FedUpUSA

Archive for November 29th, 2009

Stacy Summary:  I recall reporting on the number on food stamps hit 1 in 13, oh about three years ago.  It’s now one in 8 Americans.  Your thoughts?  Anyone seeing the rise in their county? And what’s up with the fact that apparently 100% of the top 100 counties using food stamps voted Republican?  Wonder what that means?

• Food stamp use soars in America

From the ailing resorts of the Florida Keys to Alaskan villages along the Bering Sea, the program is now expanding at a pace of about 20,000 people a day.

There are 239 counties in the United States where at least a quarter of the population receives food stamps, according to an analysis of local data collected by The New York Times.

The counties are as big as the Bronx and Philadelphia and as small as Owsley County in Kentucky, a patch of Appalachian distress where half of the 4,600 residents receive food stamps.

• Map of food stamp usage
  

Hide the Decline – Climategate:

In 2003 Donald Rumsfeld estimated a war with Iraq would cost $60 billion. Five years later, the cost of Iraq war operations is over 10 times that figure.

So what’s behind the ballooning dollar signs? Joseph E. Stiglitz and Linda J. Bilme’s exhaustedly researched book, “The Three Trillion Dollar War: The True Cost of the Iraq Conflict,” breaks down the price tag, from current debts to the unseen costs we’ll pay for years to come.

Obama May Add 30,000 Troops in Afghanistan

Please consider Obama May Add 30,000 Troops in Afghanistan

President Obama said Tuesday that he was determined to “finish the job” in Afghanistan, and his aides signaled to allies that he would send as many as 25,000 to 30,000 additional American troops there even as they cautioned that the final number remained in flux.

The White House said Mr. Obama had completed his consultations with his war council on Monday night and would formally announce his decision in a national address in the next week, probably on Tuesday.

At a news conference in the East Room with Prime Minister Manmohan Singh of India, Mr. Obama suggested that his approach would break from the policies he had inherited from the Bush administration and said that the goals would be to keep Al Qaeda from using the region to launch more attacks against the United States and to bring more stability to Afghanistan.

“After eight years — some of those years in which we did not have, I think, either the resources or the strategy to get the job done — it is my intention to finish the job,” he said.

Ms. Pelosi said she did not want to sacrifice the party’s domestic agenda to the cost of the troop buildup. “The American people believe that if something is in our national security interest, we have to be able to afford it,” she said. “That doesn’t mean that we hold everything else” hostage to that.

Cost Per Soldier = $1 Million

War mongering costs are rising. Please consider High Costs Weigh on Troop Debate for Afghan War.

While President Obama’s decision about sending more troops to Afghanistan is primarily a military one, it also has substantial budget implications that are adding pressure to limit the commitment, senior administration officials say.

The latest internal government estimates place the cost of adding 40,000 American troops and sharply expanding the Afghan security forces, as favored by Gen. Stanley A. McChrystal, the top American and allied commander in Afghanistan, at $40 billion to $54 billion a year, the officials said.

Even if fewer troops are sent, or their mission is modified, the rough formula used by the White House, of about $1 million per soldier a year, appears almost constant.

The estimated $1 million a year it costs per soldier is higher than the $390,000 congressional researchers estimated in 2006.

Military analysts said the increase reflects a surge in costs for mine-resistant troop carriers and surveillance equipment that would apply to troops in both Iraq and Afghanistan. But some costs are unique to Afghanistan, where it can cost as much as $400 a gallon to deliver fuel to the troops through mountainous terrain.

Some administration estimates suggest it could also cost up to $50 billion over five years to more than double the size of the Afghan army and police force, to a total of 400,000. That includes recruiting, training and equipment.

At a stop at a military base in Alaska on Thursday, Mr. Obama told a gathering of soldiers that he would not risk more lives “unless it is necessary to America’s vital interests.”

Double The Idiocy

Any expectations that Obama would show some sense of restraint about military spending have long ago vanished.

