Cannon & Brennan at Capitol: Former House speaker "Uncle Joe" Cannon, congressman from Illinois, accessorized with Maine lawmaker Vincent Brennan and a big cigar
Ilargi: The title for this entry comes straight out of a New York Times article by Andrew Martin, entitled Does This Bank Watchdog Have a Bite?, which deals with John Dugan, the present US Comptroller of the Currency (and a former bank lobbyist). The quote from the title doesn’t come from some fringe lunatic, the man quoted is West Virginia Attorney General Darrell McGraw, and yes, he's talking about Washington DC. For good measure, Martin quotes a second Attorney General, Iowa's Tom Miller, who says this about Dugan:
"To have a regulator this partial and this helpful to the people he is supposed to regulate is, to say the least, very troubling,"
Unfortunately for them and the rest of America (except the bankers), Dugan is a well connected man, and a close ally of Treasury Secretary Tim Geithner. Here's an example Martin provides of Dugan's work ethic:
When Darrell McGraw, the attorney general of West Virginia, decided to sue Capital One Bank in 2005, alleging credit card abuses, his office expected to face a phalanx of high-priced defense lawyers. What it didn’t expect was that Capital One would get a hand from the federal government. As Mr. McGraw tells it, his legal team was thwarted every step of the way by Capital One and the [Office of the Comptroller of the Currency]. While Capital One didn’t comply with Mr. McGraw’s subpoenas, it did apply for a national charter with the O.C.C., which it obtained in March 2008. Soon afterward, Capital One notified Mr. McGraw that he no longer had authority over it.
For more than a decade, the O.C.C. has beaten back state attorneys general who have tried to enforce state consumer laws against national banks, arguing that federal laws pre-empt those of the states: the O.C.C. has stopped Georgia from enforcing predatory lending laws, intervened in New York’s effort to investigate discriminatory lending and opposed a campaign by New England states to curb gift card fees. "It’s always disheartening when the federal government becomes the refuge for scoundrels," Mr. McGraw says.
Many of you may say that we should just get rid of John Dugan ASAP. Me, I would say he’s exactly where he belongs. More on that in a minute.
In the wake of Obama's latest effort at allowing people to stay in their underwater homes, the plan I named "The New Losers Program", here's an interesting stat: nearly 14% of US mortgages are now delinquent. That’s about one in every seven homes. And yes, once again, home prices will keep on dropping, so we’ll see one in five, then one in four (that’s how many are underwater today), etc.. Another good stat: half of all modifiied mortgages default again. What does that spell for the program?
I’m happy to see I’m not the only one who thinks that the perverted madness of Fannie, Freddie, and the FHA guaranteeing your neighbor’s mortgage with your money should stop. If only because, yes, home prices wil keep on dropping. And you will therefore be on the hook for the losses on both the mortgages AND the securities written on them, while in the long run nothing will have been saved or prevented, the "bad" things will have just been pushed a little bit further into the future.
There are some smarter voices popping up, and that's good, even if they don't always seem to be able to think things through to their logical conclusions, likely because these are often of the bitter variety. Here's Bloomberg's Caroline Baum:
Lower Home Prices Can Fix What Government Can’tAlas, all the Fed’s purchases and all the government’s men can’t put the residential real estate market together again.
Between them, the federal government and central bank can lower mortgage rates, modify mortgages, use their power to get private lenders to modify mortgages, and create incentives to move inventory, such as the first-time homebuyer’s tax credit. What they can’t do is manufacture enough artificial demand for an asset that was artificially inflated to begin with. Prices will have to fall, which is how supply is allocated in a market economy. (An occasional reminder is in order given the current spend-money-to-save-money mindset.)
The Federal Reserve will complete its purchase of $1.25 trillion agency mortgage-backed securities at the end of this month. Its efforts on our behalf have driven 30-year fixed-rate mortgage rates to half-century lows of sub-5 percent, "which should have been more stimulative than it was,"[..]
Almost one-quarter of all residential properties with a mortgage were underwater in the fourth quarter, according to First American CoreLogic. What’s done is done. Throwing bad money after good makes no sense. The government can’t save housing without sapping something else of needed capital.
