Thirteen-year old sharecropper boy near Americus, Georgia
Ilargi: The US administration is trying a new approach to patching up the broken land it rules over. While it moves away from universal health care, it now aspires to turn itself into a landlord. And a big one. I'd say that's about halfway towards the Bulgaria model, an yardstick I've used on a regular basis to measure where we stand. In the heyday of the Sofia empire, all Bulgarians were renters. But they did have free health care, though probably not at the level of France or the Netherlands.
Personally, I don't think the choice is the best possible one. I know from personal experience how much of a weight a community provided health care system lifts off people’s backs. Of course, calling it "community provided" doesn't sound nearly as ominous as provided by "big government". That whole storyline about "big government" gets more distorted by the day anyway. The American government appropriates at least as much money from its citizens as for example the German one. At least. A $14.8+ trillion US stimulus bill so far leaves no doubt about that. The main difference is that where US taxpayer money is handed to corporations, the Germans use the money their citizens pay in taxes to alleviate the problems those same citizens find themselves in, whether it's through health problems, job losses or other causes. Take your pick.
Obama said a few days ago that Canada's health care system wouldn't work in the US. I didn't see him elaborate on that. Might be interesting if he would. But it's apparently already too late. If you're still inclined to cut him some clack, you can say he fought the -corporate- law and the law won. Which is very bad news for most Americans. If they don't yet understand why, they will soon enough. Accidents and illnesses are mostly plenty bad, thank you very much, even if they don't bankrupt you and your family in the bargain. In the US, though, that's a common feature of the system. Medical bills are still -by far- the single largest cause of US personal bankruptcies. In Western Europe, the very idea would be impossible, unheard of and considered unacceptable.
In a better political system than it has at present, the US government would stay away from the housing market. There is no better one, though. In a system so proud of the free market moniker, government policies, paid for with taxpayer money, have ironically been greatly perverting domestic real estate for decades through Fannie and Freddie, transferring ever larger profits from US citizens to its banking conglomerates, culminating in 2005 highs and having only onw way -down- to go from there. All under the guise of helping the less wealthy acquire that much vaunted humble abode for themselves. Myths tend to die hard.
This practice has now led to its own logical and inevitable conclusion: the "less wealthy", the middle class, have today become the new poor. Don't worry, you're next in line. Like so many other great looking ideas, this one also works only in times of growth. If growth stalls, it turns against its maker, very much in the same way the sorcerer's apprentice did. We already know that a minimum of 4 million homeowners will receive foreclosure filings this year. Many of these will indeed lead to repossessions. And there is no end in sight to the tidal wave of people being forced out of their homes, the wave is gathering strength.
You would think someone in the Oval Office would consider the idea of dramatically overhauling a system that has so bitterly failed a nation and its people. But you would be wrong to think so. There is too much to hide, to much to gain for some, and too much to lose for all the rest, and those who stand to lose -and gain- the most have a very firm grip on power. They won’t let go till their hands are long gone, bitterly cold and eerily lifeless.
Ultra-low interest rates predictably lead to a few more sales, as do all sorts of modification plans and purchase subsidies. All serve to superficially improve a few numbers. But you don't need to look at projected foreclosure numbers for more than two seconds, if that, to understand what is in the offing, especially if you also realize the strong connection between foreclosures and job losses, and if you're aware of present unemployment numbers.
The average unemployed American is close to exhausting his/her 26 weeks of initial benefits, the present number is 25.1 weeks and rising. Think about that for a moment, please, and then realize how fast that number goes up. In the next 4 months, 400.000 people each and every single month are set to exhaust even all of the hastily improvised extended benefit initiatives. Yes, you saw that right. That's 5 million of them on an annual basis. People who've been without a job for more than 52-79 weeks, depending on which state they live in. and these also are fast rising numbers, heading for the gutter without hardly being registered by the mainstream economic radars that have so far this summer focused exclusively on rising stock markets.
If that doesn't spell Bulgaria to you, you probably need a dictionary.
Washington has gotten the message, though, and new plans are being put into place. Stealthily and under that same radar, of course. There will be a momentous shift in the residential mortgage loan and securities markets, from Fannie and Freddie to the seemingly virgin Ginnie Mae. It will come with a greatly increased role for the FHA (Federal Housing Administration), as well as in all likelihood the FHLB (Federal Home Loan Banks) and the great -and greatly failing- supervisor FHFA (Federal Housing Finance Agency).
These are agencies with largely unblemished records, yet large "growth possibilities". Ideal for the purpose. Keep the game going at all cost. If Washington would withdraw from the housing market now, home prices would revert to levels that people can actually afford. I don't know if you ever heard of a thing named "supply and demand", but you can look it up in the same dictionary, at the other end of where you found "Bulgaria". Supply and demand, or free market principles, if they were applied to the US real estate market today, would instantly bankrupt all of Wall Street, plus a few thousand smaller banks, plus Fannie and Freddie, and the parade wouldn't stop there. In other words, the entire economy is held together by the government taking money from its people and their children, and using it to prop up a financial system that guarantees those same children will not be able to afford a home of their own.
Let's be clear: there is no legitimate reason for this shift other than the, of necessity temporary, preservation of the existing banking system, which holds tens of trillions of dollars in lost racetrack wagers in its books. Fannie and Freddie, who've been buying any and all loans offered to them recently, have such stunning losses on their books, transferred to them (i.e. the taxpayer) by the banks, that something needs to be done lest someone somewhere smells too many dead rats.
Rest assured, it is being done. The GSE losses, which will run in the trillions of dollars, remain largely hidden so far, and won’t be revealed till the new system is in place, and even then only piece by piece, to prevent too many people from having a seizure and/or a pitchfork. This, like so many others, is a problem that's only getting worse, and fast. Default rates on more recent loans outdo those on older ones by large margins.
In order to prep the new regime, a bunch of "key" people are being replaced. In short time period, James Lockhart resigned as head of the FHFA, while Ginnie Mae president Joseph Murin quit after just one year. Ginnie, incidentally, has -alongside the FHA- behind the scenes already taken on a portfolio approaching $1 trillion. Mind you, that's only in government guarantees for mortgage securities, Ginnie's "core business".
In order to ever have a healthy economy and society again, one in which people don't need to constantly and consistently blandly lie to each other's faces, books, ledgers and balance sheets have to be dug up, opened and exposed to daylight. Losses have to be paid off, bets have to be settled, and cheaters have to be run out of town or locked in the county jail. It is something that cannot be avoided, it will one day happen no matter what.
Unfortunately for the common man, the less wealthy middle class which will wake up to find themselves relabeled as the newly poor, or the Formerly Well Off, all and any efforts of the entire political and financial class over the past few years have been geared towards hiding reality from reality, and towards putting $14.8 trillion worth of lipstick on a bunch of pigs so long deceased their meat is way beyond any date safe for human consumption.
And we now know there's more to come. Lipstick on Ginnie. And for millions of Americans: no job, a rental concrete slab, no health care. What do you think the chances are you're going to wish you were born in Bulgaria? Don't answer too fast. Think it over.
PS: As always when I refer to the Bulgaria model, I have nothing against that country or its people. I'm merely using it as a metaphor.
Shanghai Stocks Lead Fall, Drop 5.8%
Shanghai stocks lost 5.8% Monday, suffering their biggest percentage drop so far this year, as lower commodity prices, persistent worries over tightening in bank loans and weak economic data dampened investor sentiment. Hong Kong shares were weighed by the performance in China as well as a steep fall in U.S. stock futures and commodity prices. In Tokyo, exporters were dragged down by the yen's strength as risk-averse investors bought the low-yielding currency in search of a perceived safe haven.
"The U.S. fall on Friday helped to reduce the risk appetite for speculators holding Asian assets, said Ben Collett, head of cash equities at TFS Derivatives. He added, "What we're seeing is guys getting a little risk averse and cutting their losses." China's Shanghai Composite index posted its biggest percentage drop since November and ended at 2,870.63, its first close below 3,000 since the end of June. In Shenzhen, the main stock index dropped 6.6% to 955.87, while Hong Kong's Hang Seng Index skidded 3.6%, led by a slump in China-related stocks.
Metals stocks were hit hardest, with Angang Steel and Yunnan Copper dropping by the day's 10% limit in Shenzhen, while Aluminum Corp. of China and Jiangxi Copper dropped by as much in Shanghai. Sentiment was also hurt after Yunnan Copper reported a loss for the first half of the year. "The large gains in (China markets in) the first half recreated a bubble in the market, so when the government showed signs of tightening bank credit there's a selloff," said Zhang Yong, an analyst at Great Wall Securities.
The drop coincided with data showing foreign direct investment into China slumped 35.7% to $5.36 billion in July from the year-earlier period. Foreign direct investment flows for the first seven months of the year were down 20.3% compared with a year earlier, noted Moody's Economy.com economist Sherman Chan. "As the central government is determined to achieve the annual growth target of 8%, policymakers may have to step up efforts to boost momentum in coming months," she wrote in a report.
Japan's Nikkei Stock Average of 225 companies ended down 3.1%, Australia's S&P/ASX 200 ended 1.6% lower, South Korea's Kospi ended down 2.8% and India's Sensex was 4.1% lower. Taiwan's Taiex ended 2.0% lower, while New Zealand's NZX 50 lost 2.1%. Dow Jones Industrial Average futures were recently down 163 points in screen trade, adding to the late selling pressure in the region. The Sydney stock market performed relatively better, with Fortescue Metals up 2.9% after it struck an iron ore price deal with China. The pact is the first China has made in protracted iron ore price negotiations, and the China Iron and Steel Association said that talks are ongoing with other iron ore miners. It hopes the pact with Fortescue will be followed by other miners.
Data showing Japan's second-quarter gross domestic product registered its first quarterly growth in five quarters, did little for the Tokyo markets. GDP grew 0.9% from the quarter before, compared with a 1.0% rise tipped in a Dow Jones Newswires poll of economists. Royal Bank of Scotland economist Junko Nishioka, however, noted that capital expenditure by Japanese companies dropped for a fifth straight month. "As corporate free cash flow decreases, we expect capex to continue to contract throughout the year," said Ms. Nishioka. "Given exports started to slow down in June, especially to China, and household consumption is quite fragile due to the deterioration in the labor market, we believe GDP will slow in Q3 and beyond. In addition, the effect of the economic stimulus packages is likely to gradually diminish."
Among Japanese exporters, Sony Corp. lost 4.1% and Toyota Motor Corp. gave up 2.7%. Among commodity-related companies, BHP Billiton lost 3% and Rio Tinto shrank 4.8% in Sydney, Tata Steel shares dropped 6.8% in Mumbai trading, Inpex gave up 4.8% in Tokyo and Korea Zinc Co. shed 5.9%. The September Nymex crude oil futures contract was down $1.71 at $65.80 per barrel. On Friday, the surprise drop in the latest survey of U.S. consumer confidence triggered a selloff in oil futures, with Nymex crude losing $3.10 to $67.51 per barrel, breaking out of the $68-$70 range it's held since the start of August. Spot gold prices gave up $12.04 to $935.20 a troy ounce.
Base metals prices were lower across the board, mirrored by falls in crude oil and equities and strength in the U.S. dollar, raising concerns that this time the correction could be deeper and more extended than recent mild sell-offs.
London Metal Exchange three-month copper was at $6,057 a metric ton, down $183. On the Shanghai Futures Exchange, the benchmark November copper contract settled down 4.8% at 47,880 yuan a metric ton. LME three-month nickel broke support at $19,000 and was down $1,075 at $18,500 on heavy volume. Taiwanese stocks were weighed by worries of rising bad debt and insurance payouts because of damage and casualties from heavy floods in the southern part of the island. Waning optimism over improved trade between Taiwan and mainland China also pulled shares lower.
The South Korean market was being pulled lower by weaker-than-expected U.S. consumer sentiment data released Friday, said Lee Sun-yup at Goodmorning Shinhan Securities. KB Financial was down 4.8% and Samsung Electronics shed 2.5%. Korean Air was down 5.1% on news of Korea's first H1N1 deaths over the weekend. In Mumbai, concerns over the impact of poor monsoon rains were in play, dragging shares of tractor maker Mahindra & Mahindra down 5.3%, motorcycle maker Hero Honda Motors 5.9% lower and consumer products major Hindustan Unilever down 2.7%.
Singapore's Straits Times Index was down 3.3%, while Philippine shares were 2.8% lower. Thailand's SET Index dropped 2.9%. Markets in Indonesia were closed for a holiday. In foreign exchange markets, the yen was stronger against the euro and the U.S. dollar. Hiroshi Maeba, a senior dealer at Nomura Securities, said Japan's GDP result had little impact on the yen was it was largely in line with expectations. He expected the dollar to be biased lower against the Japanese currency in thin trade this week, because U.S. consumer sentiment data introduced more uncertainty over the pace of the global economic recovery, to the benefit of the safe-haven yen.
After Dow's 42% Run, Roadblocks Looming
Now that economic indicators and credit markets are returning to levels seen before Lehman Brothers melted down in September, some investors are starting to wonder what is keeping the stock market from getting there, too. In one example of the economy's resilience, the Institute for Supply Management index of manufacturing activity is within a whisker of where it was in August 2008. Even risky high-yield bonds have recovered all the ground they lost. Yet the Dow Jones Industrial Average's rally of 42% since March 9 still leaves the blue chips down 18% from 11421.99 on Sept. 12, the last trading day before Lehman tumbled into bankruptcy and Merrill Lynch was sold to Bank of America. After closing Friday at 9321.40, the Dow is 34% below its all-time high close of 14164.53 in October 2007.
Stocks have roared back from their bottom in March with ease, shrugging off the recession and unrelenting loan losses at banks. That combination of momentum and psychology could carry stocks back to pre-Lehman levels soon. Holding onto that ground, much less another upward jolt that carries stocks to new highs, will likely be much tougher, many market watchers contend. Some suggest the market could be stuck in a holding pattern until 2011. "In order for the stock market to deserve to go back to pre-Lehman levels, we need to see a lot of growth," says Ben Inker, director of asset allocation at GMO, a Boston asset-management firm, "and it's just not clear where that growth is going to come from in the near term."
One potential roadblock is corporate earnings. The rally since March has come in two distinct legs, each driven at least partly by companies beating very low profit expectations through aggressive cost-cutting, even as revenues fell. Second-quarter earnings inspired a July-to-August rally that broke stocks out of a monthlong trading range and raised hopes that the way was clear for them to soar even higher. Now the rally seems to be sputtering, particularly after last week's disappointing data on July retail sales and August consumer sentiment reinforced doubts about consumer spending.