“It is my intention to finish the job” translates to “I will blow another $3 trillion war mongering if that is what it takes”. And of course Pelosi does not think war idiocy should be at the expense of domestic idiocy.

War mongers want war but they do not want to pay for it. Sadly, Obama, Bush, Pelosi are all alike. Thus, Congress and the Administration is committed to having military idiocy and domestic idiocy at the same time.

God do we ever need a balanced budget amendment and a sound currency. We should not fund a damn thing unless we are willing to raise taxes to pay for it. Virtually no one but the war mongers and the military beneficiaries would be in support of raising taxes to pay for this monstrosity.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
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In a sign that the Federal Reserve is circling the wagons, chairman Ben Bernanke has an op-ed in the Washington Post that attempts to defend the central bank’s role. What is interesting is how much the tables have turned. The Obama effort to make the Fed into the uber bank regulator has become a rout, with decent odds that the Fed will have its powers reduced, and an increasing possibility that Bernanke might not be reconfirmed (which is frankly the right outcome, no CEO who presided over a similar disaster would still be in charge).

This piece has so many artful finesses that I must limit myself to the most salient points. From Bernanke:

As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

Yves here. He’s only one paragraph into the article and he is already discrediting himself. If he is looking only to last two years for lessons, he is looking in the wrong place. This crisis was at a minimum a decade in the making, and I’d say more like 30 years. Where are the post-mortems? There is absolutely no evidence that the Fed sees its own policies, namely the Greenspan and then Bernanke puts, and the extreme laissez-faire attitude towards bank regulation, as major culprits.

For instance, the Fed was the architect of the “let a thousand flowers bloom” policy towards derivatives, and made inadequate (one might say no) effort to understand new financial technology. Bernanke himself rationalized burgeoning consumer debt, claiming that consumer balance sheets were in good shape. Hun? This is Japan circa 1989 thinking. The measure of whether a borrower can handle his debt load is primarily his debt coverage ratios (income versus debt service costs). And by those measures, consumer creditworthiness had been deteriorating (admittedly, the data series aren’t great here, but merely looking at zero consumer saving rates would tell anyone with an operating brain cell that things were out of whack). And why do we want to encourage consumer borrowing? Unlike businesses, consumers are not funding in productive investments (and before you offer student loans as an example, one reader has done an analysis and had concluded the returns are lousy). Balance sheets are relevant only in a distress or liquidation scenario. If you need to revert to a conversation about balance sheets to defend debt levels, it should be obvious you are on shaky ground.

Similarly, I had a chat with a Fed official in the early stages of the subprime crisis, and the Fed was absolutely unwilling to see the banks as having any culpability for the disaster.

This is hardly a complete list of pre-crisis failures; I’m sure readers can make numerous additions. Back to Bernanke:

I am concerned, however, that a number of the legislative proposals being circulated would significantly reduce the capacity of the Federal Reserve to perform its core functions. Notably, some leading proposals in the Senate would strip the Fed of all its bank regulatory powers. And a House committee recently voted to repeal a 1978 provision that was intended to protect monetary policy from short-term political influence. These measures are very much out of step with the global consensus on the appropriate role of central banks, and they would seriously impair the prospects for economic and financial stability in the United States. The Fed played a major part in arresting the crisis, and we should be seeking to preserve, not degrade, the institution’s ability to foster financial stability and to promote economic recovery without inflation.

Yves here. Notice how Bernanke invokes a “global consensus,” which is wonderfully vague and ignores the fact that the pre-crisis “global consensus” of minimally regulated markets and financial institutions, is precisely what caused the crisis. Moreover, even if the Fed’s mandate in theory was appropriate, its governance structure is not. The Bank of England and the ECB are not peculiar largely private institutions, accountable to almost no one, as the Fed now is. The Fed’s insistence on secrecy regarding many of its emergency operations is unwarranted and deeply troubling. And “the Fed played a major role in arresting the crisis” ignores the fact that the Fed played a major role in creating it, namely, via negative real interest rates for a protracted period. And he is declaring the Fed’s policies to be successful when the jury is still out.