Good points (.. but?) . Former National Economic Council director Keith Hennessey has some more:
Should taxpayers subsidize underwater homeowners?Mr. Hennessey is getting close. But then he veers off the road like a steamroller:Who is eligible? Under one program, called HAMP, the Home Affordable Modification Program, you are eligible if you:
… live in an owner occupied principal residence, have a mortgage balance less than $729,750, owe monthly mortgage payments that are not affordable (greater than 31 percent of their income) and demonstrate a financial hardship. The new flexibilities for the modification initiative announced today continue to target this group of homeowners. Excuse me? We’re going to subsidize someone with a mortgage balance of $700,000?!
Let’s do a quick back-of-the-envelope calculation. Suppose you have a mortgage balance of $700K, with 28 years left on your 30-year mortgage at a fixed 7% 5.25% . Your monthly mortgage payments would be almost $4,800. If that’s greater than 31% of your income, you make less than $186,000 per year.[..]
[..] let’s look at a homeowner with a fixed rate mortgage who is “underwater” because his home has declined in value so that the house is worth less than the mortgage. His net worth has declined because the value of his home plummeted, and that’s tragic. But since he has a fixed rate mortgage, his monthly mortgage payment has not changed. The decline in the value of their home has not affected his ability to make his mortgage payment, and therefore to remain in that home.
He can continue to live in his home and wait for the value to appreciate, just as a stockholder can hold onto a stock after a decline and wait for the price to recover. I don’t see why taxpayers should subsidize him because he lost money on an investment, just as taxpayers shouldn’t subsidize him if he lost money in the stock market.[..]
Imagine twin brothers, each with $180K of annual income. One rents, and the other has a $700,000 mortgage on a home that declined from $800,000 in value to $600,000 in value. Both brothers lose their jobs. Why should the renter pay higher taxes to subsidize his brother’s mortgage payments? Losing a home due to financial hardship is tragic. Does that make it someone else’s responsibility? Why should a broad-based decline in housing prices shift responsibility for planning for a financial loss from a homeowner to taxpayers?
Why do policymakers (on both sides of the aisle) think we should make taxpayers (some of whom struggle to make their own mortgage payments, and others of whom rent housing) subsidize someone who lost money on an investment? I would like to hear a sound and compassionate policy argument that addresses my twin brother example. To make sure your argument works, please assume there is also a triplet brother who also rents but recently lost $200,000 in the stock market, and explain how your policy applies to him.
To have good arguments not to do something, and then propose to do it anyway, I'm going to have to guess that stems from, as I just said, the fear of "bitter conclusions". Moreover, none of it would work if prices keep falling. And more importantly, Mr. Hennessey misses out on the underlying truth behind the New Losers Program.
I would be willing to use some tax dollars to subsidize a subset of those homeowners who were fooled or deceived into buying bad adjustable rate mortgages. I would subsidize only the ones who, with a little taxpayer assistance, could afford to keep their home. The hard part is determining who was fooled or deceived. This subsidy would apply only to bad ARMs made in the past and therefore would not be designed as a permanent program.
Barry Ritholtz does not. He catches it, so to speak, full frontal:
More Foreclosures, Please . . .The various foreclosure programs are essentially a way the banks don’t have to take their write offs now. Avoid the hangover, have another shot of tequila, push the pain of into the future, regardless of economic cost. Were the banks required to report their mortgages accurately and/or write them down, they would be revealed as insolvent.
Now we get to the ugly Truth: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar and at the expense of the middle class. These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics.
There we go. Now, was that so hard, Ms. Baum, Mr. Hennessey? Twiddling around with these programs, a little more of this, little less of that, is of no use whatsoever, because the intention behind them never was to help homeowners. And if you need a real good strong reason why the programs must be stopped as soon as possible, look no further than this from the Economic Collapse Blog:
The Silent Entitlements Monster: Social Security, Medicare And Interest On The Debt Will Gobble Up Every Single Tax Dollar By 2020In fact, according to an official U.S. government report, rapidly growing interest costs on the national debt together with spending on major entitlement programs will absorb approximately 92 cents of every dollar of federal revenue by the year 2019. By 2020, that figure will be up around 100 cents of every dollar of federal revenue.