"Significant earnings recovery will be difficult to accomplish without a more robust consumer than we currently have," says Rich Hughes, co-president of Portfolio Management Consultants, a Chicago firm managing more than $7 billion in assets. And if it takes years for corporate profits to return to precrisis levels, as many observers predict, it probably will take the stock market about that long to get there, too. Companies in the Standard & Poor's 500-stock index are on track to post combined per-share earnings of $59.59 this year, according to Thomson Reuters. That would be 28% lower than their 2007 earnings of $82.54 a share.
While the 26% profit surge expected in 2010, giving the 500 big companies combined earnings of $74.90 a share, would be impressive considering the doom and gloom of the past year, analysts don't expect earnings to reach a new high until 2011. Companies in the S&P 500 are projected by analysts to earn $91.39 a share in 2011, or 11% higher than in 2007. The S&P 500 index now trades at a relatively cheap 13 times 2010 earnings, appearing to give it more room to rise. But that optimism assumes analysts aren't being irrationally exuberant about the pace of profit recovery.
For instance, the financial sector likely won't soon regain its old strength in any sustainable way. Credit losses still are piling up, and the amount of leverage available to supercharge bank profits is substantially lower than at the height of the credit bubble. In 2007, financial firms generated roughly a third of the S&P 500's overall earnings. Shell-shocked consumers are widely expected to stick to the frugality they adopted after the bubble burst. That poses a hurdle for the economy and corporate profits beyond the inventory-rebuilding bounce expected in the second half of this year. "I asked all of our senior analysts when they see earnings in their sector getting past their prior peak," says Barry Knapp, head of U.S. portfolio strategy at Barclays Capital. "I didn't get a single analyst to tell me it would happen in 2010."
While a lackluster stock market would frustrate bulls, some strategists warn that bears shouldn't expect a big market swoon. So far, stocks have shown amazing resilience in the face of bad news, and a stubborn refusal to put in a major correction of 10% or more. One reason could be the residual skepticism about the recent rally and future earnings. That always excites contrarians, who cling to the old saw that stock markets climb walls of worry. "Negativity is a welcome sign," says Ryan Detrick, senior technical strategist at Schaeffer's Investment Research in Cincinnati. "It lowers expectations, and then when they are beaten, the market keeps trucking higher." Partly for that reason, Mr. Detrick figures the S&P 500 could get back to its pre-September level of about 1250 within six to nine months.
Of course, there is always the risk of a big swing in either direction. September and October can be perilous months for stocks, and analysts cite rising foreclosures and disappointing economic data as potential triggers for the correction bears have been waiting for. There also could be sudden rushes to the upside. Central banks around the world still have their monetary floodgates open. Trillions of dollars sitting in money-market accounts might be pushed back into the market if investors increasingly worry about missing out on the rally.
A wave of stock buying would be cheered by investors still dreaming about their portfolios fully recovering from the past year's damage. But another rally could dissipate just as fast if the fundamentals don't keep up, many experts say. "We could have a run-up because of momentum, but you've got to look through it to the underlying economy," says George Feiger, who oversees $1.3 billion as chief executive of Contango Capital Advisors, a subsidiary of Zions Bancorp., a regional bank based in Salt Lake City. "The world is not ending, but it is far from repaired."
Foreign Direct Investment in China Fell 35.7% in July
Foreign direct investment in China fell for a tenth straight month in July as companies stalled expansion plans amid the global financial crisis. Investment declined 35.7 percent from a year earlier to $5.36 billion, the Commerce Ministry said at a briefing in Beijing today. That compared with a 6.76 percent drop in June. The situation for foreign direct investment in China remains "severe" even as "positive signs" have emerged in the past two months, Vice Commerce Minister Fu Ziying said last week. Japan emerged from its worst postwar recession in the second quarter, the Cabinet Office said today in Tokyo, and a Bloomberg survey of users shows confidence in the world economy surged to a 22-month high in August.
"This is a reflection of global overcapacity and the earlier credit squeeze," said Ben Simpfendorfer, an economist with Royal Bank of Scotland in Hong Kong. "The monthly data is very volatile." The detention of four Rio Tinto Group staff since July 5 may weigh on business investments in the country, U.S. State Department spokesman Philip J. Crowley said Aug. 13. The four were formally arrested on charges of trade secrets infringement and bribery, China’s Supreme People’s Procuratorate said Aug. 11, according to a Xinhua report. Australia’s Prime Minister Kevin Rudd said July 15 that the world was "watching closely" how China handles the case.
China’s economy will expand 9.4 percent this year, topping the government’s official 8 percent target as a 4 trillion yuan ($585 billion) stimulus and record bank lending spurs growth, Goldman Sachs Group Inc. said last week. Growth rebounded to 7.9 percent in the second quarter, after slowing to 6.1 percent in the first, the weakest pace in almost a decade. In Asia, Singapore and Hong Kong emerged from recessions last quarter, as did Germany and France in Europe. "China’s FDI is still healthy compared to the global slump in investments," said Commerce Ministry spokesman Yao Jian at today’s briefing. "We can say that China is one of the most attractive places for investments."
Chances Dim for U.S. Public Health Plan
The Obama administration gave its strongest signal yet that it would be willing to compromise on plans to expand the government's direct role in health-insurance coverage as it fights a growing crescendo of opposition to its effort to overhaul health care. Health and Human Services Secretary Kathleen Sebelius said Sunday that a new, government-run, health-insurance program wasn't the "essential element" of any overhaul plan.
Robert Gibbs, the president's press secretary, said President Barack Obama wants "choice and competition" in the insurance market. Mr. Obama "has, thus far, sided with the notion that can best be done through a public option," or government-run plan, Mr. Gibbs said Sunday on CBS's "Face the Nation." However, he said the bottom line is simply that "what we have to have is choice and competition in the insurance market." A day earlier, President Obama defended the public option at a town-hall meeting in Grand Junction, Colo., while leaving the door open to alternative approaches that expand coverage and reduce costs, but don't increase the federal deficit. The public option, "whether we have it or we don't have it, is not the entirety of health-care reform," Mr. Obama said. "This is just one sliver of it, one aspect of it."
The comments come after a bruising two weeks in which the president's call for a public plan to "keep insurance companies honest" has been interpreted by Republican opponents and some members of the public as a push to drive private insurers out of the marketplace. Insurance companies have fought a public plan, objecting specifically to one that would use the government's buying power to negotiate rates. The worry is that hospitals and doctors would charge private companies more to make up for being underpaid by the government. Concerns have also been raised that insurers would be unable to compete with such a plan, and that the public option would be a precursor to national health care.
The implications for consumers of nonprofit health-insurance cooperatives, one alternative way to help individuals and small businesses get coverage, are unclear. Much will depend on how and how quickly the co-ops can organize -- a daunting task that could involve setting up the equivalent of new insurers on a state or regional basis. The savings wrung from this extra competition could help cash-strapped patients, though it is unlikely that the co-ops would bring prices down as significantly as the government could.
Obama administration officials have indicated before that they could support a health-care overhaul without a government-run insurance option. "Nothing has changed. The president has always said that what is essential is that health-insurance reform must lower costs, ensure that there are affordable options for all Americans and it must increase choice and competition in the health-insurance market. He believes the public option is the best way to achieve those goals," Linda Douglass, communications director for the White House's health-reform office, said Sunday.
But as the debate over Mr. Obama's ideas for a health-system overhaul grows more shrill, proponents have indicated willingness to drop some controversial elements in order to get a plan passed. Aides to Senate Minority Leader Mitch McConnell (R., Ky.), an opponent of the public option, labeled Ms. Sebelius's comments a "shift" on the issue in an email pointing out various occasions on which President Obama had said a health plan should include a public option. Some liberal advocates interpreted the administration's position as a shift in emphasis, but not away from the public option. Mr. Obama wants to "broaden the conversation so people understand that health-care insurance reform is bigger than just one element," said Jacki Schechner, spokeswoman for Health Care for America Now, a grass-roots campaign for health-care reform.
Ms. Sebelius's comments come as some senior Democrats in the Senate are urging the administration to give up on the idea of a public plan run directly by the government. The House has already passed a bill with a robust public option. But House Democrats might be reluctant to vote for a final bill that includes a government-funded plan -- exposing themselves to attacks from the right -- if the White House appears willing to bargain that away too quickly.
The insurers set to breathe the biggest sigh of relief if the public plan is dropped are Wellpoint Inc., which operates Blue Cross and Blue Shield plans in 14 states, and the dozens of other not-for-profit Blue plans across the country.
They are currently the biggest sellers of individual health policies, the kind that would compete with new public or co-op plans. Companies such as Aetna Inc. and Cigna Corp. have less to lose from a public plan as they market mostly to employers. Robert Laszewski, a consultant at Health Policy & Strategy Associates, said nonprofit co-ops aren't necessarily an easy victory for insurers, though. If they don't work down the road, and the government has to bail them out, they might be a precursor to a stronger government role in health care, he said.
He pointed out that the barriers to entry for new insurers are high: They need to set up information-technology infrastructure, build networks of providers and raise significant capital to hedge against catastrophic claims. A co-op that doesn't navigate those challenges smoothly runs the risk of being shunned by potential customers. America's Health Insurance Plans, the lobbying group that represents the industry, is also cautious about the idea of co-ops, saying it hasn't seen any details on how such a system would operate. Robert Zirkelbach, a spokesman for the group, said that reforms the insurers have proposed -- such as accepting patients with pre-existing conditions -- are enough to fix the health-care system. "If we do those things, a government-run plan -- including a co-op -- is not necessary," he said.
President shifts focus to renting, not owning
The Obama administration, in a major shift on housing policy, is abandoning George W. Bush’s vision of creating an "ownership society’’ and instead plans to pump $4.25 billion of economic stimulus money into creating tens of thousands of federally subsidized rental units in American cities. The idea is to pay for the construction of low-rise rental apartment buildings and town houses, as well as the purchase of foreclosed homes that can be refurbished and rented to low- and moderate-income families at affordable rates.
Analysts say the approach takes a wrecking ball to Bush’s heavy emphasis on encouraging homeownership as a way to create national wealth and provide upward mobility for low- and working-class families, especially minorities. Housing and Urban Development Secretary Shaun Donovan’s recalibration of federal housing policy, they said, shows that the Obama White House has acknowledged that not everyone can or should own a home. In addition to an ideological shift, the move is a practical response to skyrocketing foreclosure rates, tight credit, and the economic crisis.
"I’ve always said the American dream should be a home - not homeownership,’’ said Representative Barney Frank, chairman of the House Financial Services Committee and one of the earliest critics of the Bush administration’s push to put mortgages in the hands of low- and moderate-income people. Conservatives, however, believe that President Obama and HUD shouldn’t head too far in the other direction; in some cases, rent can be more expensive than a mortgage payment. Done properly, they say, homeownership can bolster the tax base and bring stability to neighborhoods and families, reducing crime and helping people achieve financial independence.
The $4.25 billion set aside for the creation of rental housing will come from $14 billion that HUD has received from the federal economic stimulus package. Another $4 billion of the money will be used to fix up the nation’s existing public housing stock of 1.2 million units. The funds for new units will be available under competitive grants, and officials in Massachusetts said they will be among the states aggressively competing for the money. In Boston, more than 20,000 households are on a waiting list for affordable rental housing, said Lydia Agro, a spokeswoman for the Boston Housing Authority. "There’s definitely a need out there,’’ she said.
City, state, and federal officials said they could not yet estimate how many new rental units will be created with stimulus money, but HUD said the "tens of thousands’’ of apartments and town houses it will produce nationwide will ease an increase in homelessness that has resulted from the foreclosure crisis. Carol Galante, HUD’s assistant secretary for multifamily housing, said HUD will still be in the business of helping people buy homes using existing lending subsidies.
The difference from the Bush administration, she said, is "we’re trying to have a balanced policy. We’re not trying to say homeownership isn’t important, because it is. But we have to be sure we’re helping people get into homes that are sustainable for them.’’ RealtyTrac, a private company that follows homeownership trends, reported Thursday that the number of foreclosure notices issued to homeowners nationwide increased 9 percent during the first half of 2009. At the same time, the US Census Bureau reported that the vacancy rates for homeowner housing nationwide crept up for the second consecutive quarter, further signs of the ongoing mortgage crisis. The foreclosures are displacing large numbers of families, who will need new housing.
"People who were owners are going to be renting for a while,’’ said Margery Turner, vice president for research for The Urban Institute, a Washington think tank that studies social and economic policy.
"There is a housing stock that is sitting vacant. There is a real opportunity here’’ to use those homes as rental property and solve both problems, she said. In addition to the stimulus money, Obama’s budget also seeks $1.8 billion for the construction of rental housing, the same amount that Congress approved in the last year.
David John, a senior analyst at The Heritage Foundation, a conservative policy center, said it remains to be seen whether the Obama administration’s decision to step away from the Republican administration’s "ownership society’’ will have a positive effect on minorities and the working class. John said the benefits of homeownership are greater than just building equity in a house. For example, he said, children of parents who own homes do better in school. "There’s more stability in the family and overall an improvement in society,’’ he said. "Usually, homeownership brings with it a sense of building towards the future, rather than living day to day.’’ Still, he said, renting is better than putting a family in a house that it cannot afford. "It’s a mixed bag,’’ he said.
In the past few weeks, Donovan, the former housing commissioner in New York City, has embarked on a series of cross-country trips to cities like Seattle and Anchorage to highlight the federal stimulus money being used to build low- and moderate-income rental housing units. Donovan was unavailable for an interview. Bush made homeownership a signature issue of his tenure. In remarks before a panel discussion on promoting minority homeownership in 2002, Bush said America is "a nation of owners. Owning something is freedom, as far as I’m concerned.’’
But that vision disappeared over the last two years as the housing market plunged, leaving homeowners struggling under mortgages they could no longer afford for a home that was no longer worth what they paid. As mortgage defaults piled up, banks that made the risky loans imploded, helping trigger the global financial crisis. "This notion that a home was your source of wealth was a recent one,’’ Frank said. "People thought that prices would go up, and up, and up, and up.’’ Frank said he never bought the idea that Americans could keep borrowing to support higher and higher home prices. "My answer was, I wish I could eat more and not gain weight,’’ he said.
