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Archive for the ‘Economy’ Category

Not so cherry post on the way cheap credit has become almost necessary to make ends meet for the “average” American family.  Not so clear how we’re headed to recovery at this rate.  As the author notes:

Because we outsourced our jobs, incomes fell. Because incomes fell and savers were punished (thanks to abysmal returns on savings rates) we pulled future demand forward by splurging on credit. Because we splurged on credit, prices in every asset under the sun rose in value. Because prices rose while incomes fell, we had to use more credit to cover our costs, which in turn meant taking on more debt (a net drag on incomes).

And on and on.

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Greek Default

What’s happening to Greece is a glimpse of America’s future: years of artificial plenty followed, quite dramatically, by unrest, massive cutbacks in services, and a loss of power and prestige.  This, all due to excessive government spending and a lack of economic productivity.  To a lesser extent, it’s also the story of how foreign institutions, international bankers, and foreign governments will control a people’s destiny if those people are too indebted to them.

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We’ve all heard of, “I cut, you choose.” It’s a game theoretic principle, well known to children, that basically says if someone is dividing the pie, the other person should get to pick which slice he gets.  That way the cutter has an incentive to divide it as evenly as possible.  Well, with Obama, it’s all about redividing the pie.  That great big pie that represents our collective economic wealth.  For him, it’s a pie fit for redivision, where 90% of the wealth is supposedly in 10% of the hands.  If that’s the case–and this Marxist folk wisdom defined Obama’s entire adult life–then the problem of governance is relatively easy:  you simply need to organize the aggreived majority, demonize the wealthy minority, and, in Obama’s words, take from the “money people” in order to “spread the wealth.”

He spent most of his life thinking about how to redistribute wealth from the wealthy to the less wealthy through various schemes like redistributionist taxation, nationalized health care, community organizing, affirmative action, increased government sector, unionization, minority set-asides and the like.  But now he’s in the awkward position of having to come up with policies designed to replace and create wealth.  Massive wealth has been lost in this recession, both in housing, bank balance sheets, government revenues, and all the rest.  It threatens to remain this way for a long time.

Obama did not want to be president at this moment, any more than George H.W. Bush wanted to be a post-cold-war president.  Obama doesn’t know what to do, as evidenced by the large proportion of stimulus dollars going to “jobs” like government sector jobs at the state and local level, such as clerks, teachers, etc.  The minor exception to this is the “flying cars” concept; you know, so-called green jobs.  Truthfully, no one really thinks this will work, and, if it does, it won’t create all that many jobs, since the unemployed in construction, service sector, sales, office workers and others with industry-specific skill sets can’t easily move into manufacturing nifty flying cars and solar plants all that easily.

Further, the pretension that Obama can pick the next big growth sector is kind of quaint.  This kind of industrial policy–as opposed to broad-based monetary and trade policy–has been a major failure where it’s been tried, as evidenced by the overinvestment of the Japanese Ministry of Trade in HDTV 25 years agoand other mercantalist schemes, such as Brazil’s inefficient investments in airplane and auto manufacturing. He probably knows nothing about the sorry history of public-private investment partnerships.

He does not accept, does not benefit from, and does not realize that the best thing he can do for the economy is to restore confidence in government finances, shrink the deficit, avoid radical moves, and restore sound financial regulation to prevent market blowups, while channeling investment generically into productive sectors (as opposed to the prevailing trend of leveraged gambling on currency trades and what not). In other words, most of what he needs to do is less of everything involving government intervention, and it’s against his nature to do so.

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There is a combination of worry and hope about the coming wave of mortgage resets.  First came the subprime.  Next will be the Alt-As and Option ARMs.  And then, in 2013 or so, it appears that we may be out of the woods.  Housing will stabilize.  Rates will be set. Foreclosures will level off and decline.

Will they?  ARM resets lock in a particular rate and then float.  They’re a good mortgage product for people that expect rising income, or expect to sell their house in a few years, or have good credit and equity to allow conversion to a 30 year fixed at the reset point.  And low rates–caused in part by the 2008-2009 flight to treasuries and deflation–have made resets a boon to homeowners that led (for now) lower rates.  But times are changing.  Banks are stingier with their credit, and even those with ARMs (especially Alt-A ARMs) are being buffeted by unemployment, reduced assets, the inability to refinance their homes based on their nonexistent equity, and all the other tales of woe unleashed by the recession.

The reset is not a one-time event.  It’s periodic.  It means that the ARMs will now be floating based on the LIBOR (i.e., an overnight rate that is pretty much the lowest market rate) plus some marginal rate.  LIBOR plus 2-3%, let’s say.  But the LIBOR floats, as will the new floating rates.  As government spending goes up, defaults of various loans continue apace, and inflation risk gets priced into borrowing, interest rates across the board will rise.  This rising cost of borrowing will be reflected in both the floating rates and the available 30 year fixed rates in the years ahead.  And these rates by design adjust periodically, either every six months, once a year, or monthly (according to The Handbook of Mortgage Backed Securities).

Far from being relieved of danger after the “Alt-A reset bomb,” the reset bomb will be a continuous threat to housing, made more permanent by the inability of upside down ARM holders to refinance.  Every year, as interest rates rise, their monthly payments will go up.  Borrowers will get the double whammy from inflation that the old-fashioned fixed rate provided protection against.  The ARM, which made a great deal of sense in the go go years of the mid 2000s, may become a permanent albatross on homeowners, and, in turn, a continued source of new insolvency, reduced consumer demand, and declining wealth nationwide.