It turns out that the "recession" that we have just been through has hit Social Security revenues really hard. And unfortunately, as waves of Baby Boomers start retiring, these "Social Security deficits" are going to get even worse. So where will the money come from to pay the benefits that are owed? For now, the money will come from the $2.5 trillion Social Security Trust Fund that has been accumulated.
But keep in mind that the $2.5 trillion figure is extremely misleading. There are not $2.5 trillion dollars sitting around in a bank account somewhere to pay these benefits. The truth is that the Social Security Trust Fund does not contain any actual assets. The only assets the Social Security Trust Fund has are IOUs from the U.S. government. So basically the U.S. government owes the Social Security Trust Fund $2.5 trillion dollars, and now it turns out that the Social Security system is going to start needing that money. So where will the U.S. government get that money? Well, they will borrow it of course.[..]
As a society, we are really between a rock and hard place. If we continue on the same path, the United States government is going to go bankrupt. But any politician who tries to cut benefits or raise taxes will likely face the wrath of the voters at the ballot box. So for now the U.S. government just continues to spend even more money and continues to go into increasing amounts of debt - apparently hoping that somehow everything will just turn out okay. But things are not going to turn out okay. We are headed for a financial mess of horrifying proportions.
[..] until severe financial pain starts happening, a large percentage of the American people are not going to be motivated to do anything about this problem. But by then it will be too late.
Ten years from now, and probably quite a bit sooner, The United States of America will be hopelessly bankrupt. That's what its own Government Accountability Office says. But people like John Dugan, Tim Geithner, and yes, Barack Obama, keep on inventing plans that shield the banks from losses, but not the citizens. Indeed, the citizens' money goes directly towards keeping banks afloat while ever more Americans find their homes underwater.
And that's why Comptroller of the Currency John Dugan is in the right spot at the right time. He sticks out like a sore thumb, but cutting him off is no use: the whole hand is mortally wounded. And mortgage modification plans or financial regulation schemes don't matter anymore. As I’ve often said, this is not a financial crisis, it's a political one. It’s the politicians who owe their plush seats to the very institutions they now pretend to want to re-regulate, who have allowed it to happen. And even for the lone voice who's halfway sincere, it doesn't matter anymore, we're long past that stage.
As I've also often said, and was pleased to recently hear Michael Moore repeat, the only thing that works is to get money out of politics. However, in the present political system, that means the politicians, the very people who would presently be tasked with getting that money out of politics, are the ones who most benefit from keeping it in. And that defines a political crisis like nothing else does.
Politicians would lose their votes if they cut entitlements and debt (which will bankrupt the nation), and they would lose their campaign money (and further perks) if they go against the money cabal (which will keep the government in the hands of the few, acting against the many) . How you solve that by any means other than pitchforks, or worse, you tell me. Mortgage mods ain't going to cut it. Not even a new Glass Steagall will.
The Daily Telegraph's Jeremy Warner, interwoven with curious Thatcher admiration (shouldn't the Brits just LOVE Angela Merkel?), gets a few things right about his own country, and many others like it.
Strikes and strife are only just beginningEven the Chancellor now concedes that when the axe falls it will need to be deeper and tougher than anything attempted under Margaret Thatcher. Using published Treasury projections, the Institute for Fiscal Studies calculates that after taking account of "protected" areas of spending such as health and schools, the cuts elsewhere in public services and administration will have to be of the order of 25 per cent. In the event of a fully blown funding crisis, they would be deeper still.
Nothing quite like it has been attempted since the 1930s. Is Labour, still trailing the vestiges of its socialist roots, substantially funded by union donations, and politically dedicated to the provision of state-funded services and welfare, really up to the job? If Labour ministers were being asked to poison their own children, the task that awaits could scarcely be grimmer. The reason the Chancellor is not telling us how he might do it is not just because he fears the truth would cost votes, but because he doesn't know.
We are a tragic species indeed. We can see ourselves drown, and can't do a thing to prevent it.