FHFA Report On Restructurings
by Bruce Krasting
The FHFA released a report on their refinancing activity for the year to date. As usual it was cast in glowing terms. It is clear that FHFA is doing something. In my view that ‘something’ is consistently the wrong thing. From the report:Washington, DC – Fannie Mae and Freddie Mac refinanced more than 2.9 million mortgage loans in 2009 through July of this year. Since the inception of the Making Home Affordable Refinance Program (HARP) in April, Fannie Mae and Freddie Mac refinanced almost 1.9 million mortgage loans through July.
A little clarity. This first paragraph reads as if the Agencies have addressed and restructured 2.9mm loans under the Harp program. That is not correct. Of the total of 2.9mm only 190k were under the HARP program. The balance were ReFi’s where the borrower got a lower rate and likely took some additional money in a cash out.
In the first seven months of the year Fannie and Freddie did all the ReFi's that they could at lower interest rates. During this period the D.C. lenders were 90% of the mortgage market. The opportunity to lower a mortgage interest rate had a very beneficial impact on those lucky borrowers. The claimed ‘savings’ of 1.3% on 2.7mm mortgages with an average balance of $200k comes to $7 billion a year. An effective stimulus for sure. But now the rates for mortgages have risen. On a mark to market basis those new mortgages are underwater. Because the folks at F/F do not have to bother with trivialities like mark to market there is no reported loss from this activity. But it will be a drag on future income for the next decade. We again follow a policy that steals from the future to pay for current excesses.
Anyone can make cheap loans. That is not success. This is a policy decision by the federal government to stimulate consumer demand. If F/F are tools of government policy their status should be resolved so that role can be debated. Making low interest rate loans and then having the Fed buy $1.25 trillion of these loans is a subsidy. It has a current and future expense. This needs to be understood and accounted for. Mr. Lockhart said. "Importantly, over 60,000 borrowers with mortgage loans that exceed 80 percent of the house value up to 105 percent have been refinanced. We are now seeing significant results from the HARP and the Home Affordable Modification Program (HAMP), but much more work needs to be done. I commend the Fannie Mae and Freddie Mac teams for helping drive this effort."
Historical data shows that the bulk of mortgage defaults occur when the borrower has a change of circumstance (illness, death of spouse, loss of job) and not high LTV loans. The Agencies are relying on this with these new high LTV loans. That is terrible policy. Up until 2007 there had never been a year where there were nationwide declines in RE values greater than 5%. So relying on old reasoning does not apply when prices can decline by 25% in just one year. The most significant cause for default today is that borrowers are ‘upside down’. When the Agencies make high LTV loans they put all of us at risk. High LTV loans have default rates in the 20%+ range. We need to stop policies that encourage defaults. Mr. Lockhart lauds these results. He is just writing a taxpayer check.
Under HARP, borrowers whose loan-to-value (LTV) ratio is above 80 percent up to 105 percent are able to refinance without added mortgage insurance requirements, a previous key barrier to refinancing.
The Charters of both Fannie and Freddie spell this out in their definition of Conforming Loans. It is simple. 80% LTV to a borrower who can demonstrate they can make the payments. Insurance industry lobbyists created a carve-out to this rule with Mortgage Insurance. This allowed F/F to buy 103% LTV loans and avoid their own restrictions. It has proven to be a disaster. The ‘enhanced’ loans are one of the largest contributors to the pool of busted mortgages. Now they are just waiving those Charter restrictions away. By what authority do they do that? Congress is supposed to be looking after this mess. Who is minding the store here? Is Barney Frank still involved with this? Is he writing taxpayer checks too?
Through July, Fannie Mae had refinanced 1.7 million loans. Of that total, approximately 138,000 loans were refinanced under the company’s DU Refi Plus and Refi Plus flexibilities that were put in place to support the HARP. Freddie Mac refinanced 1.2 million loans through July. Of that total, approximately 53,000 loans were refinanced under the company’s Relief Refinance program that was put in place to support HARP.
The 190k loans restructured under HARP guidelines are the problem loans. While FHFA crows about this success they fail to mention that they have a backlog of more than one million borrowers that are seriously delinquent. Nor do they mention that as many as 50% of these ReFi's will go back into default in less than six months.
The Federal Housing Finance Agency recently announced the expansion of HARP to allow borrowers with LTVs up to 125 percent to participate. Fannie Mae will begin accepting deliveries of refinanced loans with LTVs over 105 percent up to 125 percent as of September 1. Freddie Mac will begin accepting deliveries of these loans on October 1.
This is insane. No private lender in their right mind would make a 125% loan. These are just losses to be. The FHFA is perpetuating the cycle of default. They are making things worse, not better.
The Federal Housing Finance Agency regulates Fannie Mae, Freddie Mac and the 12 Federal Home Loan Banks. These government-sponsored enterprises provide more than $6.3 trillion in funding for the U.S. mortgage markets and financial institutions.
The FHFA always ends its communications with this sentence. I do not know if they are proud of this number or whether they point this out to remind us of how powerful they are. No single entity should have this much exposure to the credit market. It defines systemic risk.
The Coming Foreclosure Wave
Has housing hit a bottom? Fox News declared that the bottom is in, as had many other talking heads.
In fact, the reality of the situation is a "good news, bad news" scenario.(Bloomberg) -- The wave of "option" adjustable-rate mortgages recasting to higher payments, projected by some economists to represent a looming source of foreclosures that will hurt housing markets over the next few years, will be smaller than "feared" because many borrowers will default before their bills change, Barclays Capital analysts said.
So you see, the coming tsunami of foreclosures will be much small than expected because much of the foreclosure wave will hit earlier.
The subprime crash is largely over, but the Option-ARM bubble was supposed to be spread out over many years.
Instead the Option-ARM mortgages are blowing up ahead of time. Why are they blowing up early? Because they are already underwater, and "negative equity is a necessary condition for foreclosure" according to the Boston Federal Reserve.
Option-ARM holders are the worst of the worst. While 24% of all mortgage holders are currently underwater, and that number expected to rise to 48%, Option-ARM borrowers are expected to peak at a number closer to 90%.
40% of Option-ARM borrowers are already delinquent. This is especially bad news for California, where an overwhelming percentage of Option-ARMs originated.
"The additional risk really will only be for borrowers who manage to stay current over the next couple of years and might default due to a payment shock," the New York-based analysts including Sandeep Bordia and Jasraj Vaidya wrote.
"To say there is a second wave implies the (current) wave has receded. I don’t see that the wave has receded."
- Sam Khater, senior economist, First American CoreLogic
Another factor you must take into the coming wave of foreclosures is the high unemployment rate.
Another factor weighing on the housing sector is the near record level of inventory.
And that's only the official housing supply. The Shadow Inventory is far, far larger."The number of homes listed officially on the market, while still at historically high levels, might be only the tip of the iceberg," said Stan Humphries, chief economist at real estate website Zillow.com in Seattle, Washington.
According to Zillow's latest Homeowner Confidence Survey, 12 percent of homeowners said they would be "very likely" to put their home on the market in the next 12 months if they saw signs of a real estate market turnaround, 8 percent said "likely," while 12 percent said "somewhat likely."
Survey results could translate into around 20 million homeowners trying to sell their homes, a startling number given that the Census bureau indicates there are 93 million U.S. houses, condos and co-ops, Humphries said.
According to the National Association of Realtors, the market is currently on track to sell 4.89 million homes annually.
"At this pace, it would take about four years to run through this amount of backlogged inventory," he said.
And if that wasn't enough, the banking sector has its own "shadow inventory" that it refuses to sell at this time because it can't afford to book the losses. Estimates are somewhere north of 600,000 homes.
Speaking of the banks, what effect will all these foreclosures have on them?The Barclays analysts, who wrote that about 88 percent of option ARMs packaged into securities in 2007 will eventually default, said that after a rally in prices they no longer suggest owning related bonds, "a trade we have been recommending for months."
More than $750 billion of option ARMs were originated between 2004 and 2008 as borrowers used their low initial payments to afford higher-priced homes, according to newsletter Inside Mortgage Finance.
All those losses that banks will eventually have to book one way or another, will take their toll on balance sheets. The Congressional Oversight Panel created to oversee the U.S. banking bailout, had this to say about the state of the banking system.In its latest assessment of the $700 billion financial system bailout, the Congressional Oversight Panel warns that banks still hold many risky loans of uncertain value. If unemployment rises sharply or the commercial real estate market collapses -- as many economists fear -- the banking system could again lose its footing, the panel says in a report to be released Tuesday.
No mention of Option-ARMs, but then maybe no one wants to talk about it.
Treasury puts Fannie and Freddie under renewed scrutiny
Lawmakers need to renew Treasury's ability to buy Fannie assets by December
Almost one year after Fannie Mae and Freddie Mac were effectively nationalized in the midst of an expanding economic crisis, policymakers in Washington have still yet to come to a conclusion about what to do with the quasi-governmental mortgage giants. This has Republican lawmakers steaming about the companies, which they believe should be reformed right away. Democrats -- including those in the White House and Treasury -- have put the issue off until after their current bank restructuring endeavor is completed, which in itself is a momentous undertaking that is only scheduled to be wrapped up by year-end.
"Fannie Mae is something we will take seriously, study and take our time and come back to folks next year," said Treasury Assistant Secretary Michael Barr. Nevertheless, with the Obama administration's bank regulatory reform proposals out the door, key Treasury Department officials can begin thinking about expanding on options for the entities it released in June guidelines. Possible reform ideas involve nationalization, privatization and a series of hybrid approaches.
The mega-institutions became a symbol of the financial crisis when they were taken over by the government in a conservatorship in September as the crisis expanded. Government regulators took over Fannie Mae and Freddie Mac because they believed their collapse would have had an even more wide-ranging explosive impact on the markets than the failure of Lehman Brothers. Fannie and Freddie purchase whole loans, and package them as a means of ensuring that capital is available to banks and other financial institutions that lend money to home buyers. They either hang on to the mortgage securities or sell them to investors with a government guarantee.
So far, Fannie Mae has received $34.2 billion in taxpayer-funded bailout money, while Freddie Mac has received $51.7 billion. Taxpayer investments may go up as defaults on home mortgages swell. It's unclear how high their losses will be but the government recently expanded a regulatory limit of $100 billion in losses the entities will accept to $200 billion each. Nevertheless, there are growing reasons to reform the entities, which have become almost the sole provider of mortgage financing in the United States. Legislation approved in 2008 gave the Treasury the authority to purchase Fannie Mae and Freddie Mac securities through Dec. 31, 2009.
Christopher Whalen, director of Institutional Risk Analytics, said he expects lawmakers to draft legislation extending this authority, which would allow the government's conservatorship of the entities to continue through 2010. The debate about what to do with troubled assets of Fannie Mae and Freddie Mac is part of a broader discussion about the two mortgage giants. Charles Horn, partner at Mayer Brown LLP in Washington, said there are calls for the government to reduce the size of the entities, perhaps by requiring that they wind down their assets over a period of time. One possible approach to achieve this would be to create a "bad bank" taking hundreds of billions of dollars of Fannie Mane and Freddie Mac bad loans off their books. The bad bank would seek to collect as much of the debts as possible.
Fannie Mae securitized roughly $94.6 billion of whole loans held for investment in its mortgage portfolio in the second quarter of 2009. It had total non performing loans of $171 billion as of June 30, up from $144.9 billion in March and $119 billion in December. A second part of this approach, which is one of many under consideration by the White House, would be to privatize by creating new quasi-governmental corporations or "good banks" that would resemble the old entities with public offerings that accept private equity and debt investments.
However, Whalen doesn't believe restoring their previous hybrid quasi-public-private status is in the cards. "I think losses at Fannie and Freddie will be so high in both of these entities that by the time we get into next year, Congress won't be interested in privatizing Fannie and Freddie," Whalen said. "I cannot imagine a rational argument to have private equity investors in these entities. The only role for private capital should be in bonds."
However, Dwight Smith, partner at Alston & Bird LLP in Washington, said there are advantages with a public model - in particular funding from shareholders and creditors -- if it can be structured in a way that limits the possibility that their collapse could cause massive damage to the markets. Smith argued that a public model with a government guarantee could work if Fannie and Freddie were dissolved into many smaller public companies, a prospect that is also under consideration by Treasury.
"If Fannie and Freddie were to have failed, that would have thrown the entire residential market into incredible turmoil," Smith said. "However, if you have ten or twelve smaller Fannies, then, if one of them were to fail, it doesn't mean that the others would fail as well. If investors know they can't rely on government to bail out a mini-Fannie that would restore market discipline."
However, Whalen said that a more useful approach would be to merge Fannie and Freddie, as many expect to happen, and create a Ginnie Mae type structure out of the entities, known as Government Sponsored Enterprises. Unlike Fannie and Freddie, which buy whole mortgage loans and mortgage securities from financial institutions, Ginnie Mae only provides government guarantees for mortgage securities. The agency currently guarantees $771 billion in mortgage securities and it has guaranteed roughly $2.9 trillion in assets since its inception in 1968.
Whalen argues that having a Ginnie Mae type entity is important because it creates a secondary market for banks by giving them an option have their mortgage securities receive a government guarantee. Before Fannie and Freddie become a Ginnie Mae type entity they would need become smaller, which would happen "if the government is disciplined" and pays off the massive debts that exist to support their retained portfolios of loans and securities. A substantial size reduction is necessary, Whalen added, because it would limit their "too- big-to-fail" quality.
However, Smith argues that such an approach would limit Fannie and Freddie's flexibility in the mortgage market. By only guaranteeing mortgage securities and not whole loans, a new consolidated Fannie and Freddie could hurt struggling smaller financial institutions that rely on the entities to prop the market for whole loans. "Originators who now sell whole loans to Fannie or Freddie would be left out, leading to further industry consolidation," Smith said.
Smith added that he was worried that an entity that only guarantees high quality mortgage securities would not be in a position to limit the fallout from a financial crisis, unlike the Treasury's current program that includes purchases of subprime mortgages and problematic mortgage securities. "Treasury purchases would have a smaller impact," Smith said. Treasury also may restructure Fannie and Freddie into public utilities, where government regulates their profits, sets fees, and provides guarantees for their assets.
The approach has pro's and cons. Smith said that with a utility model, regulators could prevent abuses in advance in a way that the current model can't. "In this environment, mortgage lenders have shown that when they compete they do a bad job and impose billions of dollars in costs on taxpayers. The government needs to be sure that this business is managed much more closely and on a day to day basis," Smith said. "However, a utility model would represent the most intrusive government regulation of all the options and would reduce the flexibility of lenders to offer mortgages."
