FedUpUSA

Archive for July 15th, 2010

Michael David White has painted some dire pictures of the US housing market, but this one is shocking in its implications.

Chart fromA Blistering Ride Through Hell by Michael David White.

I enjoyed the synopsis of this chart that was done by Automatic Earth in Is It Time to Storm the Bastille Again:

“That is, what Americans’ homes are worth, their equity, decreased by $7 trillion -from $20 trillion to $13 trillion, from spring 2006 to spring 2010. In the same period, mortgage debt, what Americans owe on their homes, went down by only $270 billion. Yes, that’s right: US homeowners lost more, by a factor of 26, than they “gained” through clearing mortgage debt. Thus, if we estimate that there are 75 million homeowners in America, they all, each and every one of them, lost $93,333.”

Nine out of ten Americans will notice that there is a significant gap that must be closed here. What makes it even more chilling is that the gap is continuing to widen as home prices continue to correct to the mean.

This debt must be resolved. There are two major ways to do it: repayment and default.

Repayment is probably a fantasy, if not beating a dead horse. The homeowners do not have the money with which to pay the loans given the current state of employment and wage stagnation, and the mortgages are for the most part on houses whose value is significantly under water compared to the debt, as in ‘ just mail in the keys.’

Straight up default, writing off the debt through principal adjustment, is also probably out of the question, because it would essentially vaporize the balance sheet of the US banking system which is also insolvent, to a greater degree than most understand, and if they understand it, would admit.

Automatic Earth references an essay which we also had linked here by Eric Sprott called Wither Green Shoots that points out the unfortunate fact that of the 986 bank holding companies in the US, 980 of them lost money last year. The lucky six were the TBTF banks on major government subsidy.

So, where is the government going to liquidate the debt? And what effect will it have on dollar assets when they do it?

The Japanese solution was to ignore their bad debt and insolvent kereitsu, because admitting it would cause significant loss of face, not to mention financial loss, to an elite that does not permit such things to happen. So instead they arranged for their single party LDP system to drag the debt like a ball and chain through what came to be known as ‘the lost decade’ while they tried to make it go away by export mercantilism and crony monetarism wherein funds were given to the same kereitsu in a remarkably ambitious (and expensively wasteful) series of public works boondoggles.

Do you think the US can follow this path? As if. Japan started from a base as a net exporter with a huge trade surplus and little debt. Scratch that idea.

Someone has to end up ‘holding the bag.’ And the consumer cannot rise to the occasion, the banks are all insolvent and a sinkhole until they change their business models. So what will be ‘the last bubble?’ Bernanke has managed to monetize about 1.5 trillion dollars so far. Only 5.5 trillion more to go, if housing prices can stabilize at current levels, and employment return to pre-crash levels quickly.

A few European readers have expressed their relief, and some noticeable pride, that their banking and political system resolved its own debt crisis so quickly and easily. To the extent that their banks are holding dollar denominated financial assets, they have merely stopped the table from shaking for the moment, as their sand castles await the next mega tsunami to come rolling across the Atlantic.

Consider this well, and you will understand what is happening in the economy, and why certain things occur over the next 24 months, despite the fog of wars, currency and otherwise.

It will be amazing, but it won’t be pretty. And it was all unnecessary, attributable to the dishonesty and greed of a remarkably small number of men in New York and Washington who managed to rig the markets and the political process, with the acquiescence and support of a public grown complacent and in far too many cases, soft headed and corrupt.

These are the same people, along with their enablers, who are now preaching the virtues of austerity for the many, and free and easy markets for themselves. All gain, no pain. While the game is going it must still be played.

 Bernie Madoff was lying and cheating and taking money until the day he closed his doors.

Perhaps they are in denial, but surely they must hear the footsteps of history approaching. And their bravado is yet another bluff, and hides the rising stink of fear.

Jesse’s Cafe Americain

I am a Loan Officer for a national mortgage bank – yes, I am one of those horrible bankers who forced people to take out mortgages they did not understand on homes they could not afford. Actually, I have been a loan officer for 5 years, so I started after those OTHER horrible bankers had done all those bad things to poor unsuspecting people.

At any rate, I get asked often if now is a good time to buy a home.

My answer? There has probably never been a better time to buy a home. Home prices are low, and interest rates are about as low as they have ever been. It is a Buyer’s market, and you can get a great deal on a home.

