as this borrowing is short-term), and Goldman, Sachs and other trading companies are as happy as Chinese pig farmers.
The only theme an investor can follow is that the powers that be don't care about you. In fact, they want your money. Thus American homeowners have systematically been turned into renters for the most part. How to preserve capital adjusted for "flation" has been deliberately been made so complex that the average person has better odds, perhaps, in Vegas than playing our markets. "They" have made it overly complex. Your job is to keep it simple and keep your eyes open and your hand on your wallet. Emulate not Chinese pig farmers. Whether precious metals and other ETFs are the Western equivalent of copper and aluminum in their yards is unclear. More than ever in modern financial times, you never know.
Copyright (C) Long Lake LLC 2009
Even as the biggest banks repay their government debt in what is being heralded as a successful rescue program, four troubled giants of the financial world remain on government life support.
These companies, the American International Group, Fannie Mae, Freddie Mac and GMAC, are not only unable to repay the government, they are in need of continuing infusions that make them look increasingly like long-term wards of the state.
And the total risk they pose to the taxpayer far exceeds that of the big banks. Fannie and Freddie, in the final days of the year, are even said to be negotiating with the Treasury about greatly expanding the money available to them. . .
Fannie Mae recently warned, for example, that it could not pay the dividends it owes the Treasury, so “future dividend payments will be effectively funded with equity drawn from the Treasury.”
It would appear that Fannie Mae is involved in a Ponzi scheme with the Treasury.
All the above and almost all of the point of the entire article relates to the old Irving Fisher/Austrian economics point of too much aggregate debt. As debt levels in the West relative to the size of the economy have risen over the past 3 decades, secular economic growth has slowed and Treasury borrowing rates have fallen concomitant with decreased private demand for funds (e.g., decreased perceived real investment opportunities for the private sector).
From an investment standpoint, the opposite of debt is ownership, and an opposite of paper money is hard money AKA gold (and silver?), and by extension other physical goods known as commodities. But what happens when ownership of hard money occurs due to borrowing paper money (in electronic form)? One has a confusing situation. The mistrusted fiat money sector is used, on the margin with leverage, to purchase a form of insurance against itself. Logical? I think not. Yet ultimately gold is gold, nothing more or less. It just sits there, not tarnishing even after centuries at the bottom of the sea. It can't pull an AIG and have one obscure division ruin the entire entity or morph from an auto manufacturer to a finance company with a manufacturing subsidiary, as GM effectively did. It also can't become Apple Inc. Gold should be the ultimate non-get rich quick asset, a topic addressed next.
Mish has a compelling, must-read article that addresses this in China Faces Crash Scenario, which in turn references what strikes me as a credible article by a man named Brent Cook titled Pig Farmers are Making Brent Nervous. Here are excerpts from the latter:
Before getting into to the relationship between copper and pork products, I want to draw your attention to what makes me nervous, have a look at these photos from China. They are excerpted from a China Central Television Channel (CCTV) program documenting private speculation and hoarding of metals throughout the country. According to an associate of mine at an Asia-focused hedge fund who was just in China, “It’s pervasive; people are piling this stuff up in their backyards."
He Jinbi from Maike (metal trading company). He told CCTV they saw many farmers in Guangdong province stocking more than 100 tonnes of aluminium at home. These people used to raise geese for living.
Because the interest rate is too low in China. Many farmers could make hundreds of RMB profits per tonne, with dozens of Rmb per tonne cost of interests. They use their existing inventories to borrow more from banks. Banks are very 'happy' to lend to them. . .
A September 17 Bloomberg story by Singapore-based Glenys Sim reports that “Private investors in China, the world’s largest metals user, have stockpiled ‘substantial’ quantities of copper as the government ramps up stimulus spending to spur the economy.” The article points out that pig farmers and other speculators have amassed in the order of 50,000 tonnes of copper. That is about half the level of inventories tallied by the Shanghai Futures Exchange."
Mr. Cook goes on to state flatly:
What is obvious is that gold and now base metals have become speculative investments that in addition to being bought as hedges against inflation and a falling US dollar are the latest get rich quick scheme. . .
I remain cautious and somewhat concerned by what appears to be hot and fickle money jumping into a sector that is apparently taking its cue from pig farmers.
Only for reasons of space have I ignored the rest of Mish's article, which has several linked articles.