Back to Bernanke:

The proposed measures are at least in part the product of public anger over the financial crisis and the government’s response, particularly the rescues of some individual financial firms. The government’s actions to avoid financial collapse last fall — as distasteful and unfair as some undoubtedly were — were unfortunately necessary to prevent a global economic catastrophe that could have rivaled the Great Depression in length and severity, with profound consequences for our economy and society. (I know something about this, having spent my career prior to public service studying these issues.) My colleagues at the Federal Reserve and I were determined not to allow that to happen.

Yves here. This is actually very arrogant once you translate it: “What we did was correct, but the public is on a witch hunt and is incorrectly taking it out on the Fed. And I do know better because I am an expert on the Depression.” First, if we are going to get into dueling experts, Anna Schwartz has been enormously critical of the Fed’s conduct, both pre-crisis and in seeing providing liquidity as the primary solution. She also warned explicitly against drawing comparisons between the gold standard era Depression and now. Second, Bernanke’s reading of the Depression (which is pretty conventional, that the Fed blew it by not providing more liquidity) is contradicted by other evidence. As Paul Krugman has pointed out repeatedly, the monetary base, which is what the Fed controls, grew in 1930. But the money supply collapsed. Third, the vast majority of economists tend to look for single factor explanations of why the Depression ended, and within those, tend to focus on the ones that are the easiest policy levers, namely monetary or fiscal stimulus. But the Depression also saw considerable institutional reform, as well as a protracted period of debt reduction, via restructuring (via the Home Owners Loan Corporation) and defaults. Drawing simple conclusions from a complex phenomenon strikes me as misleading and misguided.

Back to Bernanke:

Moreover, looking to the future, we strongly support measures — including the development of a special bankruptcy regime for financial firms whose disorderly failure would threaten the integrity of the financial system — to ensure that ad hoc interventions of the type we were forced to use last fall never happen again. Adopting such a resolution regime, together with tougher oversight of large, complex financial firms, would make clear that no institution is “too big to fail” — while ensuring that the costs of failure are borne by owners, managers, creditors and the financial services industry, not by taxpayers.

Yves here. This is way oversold. First, financial firms decay catastrophically, as we saw with Bear and Lehman. No one has a template for how to resolve a big capital markets trading firm, save a subsidized gunshot wedding. This is like pretending you know how to build a nuclear weapon in 1935. What do you do about counterparty exposures? No one wants to be at risk of having his positions frozen. And if you have the government backstop a firm while it continues trading, you get into another huge can of worms. And layer the political problems, that to resolve a big financial firm, you need a very large check. Congress is not about to cede that kind of spending authority to the Treasury, and there do not appear to be any proposals on the table to come up with emergency approval processes (as in some pre-set frameworks and ground rules). But even so, there are massive thorny issues that Bernanke is pretending are solved, when they have not even been addressed. What do you do with Citibank’s $500 billion of foreign deposits, for instance, a fair chunk of which are presumably uninsured? How do you justify having US taxpayers bail out foreign depositors? What responsibility (if any) does the US have for trading operations in other countries? This is thorny because trading books are passed across time zones, again putting operational issues in conflict with legal jurisdiction. And it isn’t clear that a US desire for a resolution regime will dovetail well, or at all, with the bankruptcy regimes in various countries (bankruptcy is handled where the legal entities are domiciled, the Fed’s fond wishes for a US-driven process to the contrary). I have not seen anything to indicate that anyone in authority has grappled with the complexity of the issues, which means statements like this are mere empty sloganeering.

Back to Bernanke:

Working with other agencies, we have toughened our rules and oversight. We will be requiring banks to hold more capital and liquidity and to structure compensation packages in ways that limit excessive risk-taking. We are taking more explicit account of risks to the financial system as a whole.