That said, there is a caveat or two. You have to have decent credit (decent, not great), a job, and you have to have some money (unless you are an Armed Services veteran, there are no more 100% loans), and you cannot have too much other long term debt (long term debt is car loans, other consumer loans, student loans, mortgages and credit card debt).

There can be issues with getting approved if you are self-employed or if you are new to a job or career field, but for the most part, loans are available, and not just for the people with great credit and 20% to use as a down payment.

In addition, you should be relatively secure in your employment situation. I know there is no guarantee that anyone will keep their jobs, especially these days. Buying a home is a large commitment, so if you have an unusual amount of job or financial anxiety, wait to buy until things improve. Peace of mind is a hard thing to lose.

So, given the current good market for buying, what does the future hold for the housing and mortgage market? If I knew for sure, I would be on my yacht sipping umbrella drinks and wondering what to snack on next, but I can make some informed predictions. I call these types of predictions SWAG’s (scientific wild-ass guesses).

My view of the future is predicated on the following assumptions. Until something changes dramatically, these things are and will continue to be true.

• Government spending and the associated deficits will continue to be HUGE – even if the Republicans take over Congress in the next election, it will be many months or several years before anything changes with government spending – this is not want I want, this is reality. Nothing changes quickly in DC.
• Taxes will rise – a lot. This is a sure thing. The tax cuts that President Bush got passed on 2001-2002 expire at the end of 2010, so taxes will go up. Add to that the new healthcare bill and other “stimulus” measures coming out of Washington, and you can expect a BIG increase in your taxes.
• The economic doldrums will continue – the decisions and spending by our federal government are exactly opposite what was/is needed to get the economy pumped up. Think I’m wrong? Check out what happened in Japan in the 90’s and see what their government did to “fix” it. They did exactly what Washington is doing, and we are going to get the same result – a decade or more of no grow, at all.

All this means that the housing and mortgage markets will be adversely affected. I expect the following:

• Interest rates will remain low for the remainder of 2010. Then, depending on what happens in the Nov. election, and what course the new Congress takes, rates will rise – maybe a lot. I would not be surprised if mortgage interest rates were at or near 10% in 12-18 months. Why will they rise? The Treasury department artificially “made the market” for mortgage interest rates by buying LOTS (over $1 trillion) of mortgage-backed securities, starting in Dec of ’08. This program stopped at the end of the 1^st quarter this year Government deficit spending. Right now, other countries ate financing our spending by buying Treasury bonds – at very low rates (near 0% returns). That will NOT continue. When the countries & investors buying our debt stop doing so, the return will have to rise to get them to buy (good old supply & demand). So, the Federal Reserve will have to raise rates to sell the bonds, and that will make rates in all other things rise as well. In addition, I think we are headed for rapid inflation, and the Fed will fight that by raising interest rates. This could happen very quickly – in a matter of weeks. I watched rates go up 2+% in a few weeks in 2005, and down 2+% at the end of 2008.
• Home Values will NOT recover – not in the next couple of years. There is not enough demand for homes to warrant an increase – except in some very specific towns & neighborhoods. People are anxious about their livelihoods and the economy and government spending, and that is not going to change until several things change 180 degrees.

All this tells me that the next year or so are not going to be perceptively better than now – and got get worse.

I hope I am wrong. I hope (and am working personally to see it happens) that there are substantial changes in Washington as a result of the November election. I hope that the new Congress will see the light and go after government spending with a blow torch, especially that horrible health care “reform”, without more taxes hikes than we will have anyway (those Bush tax cuts expiring). I hope that they make major changes to entitlement spending (Social Security, Medicare, Medicaid) that get those runaway programs under control. I hope all these things, and I am working in my small way to help make them happen, but until they do, no one can assume they will. The old saying applies – “Hope for the best, plan for the worst.”

OK, mortgage rates are low and probably going up soon. Home prices are down and probably not going up anytime soon. The federal government is filled with thieves, charlatans, mountebanks, and failed lawyers (basically the same thing, huh?) , and that will probably never change.

What are you going to do? Do like I did. I own a home and have refinanced to a rate in the mid-4%. If I had some money, I would buy rental properties and/or a vacation home, but alas I do not have the funds for that. Buy a home if you can and want to; refinance your mortgage if you have not done so yet. These things will help you and will help the economy. Then, go vote for conservatives in November and force them to do as they are told.

Contact me if you want more info about anything I have written here.