The Brent Cook article states that banks are happy to lend to pig farmers for commodity speculation. Here is an online dictionary's definition of a bank:
"an institution for receiving, lending, exchanging, and safeguarding money and, in some cases, issuing notes and transacting other financial business."
Note the word "safeguarding". Your "money" in the "bank" is not safe except at the most conservative institutions. It would appear that much of the global economy has been, through overt governmental and business policy and by governmental neglect as well, subjugated to the traders, middlemen and salespeople who benefit from volatility with government bailouts as a given.
When what should be an uncorrelated asset--gold--trades up hard and down hard due to the same leverage that it should be insurance against, what you have is a mess. My guess--just a guess-- is that central banks need "money" and those in countries that have lots of gold, such as the U. S., France and Germany are more than happy to see gold's price trend higher, because this provides a larger capital base on which to continue to support the economic basket cases of their economies, so that unlike past years, official policy may work in favor of gold owners, not against them.
On the other hand, every other commodity, including silver and platinum, are for official purposes all the same: industrial commodities. They are imports for the powers in the G7 and G20 and all things being equal, lower prices are better for their economies than are higher ones.
To summarize, the post-Cold War economic stability of the West of the 1990s is definitely gone.
Whatever price gold and stocks had then is mostly of historical relevance. The U. S. is going the route of Japan with weak, giant financial institutions, politically-motivated infrastructure spending paid for with borrowed funds and a carry trade currency. The economy built on outsourcing, China, may well be in the late stages of a complex financial bubble, and the world's largest economy is being propped up by taxpayers borrowing in part at zero percent interest rates (but with massive re-financing risk as this borrowing is short-term), and Goldman, Sachs and other trading companies are as happy as Chinese pig farmers.
The only theme an investor can follow is that the powers that be don't care about you. In fact, they want your money. Thus American homeowners have systematically been turned into renters for the most part. How to preserve capital adjusted for "flation" has been deliberately been made so complex that the average person has better odds, perhaps, in Vegas than playing our markets. "They" have made it overly complex. Your job is to keep it simple and keep your eyes open and your hand on your wallet. Emulate not Chinese pig farmers. Whether precious metals and other ETFs are the Western equivalent of copper and aluminum in their yards is unclear. More than ever in modern financial times, you never know.
Copyright (C) Long Lake LLC 2009
Friday, March 13, 2009
Serfing USA
As the stock market parties as though the bear market has ended, it's good to keep track of various facts.
An update on mortgage equity can be found at Calculated Risk's post, "Fed: Household Wealth Cliff Dives in Q4", from which the following is reported and calculated:
In 1952, despite all the tough economic times the country had been through, the average homeowner had 80% of the value in his (her) home as equity, the rest being debt. That percentage stayed as high as 70% as late as 1985. It is now 43%.
Based on various other statistics, I calculate that the homeowners who have mortgages only have at most 18% of the value of their homes as equity, the rest being debt (mortgage(s)).
Worse, for them to realize money from their homes, they will face commissions and other closing costs of (say) 8%. So for the about 70% of homeowners who do not own their home free and clear, if they sell, they will receive almost none of the value of the house.
Thus, the forces that control this economy have seen to it that most homeowners are financial serfs.
Next, on the same debt/credit axis, the Labor Department reported that corporate debt rose at a 2.2% annual rate. (One wonders why it rose at all in a severe economic downturn, and who lent the funds). However, total nonfinancial debt rose at a 6.3% annual rate in Q4 2008 (after rising 8.1% in Q3). Why so much increase in debt? Because the Federal government raised its debt issuance by 37% (following an increase of 39% in Q3), that's why.
Thus, all the talk in the media about "deleveraging" misses the more major point. Yes, it is true that Goldman, Sachs and Morgan, Stanley can now control fewer assets per borrowed dollar. That is a form of deleveraging. The more major form of leverage is debt itself. The Merchants of Debt, led by the Federal Reserve and the Federal Government, with their favored industry of finance, continue to grow. "Reform" is likely to simply mean a greater presence for the Feds, but with institutionalization of the toxic derivatives such as credit default swaps that Nassim Taleb correctly inveighs against rather than the banning of them.