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U.S. Is Riskier Than Euro Zone; So Says CDS Market
Something troubling has occurred in the market for default protection on the debt of the world's biggest borrower. As the folks at Standard Poor's Valuation and Risk Strategies division noted in a research note Monday, the difference between the spread on U.S. sovereign credit default swaps and an equivalent benchmark for AAA-rated euro-zone sovereigns flipped into positive territory March 12. As U.S. CDS spreads expanded to their widest levels in two years, that cross-region gap blew out to 5.7 basis points last Friday before narrowing to 4.7 Tuesday.
Wider CDS spreads indicate that sellers of insurance against a particular issuer's default are charging more for it. In effect, the positive U.S.-versus-euro zone spread means investors think the risk of a U.S. default--however remote--is greater than that on euro-denominated sovereign debt. So much for the view that low inflation and loose monetary policy make for a rosier debt outlook for Treasurys than for the debt of crisis-hit euro-zone sovereigns. "We've seen CDS on U.S. Treasurys break with euro CDS before, but never to the degree we have here," said Michael Thompson, head of research for S&P's Valuation and Risk Strategies group. "If we sit on this precipice for a time, I think a lot of market participants would see this as a bit of a shot across the bow, a bit of a wakeup" for anyone who's complacent about U.S. debt.
Wouldn't it also challenge U.S. Treasurys' status as the so-called "risk free" benchmark? S&P didn't go there. But the report did say the trend "reflects increasing market anxiety surrounding the U.S.'s credit quality." In other words, a fiscal deficit worth 10% of gross domestic product--in the absence of a clear plan to reduce it -- matters. My first instinct was to dismiss the trend as an anomaly fueled by the technical quirks of an illiquid sovereign CDS market, where a conflicting array of investment strategies can confuse price signals. Some market participants use CDS contracts to hedge existing positions in underlying bonds, others sell default insurance as an alternative exposure to those bonds, while still more seek to extract arbitrage profits from playing between the two.
What's more, the AAA euro-zone benchmark doesn't reflect bets on a single sovereign's debt but rather a basket of the region's six remaining AAA-rated countries: Germany, France, Austria, Finland, the Netherlands and Luxembourg. Disentangling its message on default risk could be messy. And what, after all, can a current-day contract on a future Treasurys default tell U.S. when a U.S. breach on its financial obligations is virtually inconceivable? [The government would pay for its debt with inflation long before opting for the blunt instrument of default.]
Yet, notes Mr. Thompson, "there is real money changing hands there [in CDS markets]. And if there is real money changing hands, there has to be real value ... The market is expressing some valuable information." Short-term moves of a basis point or two can be attributed to technical factors, but such a lasting shift in the two regions' CDS relationship "is not technical," Mr. Thompson said. "I certainly wouldn't ignore it." Thompson's team also noted that the deterioration in U.S. default swaps meant that S&P's "market-derived signal" dropped to 'aa+,' its lowest level in two years. The historical series for that indicator is based on an established correlation with actual S&P ratings.
There's no indication that S&P's separate ratings division is about to downgrade the U.S. 's vital 'AAA' rating. But over time, ratings analysts cannot stay blind to market signals like this one. As its weighs the stimulus needs of a still-fragile U.S. economy against future risks to debt servicing costs, the U.S. government can't ignore market signals either.
CBO report: US debt will rise to 90% of GDP
by David M. Dickson
President Obama's fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation's economic output by 2020, the Congressional Budget Office reported Thursday. In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president's budget would generate a combined $9.75 trillion in deficits over the next decade.
"An additional $1.2 trillion in debt dumped on [GDP] to our children makes a huge difference," said Brian Riedl, a budget analyst at the conservative Heritage Foundation. "That represents an additional debt of $10,000 per household above and beyond the federal debt they are already carrying." The federal public debt, which was $6.3 trillion ($56,000 per household) when Mr. Obama entered office amid an economic crisis, totals $8.2 trillion ($72,000 per household) today, and it's headed toward $20.3 trillion (more than $170,000 per household) in 2020, according to CBO's deficit estimates.
That figure would equal 90 percent of the estimated gross domestic product in 2020, up from 40 percent at the end of fiscal 2008. By comparison, America's debt-to-GDP ratio peaked at 109 percent at the end of World War II, while the ratio for economically troubled Greece hit 115 percent last year. "That level of debt is extremely problematic, particularly given the upward debt path beyond the 10-year budget window," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget.