Tom MacKinnon

Heritage Employment Report: June Job Market Jolts Economy

by Rea Hederman, Jr. and James Sherk

The June jobs report released by the Bureau of Labor Statistics revealed that while total employment had declined by 125,000 jobs, the unemployment rate dipped slightly to 9.5 percent from 9.7 percent. Private employment increased 83,000 jobs but was swamped by the ending of many temporary government jobs associated with the decennial census.

This is a weak labor market report, with the health of the labor market not improving even as the slow recovery continues. Job growth and wages in the private sector are still anemic, especially compared to government workers who have not experienced nearly the same amount of job losses. The American experiment in Keynesianism has not fared well.

The June Report

While total employment fell by 125,000 jobs, the reason is not quite as alarming as the number. Government jobs fell by 208,000, almost all of them associated with the census. Private hiring increased in many industries, including manufacturing (9,000) and the service sector (91,000). The construction industry again shed jobs (–22,000) as both the private and commercial real estate market continue to struggle.

While the unemployment rate dropped from 9.7 to 9.5 percent, this is due to a large drop (–652,000) in the labor force, which decreased from 65 to 64.7 percent. A large drop in working teenagers accounted for almost 40 percent of the decline in labor force. Women over 20 accounted for another 41 percent, while adult men were less than one-fifth of the labor force decline.

The number of teens in the civilian labor force has reached its lowest level since the 1960s. The large decline in potential adult working women dropped the female labor force to its lowest level this year, erasing the labor force growth for the rest of 2010.

A larger concern is that the number of hours and wages did not increase in the last month. In fact, the average hourly earnings for all private workers actually declined by two cents. This indicates that the labor market is not recovering as fast as it was earlier in the spring. Businesses are not hiring or expanding their work hours as much. Even temporary help hiring (20,500) has slowed significantly, growing at the lowest rate since last September.

More Government Does Not Reduce Unemployment

Congress and the Administration have attempted to boost employment through government spending. Figure 1 shows the Administration’s unemployment if Congress did and did not pass the stimulus, as well as the actual unemployment rate since then. By the President’s own measure, the stimulus has failed.

This is unsurprising. Government spending does little to boost private sector hiring, for two reasons. First, government spending does not encourage new private investment. For example, government highway construction, while funding construction jobs, does not address the underlying factors that discourage entrepreneurs from staring new firms.

Second, the resources the government spends do not materialize out of thin air—they are taken from the private sector. Each dollar the government borrows is one dollar less that entrepreneurs can borrow to fund new operations or that private consumers can spend. Research shows that government spending crowds out private investment. Each $1 increase in government spending reduces private sector investment by between $0.46 and $0.97 after two years and $0.74 and $0.95 over five years.[1]

Government spending substitutes for private sector investment; it does not supplement it. This is why countries in which the government spends heavily to create jobs—such as France and Germany—do not enjoy higher employment rates. In fact, countries with greater government spending and larger public sector payrolls have higher unemployment.[2]

Government Spending Does Benefit Government Workers

Greater government spending does benefit one group of workers: government employees. The stimulus increased federal spending and directed billions to state governments. As a result, government employment has stayed steady even as private sector employment has plunged.

Since the start of the recession in December 2007, private sector employment has fallen by 7.9 million jobs (6.8 percent), federal government employment has increased by 240,000 jobs (12.2 percent), and state and local employment has dropped by just 60,000 jobs (0.3 percent).

As a result, government workers enjoy the lowest unemployment rates of workers in any industry. Figure 2 shows unemployment rates by industry in June 2010. Across all industries, private sector workers endure an average unemployment rate of 9.7 percent. Unemployment for government employees is less than half that rate at 4.4 percent.

Government employees have enjoyed a privileged position in this recession, largely insulated from the effects of the downturn.

No Bailout for Government Workers

As the recession continues to affect tax revenues, many states are now proposing budget cutbacks. These cutbacks would mean layoffs of some state and local government employees, primarily teachers. To prevent this, the House of Representatives has added a $10 billion bailout for state and local government education budgets.

Such a bailout would prevent state and local governments from having to prioritize spending and layoff redundant employees. It would help insulate government employees from the uncertainty of the recession and add billions to the national debt. It would not, however, boost the economy. If government spending and job security for government employees helped the economy, then Greece would be booming right now.

The state government bailout is a special interest handout that boosts the job security of a politically favored group—government employees—at a cost to America’s future fiscal health and taxpayers’ wallets.