Will Ginnie Mae be the next shoe to drop?
The more things change, the more they stay the same. You might think that with all the government take-overs and financial industry failures that the practices that lead to the near total collapse of the mortgage industry have been weeded out. Not so. The practices are simply being performed by the government rather than the private sector.
When you get a mortgage, it is often guaranteed by a third party. It could be private company or a federal agency like the FHA. The mortgages are bundled into a pool and investors can buy shares in the pool. To sweeten the deal, a fifth party enters the deal and guarantees payments to these investors. If you don't pay your mortgage, the mortgage is covered by the mortgage guarantor and the investor is covered by the mortgage backed security guarantor. The idea is to minimize the risk to the loan originator while providing them capital through investors, whose risk has also been greatly removed. In theory, the fees charged by the intermediaries would cover the cost of backing up the loans.
This is fine when defaults are in the 2-4% range. When they get higher than that large "institutional players" (the intermediaries) go under water. If it's a private company, it goes out of business or is taken over by the government. The government might also arrange for another private company to take it over. In the case of a government agency, they simply go to Congress, the Fed or the Treasury for more cash. The system works great for loan originators and investors, but with default rates at 7% and higher, the intermediaries have gotten clobbered. The private sector can't do it anymore. This is why the taxpayer now owns Freddie Mac, Fannie Mae, AIG and others who are "too big to fail". Actually they are only "too big to fail" if you intend to perpetuate the status quo, which is exactly what's happening.
The government's solution, under both Bush and Obama is to cut out the middle man and just take the losses directly to the taxpayer. Ginnie Mae writes guarantees for FHA and other government agency backed mortgages. The down payment requirement for FHA backed loans is 3.5% and there's no credit score requirement. Ginnie Mae now has almost 18% of the agency backed mortgage bond market. Their portfolio has doubled in just over two years and is expected to grow by another 30% over the next year. Sub-prime lending and trading hasn't gone away. It's being consolidated and your money is funding it.
Home Prices: There's No Quick Recovery Ahead
So, is our long national nightmare over? Has the housing market finally hit bottom? There has been some muted -- albeit exhausted -- cheering from homeowners in recent weeks. But before we break out the champagne, look out for further potential problems just down the road. The good news? According to the closely watched Case-Shiller Home Price Index, which tracks home prices across 20 major cities nationwide, the three-year housing slump slowed sharply in April and May.
May's decline was just 0.2%, the slowest in two years. And several cities actually saw prices rise -- among them Denver, Washington, D.C., Chicago, Boston, Cleveland and Dallas. Even Miami only fell about 1% in May. That's a great month down there. Previously, prices had been falling 3% a month. We'll get an even better picture of the situation when the Case-Shiller figures for June are released on Aug. 25. But these data aren't the only hopeful signs. Inventories of unsold homes have come down. According to the National Association of Realtors, there were about 3.8 million unsold homes on the market at the end of June. That's down a long way from 4.5 million a year ago.
And yes, housing affordability is dramatically better. People, obviously, need to live somewhere. At some point, housing gets cheap enough that the fundamentals start to look good. The average home is about a third cheaper than it was at the peak three years ago, a plunge unprecedented since the Great Depression. In the hardest-hit places, such as Phoenix, Las Vegas and Miami, average prices have been halved or better from their bubble peaks. Factor in falling mortgage rates as well, and housing starts to look cheap by many measures. Thirty-year mortgage rates, at around 5.5%, are still low by historic standards. A few months ago, when they fell below 5%, they were very cheap.
There's some other good news for homeowners from the rest of the economy. July's job losses were better than feared: The unemployment rate, which was heading vertical a few months ago, eased to 9.4% last month from 9.5%. Some are saying the worst is behind us, for the economy and the housing market. No wonder the iShares Dow Jones U.S. Home Construction exchange-traded fund (ITB), which tracks shares of home-building stocks, has bounced sharply since early July. So, is that it? Not so fast.
Prices may -- may -- be nearing the bottom in many markets. But beyond the headlines, there are plenty of reasons to stay cautious. There may even be fresh dangers just ahead. And even if prices have stopped falling, it may be years before they start rising sharply again. First, late spring is traditionally the strongest season in the real-estate market. And it's hardly a surprise the market saw some green shoots this time around. It's enjoying not one, but two, gigantic taxpayer subsidies -- an $8,000 refundable tax credit, or gift, for first-time buyers, as well as those cheap mortgage rates. The Federal Reserve has been spending billions of dollars to keep interest rates down.
Both are only short-term fixes. Any sustained economic upturn would be expected to send long-term mortgage rates rising again, dousing the real-estate market with fresh cold water. The picture on inventories isn't as good as it sounds, either. A lot of unsold homes have simply been put up for rent instead, especially in the most difficult markets like Miami. The result? A glut of empty rentals as well. New waves of foreclosures and distressed sales may be coming, too. In states such as California, it can take many months for delinquencies to turn to foreclosures, which means last winter's bad news may still be coming down the pike. Meanwhile, vast tranches of teaser-rate mortgages are due to reset later this year and in 2010.
As for the economy: Both unemployment and household debt levels remain at extremely high levels by the standards of postwar history. Either is bad news for housing. The combination is very bad. Dean Baker, co-director of the Center for Economic and Policy Research, argued in a recent paper that the fundamentals still aren't great. It still remains cheaper to rent than to own in many markets, he says. The biggest bubbles usually produce the deepest busts. And the 2002-2006 bubble was a doozy. The bad news may have ended after three terrible years, but maybe not. Japanese housing prices still haven't recovered from the late 1980s bubble. Western U.S. markets took six or seven years to recover after the last big bubble burst there in the early 1990s.
Yes, there are some hopeful signs, but don't let them fool you into thinking it's all clear. It might not be. As ever, anyone making a major financial decision needs to think more about his or her own situation than what "the market" is doing. A real-estate purchase needs to make sense on its own terms. And measure it on cash flow today, not the hope for capital gains tomorrow. When you factor in all the costs, is the purchase cheaper than renting? If you get a cheap mortgage and you are aggressive on price, you may get a bargain. That's especially true if the owner has to sell. Foreclosures and other distressed sales are selling for about 20% below the rest of the market. There are opportunities out there. But you can afford to take your time to shop around.
Housing Markets Won’t Recover Until Employment Does
Splinters of good news spurring optimism and a broad market rally over the past few months are also surrounded by various weak indications that the U.S. economy is not quite on a path of sustainable recovery-despite what is perceived by the capital markets. For example, as news across the pond pointed to the end of a recession in France and Germany on Thursday, another dip in retail sales (a monthly decline of 0.1% for July, leading to a 9% y-o-y decline) on top of a record number of homes receiving a foreclosure filings in July reminded us that we are still surrounded by a very weak economy. More importantly, the July labor report continued to indicate a bleak employment landscape in our opinion.
As various housing indicators continue to come in ahead of expectations, we remain primarily focused on the employment situation as the principal driver of the housing markets-affecting both demand and supply. Unemployed consumers can not buy homes, and protracted unemployment makes it difficult to service mortgages which can lead to forced sales or foreclosures, events that add to the current high level of unsold home inventory.While low home prices, a large supply of foreclosures, various government interventions and low mortgage rates may make buying a home more attractive, rising unemployment and stricter lending standards continue to deter any significant rise in demand.
On top of the optimism spurred by various home sales and price data that have come out over the past month, the unemployment report for July did show some "better-than-expected" numbers indicating that the employment decline has slowed. However, as our strategy team discussed in its analysis of the Bureau of Labor Statistics July Employment Report on Friday, there are many ways to look at the numbers and in the end people are still losing jobs-suggesting that housing demand will remain weak and mortgage delinquencies and foreclosures will continue to rise higher.
Credit card issuers have the last laugh
New pro-consumer credit card regulations issued by the Federal Reserve begin taking effect this Thursday, and the so-called Credit Cardholders Bill of Rights that Congress adopted to its own, self-congratulatory applause last spring will roll out early next year. But if you think the playing field between cardholders and credit card issuers is about to be leveled, I suggest you check your mailbox.
Last week, I was among hundreds of thousands of American Express cardholders who received letters disclosing what at first appeared to be good news. "We are pleased to let you know that we will not charge you a fee if you go over your credit limit," the letter said. The bad news, the unsigned notice added, is that AmEx is simultaneously hiking the interest rates it levies on purchases, cash advances and balances that have a penalty rate because of a late payment. And, oh yes: The onetime fee imposed on such late payments is going up, too.
I took all this philosophically, since I have neither exceeded my credit limit, made a late payment, carried a balance or even used the card in question for nearly a year. If recent news reports are correct, and I continue to lay off the plastic, AmEx will soon penalize my parsimony by canceling my card altogether, without notice to me, as it is lawfully entitled to do. The Wall Street Journal reported last week that AmEx, Bank of America, Citigroup and other major issuers all have been canceling card accounts, with no detailed explanation and with no advance notice to cardholders, in anticipation of new federal constraints on their fees and practices.
The timing of AmEx's latest mailing is hardly accidental. After the Federal Reserve regulations take effect this week, cardholders will be entitled to 45 days notice before an issuer can raise their interest rates, reduce their credit limits, or make other substantive changes in the terms of their agreements. Nothing in AmEx's letter suggests the company's decision to stop levying a fee on cardholders who exceed their credit limits is anything but a beneficent gesture toward the company's loyal customers.
But while legislation Congress adopted in May doesn't specifically outlaw the fees AmEx is rescinding, it does mandate that such fees be reasonable and proportional and bar issuers from imposing them unless cardholders ask permission to exceed their credit limit and agree to the penalty up front. AmEx seems to have concluded that, under those circumstances, it is more cost-effective to scrap the fees altogether. After all, the company can always make up the lost revenue by arbitrarily raising interest rates.
It might have been different if a majority of the federal lawmakers who adopted the Credit Cardholders Bill of Rights had been as interested in protecting consumers as they were in creating the impression that they were standing up to rapacious banks. But the one provision that might have given cardholders some real protection -- a cap on the maximum interest rate credit card issuers could charge, similar to the ceiling on what federal credit unions can charge their borrowers -- was rejected when it came to a vote in the U.S. Senate.
Michigan's junior Democratic senator, Debbie Stabenow, was among 60 senators who nixed the interest-rate cap proposed by Vermont independent Bernie Sanders. (Michigan's other senator, Carl Levin, supported it.) Stabenow said she worried that any limit on credit card rates would leave millions of households with no access to unsecured credit. Her mistake was assuming that issuers would wield their power more responsibly if they got their way on interest rates.
In the end, card issuers preserved both their right to charge whatever the market will bear and their right to abruptly cancel a cardholder's credit without advance notice. If that's your idea of a resounding victory for consumer rights, I've got a bridge I'd like to sell you. I'll even lend you the down payment.
Deadline looms for Guaranty Financial bids
US banking regulators have asked prospective buyers of Guaranty Financial, a struggling Texas bank with $14bn in assets, to submit bids for the group by Monday, according to people close to the matter. The Federal Deposit Insurance Corporation is helping to manage the attempted sale of Guaranty, which last month said it was likely to join the lengthening list of banks that have failed this year. Guaranty’s fate has become intertwined in recent weeks with that of Colonial Bank, an Alabama-based bank that was forcibly closed on Friday and largely sold to BB&T, another regional bank, in an FDIC-backed deal.
The FDIC, which is juggling failing banks around the US in an effort to minimise the fallout to consumers, had initially wanted to resolve Guaranty’s problems before Colonial’s by arranging a sale of Guaranty, which is struggling under the weight of burgeoning losses on homebuilder loans and mortgage-backed securities. But regulators’ concerns over Colonial’s instability recently overtook their worries about Guaranty, because of Colonial’s deteriorating credit quality and its role in two federal investigations, so regulators contacted bidders and asked for offers for Colonial last week.
Regulators have been hoping that three banks that had bid for Colonial – Canada’s Toronto Dominion, JPMorgan and Spain’s BBVA – would step in instead as bidders for Guaranty. People close to the matter said TD and JPMorgan had expressed interest in Guaranty, which has also drawn interest from other regional banks.
Guaranty’s assets were not seen by banking experts as a direct substitute for Colonial’s higher-quality commercial banking assets, but Guaranty’s strong presence in Texas could draw interest from bidders. At least one private equity consortium, which includes Blackstone, Carlyle, Oak Hill Capital, TPG and Gerald Ford, is considering a bid for Guaranty. The FDIC, however, has long made clear that it prefers other banks as buyers of troubled financial institutions rather than private equity firms. Heading into the weekend, the private equity firms had not been given access to Guaranty’s confidential financial data.
Failed Banks Weighing on FDIC
Banks in the U.S. that failed in the past two years were in far worse shape than those that collapsed during the industry's last crisis, a looming problem for the government agency charged with insuring deposits. At three of the five banks that failed Friday, increasing the total to 77 so far this year, the financial hit to the agency's deposit-insurance fund is expected by the Federal Deposit Insurance Corp. to be about 50% of their assets.
The biggest hit on a percentage basis is coming from Community Bank of Nevada, a Las Vegas bank with $1.52 billion in assets and an estimated cost of $781.5 million. The failure of Colonial Bank, a unit of Colonial BancGroup Inc. that was sold to BB&T Corp., will cost $2.8 billion, or 11% of the Montgomery, Ala., bank's assets. For the 102 banks that have collapsed in the past two years, the FDIC's estimated cost averaged 25% of assets. That is up from the 19% rate between 1989 and 1995, when 747 financial institutions were closed by regulators, according to the FDIC.
The agency's insurance fund already has dipped to $13 billion, with more than 300 battered banks and thrifts still on an undisclosed FDIC list of problem institutions. One problem is that so many banks took risks when the economy was booming, and are seeing their capital dissipate with alarming speed. "Compared to the savings-and-loan crisis, banks these days have gotten much bigger and the economy has gotten much bigger," said Bob Patten, an analyst at Morgan Keegan & Co. "This crisis won't eclipse the last one in size, but the costs to the FDIC are showing the amount of leverage they really had on their books."
Regulators also have been blamed for not taking quick enough action and for allowing zombie banks to limp along. Inspectors general at the Treasury Department and FDIC, which serve as watchdogs, have issued more than a dozen reports that conclude regulators dithered while banks they oversaw plowed ahead with rapid and unsteady growth. "When you get these failing banks, they are much more like a fresh-caught fish than a fine wine. They don't get better with age and the losses keep piling up." said Bert Ely, a longtime banking-industry consultant.