The rough ride is only beginning, I fear, and the loose money policies of the Federal Reserve and the Federal Government are only going to make things worse by pushing up interest rates and inflation.  Those who did the historically responsible thing by buying a home in the last ten years will get whacked by the combination of inflation, rising interest rates, and wages that lag behind this wealth-destroying pincer movement.

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“Even God Himself could not sink the Titanic.”

Tim Geithner must think we’re all a bunch of idiots. The Federal Reserve is buying 80% of treasuries, the debt has exploded, and our unfunded obligations going forward are north of $65 Trillion (i.e., 1X our entire national wealth), and he reassures us that America will never lose its AAA rating?!?  This, by the way, is this lightweight’s typical mode of reasoning:  assertion without evidence.  He’s not even doing a good job of buying time for the Ponzi Schemers whom he has served his entire career.

We are in major trouble.  Mainstream Wall Street figures are talking about heading to the hills, buying survival farms, and the like.  The debt explosion makes this “recession” different from its predecessors. We are in the middle of a great reckoning, and Tim Geithner wants us to forget this fact and continue business as usual which he pursued at the New York Fed.  But this too will end thanks to the globalism we were told would solve all of our problems.  Our international counterparties–especially the Chinese–are our government’s lifeline.  The Chinese are a creditor, and like the British who put 19th Century Egypt into receivership, they will soon decide what we do, what we spend, how much we can buy or sell, and all sorts of other incidents of sovereignty. And even that probably won’t work in the end, because the Chinese, like us, are also a credit-addicted behemoth, tempest-tossed by the instability of a worldwide fiat currency meltdown.

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Not only did the bailout of AIG help stem losses at Goldman Sachs, but it let them avoid all housing related losses from its huge MBS exposure by subsidizing their credit default swaps with AIG–in effect, in surance policies–dollar for dollar.  Not a penny in losses.  And, worse, Tim Geithner, working then as NY Fed Chairman in late 2008, colluded with them to hide this scandalous situation from the public:

The Federal Reserve Bank of New York, then led by Timothy Geithner, told American International Group Inc. to withhold details from the public about the bailed-out insurer’s payments to banks during the depths of the financial crisis, e-mails between the company and its regulator show.

AIG said in a draft of a regulatory filing that the insurer paid banks, which included Goldman Sachs Group Inc. and Societe Generale SA, 100 cents on the dollar for credit-default swaps they bought from the firm. The New York Fed crossed out the reference, according to the e-mails, and AIG excluded the language when the filing was made public on Dec. 24, 2008. The e-mails were obtained by Representative Darrell Issa, ranking member of the House Oversight and Government Reform Committee.

The New York Fed took over negotiations between AIG and the banks in November 2008 as losses on the swaps, which were contracts tied to subprime home loans, threatened to swamp the insurer weeks after its taxpayer-funded rescue. The regulator decided that Goldman Sachs and more than a dozen banks would be fully repaid for $62.1 billion of the swaps, prompting lawmakers to call the AIG rescue a “backdoor bailout” of financial firms.

“It appears that the New York Fed deliberately pressured AIG to restrict and delay the disclosure of important information,” said Issa, a California Republican. Taxpayers “deserve full and complete disclosure under our nation’s securities laws, not the withholding of politically inconvenient information.”

Isn’t this amazing?  This is the worst kind of crony capitalism.  Mexico and Indonesia could do no worse.  What free market principle says a big risk-taking investment bank can never book a loss?  What principle says this institution, which never was FDIC insured, was not a money market, and was known for its knee-deep exposure to housing, could avoid all housing-related losses as millions of Americans struggle to pay down their upside down housing notes or get walloped with the credit devastation of a foreclosure or bankruptcy?

The only thing saving Wall Street from a pitchfork rebellion by the middle and lower classes is the byzantine confusion created by “financial engineering.”  The principle here is no principle at all:  the primitive idea that connected super-big and super-rich firms and people can fleece us, pass their losses onto the public, and confuse and bribe our politicians into doing whatever they want.

Goldman Sachs is a dangerous, anti-democratic and anti-free market behemoth.  It serves one purpose:  enriching its senior management at the expense of the public, the government, and even its own shareholders.  And Tim Geithner is a weak-willed and mealy-mouthed moron, whom it should be increasingly obvious was suggested as treasury secretary by the powers that be because he was a useful idiot and strawman who would do Wall Street’s bidding at the expense of the general public.

Goldman Sachs should be liquidated, the personal assets of each of its managers and directors for the last ten years clawed back into a fund, and this sum should be distributed pro rata to every American taxpayer.  Unjust you say?  Well, no more unjust than the crony capitalist principle that lets them do this in reverse.

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Interesting story on Goldman Sachs.  It basically says that they were shorting CDOs (collateralized debt obligations that rebundle poorly rated MBS (mortgage backed securities) tranches) and taking bets that housing would fall while still pumping ordinary MBS and CDO assets to ordinary investors.

This company is too big, too powerful, and too connected for our own good.   Obama, empty suit that he is, would rather toy around with GITMO and Professor Gates than address this thornier problem.  Perhaps we can have a class action lawsuit with the class made up of every homeowner who lost money on a housing sale in the last 12 months.  We can add Ben Bernanke as a defendant too.  That could be quite a judgment!  Goldman would probably lose 10% year over year.

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