Businesses Hunkering Down

The June jobs report illustrates that the recovery in the labor market has slowed. The labor market remains weak and job growth is elusive. Businesses are saving their cash as they worry about looming tax increases, government regulations, and below-average economic growth. Congress should resist efforts to pass another weak stimulus bill that would transfer resources from the private to the public sector. Instead, Congress should look to encourage private business development and formation through tax cuts and fewer regulations.

Rea S. Hederman, Jr., is Assistant Director of and a Research Fellow in, and James Sherk is Senior Policy Analyst in Labor Economics in the Center for Data Analysis at The Heritage Foundation.

Please let him know how you feel about this legislation but before you do, make sure you read the articles about the legislation posted below.

BERNIE SANDERS’ POLL

The economic frustration of the American people is reaching a fever pitch.  Millions of Americans can’t seem to get a good job no matter what they do.  Millions of others are working as hard as they can but find that they keep coming up short at the end of the month.  Record numbers of Americans are still going bankrupt.  Record numbers of Americans are still losing their homes.  Meanwhile, the U.S. economy is a dead horse at this point.  It just doesn’t have any more to give.  At this point the U.S. economy is like an aging rock star that requires larger and larger doses of drugs each night just to be able to perform.  The U.S. economy is addicted to “drugs” such as debt and government stimulus, and years ago those things really supercharged the U.S. economic system, but at this point they aren’t provoking much of a response at all.  In fact, the things that once “stimulated” the economy are now slowly killing it.  But the vast majority of the American people do not understand this.  All they know is that the economy is broken and they want someone to “fix” it.

For most Americans, all we have ever known is tremendous prosperity.  All our lives we have been taught that America is the richest and most prosperous nation on the planet, and that while there will always be times of “recession”, things will always bounce back and be better than ever before.

But this time things aren’t bouncing back.

And Americans are starting to become extremely frustrated.   

A couple of quotes that appeared in a recent article in The New York Daily News really embodied the growing frustration that so many are feeling at this point….

“My husband and I are fortunate to be able to move in with my 81-year-old mother-in-law. But how sad is that? I apply for jobs and nothing happens,” writes Gayle Hanson. “Who wants to hire a 59-year-old woman? My answer is nobody. [I] have years of experience, excellent references. And nothing to show for it.”

“I am soon to be 57 and considered too old, too expensive, etc. I can’t get an employer to hire me at any salary,” writes Mike Stiller. “I am BOILING MAD.”

But Gayle Hanson and Mike Stiller are far from alone.

Millions upon millions of Americans are “boiling mad” about the economy at this point.

The truth is that the United States has lost 10.5 million jobs since 2007.  Many of those jobs have been shipped off to countries like China and India where labor is much cheaper and they are never coming back.

There just are not enough jobs for everyone in America at this point.  The number of “chronically unemployed” has been rising at a frightening pace.  In fact, the average duration of unemployment in the United States has risen to an all-time high. 

If you have never been unemployed and unable to find a job, then you just don’t know how soul crushing it can be.  This is especially true when you have a family to support.

Right now, there are 9.2 million Americans that are unemployed but are not even receiving an unemployment insurance check.  It is easy to tell those unemployed workers that they should “get a job”, but as the chart below shows, the gap between the number of unemployed workers and the number of job openings has increased dramatically over the last couple of years….

But in this economy, even many of those who do have jobs are still struggling mightily.  According to a poll taken in 2009, 61 percent of Americans ”always or usually” live paycheck to paycheck.  That was up significantly from 49 percent in 2008 and 43 percent in 2007.

And Americans are still losing their homes in record numbers.  Banks repossessed an average of 4,000 south Florida properties a month in the first half of 2010, which was up 83 percent from the first half of 2009.

Meanwhile, demand for homes is dropping through the floor.  The Mortgage Bankers Association announced on Wednesday that demand for loans to purchase U.S. homes sunk to a 13 year low last week, and refinancing demand also plummeted despite near record-low mortgage rates.

So considering all of these statistics, is it any wonder why so many Americans are so pessimistic?

According to a recent poll conducted by Bloomberg, 71% of Americans say that it still feels like the economy is in a recession.

But the truth is that we haven’t seen anything yet.

Things are going to get much worse.

Already, Federal Reserve policymakers are discussing what steps they might take to stimulate economic activity “if the outlook were to worsen appreciably”.

So can more economic stimulus help?