For countries with debt-to-GDP ratios "above 90 percent, median growth rates fall by 1 percent, and average growth falls considerably more," according to a recent research paper by economists Kenneth S. Rogoff of Harvard and Carmen M. Reinhart of the University of Maryland. CBO projected the 2011 deficit will be $1.34 trillion, not much different from the administration's estimate of $1.27 trillion. However, CBO's estimate of the 2020 deficit at $1.25 trillion significantly exceeds the administration's $1 trillion estimate
The Silent Entitlements Monster: Social Security, Medicare And Interest On The Debt Will Gobble Up Every Single Tax Dollar By 2020
There is a silent monster that looms menacingly over U.S. government finances. Every politician knows about it, but very few of them ever want to talk about it. This silent monster grows larger every year, and yet nobody seems to know quite what to do about it. Those who have closely analyzed this monster all seem to agree that one day it will create a financial tsunami of a magnitude that is absolutely unprecedented, but there is vast disagreement about how to escape this financial tsunami or if it is even possible to escape it.
The name of this monster is "entitlements" - Social Security, Medicare and other social Ponzi schemes that the U.S. government has locked itself into funding. It would be hard to understate the seriousness of the problem that entitlements present. In fact, according to an official U.S. government report, rapidly growing interest costs on the national debt together with spending on major entitlement programs will absorb approximately 92 cents of every dollar of federal revenue by the year 2019. By 2020, that figure will be up around 100 cents of every dollar of federal revenue. So that means that interest on the debt and spending on entitlement programs will eat up everything the U.S. government takes in before a penny is spent on anything else. That is a recipe for national financial suicide.And unfortunately, the problem is only going to get far, far worse when you project things out beyond the year 2020. Right now, interest on the debt and spending on entitlement programs like Social Security and Medicare eat up only about 10 percent of GDP. By 2080, they are projected to eat up approximately 50 percent of GDP. In fact, things are even more dire than the chart below indicates. This chart is based on previous government figures that projected that mandatory spending will exceed government revenues at some point between 2030 and 2040, but the latest government figures now project that this will happen right around 2020. So as mind blowing as this chart is, keep in mind that it actually understates the problem we are facing....
This week, there was news that the Social Security system is in much worse shape than previously projected. According to the Congressional Budget Office, this year the Social Security system will pay out more in benefits than it receives in payroll taxes. This was not supposed to happen until at least 2016. Now it is happening in 2010.
It turns out that the "recession" that we have just been through has hit Social Security revenues really hard. And unfortunately, as waves of Baby Boomers start retiring, these "Social Security deficits" are going to get even worse. So where will the money come from to pay the benefits that are owed?
For now, the money will come from the $2.5 trillion Social Security Trust Fund that has been accumulated.
But keep in mind that the $2.5 trillion figure is extremely misleading. There are not $2.5 trillion dollars sitting around in a bank account somewhere to pay these benefits. The truth is that the Social Security Trust Fund does not contain any actual assets. The only assets the Social Security Trust Fund has are IOUs from the U.S. government. So basically the U.S. government owes the Social Security Trust Fund $2.5 trillion dollars, and now it turns out that the Social Security system is going to start needing that money.
So where will the U.S. government get that money? Well, they will borrow it of course.
The reality is that the Social Security program is simply not sustainable. Back in 1950 each retiree's Social Security benefit was paid for by 16 workers. Today, each retiree's Social Security benefit is paid for by approximately 3.3 workers. By 2025 it is projected that there will be about two workers for each retiree.
As a society, we simply have not been producing enough new workers to sustain the current system. Of course the politicians all say the right things to make us think that they are going to do something about this crisis. For example, Barack Obama recently had the following to say about the massive deficits the U.S. government keeps piling up: "It keeps me awake at night, looking at all that red ink".
But the truth is that neither political party would dare propose a dramatic restructuring of Social Security or Medicare that would significantly reduce benefits.
Why? Because it would be political suicide. Say what you want about old people - the truth is that they vote more than the rest of us do.
Anyone who would dare "take away" their Social Security or Medicare would suddenly find hordes of old people voting against them in the next election.
But something has to be done.