Integrity Bank, of Alpharetta, Ga., was permitted to keep luring deposits paying unusually high interest rates for more than two years after examiners noted deficiencies in its loan underwriting, according to the FDIC's inspector general. Integrity failed last year, costing the FDIC $295 million. The FDIC's response to the report about Integrity noted that "greater concern for Integrity's loan administration and underwriting weakness identified could have led to earlier supervisory action."
As the number of bank failures escalates, FDIC officials have been trying to find investors and buyers for terminally ill financial institutions, increasingly by agreeing to shield acquirers from certain losses on assets of the failed bank. The FDIC and BB&T entered into a loss-share transaction on approximately $15 billion of the $22 billion in Colonial assets bought by the Winston-Salem, N.C., bank. FDIC Chairman Sheila C. Bair said in a statement that losses from Friday's failures "are lower than had been projected."
Fed Extends TALF Program Through June for New Commercial Loans
The Federal Reserve extended by three to six months an emergency program aimed at restarting credit markets, a move that may cushion the commercial real- estate industry from rising defaults and falling prices. The Term Asset-Backed Securities Loan Facility, with a capacity of as much as $1 trillion, will expire June 30 for newly issued commercial mortgage-backed securities, instead of Dec. 31, the Fed and U.S. Treasury said today in a statement in Washington. For other asset-backed securities and CMBS sold before Jan. 1, the plan was extended three months to March 31.
Chicago City Government Closed For Business On Monday
If you planned to check out a library book, visit a city clinic or have your garbage picked up on Monday, you're out of luck. The City of Chicago will basically be closed for business on Aug. 17, a reduced-service day in which most city employees are off without pay, according to a release from the Office of Budget and Management. City Hall, public libraries, health clinics and most city offices will be closed. Emergency service providers including police, firefighters and paramedics will be working at full strength, but most services not directly related to public safety, including street sweeping, will not be provided, the release said. That also includes garbage pickup. Residents who receive regular collection on Mondays should expect trash to be picked up the following day, the release said. Some other customers may experience a one-day delay as collectors catch up.
As part of the 2009 budget, three reduced-service days were planned for 2009, days which are unpaid for all affected employees -- the Friday after Thanksgiving; Christmas Eve; and New Year's Eve. The City Council recently approved moving the reduced-service day planned for New Year's Eve to Monday. The 2009 budget anticipates saving $8.3 million due to the reduced-service days. In addition to reduced service days, all non-union employees were asked to take a series of furlough days and unpaid holidays, and most non-sworn union employees agreed to similar unpaid time off. "Every dollar we save from these measures helps to save jobs, and in the long-term, maintain services for Chicagoans," Mayor Daley said in the release. "This plan relies on most of our civilian employees to be part of the solution to our very serious budget challenges. I want to thank them again for their sacrifice."
There's a sign on the door of a city clinic in Englewood telling patients all Chicago health offices will be closed Monday. A lot of residents CBS 2 interviewed didn't know about the partial government shutdown. It came as bad news to Denzel Thornton, a student at Chicago State who visited the library Sunday to find out it will be closed Monday. "Where am I supposed to go now?" he asked. "I have no other place to go. I don't have a computer of my own, so this is the only public place I can go to do what I need."
But for city workers like Marx Daniels, the day off is a mixed blessing. "I never took a day off, and I've never been late, so now the reduced days seem pretty good, you know," he said. Tomorrow the boots, shovels and jacket he uses while excavating and cleaning city sewers will sit at home. But he's happy to trade a day off here and there if it means keeping his job. "At first … I didn't think that I could live with it, and then when I found out the alternative was being laid off, I thought it was a good thing," Daniels said. Daniels will lose a little over $200 dollars for each reduced services day. And he says that can add up. "With me having two kids in college, that one day makes a difference," he said.
Social Security crunch coming fast
by Bill Fleckenstein
The debate over health care has captured everyone's attention, but it appears the next big government program that needs to be addressed will be Social Security. That's the focus of the July 30 article "The next great bailout: Social Security" by Allan Sloan, Fortune's senior editor at large. Those who've been paying attention have long known there is no money in the Social Security Trust Fund -- it's all been spent. Thus, former Vice President Al Gore's famous assessment that Social Security receipts should be placed in a "lockbox" was actually correct.
Given that so few people really understand the Ponzi nature of the current Social Security financing scheme -- created in 1983 by a commission chaired by none other than the world's greatest serial blower of bubbles, Alan Greenspan -- I decided to reprise Sloan's article. (The Social Security problem is especially important because it likely will put additional pressure on the dollar and on bonds, and exacerbate the funding crisis down the road.) The story begins: "In Washington these days, the only topics of discussion seem to be how many trillions to throw at health care and the recession, and whom on Wall Street to pillory next. But watch out. Lurking just below the surface is a bailout candidate that may soon emerge like the great white shark in 'Jaws': Social Security.
"Perhaps as early as this year, Social Security, at $680 billion the nation's biggest social program, will be transformed from an operation that's helped finance the rest of the government for 25 years into a cash drain that will need money from the Treasury. In other words, a bailout."
As I've already noted, there is no money in the Social Security Trust Fund -- just IOUs from the government to itself. What is liable to spark debate and grab headlines is that instead of producing its biggest surplus ever in 2009-10, the trust fund could start running deficits in the next year, primarily because the weak economy is generating less tax revenue.
That's years earlier than expected. Social Security wasn't supposed to go into the red until around 2015. Past projections were for a cash-flow surplus of about $87 billion this year and $88 billion next year. But new projections show those figures may drop to around $18 billion or $19 billion, which could easily go negative. And once the red ink starts spilling (a temporary bounce into the black in the next couple of years notwithstanding), that deficit will grow for the next 20 or so years unless something is done to halt it.
In order to better illuminate what has transpired and how misleading government accounting is, I would like to use the example from Sloan's article to explain what has happened: "The cash that Social Security has collected from my wife and me and our employers isn't sitting at Social Security. It's gone. Some went to pay benefits, some to fund the rest of the government. Since 1983, when it suffered a cash crisis, Social Security has been collecting more in taxes each year than it has paid out in benefits. It has used the excess to buy the Treasury securities that go into the trust fund, reducing the Treasury's need to raise money from investors."
In other words, the government spent it. Throughout all those years in the 1980s and 1990s, when folks worried about the budget deficit, it was reported to be lower than it would have been had the Social Security Trust Fund's money not been going into government coffers, thereby reducing the size of the deficit. Also untenable is the projected worker-to-retiree ratio, which will jump from 30 Social Security recipients per 100 workers in 1990 to 46 per 100 in the next 20 years.
And Social Security funding isn't the only time bomb. Sloan notes that "when it comes to problems, Medicare makes Social Security look like a walk in the park, even though at about $510 billion this year, it's far smaller. Not only are Medicare's financial woes much larger than Social Security's, but they're also much more complicated. . . . Medicare is more convoluted, because the health-care system is much more complex than Social Security. Which, when you think about it, involves only money."
Summing up, Sloan cautions: "Social Security may not make it onto the agenda until next year. But it's going to show up sooner or later, and probably sooner, because the numbers are so bad that something's got to be done." All of these future funding issues will come under scrutiny in the next couple of years as the budget deficit explodes and worries about how it will all be financed take center stage.
Is the Recession Really Over?
After going into a tailspin for a year, the German economy is experiencing slight growth once again. But experts are divided over whether it is merely a temporary respite or a sign of genuine recovery. Germany's two main political parties, the conservative Christian Democrats and the center-left Social Democrats, may have locked horns as election campaigning in Germany begins in earnest. But when it comes to the state of the domestic economy at least, the two rivals are, as of last Thursday, on the same page -- and united in their determination to not be overly optimistic.
"We have reached the bottom of the trough," Chancellor Angela Merkel announced, only to quickly dampen any enthusiasm that statement might have aroused. Times are still tough, she added, and the crisis isn't over by a long shot, "just because there has been a slight improvement for the first time." A few hours earlier, the Federal Statistics Office in the western city of Wiesbaden had declared an end, albeit a preliminary one, to the worst recession in the history of postwar Germany. In the second quarter of 2009, the statistics experts announced, the German economy grew by 0.3 percent compared with the first quarter.
In light of the preceding dramatic declines, there was little reason for excessive enthusiasm, which explains the hesitant approach taken by the members of Merkel's cabinet. "There are more and more indications that things are slowly going upwards again," said a cautiously optimistic Finance Minister Peer Steinbrück, who belongs to the SPD. Even Economics Minister Karl-Theodor zu Guttenberg, a member of the CDU's Bavarian sister party, the Christian Social Union, kept his comments muted. "We should be encouraged by these numbers," he said, but simultaneously cautioned against euphoria.
But after months of bad news, including recurring bank troubles, company bankruptcies and sharp declines in production, other observers were surprisingly quick to express their relief. "Germany is awakening from the recession," the respected center-left broadsheet Süddeutsche Zeitung wrote in its cover story. And the Financial Times Deutschland struck a note of celebration: "The German economy is taking off once again." Even professional observers of the economy could hardly believe their eyes. "It's really a bit surprising," admits Gustav Horn, the head of the Macroeconomic Policy Institute (IMK), which has links to Germany's unions. Like many of his fellow economists, Horn had expected zero or slightly negative growth.
In any case, economies worldwide appear to be recovering from the state of shock induced by the crisis. The news coming from the United States, the epicenter of the economic tremors of the last two years, is surprisingly positive. The rate of growth is beginning to pick up, the wave of job cuts is slowly subsiding and many companies are already taking a more optimistic view of the future. On the other hand, foreclosures are at a record high in the United States, a repercussion of the American real estate crisis, the effects of which could very well be felt around the world for a long time to come.
German economic growth is still well shy of, for example, the 8 percent China is already reporting. Nevertheless, the latest statistics from Wiesbaden are part of a wave of positive news that has market players and politicians breathing a sigh of relief. The Ifo Business Climate Index for industry and trade, for example, has been rising for months. Such barometers of the general mood provide an indication of companies' and consumers' expectations for economic development in the coming months.
Even more important is the fact that production volume in German industry increased by 4 percent in June compared with May. The total number of orders is also rising once again, by leaps and bounds in some cases. In June, exports were up a surprising 7 percent. But the German economy is also faced with its share of contradictions, with industry insiders admitting that companies are cutting jobs at the highest rate since 2002. Nevertheless, the overwhelmingly positive data have even prompted skeptics to concede that the recession may have come to an end.
"There are in fact a number of signs of stabilization at the moment," says Jürgen Stark, chief economist at the European Central Bank. According to Stark, these assessments are no longer based solely on polls, "but are increasingly being confirmed by actual economic data." The upturn is attributable to the proactive efforts of national governments to combat the crisis. The German government, for example, has introduced two economic stimulus programs, and the measures are beginning to work. Other factors contributing to the upturn include the central banks' low interest rates and current price trends. Many products, most notably gasoline and food, are significantly cheaper than in 2008. This increases buying power and stimulates consumption, at least in Germany.
Last week German statisticians confirmed the first annual decline in consumer prices in the country for more than 22 years, with the country's Federal Statistics Office releasing figures showing that consumer prices had dropped 0.5 percent in July compared to the same month last year. This acts as an additional stimulus program, because it reduces costs for consumers by billions of euros.
But what comes next? Is the cautious growth in the second quarter merely a temporary blip or the beginning of a real turnaround? Economists are applying several different theories in an attempt to predict the future. The majority of economists long believed that the current recession could be characterized by an L-shaped curve: a rapid drop, followed a prolonged period of virtually no growth. The advocates of the L-shaped recession theory are currently on the wane, while a V-shaped curve seems increasingly likely: a rapid drop, followed by a speedy recovery. Others believe a slower, U-shaped recovery is more realistic.
One of the optimists is Michael Heise, the chief economist of German insurance giant Allianz, who predicts that growth rates of 2 to 3 percent next year are within the realm of possibility. But a large number of economists fear that the current downturn may turn out to be a W-shaped recession: a brief recovery followed by another collapse. The W-shaped scenario cannot be ruled out, says IMK economist Gustav Horn. "The worst is over, but not on the job market," he says, arguing that unemployment always lags a few months behind the actual economic trend.
This is also the reason why not all experts are convinced that the economy is in fact turning around. "Current developments in the labor market have real potential for causing a setback," says Kai Carstensen, who is head of the economic trends department at the Munich-based Ifo Institute for Economic Research. According to Carstensen, consumption will suffer if a significant number of people become unemployed soon, after the end of Germany's short-time work program, whereby employees work shorter hours and the state makes up part of their lost income. This, in turn, could quickly put an end to tentative growth.
Other problems could arise when economic stimulus programs, such as Germany's scrapping bonus for cars, expire. Besides, not all risks in the financial sector have been warded off, and new problems in the banking sector cannot be ruled out. All caveats aside, Ifo economist Kai Carstensen still expects growth to accelerate in the third quarter. He predicts it could exceed 0.5 percent. Some analysts are already correcting their initial forecasts, although the changes remain cosmetic at best.
Carstensen estimates that the German economy will shrink by about 5.5 percent for the year as a whole, and not 6 percent, as originally predicted. Joachim Scheide of the Kiel Institute for the World Economy (IfW) agrees with Carstensen's assessment. Both economists also expect the German economy to continue growing in 2010, though not with any significant force. Scheide expects that "we will spend the entire year hovering just above the zero line."
Obama's Second Biggest Test: Reforming Wall Street, and Why Early Indications Aren't Hopeful
by Robert Reich
Citigroup -- the giant Wall Street bank still on life-support courtesy of $45 billion from American taxpayers -- wants to pay its twenty-five top executives an average of $10 million each this year, and award its best trader $100 million. Whaaat? Second only to healthcare reform as a test of Obama's toughness and resolve is reform of Wall Street. And like the healthcare industry, Wall Street has platoons of lobbyists and an almost unlimited war chest to protect its interests and prevent change. So what can we learn by what's going on now, regarding pay for the top brass at big "too big to fail" banks?
After the bonus plan for AIG executives blew up last year, a law enacted last February requires that any "too big to fail" institution that's received bailouts get Treasury's approval on pay for their top earners. Companies are supposed to file their pay proposals no later than today. So far, most are seeking around $7 million each for their top twenty-five. As you can expect, Citi and the rest argue that $7 to $10 million is necessary in order to keep and attract "talent."