Huh? Toughening oversight? We’ve seen the reverse, massive regulatory forbearance. Yes, I am told the Fed is now making all the banks disclose their derivatives positions to them, but the Fed lacks the analytical capacity to do much with this information (and I am further told the Fed staff understands that too). So that does not fit my notion of “tougher oversight.” And the rest is just empty promises. Back to the op-ed:

We are also supplementing bank examination staffs with teams of economists, financial market specialists and other experts. This combination of expertise, a unique strength of the Fed, helped bring credibility and clarity to the “stress tests” of the banking system conducted in the spring. These tests were led by the Fed and marked a turning point in public confidence in the banking system.

Yves here. The worst is the folks at the Fed clearly believe the bogus stress tests were a meaningful exercise. That alone should disqualify them from getting a bigger role in bank supervision. And if you read their pronouncements, they plan to continue to use them, and have the process run by….monetary economists! Pray tell, what do they know about bank operations? Help me! And some of the help the Fed has enlisted in the stress test exercise includes the consulting firm McKinsey, which has the biggest banking practice in the consulting industry. Think McKinsey is going to devise anything that might be rough on its biggest meal tickets? Bernanke also conveniently ignores the fact that the rally might also have a wee bit to do with the fact that he threw a bit over $1 trillion at the markets, as announced in mid-March.

I could go on, but you get the picture. The Fed seems to believe its own PR.

For the record, zero is a very impressive achievement, so we have to give the Treasury department credit where credit is due. From Bloomberg:

More than 650,994 loan revisions had been started through the Obama administration’s Home Affordable Modification Program as of last month, from about 487,081 as of September, according to the Treasury. None of the trial modifications through October had been converted to permanent repayment plans, the Treasury data showed. That failure is getting the administration’s attention.

Treasury was clearly trying to blunt criticism of this program by having some new measures ready to go, as discussed in the New York Times yesterday. But the goose egg results, per Bloomberg today, are, even by the low expectations for this effort, a remarkably poor showing. And give the complete failure of the Bush, then Obama Administration efforts to get more mortgage mods within the considerable confines of current practice, why should we expect a different outcome?

The mortgage mod program is yet another ill-conceived effort to solve the problems borne of faulty technology, namely securitization. The FASB came out with a memo in 2004 that warned that warned about subprime loans and the current head of the FASB has questioned the entire premise of securitizing risky mortgages. In a 2008 roundtable, FASB chairman Robert Herz remarked:

In securitization accounting, there’s been in place, as part of the rules, a device called a qualified special-purpose entity (QSPE). It basically was a notion that if assets were placed into a trust, a vehicle, and then interests were issued out of that vehicle to various forms of security holders, what are called beneficial interest holders; basically the form of that vehicle, that trust, was to collect the proceeds on the assets and then remit them to various security holders. They were fairly passive, and the rules talked about how the powers would be very limited-entirely specified up front–and I think that worked for a fair amount of time.

But 1 think what we’ve learned in the last three to five years is in residential mortgages (also to a certain extent in commercial mortgage space and some other assets) that these assets are not passive in nature. Certainly, the subprime assets that were put into these vehicles called “Q’s,” with a lot of hindsight, because they took a lot of management when they went bad in terms of the servicing or having to restructure the loans, modify them, do all sorts of workouts. That clearly was not intended. I think the lesson learned here is that they were not actually “Q-able.”

Yves here. Now there may be remedies to prevent this sort of problem from occurring in the future, but that does nothing to solve the wee mess we have now. Residential real estate prices are sufficiently under water in a most markets that for a viable borrower (meaning one who still has a steady source of income), a deep mod can be a win/win. And before readers get moralistic, this isn’t charity, it’s practicality. In real estate downturns in the stone ages when banks held mortgages on their balance sheets, banks routinely did mods. And even in our current environment of more highly levered consumers, this practice has some empirical support. Wilbur Ross, vulture investor (ie, not predisposed to be a friend of the little guy) is an advocate of deep principal reductions based on his success with them as the owner of the biggest third-party mortgage servicer.