The 2009 Financial Report of the U.S. Government was recently released, and it basically says that the U.S. government is facing financial Armageddon if something drastic is not done....
Absent a change in policy, under this scenario, the interest costs on the growing debt together with spending on major entitlement programs could absorb 92 cents of every dollar of federal revenue in 2019.
Keep in mind that this is before anything is spent on defense, health care, education, homeland security, job creation or anything else.
The following chart was pulled right out of the report. These aren't the projections of some Internet wacko. These projections are in an official U.S. government report. The implications of the chart below are absolutely mind blowing....
Keep in mind that the U.S. government and the U.S. economy are already on the verge of financial oblivion in 2010. So what is going to happen if these projections are anywhere close to accurate?
In addition, the report also admitted that the present value of projected scheduled benefits exceeds earmarked revenues for entitlement programs such as Social Security and Medicare by about $46 trillion over the next 75 years.
$46 trillion!
Either the U.S. government is going to have to radically slash Social Security and Medicare benefits or they will have to come up with tens of trillions of extra dollars from somewhere.
And remember, the $46 trillion figure is just the "present value" of those future payments.
Because of inflation, the "actual value" of those future payments will be far greater.
In a section about Social Security and Medicare, the authors of the report confessed that "it is apparent that these programs are on a fiscally unsustainable path". Obviously something has got to give. These programs cannot keep on paying the same level of benefits. It is financially impossible.
But what are we going to do? Millions upon millions of elderly Americans rely on these programs. Are we going to reduce payments to a level where they can only afford dog food to eat and a shack to live in? As a society, we are really between a rock and hard place. If we continue on the same path, the United States government is going to go bankrupt. But any politician who tries to cut benefits or raise taxes will likely face the wrath of the voters at the ballot box.So for now the U.S. government just continues to spend even more money and continues to go into increasing amounts of debt - apparently hoping that somehow everything will just turn out okay. But things are not going to turn out okay. We are headed for a financial mess of horrifying proportions.
The truth is that it doesn't matter how much the U.S. government cuts spending in other areas if it does not get entitlement spending and interest on the national debt under control. If those expenditures are not addressed, it is absolutely guaranteed that the U.S. government will be swamped in red ink for many years to come.
But until severe financial pain starts happening, a large percentage of the American people are not going to be motivated to do anything about this problem. But by then it will be too late.
Sell-off in US Treasuries raises sovereign debt fears
by Ambrose Evans-Pritchard
Investors are braced for a further sell-off in US Treasuries after dramatic moves last week raised fears that the surfeit of US government debt is starting to saturate bond markets. The yield on 10-year Treasuries – the benchmark price of global capital – surged 30 basis points in just two days last week to over 3.9pc, the highest level since the Lehman crisis. Alan Greenspan, ex-head of the US Federal Reserve, said the abrupt move may be "the canary in the coal mine", a warning to Washington that it can no longer borrow with impunity. He said there is a "huge overhang of federal debt, which we have never seen before".
David Rosenberg at Gluskin Sheff said Treasury yields have ratcheted up 90 basis points since December in a "destabilising fashion", for the wrong reasons. Growth has not been strong enough to revive fears of inflation. Commodity prices peaked in January and US home sales have fallen for the last three months, pointing to a double-dip in the housing market. Mr Rosenberg said the yield spike recalls the move in the spring of 2007 just as the credit system started to unravel. "The question is how the equity market is going to handle this back-up in rates," he said.
The trigger for last week's sell-off was poor demand at Treasury auctions, linked to the passage of the Obama health care reform. Critics say it will add $1 trillion (£670bn) to America's debt over the next decade, a claim disputed fiercely by Democrats. It is unclear whether China is selling US Treasuries after cutting its holdings for three months in a row, or what its motive may be. There are concerns that Beijing may be sending a coded message before the US Treasury rules next month on whether China is a "currency manipulator", though experts say China is clearly still buying dollar assets because it is holding down the yuan against the greenback. Some investors may be selling Treasuries as a precaution against a trade spat.