Tragically, Treasury has already given in on this one. In judging whether a proposed pay package is appropriate, Treasury has decided to be guided by "comparable" pay packages in the industry. This means Ken Feinberg, appointed as special master to decide on a case-by-case basis, will be the flak-catcher. He'll take the heat when he approves pay packages that, while perhaps not as ridiculously exhorbitant as the ones the banks seek, are still bonkers because they're roughly "comparable" to the wild pay on the rest of the Street -- thereby protecting Geithner and Geithner's boss from the public's outrage about bailing out these bankers and then having them earn princely sums at a time when most peoples' jobs are at risk and their earnings are shrinking.
"Comparable" pay is a ridiculous standard to begin with, and the argument that $10 million, or even $7 million, is necessary to keep talent is absurd on its face. I needn't remind you that over the last several years Wall Street has exhibited a truly astonishing lack of talent. So why do any of Wall Street's big banks have the audacity to offer this sort of pay? Because the Street is back to the same, relentlessly untalented tactics that made it lots of money before the meltdown -- which also forced taxpayers to bail it out, caused the world economy to melt down, and tens of millions of people to lose big chunks of their life savings. Goldman Sach's chief financial executive asserted recently that its business model hadn't changed one bit from what it was before the meltdown. Goldman is making big money again, but its business model got it into such deep trouble it needed a multi-billion dollar taxpayer bailout as well as a bailout of AIG, which owed it money. Without these bailouts, there'd be no "talent" because there'd be no Goldman, no Citi, no Street.
Even if you believe Wall Street needs "talent," I suspect that firms such as Citi can get all the talent they need for far less than an average of $10 million each. Maybe even $1 million? The whole system of "comparable" pay is propped up by a zero-sum self-perpetuating competition in which the price of so-called "talent" is determined by how much every other bank is willing to pay for "talent." If every bank decided to pay $1 million, that would be the "comparable" price of talent on the Street. I mean, it's not as if this economy has so many other $1 million-a-year positions begging for Wall Street executives and traders.
There's a more basic issue here. The fact that these big banks have been judged "too big to fail" means their top executives and traders know they can take even bigger risks now, because we taxpayers will bail them out. So inevitably part of their firm's earnings, based on such risk-taking, now come as a result of this public insurance policy. When risks pay off, as many are doing now that the stock market is showing signs of life, they reap large rewards. When the risks turn really bad, you and I and other taxpayers will pick up the pieces.
The insurance these "too big to fail" banks are receiving makes them more like public utilities than private firms. As such, not only is it entirely appropriate for government to review their pay but also to make sure pay is kept within strict bounds -- not $100 million, not $10 million, not $7 million, but far, far less. As long as you and I are cushioning them, their top brass should be earning just about what the top brass of any public utility earns (which, when I last looked, ranged from $100,000 to $600,000).
The big banks have a choice, of course. They could opt out of the "too big to fail" system. They could break themselves apart (or invite antitrust agencies to do the breaking for them) so they were no longer too big to fail and won't be bailed out the next time they make hugely stupid mistakes. Then they could award their executives and traders as much money as they wanted and as the market would bear -- because then they'd be part of the free market instead of wards of the state.
Will this happen? Don't bet on it. Note how easily Treasury caved in on the "comparable" pay standard. In coming months, other financial regulators will decide appropriate pay guidelines for the institutions they supervise. Two weeks ago, the House passed legislation giving regulators even greater authority over compensation packages. Given what's happened to date, there's no reason to suppose Wall Street pay will be reined in at all.
Buckle the Heck Up!
No, I’m not being over-dramatic. It is time to buckle the heck up. The resonant disconnect between reality and the pumping that is going on in the media and among supposed “experts” is at an all time historic, never been here before, Economic Mass Psychosis, HIGH.
To Quote John Kenneth Galbraith, “The majority is always wrong.” Right now the majority believe we are exiting the crisis. They are just plain old fashioned WRONG – again.
To prove my point, I’m going to show you the week in charts courtesy of the St. Louis Fed. This week, however, I’m issuing a WARNING. The evidence in these charts points to the beginning of a DEFLATIONARY SPIRAL. The PPI data comes out next week and will be a key piece of evidence in this regard. The results of a deflationary spiral will be UGLY if entered. You will see another round of deleveraging to go with locked credit markets. Equities will get hammered and the real cleansing of the economy will accelerate. This process will be PAINFUL but necessary to end the malinvestment. It will be the phase where more businesses who were hanging on HOPING for recovery will simply run out of cashflow to maintain operations. The same thing is necessary to cleanse a way over-bloated government and military.
The fallout will affect everyone. These charts are HISTORIC, they are NOT indicative of a short recession. As you view these charts, pay attention to the negative trends and look at them from a historic perspective. Many market callers are looking for immediate inflation due to the money pumping. I challenge them to point out inflation anywhere in these charts besides the money aggregates, which, by the way, are not growing at the rate they were. Those who look solely at the money aggregates are not seeing the destruction of credit which is very real and has hobbled the consumer. Never ending growth was a fantasy and is over for the time being, there is simply too much debt/credit in the system.
The pundits of green shoots will say that the economy is getting better and that the leading indicators are pointing to a dramatic recovery. THEY ARE WRONG. They were wrong in 2007 and they are wrong now. The one and only TRUE LEADING ECONOMIC INDICATOR in a debt riddled society is DEBT to INCOME. That ratio has not improved, it is worse than ever, especially at the governmental level.
Since I am talking about inflation and deflation, I think it’s important to reiterate that most people think of inflation as an increase in PRICES and Deflation as a decrease in PRICES. True inflation or deflation is the increase or decrease in the money AND CREDIT SUPPLY. Prices follow but do give an indirect indication of money/credit supply over time when looked at in AGGREGATE. What has fooled so many in the current economy is BAD DATA REPORTING and a SHADOW CREDIT SYSTEM that produced UNREGULATED AND UNTRACKED out-of-control credit (DEBT). To create more growth, the COMBINED credit and money aggregates, whether they are tracked or not, must increase in total. That is not happening, and that is why you see negative growth. FORGET ABOUT GOVERNMENT GROWTH FIGURES, they are so far from reality as to be laughable – they are NOT credible. The same can be said for inflation statistics, but they are pointing to a trend and they are not positive.
All of the charts below are current and have been updated THIS WEEK or are annotated otherwise. Let’s begin with charts of pertinent economic releases and then we will move on and examine the current issue of Monetary Trends...
Consumer Sentiment was released Friday and came in well below estimates at 63.2. The chart below is the only one presented that was not updated, but I show where that current level is. Consumers represent over 70% of the economy. As pointed out previously, people are falling off the back of the unemployment rolls and are not being captured in that data. It’s hard to be optimistic on the economy when you are unemployed. It’s also difficult to pay more and more in terms of price when your income is either gone or under pressure. Low Consumer Sentiment, high levels of debt, and diminished access to credit all comprise the psychological foundation for price deflation:
And how are PRICES behaving? Below is a chart showing BOTH import and export PRICES. The fed does not produce this particular chart, it comes from Econoday. This is a HISTORIC collapse of prices, IMPORT PRICES (watch the scale on the left versus the right) are DOWN 19.3% year over year (yoy)! Think about that, it is HISTORIC. Import prices down nearly 20% in just one year?!! The trend is not turning, it is accelerating downward again. Export prices are down dramatically too, but pale in comparison.
Next is the current chart of the Consumer Price Index (CPI). It has not been this negative in the past 59 years! Do you see PRICE inflation there? Let’s see what the PPI says next week. By the way, why would the CPI number only be down a little more than 2% when import prices are down 10 times as much and export prices are down 4 times as much? Think there’s a disconnect there? There is, and it’s induced by our own government statistics:
So, those are PRICES. Why do prices go down? Remember supply and demand… not enough demand and way too much supply. Let’s take a look at retail sales expressed in yoy percent change… Here you’ll see a collapse of historic proportions in demand:
When demand drops domestically, imports drop. Never before, and likely never again, will you see such a historic plunge of imports. This is no ordinary recession:
At the beginning of this crisis many “experts” said that demand would continue to increase from overseas and that would help offset a slowdown in the U.S., remember? How did that work out?
“Deficits don’t matter,” remember that one too? Well, we were running a trade deficit over $60 billion a month. At the time I warned that it was not sustainable as it could not be financed at that rate forever. Now the balance of trade is swinging rapidly back, but is still way out of balance. The rate of change is also historic any way you want to measure it:
Now let’s turn our attention back inside the U.S.. Here is a chart of inventories expressed in yoy percent change. Falling business inventories are actually a good thing as businesses are reacting to falling demand. Take a look, though, at when this recession actually began versus when inventories began to fall and compare it to the last recession. Is the contraction over? Would you bet on it?
Now let’s turn our attention to what remains of the manufacturing sector. Remember that employment in that sector of our economy is now the same size as it was in 1947 and, quite unfortunately, is a much smaller percentage of the economy (for a complete update on employment, please see Employment Situation in Chart Form – Damn, I knew I should have moved to New York and found a job on Wall Street!).
Capacity Utilization is at an all time low on the following chart and is still pointing straight down:
Non-durable goods manufacturing has plummeted and has not begun to recover significantly:
Durable goods manufacturing is down twice as much in percentage terms and likewise is not recovering significantly:
Now look at the effect on the index of manufacturing hours worked:
And just to be clear about it, manufacturing output is down 15% on a year over year basis, again simply historic:
Okay, so that’s what’s happening in the REAL world of sales, export, imports, and manufacturing. What’s going on in the supply of money and credit?
Well, now that we pay banks for “reserves” (and lend real dollars against worthless toxic assets), bank “excess reserves” (Nate says no such thing in reality) are sky high and up nearly 8,000% on a year over year basis!
The latest report for M2 (week ending August 3rd) showed a DECREASE of approximately $42 billion. Still way up yoy, it is no longer accelerating higher:
Same comments for the more broad money aggregate, MZM:
Last week we saw that consumer credit is actually negative. Credit is MUCH LARGER than REAL MONEY. Yes, those aggregates measure credit that’s been deposited into financial institutions, but they do not measure credit derivatives that allow the banks to leverage debt to the hilt.
Now let’s review the latest issue of Monetary Trends, again courtesy of the St. Louis Fed:
Note on the chart below that M1, M2, and MZM are all higher, but that trend higher has turned recently. Again, keep in mind that credit growth is negative:
On page 5 we find that the adjusted monetary base has been forced sky high, but the recent trend up has stopped. You will also then see FEDERAL GOVERNMENT DEBT has absolutely skyrocketed, and that currency and time deposits are slowing their rates of growth, and that retail money market shares are negative.
Below are the money aggregates again, this time presented in percent change at an annual rate. Note that MZM and M2 are NEGATIVE and that M1 is nearly so:
Next take a look at page 7. Here you will see that everything dealing with credit is in sharp decline. Look closely at the total borrowings chart expressed in Billions! It went from over $400 billion to just over $100 billion, nearly a 75% plunge. Commercial Paper – down nearly 25%! Consumer credit – negative:
Next, please take a hard look at this chart showing actual CPI that I outlined with a vertical red rectangle (vertical plunge) and compare that to the EXPECTATIONS of inflation. You will see that those who have been forecasting inflation are simply WRONG:
Next, take a look at the velocity:
Finally, take a look at Monetary base VELOCITY GROWTH. It is down 75%! Again, this shows that when the system is saturated with debt, you can pump all the money you want into the system, but it goes nowhere. Why? Because current income cannot service current debt much less more future debt, that’s why:
That’s a pretty clear picture to me, one of DEFLATION at work. It is accelerating, not decelerating. That is a HUGE divergence from what’s occurring in the equity markets and from what you hear on television from the supposed experts.
I think we are on the precipice of a self-reinforcing deflationary spiral. The data is historic. The disconnect between the data and perception is historic. The Fed is attempting to do a magic trick by printing their way out of debt – it’s a trick that has NEVER worked throughout the history of mankind and will not work to create real growth now.
Debt is the ball, keep your eye on it and you’ll see through the Fed’s attempted magic trick and slight of hand!
French shoppers sceptical of recovery
Ferreting through the bargain bins of €7 gentlemen's trousers at Tati, the legendary French cheap clothes emporium, shoppers at Republique in Paris were deeply sceptical of any talk of an end to the economic crisis in France. Philippe Dupayage quit his job at the post office 12 years ago to move to Perpignan and set up his own communications business. Now he is back in Paris sorting letters after the crisis saw his turnover drop to zero and his business wind down.
"This is the first year we can't afford even a camping holiday," he said. The family's 10-year-old car was banging and spluttering along but they couldn't afford another one, despite government incentives on new cars. "All this talk of an end to the recession is government bluff and marketing," Dupayage said. "Maybe France needs that psychologically, perhaps it will boost morale and help us out of the economic mess. But we're on fragile ground, let's just wait until autumn when unemployment goes through the roof."
This week, a stupefied French government announced France was "coming out of the red": the economy grew 0.3% in the second quarter of the year, technically heralding the end of the worst recession since the second world war. But the reality in the eurozone's second biggest economy is more complex. French economists were less than jubilant this week, saying the factors behind this growth were short-term and fragile. The figures were boosted by the French car industry's shot in the arm from a state bailout and European so-called "cash-for-clunkers" programmes giving incentives to drivers who trade old bangers for gleaming new, efficient models. But these schemes are to be progressively wound down over the next year and as one economist said, "people can't buy a new car every six months."
Household consumption, traditionally a key driver of French growth, was also up. "But for how long?" asked Mehmood Ansar who sells gold-plated jewellery. "People never used to barter over prices, now it's the first thing they do. The word 'crisis' is still on everyone's lips." Households' disposable income has held up so far thanks in part to Nicolas Sarkozy's stimulus initiatives and tax cuts to poorer families, as well as slashed prices at France's strictly regulated summer sales and families' relatively low levels of personal debt compared to the UK. Fuel prices and decreasing inflation also helped. But experts said consumption was on fragile ground.
Consumer spending is directly linked to the health of the jobs market, and even the government shared the sense of foreboding that it could all be blown apart come autumn when unemployment is predicted to rise. The jobless figure is set to top 10% by the end of the year, 591,000 jobs are forecast to be destroyed in 2009. A surge in unemployment would immediately rein in consumer demand. "Wait until October," said one local butcher. "Meat is the first thing people cut from their shopping list and we've already seen regular customers buying 10 to 15% less. We're keeping afloat for the time being. But there's no jubilation round here."