Now it was pretty obvious that the Obama mortgage mod effort would not produce much in the way of results. First, it provided subsidies to servicers, but much less than they would make from foreclosing. That means the banks have every reason to use the Treasury initiative to amass a track record that mods do not succeed (independent of whether they might succeed, as Wilbur Ross has shown they can).

Second, the program offered only a five year payment reduction program, with the lender then able to step up the interest payments to the fixed rates in effect at the time the sorta-mod was entered into. That does not do enough for the borrower. the redefault rate on mortgage mods that do not have significant principal reduction in the first six months now is high. When the initiative was announced, he New York Times reports that payment reductions are expected to be “hundreds of dollars” a month. Is that really going to make a difference with most borrowers, particularly since the interest portion is tax deductible and these mortgages are recent (ie, the interest component is a high proportion of the total payment).

Moreover, if a homeowner has negative equity, he still faces a big bill when he sells the house. What incentive does he have to work to keep current on the mortgage, or to invest in the house?

Now most people have focused on lack of servicer incentives, infrastructure, and experience to do mods, but we have another impediment, which the Treasury interest-only modification program clearly tried to work around. Losses are distributed differently in a mod than in a foreclosure. For a foreclosure, the losses go against the lowest tranches first, and then proceed to higher tranches. However, with a principal reduction, all tranches, including the AAA (or more accurately, what was once AAA) layer.

The interesting bit here, however, is the complete goose egg in the way of results. Most banks do own some mortgages they originated, and they should be able to renegotiate those freely. The failure to do so suggests either that they are concerned that modifying delinquent mortgages might require them to write down similar paper and/or they simply aren’t set up to do mods and are not really interested in creating the infrastructure to do so (and again note that what Treasury tried to create was a “mass mods” template, to reduce the work required by the lender).

The Administration did not throw its weight behind the only idea so far that could have cut this Gordian knot, which was to allow for the modification of mortgages in bankruptcy (the concept, which is well established in commercial bankruptcies, is to write the mortgage down to the current value of the collateral, and treat any remaining mortgage balance as unsecured credit). So now that this voluntary program is turning out to be an embarrassment, what will Team Obama do next? Back to Bloomberg:

“We are taking additional steps to enhance servicer transparency and accountability as part of a broader focus on maximizing conversion rates to permanent modifications,” Treasury spokeswoman Meg Reilly said in an e-mail yesterday. The Obama administration plans to announce additional steps tomorrow, including new private-public partnerships and resources for borrowers.

Given that “public private partnerships” has meant “large subsidies to banks that produce perilous little in the way of results,” I would not hold my breath. And the measures suggested in the Times verged on laughable:

“The banks are not doing a good enough job,” Michael S. Barr, Treasury’s assistant secretary for financial institutions, said in an interview Friday. “Some of the firms ought to be embarrassed, and they will be.”

Even as lenders have in recent months accelerated the pace at which they are reducing mortgage payments for borrowers, a vast majority of loans modified through the program remain in a trial stage lasting up to five months, and only a tiny fraction have been made permanent…

“They’re not getting a penny from the federal government until they move forward,” Mr. Barr said

Shaming bankers? What planet is Barr from? The industry is systematically predatory. If they had any concern about public opinion, they’d have used the Bush and Obama efforts as cover to try pushing back against investors in securitization vehicles. Before some of you go on about sanctity of contract, the father of mortgage backed securities, Lew Ranieri, seemed genuinely shocked in the Milken conference in 2008 when other participants said mods were restricted or prohibited in many securitization contracts. Ranieri said they did them routinely. Not only has the industry done anything more than go through the motions, one has to wonder whether they influenced Treasury in the design of the program so as to assure it would not be effective.