To a limited extent.

The Federal Reserve and the U.S. government will likely try to inject more debt and more “economic stimulus” into the system to try to shock the economy back to life.

But the more debt the U.S. government takes on the worse our long-term problems are going to get. 

The reality is that the U.S. economic system is broken, and there is simply not any “quick fix” that is available that is going to get things back to normal.

So on an individual level, what should we all do?

Well, we all need to start becoming a lot less dependent on the system.

We should all consider how we can start our own businesses, grow our own food and trade within our own communities.

If the entire system is starting to break down, it is those who are the least dependent on the system that will have the best chance to prosper during the times ahead.

The Economic Collapse

ASSOCIATED PRESS Senate banking committee member Bob Corker says the new consumer agency has “absolutely nothing – zero – to do with the financial crisis.”

By Patrice Hill

The financial reform bill expected to clear Congress this week is chock-full of provisions that have little to do with the financial crisis but cater to the long-standing agendas of labor unions and other Democratic interest groups.

Principal among them is a measure to make it easier for unions, environmental groups and other activist organizations that hold shares to put their representatives on the boards of directors of every corporation in the United States.

The so-called “proxy access” provision, which activist groups say they will use to try to improve oversight of corporate financial practices, has provoked a backlash from the Business Roundtable, U.S. Chamber of Commerce and other major non-Wall Street business groups.

“This legislation includes provisions totally unrelated to the financial crisis which may disrupt Americas fragile economic recovery” and lead to increasing political battles in the boardrooms, said John J. Castellani, president of the roundtable.

Business groups are also rankled that the legislation would impose costly new burdens on airlines, utilities and other non-financial businesses that were victims rather than villains in the crisis, simply because they use financial derivatives to hedge their businesses against risks such as fluctuations in oil prices, interest rates and currencies.

Such hedging practices played no role in the crisis, though they helped many businesses weather the financial turbulence and recession that followed in the aftermath of the Wall Street storm.

Other provisions of the financial legislation, which goes before the full Senate on Thursday for a vote and likely passage, favor Democratic constituencies directly by requiring banks and federal agencies to hire and do more business with them.

The bill would create more than 20 “offices of minority and women inclusion” at the Treasury, Federal Reserve and other government agencies, to ensure they employ more women and minorities and grant more federal contracts to more women- and minority-owned businesses.

The agencies also would apply “fair employment tests” to the banks and other financial institutions they regulate, though their hiring and contracting practices had little or nothing to do with the 2008 financial crisis.

“The interjection of racial and gender preferences into America’s financial sector deserves greater media exposure” before Congress debates and passes the massive 2,400-page bill, said Kevin Mooney, a contributing editor for Americans for Limited Government‘s daily newsletter.

The powerful new consumer protection agency that is the centerpiece of the reform bill also would provide substantial employment opportunities and funding for Democratic and social-activist groups such as the Association of Community Organizers for Reform Now (ACORN), critics say.

Rather than focus on the abuses in the mortgage-lending market that led to the crisis, the new consumer agency would have broad-ranging powers to regulate and punish virtually any company that has a financial relationship with consumers – even those that had nothing to do with the crisis, said Sen. Richard C. Shelby, Alabama Republican.

Mr. Shelby, the ranking member of the Senate Banking, Housing and Urban Affairs Committee, sought to craft a more tailored role for the agency in weeks of negotiation over the Senate bill.

“During our negotiations on the consumer bureaucracy, my Democrat friends were not focused on the mortgage market. Their sights were set on the rest of the economy,” he said. “The new bureaucracy is an enormous reach across virtually every segment of our economy, and a massive expansion of government influence in our daily financial lives.”

Sen. Bob Corker, a Tennessee Republican who also sought to help write a bipartisan Senate bill more narrowly focused on the problems that led to the crisis, said he fears that an activist director of the consumer agency could use agency power to direct loans to favored constituencies, regardless of whether the loans are sound or pose risks to the banking system.

“This may sound a little far-fetched, but you can have the wrong person in this position – there’s no board, there’s really no check and balance – that you can imagine could use this organization to try to create social justice in the financial system,” he said.

Like the corporate boardroom provisions, many of the activities within the reach of the new consumer agency had “absolutely nothing – zero – to do with the financial crisis,” Mr. Corker said. “But this has become a Christmas tree for those kinds of things, because people realize it’s something that’s going to pass.”

The Washington Times