In France, with its strong state, regulated banking system and an already stuttering private sector, the shock of the global financial downturn did not hit as hard and suddenly as elsewhere. But the pick-up is forecast to be more gradual too. Economists warn that business investment is still floundering, domestic demand is weak and it's too soon to talk of full recovery. Le Monde warned in an editorial that in terms of unemployment "the worst is still ahead of us."
At a vintage fashion shop in the heart of the Marais, Atif Sheikh said: "I sense some optimism, people waited until the sales to buy, but among customers there seemed to be less talk of economic gloom." At her small independent travel agent's Lauren Kowace was sceptical. "Unemployment is a big issue," she said. "Salaries are not going up. We've seen people waiting until the very last minute to chance booking a holiday. Even in the luxury market, people are hunting around for deals."
Iceland: what ugly secrets are waiting to be exposed in the meltdown?
Almost a year since the collapse of the Icelandic banks, the rotten nature of these financial corpses is slowly beginning to emerge. For months rumours of share-ramping, market manipulation, excessive loans to their owners and unusual transfers off-shore have been circling Kaupthing, Glitnir and Landsbanki, whose failure last October left 300,000 British customers unable to access their money. It has now become clear that this was no ordinary crash. Iceland's special investigation into "suspicions of criminal activity" at the three banks is likely to stretch from Reykjavik to London, Luxembourg and the British Virgin Islands.
Eva Joly, the French-Norwegian MEP and fraud expert hired by Iceland and now working with the Serious Fraud Office, now believes it will be "the largest investigation in history of an economic and banking bank collapse".
Many of the banks' secrets are likely to be inextricably bound up with corporate Britain and the success of these investigations in tracing and recovering assets is likely to affect every UK household. Local authorities lost £1bn – or 5pc of all the money from council tax – in the over-leveraged institutions, leaving many facing the prospect of drastic cuts in services or steep hikes next year as they wait for the proceeds of the banks' administration to dribble through.
Although the Treasury can barely afford the UK's own bailout, it was forced to pay out £7.5bn to British savers who had internet accounts with Landsbanki's Icesave and Kaupthing's Edge with the uncertain prospect of getting the money back. Not only did local authorities, charities and savers have billions tied up in its bank accounts, but a number of the City's wealthiest investors, from Robert Tchenguiz and the Candy Brothers to Kevin Stanford and Simon Halabi received hefty corporate loans from these insititutions .
But among the worst affected by the crisis are 10,000 savers with £840m tied up in Kaupthing in the Isle of Man and 2,000 savers with £117m in Landsbanki in Guernsey. All lost their entire savings with no compensation and are still waiting in line with a queue of commercial creditors. When the banks were put into administration last October, experts believed that Iceland's banks had simply fallen prey to the global credit crisis. But Dr Jon Danielsson, an Icelander who teaches economics at the London School of Economics, believes that while the timing of the crash was dictated by the global banking crisis, the scandal is unique among European financial institutions. He believes the root of Iceland's problems that have now decimated its economy appear to have started when the government decided to privatise the banks in the early 1990s.
"Iceland got its regulations from the EU, which was basically sound," he says. "But the government had no understanding of the dangers of banks or how to supervise them. They got into the hands of people who took risks to the highest possible degree." Kaupthing fell into the clutches of the Gudmundsson brothers, Ágúst and Lydur, who made their fortunes building up the Bakkavor food manufacturing empire, which supplies hundreds of supermarkets in the UK. Their investment vehicle, Exista, owned 23pc of the bank, counting Robert Tchenguiz, the London property entrepreneur as a board member. Kaupthing's loan book, which was leaked on to the internet last week, shows that around one third, or €6bn (£5.1bn), of its €16bn corporate loan book was going to a small elite of men connected to the bank's owners and management.
Several investigations into Kaupthing centre on share ramping, where the bank would allegedly give loans with no interest or security in order to buy shares in that same bank – boosting the share price. One particularly murky incident revolves around the acquisition of a 5pc stake in Kaupthing by a company called QFinance linked to Mohammed bin Khalifa Al-Thani, the Sheikh of Qatar. Several weeks before the banks collapsed, a press release stated that the transaction showed that "Kaupthing's position is strong and we believe in the bank's strategy and management."
Only after the bank collapsed several weeks later did it emerge that the Qatari investor "bought" the stake using a loan from Kaupthing itself and a holding company associated with one of its employees. The bank appears, in effect, to have been purchasing its own shares, which does not seem to be uncommon; investigators are also looking at a similar purchase of a 2.5pc stake in Kaupthing by London-based property entrepreneurs Moises and Mendi Gertner. Officials have also questioned why loans to senior Kaupthing employees to buy shares in the bank were allegedly written off days before the collapse.
Companies connected to Exista, the Gudmundsson brothers' opaque investment vehicle that owned their stake in Kaupthing, received €1.86bn in loans. Their close business associate, Mr Tchenguiz, appears to have personally borrowed €1.74bn in loans to fund his private investments - from stakes in Sainsburys to Mitchells & Butlers. Mr Tchenguiz is now being sued by Kaupthing's administration committee for the return of £643m. Kevin Stanford, co-founder of the Karen Millen retail chain and one of Britain's wealthiest retailers, also got €519m in loans and was Kaupthing's fourth biggest shareholder. His company's purchase of credit default swaps in the bank is also under scrutiny, though there is no suggestion of wrongdoing his or his companies' part.
According to the leaked document, many of these loans carried little or no security and were listed as belonging to Kaupthing's "exception list" – seemingly those who received banking services on favourable terms. The loan books of Landsbanki and Glitnir remain in the hands of their administration committees – to the frustration of many Icelanders who fear they may yield equally unusual surprises. Landsbanki was controlled by the Björgólfur clan, who made their money from the sale of a Russian brewery to Heineken. Björgólfur Gudmundsson had left Iceland after minor convictions for false bookkeeping and the collapse of his shipping empire, but returned a billionaire to take a 45pc stake in the bank. His son, known as Thor, created a pharmaceuticals empire netting him riches of more than $3bn (£1.7bn).
These were the men who owned the bank responsible for Icesave accounts, the high-interest internet operations that took billions in deposits from 300,000 UK savers. Information from Landsbanki's reports suggest that companies connected to the bank's board of directors received at least €300m in loans. It is also known that Landsbanki lent the chairman's son Björgólfur Thor Björgólfsson's company Novator significant amounts, but later claimed that it did not need to be disclosed since he was not a "related party". Björgólfur Gudmundsson, who was also the owner of West Ham FC, has now been declared bankrupt.
Meanwhile Glitnir, the smallest bank, fell under the control of Jón Ásgeir Jóhannesson and related business associates. He was the conquering Viking of the Baugur private equity house that took over a huge number of British high street shops from Hamleys to House of Fraser. Barred from being a director in Iceland for minor false accounting charges, he moved his headquarters to Britain. Glitnir, though lower profile in Britain, has not escaped public scrutiny. It is known to have lent connected people at least €200m in loans.
FL Group, the investment company that owned Mr Jóhannesson's stake in Glitnir, is now the subject of a major investigation by Iceland's economic crime police. Once powerful enough to own a major stake in American Airlines and threaten to take over Easyjet, the company's collapse in October with debts exceeding £1bn was the first domino to fall in the Icelandic banking crisis. A house belonging to FL Group's chief executive, Hannes Smarason, was raided by police looking into the sales and re-sales of Sterling Airlines, a Danish carrier that failed last year. Sources in the Icelandic authorities said the investigation centred on a period when Sterling was sold three times in just over a year among a number of people closely linked to the listed company.
Mr Jóhannesson himself, having been cleared of 40 charges of fraud and embezzlement in 2008, is now awaiting trial for tax offences. So how did no one manage to spot that these banks were making precarious loans to benefit a very small number of people? One London-based analyst at a large investment bank who followed Kaupthing, Glitnir and Landsbanki for many years is unsurprised at the some of the revelations. It is the ratings agencies and financial supervisors who must take the blame for failing to spot some tell-tale signs that some unusual activity was occurring, he claims.
"If you took one careful look at the annual reports you could see that loans to related parties was extremely high," he says. "Any normal bank might give his chief executive a mortgage but running into billions is certainly unusual. But getting money on the international markets was cheap and there was no penalty for not being a proper bank – as I don't believe these were." One headache that may have caused the regulators to back away was the banks' complex ownership structures involving a constantly shifting mess of investment vehicles and holding companies. All the banks appear to have sold and re-sold stakes, shifted around top management staff and lent each other's owners large amounts.
By Christmas 2007, a handful of analysts were beginning to suspect that something was up. It looked like the Icelandic banks were finding it even more difficult than most to raise money on the international markets, turning instead more European depositors to fund their loan operations. This gave birth to Landsbanki's Icesave and Kaupthing Edge. Per Lofgrem, an analyst for Morgan Stanley, wrote at the time: "New funding has not come from traditional sources. The acquisitions of Derbyshire Building Society and Robeco [a Dutch bank] were made in order to get hold of their deposit bases. We also believe that the bank would have used better-known markets than Mexico to issue debt if more conventional markets were open."
Others warned investors strongly to stay away from them. Andreas Hakansson, an analyst for UBS in Sweden, repeatedly wrote client notes stressing that the complexity and vulnerability of the banks. Kaupthing Edge started marketing to British savers in February 2008 and was fast building up a deposit base. And all, including Glitnir, had been recommended by advisors to local authorities as a good high-interest place to put their savings. As Kaupthing, Landsbanki and Glitnir appeared to be on the brink of collapse in the autumn of last year, an army of spin doctors tried to persuade the UK that the banks were the target of a media conspiracy to discredit them. By October, the money and time to fix problems had run out. The banks fell into administration one by one over the course of one week and Iceland's currency plunged.
Since then, Iceland has had an overwhelming battle to get its economy back on track that included a bail-out package led by the International Monetary Fund. It has not been helped by a political row with the UK over who is responsible for compensating Icesave depositors . Having agreed to pay Britain £2.3bn plus 5.5pc interest in compensation up to €20,887 for each Icesave account, the population is in revolt over the bill they have to pick up for the excesses of a few wealthy men. So how are these investigations likely to end? One major issue faced by the investigators is the tightly-knit nature of the financial community, where family and friendship ties are everywhere.
KPMG in Iceland, which was meant to be conducting a forensic investigation into the collapse of Glitnir, had to resign when it emerged that its chief executive, Sigurdur Jónsson, was the father of the bank's biggest shareholder.
The government, anxious to clear the old guard from the new banks, ordered former employees off the administration committees. Glitnir and Kaupthing immediately re-hired them as consultants.
However, Ólafur Ísleifsson, a professor of business at the University of Reykjavik and former advisor to the IMF, believes the banks are already in recovery mode "Some of the information that has already been revealed is quite shocking," he says. "But an important step consists of recent decisions that place the new banks on a secure financial footing. Dr Danielsson disagrees, arguing that the financial system is still cripple by bad banks and a lack of trust in the authorities. "Things have not been able to progress and are getting worse," he says. "The government needs to act to try to find anyone who is guilty and punish those people. That is important for the country to heal."
Russia revives gold mining in the Gulags
Every winter, an ice road is laid across 400 km (250 miles) of tundra to carry supplies to one of the world's most isolated gold mines. There is no other way for heavy machinery to reach Kupol, the $700 million Arctic mine behind a resurgence in Russian gold production after five straight years of decline. "It's one of the harshest climates I've worked in, and I've worked in the Atacama desert in Chile and at 15,000 feet in Indonesia," said Patrick Dougherty, general manager at Kupol. "But I don't get to pick where the gold is."
Only South Africa holds more gold than Russia, but Moscow's fragmented industry has struggled to access vast reserves in its inhospitable Far East. The region was first mined in the 1930s by prisoners of the Gulags set up by Soviet leader Josef Stalin. Russia is the world's biggest energy supplier, but falling prices and reduced demand have cut income from natural resources to about 8 percent of its gross domestic product in the first quarter of 2009, from nearly 11 percent a year ago.
Gold, on the other hand, has been helped by recession. Its safe-haven appeal has shielded it from a demand slump that shredded other commodity prices, lifting it by 10 percent this year to keep it within striking distance of a record price of $1,030.8 an ounce set in March 2008. Chukotka, a region revived in the last eight years by the $2.5 billion investment of Chelsea soccer club owner Roman Abramovich, produced a fifth of Russia's gold in the first half of this year. Gold is the region's passport to growth after Abramovich quit as governor last July.
Russia ranked fifth among the world's gold miners last year, between Australia and Peru, with an 8 percent share of output. Production rose 13 percent in 2008, the first increase in six years, and jumped another 25 percent in the first half of 2009. "This was solely due to the commissioning of Kupol," said Olga Okuneva, mining analyst at Deutsche Bank in Moscow. "If other large projects in the Far East start producing gold, this will be a major growth driver for the Russian gold industry."
Kupol -- meaning dome in Russian -- is named after a rounded outcrop of rock that juts skyward from the tundra in central Chukotka, over 200 km (125 miles) from the nearest settlement.
The mine took five years to build. It is the largest tax payer in Chukotka, a land twice the size of Germany where reindeer outnumber people four to one. "With a deposit as large as Kupol, mining's contribution to the regional economy is expected almost to double to 37 percent this year," said Roman Kopin, the 35-year-old who took over as governor when Abramovich resigned.
Kinross Gold Corp, the Canadian miner which owns 75 percent of Kupol, is unusual among foreign investors for holding a majority share in a major Russian mineral deposit. The government of Chukotka owns the other 25 percent. Untangling the red tape that stifles some foreign investors in other parts of Russia was one of the main achievements of Abramovich's more than seven years as governor, Kopin said. "The investment climate here, perhaps, is a little bit different, because we understand that it's very difficult to work in Chukotka," he added.
Kinross has been the top performing gold stock on the New York Stock Exchange for the last three years, when the company's value rose more than 160 percent. Kupol will supply about a third of its total output this year and 15 of 24 equity analysts polled by Reuters retain a bullish rating on the stock. About 1,400 jobs are related directly to Kupol, and Chukotka's population totals around 50,000. Miners and catering staff spend four weeks on site and four weeks off, earning an average monthly wage of 50,000 roubles, 25 percent above the regional average.
"We have equipment that works here," said Alexander Puzovets, 48, a drill rig operator who works 10-hour shifts at the pit face. "I've been in mines where we've used hammers." The mine's in-house electricity plant could generate enough to power the regional capital, Anadyr.