The large financial institutions are being rapidly recapitalized by such maneuvers as putting Federal money into the vehicles of AIG and Fannie and Freddie, which are losing vast sums on derivatives. Since it is in the nature of derivatives that there is generally a winner for every loser, you can be sure that the winners are the politically favored large complex financial institutions all over the globe. This why Simon Johnson (former chief economist of the IMF and now a professor at MIT) in "Business as Usual", reports that:
If you think that the power of the banking industry may be in decline, or that its leaders are humbled, or that any kind of major change is underway, please review carefully Jamie Dimon’s speech from Wednesday, March 11 (available on Bloomberg.com).
Mr. Dimon, who runs JP Morgan Chase, makes it clear that he has great respect and appreciation for all that Hank Paulson did for the financial sector. He also strongly implies that it is time for the government to stop worrying about what approach to adopt; as far as he is concerned, the time for wrangling and figuring out what went wrong is over and the time for really big transfers of taxpayer value is now.
There is no sense here that anything much has changed. Sure, we’ve lost some banks, we’re in a big recession, and everything we thought sensible for banks in terms of regulation/risk management/corporate governance lies in tatters. But it is obvious, from the words, tone, and body language of Mr. Dimon that he thinks his side has won and it is back to business as usual, albeit now with a somewhat larger market share. On all of this, he probably has inside information.
Considering all the above, it may be that the financial industry is simply consolidating and expanding its hard-won gains and that these gains will be ratified by governments that also like playing the game, while the once-backbone of America- the homesteader/homeowner- is reduced to virtual peonage.
This is change, but not one that ordinary citizens believe in.
Copyright (C) Long Lake LLC 2009
An update on mortgage equity can be found at Calculated Risk's post, "Fed: Household Wealth Cliff Dives in Q4", from which the following is reported and calculated:
In 1952, despite all the tough economic times the country had been through, the average homeowner had 80% of the value in his (her) home as equity, the rest being debt. That percentage stayed as high as 70% as late as 1985. It is now 43%.
Based on various other statistics, I calculate that the homeowners who have mortgages only have at most 18% of the value of their homes as equity, the rest being debt (mortgage(s)).
Worse, for them to realize money from their homes, they will face commissions and other closing costs of (say) 8%. So for the about 70% of homeowners who do not own their home free and clear, if they sell, they will receive almost none of the value of the house.
Thus, the forces that control this economy have seen to it that most homeowners are financial serfs.
Next, on the same debt/credit axis, the Labor Department reported that corporate debt rose at a 2.2% annual rate. (One wonders why it rose at all in a severe economic downturn, and who lent the funds). However, total nonfinancial debt rose at a 6.3% annual rate in Q4 2008 (after rising 8.1% in Q3). Why so much increase in debt? Because the Federal government raised its debt issuance by 37% (following an increase of 39% in Q3), that's why.
Thus, all the talk in the media about "deleveraging" misses the more major point. Yes, it is true that Goldman, Sachs and Morgan, Stanley can now control fewer assets per borrowed dollar. That is a form of deleveraging. The more major form of leverage is debt itself. The Merchants of Debt, led by the Federal Reserve and the Federal Government, with their favored industry of finance, continue to grow. "Reform" is likely to simply mean a greater presence for the Feds, but with institutionalization of the toxic derivatives such as credit default swaps that Nassim Taleb correctly inveighs against rather than the banning of them.
The large financial institutions are being rapidly recapitalized by such maneuvers as putting Federal money into the vehicles of AIG and Fannie and Freddie, which are losing vast sums on derivatives. Since it is in the nature of derivatives that there is generally a winner for every loser, you can be sure that the winners are the politically favored large complex financial institutions all over the globe. This why Simon Johnson (former chief economist of the IMF and now a professor at MIT) in "Business as Usual", reports that:
If you think that the power of the banking industry may be in decline, or that its leaders are humbled, or that any kind of major change is underway, please review carefully Jamie Dimon’s speech from Wednesday, March 11 (available on Bloomberg.com).
Mr. Dimon, who runs JP Morgan Chase, makes it clear that he has great respect and appreciation for all that Hank Paulson did for the financial sector. He also strongly implies that it is time for the government to stop worrying about what approach to adopt; as far as he is concerned, the time for wrangling and figuring out what went wrong is over and the time for really big transfers of taxpayer value is now.
There is no sense here that anything much has changed. Sure, we’ve lost some banks, we’re in a big recession, and everything we thought sensible for banks in terms of regulation/risk management/corporate governance lies in tatters. But it is obvious, from the words, tone, and body language of Mr. Dimon that he thinks his side has won and it is back to business as usual, albeit now with a somewhat larger market share. On all of this, he probably has inside information.