In winter, miners walk the purpose-built Arctic Corridor -- an enclosed, 900-meter tunnel from camp to mine -- to avoid temperatures that drop more than 50 degrees Celsius below zero (minus 58 degrees Fahrenheit). About 60 percent of Kupol's gold is mined underground. Zurab Samteladze, a 55-year-old Georgian more than 7,000 km from home, hauls 45-tonne rock loads to the surface in a Caterpillar truck. In deeper parts of the mine, skilled operators maneuver drill rigs by remote control. This avoids the need for miners to work long hours beneath areas vulnerable to rock falls. "With all the video games they play, the younger generation has a better chance of operating these units," said Dougherty, a native of Arizona.
Alcohol is banned. Miners pass their time playing pool, in the gym or watching television. Popcorn is a popular snack, while eight tonnes of reindeer meat was served up last year. "I play guitar -- they have a music room. I like basketball -- they have a sports hall," said Andrei Aksanov, 34, a mechanic in the truck shop. Like 80 percent of the miners at Kupol, Aksanov comes from Magadan, the port city 1,500 km (940 miles) to the southwest.
This is where mining began in Russia's Far East. Stalin, needing bodies to unearth new-found gold reserves, sent hundreds of thousands of prisoners to slave in the region's labor camps over two decades from the early 1930s. From such grisly beginnings, Magadan has developed into the hub of gold processing in the Russian Far East. Kupol flies its dore -- bullion bars to be processed into almost pure metal -- to be refined at the Kolyma Refinery to the north of the city. Vladislav Feoktistov, the refinery's 71-year-old director, raised a glass of vodka to visiting officials from Kinross Gold. Supplies from Kupol will guarantee the plant's biggest turnover in its 11-year history, he said.
"This a business that's only as good as its suppliers," he said. From here, 15 kg (33 pound) gold bars worth more than $450,000 each at current prices are delivered to Russian banks. There should be more to come. Polyus Gold, owned by billionaires Mikhail Prokhorov and Suleiman Kerimov, plans to launch Natalka, the world's third-largest gold deposit, in 2013. Annual production of between 25 and 30 tonnes will put Natalka on the same scale as Kupol. Beyond 2017, Polyus plans to raise output to more than 40 tonnes a year.
"It's a deposit with reserves of more than 1,000 tonnes that will create jobs, infrastructure and become a major center for Magadan region," said German Pikhoya, Polyus Gold's deputy chief executive for strategy and corporate development. If Chukotka is to retain its leading position, it must do more. Current reserves at Kupol will last only until 2016. To extend the mine's life beyond this date, more reserves must be found, mapped and registered with Russian authorities. Kinross and others are already exploring. "Chukotka is definitely a key gold-producing region, particularly in the long term," said Vitaly Nesis, chief executive of St Petersburg-based miner Polymetal. His company plans to launch the Mayskoye gold deposit in Chukotka by 2011.
Corporations Are Now After Our Very Beings
by Joe Bageant
Cognitive capitalism -- just when we thought there were no new ways to get screwed
A few years ago, compliments of the George W. Bush administration, I got an education in political reality. The kind of education that makes you get drunk at night and scream and bitch at every shred of national news: "Do you see how these capitalist bastards have made so much money killing babies in Iraq? And how they are have brainwashed us and gouged us for every human need, from health care to drinking water?" I'd rage to my wife. "It's just the way things are," she said. "It's only a system."
My good wife often thinks I have slipped my moorings. But she never says right out loud that I'm crazy because, let's face it, honesty in marriage only goes so far. Furthermore, I'd be the first to proclaim that she's right. I have indeed slipped my moorings, and am downright ecstatic about it, given what the collective American consciousness is moored to these days. Anyway, I am, as I said, ecstatic. When I am not utterly depressed. Which is often. And always, always, always, it is because of the latest outrage pulled off by government/corporations -- the terms have been interchangeable for at least 50 years in this country, maybe longer.
For all its pretense and manufactured consent, our government is just a corporate racket now, and probably will remain so from here on out. This is a white people's thing, an Anglo-European tradition. Moreover, we no longer get real dictators such as a Hitler, or a good old bone-gnawing despot like Idi Amin. We get money syndicates in powdered wigs or Savile Row suits, cartels of robber barons and banking racketeers. The corporate rackets of European white people, especially banking, have a venerable history of sanction, dating back at least to when William the Conqueror granted the corporation of London the rights to handle his English loot.
For all his cruelty (he skinned the people and hung their tanned hides from their own windows, and if that ain't the purest kind of meanness, I don't know what is!) William, just like Allen Greenspan and Bernie Madoff, understood that the real muscle hangs out in the temples of banking and money changing. Even a thousand years before that however, nobody in their right mind dared mess with the money cartels.
DATELINE JUDEA, A.D. 26 -- Pontius Pilate to Jesus: "Look you seem to be a nice Jewish kid from ... where izzit? ... Nazareth? But you gotta quit fuckin wid da moneychangers, cause I get a piece of dat action, see? So stop dickin' with 'em. And especially you gotta swear off this Son of God, King of the Jews shtick. Ain't but one king aroun jeer, and you're lookin' at him. So lay off that stuff, and we can put this whole thing behind us, you and me. On the other hand, I got a couple of thieves I'm gonna do in tomorrow; and you can join 'em if you want. Your call kid. Now whose yer daddy?"
"I am the Son of God."
"Grab a cross on the way out."
On and on it goes. As the bailouts of the bankers recently proved, even Barack Obama, who descended to earth from Chicago with 10 gilded seraphim holding up his balls, doesn't screw with the corporate money changers. Or the banking corporations, or the insurance corporations, or the medical corporations, or the defense corporations ... Corporations are now, for all practical purposes, the only way anything can get done, made or distributed, or even imagined as a way of anything coming into being (except babies). Look around you. Is there anything, from the food in the fridge to the fridge itself, from the furniture to the very varnish on the floors or the clothes we wear that was not delivered unto us by corporations?
Our dependency on corporations at every level of the needs hierarchy is total. We cannot see beyond the corporate manufactured reality because, to us, it is the only possible reality. We cannot see around it or out of it from the inside. Corporate reality is all permeating. Air tight, too. Each part so perfectly reinforces all of its other parts as to be seamless. Inescapable. In that sense, we are prisoners for life. The corporate-government-media complex that manufactures our mass consciousness (hereinafter referred to as "the bastards" for clarity purposes) is simultaneously unknowable, yet easy to believe in.
With its millions of moving parts, seen and unseen -- financial, media, manufacturing, technological, material -- no one, not even its most elevated masters, can conceive of the system's entirety, or even in the same way. This great loom of ideation, with its many spindles, flycocks and shuttles, can weave any fantasy one desires and certainly sustain any individual's commodity or identity fetish. At the same time, the sheer magnitude of corporatism's crushing drain upon humanity -- for the benefit of an elite global few -- is all but invisible to most Western peoples participating in its sustaining rituals.
Corporatism's rituals are as reverentially and unquestionably observed in daily behavior as those of ancient Egypt's theocracy or the blood sacrifice of the Aztecs. The Aztecs thoroughly believed their world would end if the gods were not fed enough still-beating human hearts. We believe that the world turns on employment figures, stock prices, our jobs, productivity and consumption. Hourly, we receive reports from the media priesthood on the health of an aggregate god known as the economy. The masses pause to listen, then ask inside their heads, "Will my job, my only source of family sustenance, disappear? I must try harder."
And so, fearfully, we render tribute to Moloch in the form of increased toil, more sheaves of what they alone produced (for it is labor that produces all authentic wealth) in the form of bailouts and sons sacrificed on the altar of war.
High and low, we have been transfigured into a society of performers behaving the way we are expected to behave as productive citizens. Production as measured by the bastards. And we cannot expect to find any Gandhis or Simón Bolivars among that high caste. One does not get there by leading salt strikes, nor does one appear in their boardrooms on behalf of the masses wearing beggar's cloth. "The masses, the masses, the masses. Whatever are we to do with them?" laughed a political adviser friend, only half-jokingly. True, we've always been such a herd, always been given to self-imposed blindness of the whole. But now we are blindfolded. There is a difference.
During earlier times in this fabled republic -- and much of it has always been just that, a fable -- there were somewhat better odds of escaping such blindness. Now it is considered the normal condition; we see it as in our best interests to embrace such national blindness. In doing so, we all but ensure a new Dark Age. Oh, quit bitching you fart-stained old gasbag. The next Dark Age is sure to have a wireless connection and an RFID sex hot line locator chip in your neck. The boys in Tyson's corporate are already doing it to chickens in the poultry market for a couple cents per bird. Just be glad you were born in America!
For sure it will be wired. Because the next phase of history's greatest ongoing screwjob, capitalism, depends on it being wired. With the demise of first mercantile capitalism, and now with industrial capitalism on the ropes everywhere, and after having wasted most of the world's vital resources, you'd think the whole stinking drama of greed and mass exploitation would necessarily draw to a close. You'd think there would be nothing left to huckster after having pissed in most of the world's clean drinking water, gutted its forests and jungles, leveled its mountains for coal and minerals, and turned the atmosphere into a blanket of simmering toxins, well, you'd think it was time for the bastards to fold the game and go home with their winnings. No such luck.
Enter yet a third phase: Consciousness Capitalism! The private appropriation of human consciousness as a "nonmaterial asset." Or cognitive capitalism, in nerd and pinhead speak. Which goes to show you can never underestimate the dark bastards at the helm. Yes, these guys are good. Essentially, we're talking about stripping the human experience from life, then renting it back to humans. So how does one do that? Through the same Western European historical process used to fuck over the world in the first two rounds of capitalism -- propertization. Denying access to something because it's MINE-MINE-MINE-MINE!
Charge rents for your monopoly on the access. Manufacture artificial scarcity, even of human consciousness and experience by redefining and reshaping it. The tools here are legal means such as intellectual property rights, patents softwares ...
Cognitive capitalism by definition requires that mass consciousness be networked at all individual nodes. Each node is its own experiential realm of service relationships, entertainment, travel and the multitude of experience industries that are rapidly coming to dominate the global economy. Life as a paid-for experience, with none of the hassles of ownership. Rent a Life, Inc. (Actually, we've always rented our lives from the bastards, under such things as the pretense that mortgage payments were not just another gussied up form of rent, and so forth). If you've got the money to pay for access to their networks, it's great. I guess. If you're too poor, then you are left to fight it out in naked barbarian streets of the unwired. Given the choice, most of us would rather be inside the gates, not on the streets. But any rational person would fear the gatekeepers.
Already we are seeing cognitive mutations of our relationships with our homes, our communities and our idea of what the world is. I had an absolutely brilliant young man visit me in Belize, well known as a futurist on the Internet and avid player of Second Life. By his own admission, he could not find anyone in the entire country he could communicate with. Community and the world are becoming concepts, images and ideas ungrounded in the earthly "thingness" and the attending husbandry and respect for such, and replaced by the ultimate purchased commodity, the experience of life itself. Each person becomes an experiential Empire of One. Occupant of a single node in the network, seeking personal validation through paid-for personal experience and free from the bonds of human cooperation and responsiveness. Free from material boundaries.
Experience products, compared to those of industrial capitalism, are dirt cheap for the bastards to produce. The hard costs, land, factories, labor, are outsourced (dumped) in China. Let the Mandarin capitalists own those burdens. The Mandarin capitalists are deliriously happy to accept 'em. Because they can offset those costs in a million ways they'd just as soon not talk about. Like burning the cheapest sweat-labor coal in the dirtiest power plants they can build to power their workhouse chip factories. As in, Hey Chang! It's quitting time. Go beat those goddamned peasant workers back into their chicken cages for the night!"
Meanwhile, back here in the land of free, we are, as always, at least one water buffalo step ahead of the Chinese when it comes to enterprise. Consequently, we have moved on from Proudhon's property-as-theft model, to extortion. The new extortion is conducted through creation of a state of artificial scarcity, which is done by turning the dials of your patents, softwares and intellectual property rights machinery, which is protected by your corporate legal goon squad.
The time for extortion through consciousness capitalism is ripe in both senses of the word. People in developed nations, America especially, are ditching material goods, the veritable mountain of Asian techno-junk, sweat-labor clothing, and gewgaws, not to mention the now-worthless, overpriced suburban fuckboxes they purchased to store all that stuff in. Nothing is stranger, or sadder in a way, than watching the monolithic suburban yard sale that is now America suburban Saturday morning. Material assemblage might be a better word than sale, because there are almost no buyers, not even many "for free" takers. Just sellers. Everybody needs cash to pay down the plastic. Or eat. It's broke out there. (Although Europeans and North Americans don't really know the meaning of the word broke yet. Ask folks south of the equator).
Meanwhile, at the Twilight Zone Café, in Winchester, Virginia, Ernie, the retired backhoe driver takes another pull on his Old Milwaukee beer and says: "Now tell me this perfessor, didn't we bring all this on ourselves? Ain't we got some personal responsibility for what happens to us?" Good question. Did we create this catastrophic system, or was it created by the bastards, and in turn re-created us? How much is attributable to the smallness and ratlike sensibilities of ordinary men such as ourselves? Has human ingenuity and ability to mass replicate goods and information provided nothing more than a theater of operations for some macabre and prolonged last act in the human drama -- ecocide?
"Oh, science will come up with something," observes Ernie. "It always does." I bite my tongue and don't say that I believe human ingenuity is much overrated stuff. But even assuming it isn't, and that we all get issued solar-powered houseboats during the global-warming meltdown, we're still gonna need oxygen. Maybe Ernie is right, though. Maybe we did bring all this on ourselves by not accepting that new "personal responsibility," the Republican Party proffered a while back. But I'm blaming the bastards anyway, because first off, they've got all the power; and second, they've become obscenely rich off it; and third, I don't like the fuckers to start with. And it's not because I am jealous of their wealth either. I leave that mediocre sort of animal jealousy to realtors and super-striving dentists.
After a rather short stint in "the ownership society," material products are now increasingly replaced by immaterial licensed experiences. We will no longer "own" anything, much less attempt to own everything we can lay hands on. Which is good. But the bastards will finally own everything. Which is bad. Certainly cognitive capitalism will relieve stress on the world's resources to some degree. A nation of cyber-vegetables trying to get laid or get rich in a Second Life-type experience may be easier on poor old Mother Earth, though she's probably be gagging at the thought of what we'll have become.
Malcontent that she is, Mother Earth has been unhappy with man's behavior for a long time. And after being, bombed, mined, poisoned and generally molested for so long, who can blame her for her opinion, which is that, "On the sixth day, God fucked up." Three beers and a couple thousand words later, it's hard to disagree.