Considering all the above, it may be that the financial industry is simply consolidating and expanding its hard-won gains and that these gains will be ratified by governments that also like playing the game, while the once-backbone of America- the homesteader/homeowner- is reduced to virtual peonage.
This is change, but not one that ordinary citizens believe in.
Copyright (C) Long Lake LLC 2009
Thursday, March 12, 2009
Hey, Big Borrower
Warren Buffett, in Bloomberg.com's "Buffett Resumes U.S. Takeover Hunt as Prices, Competition Ease", reports a Depression mentality among Americans:
“The change in the American consumer’s behavior in the last six months is like nothing that’s ever happened,” Buffett said. “They won’t go in our jewelry stores. They’ve got the money, but when Valentine’s comes along, they think: ‘I still love my wife, you know, but I’ll just tell her this year.’”
In fact, the article reports that he's got the frugality bug himself:
“Frankly, when we had $45 billion, the threshold wasn’t as high for the first deal as it would be subsequently,” Buffett said (ed: Berkshire has $25.5 B now) . “I’m open for business, but it’s got to be the best business in town.”
Bottom line: he's been burned by purchases at bull-market prices. Like Citigroup's former CEO Charles Prince, he too felt he had to dance as the music played.
Meanwhile, Freddie Mac reported that in Q4 2008, it lost thirteen billion dollars on derivative hedges. Taxpayers will make up that loss. However, some other entities made the equivalent profit on the same derivatives. Many of those entities were foreign. In any case, it's just one more example of the taxpayer taking the loss and private entities getting the gain.
The Merchants of Debt are like the Terminator. They will not quit. Their mission is to keep the volume of debt growing, no matter whether there is any logic to it. The President himself has said that the economy depends on credit (which is the flip side of debt). Here are some examples, from today's Investor's Business Daily:
The head of the IMF said "there is still room to have more stimulus" (meaning more deficit spending in almost every country);
Treasury Sec'y Tim Geithner called for an increase in the IMF's emergency fund to help troubled countries. How much of an increase did he call for? 50%, perhaps? Double? No, he called for a ten times increase, to $500 B. (This extra $450 B will of course come out of thin air.)
The Bank of England has begun its announced program to print money and use that "money" to purchase Briatin's equivalent of Treasuries, which the Mother Country calls "gilts". (Gilts, as in gold-edged; this is now derisory, given that the Brits went off the gold standard long before the U.S.)
And Bloomberg reports that the European Central Bank has increased its bailout for the banks, by moving to a lower, 0.5% borrowing rate for banks. The result: higher profit margins to the banks and less money for the rest of us, both depositors and borrowers.
One can go on, but what's the point? The powers that appear to be solidly in control have determined that more debt is the solution for the debt crisis. As for the role of derivatives such as credit default swaps in this crisis, governments will apparently ratify their use and regulate these toxic monstrosities.
What are individuals with capital to do?
Re stocks, a classical rally off a bottom shoots up with good leadership on day 1, steadies or corrects on day 2, then takes no prisoners and shoots up on day 3, squeezing the shorts and drawing new money in as glamourous leading stocks break out to new highs. Japan collapsed down over 2% today; Europe's bourses are down 1-1 1/2% today. Today could be important here in the former citadel of capitalism.
Nouriel Roubini the analyst (rather than the policy wonk) has come back into EBR's good graces with the following post from last night:
"Bernie Madoff is the Mirror of a Made-Off Ponzi Economy". (No link as subscription required)
Roubini sums things up with:
Madoff may now spend the rest of his life in prison. The US household and financial and non financial firms and government may spend the next generation in debtor's prison having to tighten their belts to pay for the losses inflicted by a decade or more of reckless leverage, over consumption and risk taking.
DoctoRx here again. As the reckless borrowing shifts to the nation-state and its handmaidens, the allegedly once-independent central banks, the stock market fades into irrelevancy. The greater issue for investors is how the governments will deal with their own debt burden. Will they inflate it away, and if so when and how? If so, with what asset class will the insiders protect their gains? What asset class will see confiscation?
An outsider can stay informed; think independently, which may be helped by avoiding mainstream media with its proven ability to affect one's thinking and emotions; have no religious-type belief in any particular financial asset class; and adjust to the major trends and facts "on the ground".
The current trend is for increasing state control of the means of production through the credit-creation and debt-destruction mechanism, with "equity" such as that of GM, Fannie and Freddie, Citi, etc. potentially disappearing almost overnight with the state determining what use it wants to make of the carcass of the company.
The current fact is that Federal Reserve notes, commonly called "dollars", remain generally accepted as "money" as of today.
Copyright (C) Long Lake LLC 2009
“The change in the American consumer’s behavior in the last six months is like nothing that’s ever happened,” Buffett said. “They won’t go in our jewelry stores. They’ve got the money, but when Valentine’s comes along, they think: ‘I still love my wife, you know, but I’ll just tell her this year.’”
In fact, the article reports that he's got the frugality bug himself:
“Frankly, when we had $45 billion, the threshold wasn’t as high for the first deal as it would be subsequently,” Buffett said (ed: Berkshire has $25.5 B now) . “I’m open for business, but it’s got to be the best business in town.”
Bottom line: he's been burned by purchases at bull-market prices. Like Citigroup's former CEO Charles Prince, he too felt he had to dance as the music played.
Meanwhile, Freddie Mac reported that in Q4 2008, it lost thirteen billion dollars on derivative hedges. Taxpayers will make up that loss. However, some other entities made the equivalent profit on the same derivatives. Many of those entities were foreign. In any case, it's just one more example of the taxpayer taking the loss and private entities getting the gain.
The Merchants of Debt are like the Terminator. They will not quit. Their mission is to keep the volume of debt growing, no matter whether there is any logic to it. The President himself has said that the economy depends on credit (which is the flip side of debt). Here are some examples, from today's Investor's Business Daily:
The head of the IMF said "there is still room to have more stimulus" (meaning more deficit spending in almost every country);
Treasury Sec'y Tim Geithner called for an increase in the IMF's emergency fund to help troubled countries. How much of an increase did he call for? 50%, perhaps? Double? No, he called for a ten times increase, to $500 B. (This extra $450 B will of course come out of thin air.)
The Bank of England has begun its announced program to print money and use that "money" to purchase Briatin's equivalent of Treasuries, which the Mother Country calls "gilts". (Gilts, as in gold-edged; this is now derisory, given that the Brits went off the gold standard long before the U.S.)
And Bloomberg reports that the European Central Bank has increased its bailout for the banks, by moving to a lower, 0.5% borrowing rate for banks. The result: higher profit margins to the banks and less money for the rest of us, both depositors and borrowers.
One can go on, but what's the point? The powers that appear to be solidly in control have determined that more debt is the solution for the debt crisis. As for the role of derivatives such as credit default swaps in this crisis, governments will apparently ratify their use and regulate these toxic monstrosities.
What are individuals with capital to do?
Re stocks, a classical rally off a bottom shoots up with good leadership on day 1, steadies or corrects on day 2, then takes no prisoners and shoots up on day 3, squeezing the shorts and drawing new money in as glamourous leading stocks break out to new highs. Japan collapsed down over 2% today; Europe's bourses are down 1-1 1/2% today. Today could be important here in the former citadel of capitalism.
Nouriel Roubini the analyst (rather than the policy wonk) has come back into EBR's good graces with the following post from last night:
"Bernie Madoff is the Mirror of a Made-Off Ponzi Economy". (No link as subscription required)
Roubini sums things up with:
Madoff may now spend the rest of his life in prison. The US household and financial and non financial firms and government may spend the next generation in debtor's prison having to tighten their belts to pay for the losses inflicted by a decade or more of reckless leverage, over consumption and risk taking.
DoctoRx here again. As the reckless borrowing shifts to the nation-state and its handmaidens, the allegedly once-independent central banks, the stock market fades into irrelevancy. The greater issue for investors is how the governments will deal with their own debt burden. Will they inflate it away, and if so when and how? If so, with what asset class will the insiders protect their gains? What asset class will see confiscation?
An outsider can stay informed; think independently, which may be helped by avoiding mainstream media with its proven ability to affect one's thinking and emotions; have no religious-type belief in any particular financial asset class; and adjust to the major trends and facts "on the ground".
The current trend is for increasing state control of the means of production through the credit-creation and debt-destruction mechanism, with "equity" such as that of GM, Fannie and Freddie, Citi, etc. potentially disappearing almost overnight with the state determining what use it wants to make of the carcass of the company.
The current fact is that Federal Reserve notes, commonly called "dollars", remain generally accepted as "money" as of today.
Copyright (C) Long Lake LLC 2009
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