Looming over everything is the worry that markets will not be able to absorb the glut of US debt as the Fed winds down its policy of bond purchases, starting with an exit from mortgage-backed securities. It currently holds a quarter of the $5 trillion of the MBS market. The rise in US bond yields has set off mayhem in the 10-year US swaps markets. Spreads turned negative last week, touching the lowest level in 20 years. The effect was to drive credit costs for high-grade companies such as Berkshire Hathaway below that of the US government. This may have been a technical aberration.
The Stars Are Aligning For "Something Really Big To Happen"
by David Rosenberg
A good friend, and long-time reader, was kind enough to pass along these thoughts yesterday. Basically, the stars are starting to align for something really big to happen.
First, the Shanghai index peaked in August 2009 and had a secondary top in December 2009 (global demand slowing?). Many emerging markets are all negative year to date.
Second, gold peaked in the first week of December 2009 (and now breaking down) while the U.S. dollar index (the DXY) is breaking higher (Greece has not been resolved).
Third, TIPs (ETF) peaked the first week of December 2009 (and just broke to a new four month low).
Fourth, commodity prices peaked in the first week of January and appear to be rolling over. Head-and-shoulders top from October 2009 peak?
Fifth, could we be in for a March peak in equities? The NYSE new high list peaked six trading days ago. Recall that a market correction followed in October of last year and January of 2010 following similar peak in new highs.
Sixth, despite signs of economic cooling in Q1 (around 2.5% growth and half the Q4 pace) and lower inflation expectations, the 10-year Treasury note yield is ratcheting up (in a destabilizing fashion) and devoid of any bearish economic data (for a range of technical/fund flow reasons as was the case in the summer of 2007 — we never said at the Grant’s conference in New York that it was going to be a straight line down). But in technical lingo, it does look as though the yield is breaking out from a triangle since the December 31, 2009 yield peak — go back to that period in December and January, 3.85% on the 10-year Treasury- note served at least three times to be major technical support — a break of that this time around would mean some serious near-term trouble (the nearby high closing level was 3.98% back on June 10,2009).
Four More Banks Shut Down, Pace Set to Accelerate
Regulators on Friday shut down two Georgia banks and one each in Florida and Arizona, bringing to 41 the number of bank failures in the U.S. so far this year following the 140 that fell in 2009 to mounting loan defaults and the recession. The Federal Deposit Insurance Corp. on Friday took over the banks: McIntosh Commercial Bank, based in Carrollton, Ga.; Unity National Bank of Cartersville, Ga.; Key West Bank of Key West, Fla., and Desert Hills Bank, based in Phoenix. The four failures are expected to cost the federal deposit insurance fund a total of around $320.3 million.
CharterBank, based in West Point, Ga., agreed to assume the estimated $362.9 million in assets and $343.3 million in deposits of McIntosh Commercial Bank. In addition, the FDIC and CharterBank agreed to share losses on $263.1 million of McIntosh Commercial's loans and other assets. Bank of the Ozarks, based in Little Rock, Ark., is assuming the estimated $292.2 million in assets and $264.3 million in deposits of Unity National Bank. The FDIC and Bank of the Ozarks agreed to share losses on $206.1 million of Unity National's loans and other assets.
Another Arkansas bank, Centennial Bank of Conway, Ark., is assuming the $88 million in assets and $67.7 million in deposits of Key West Bank. The two shuttered banks in Georgia followed three bank failures in that state last week and 25 last year, more than in any other state. New York Community Bank, based in Westbury, N.Y., is assuming the $496.6 million in assets and $426.5 million in deposits of Desert Hills Bank. The agency and New York Community Bank agreed to share losses on $325.9 million of the failed bank's loans and other assets.
The pace of bank seizures this year is likely to accelerate in coming months, regulators have said, as losses mount on loans made for commercial property and development. The mounting bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, hitting a $20.9 billion deficit as of Dec. 31. The number of banks on the FDIC's confidential "problem" list jumped to 702 in the fourth quarter from 552 three months earlier, even as the industry squeezed out a small profit. Still, nearly one in every three banks reported a net loss for the latest quarter.
The 140 bank failures last year were the highest annual tally since 1992, at the height of the savings and loan crisis. They cost the insurance fund more than $30 billion. There were 25 bank failures in 2008 and just three in 2007. The FDIC expects the cost of resolving failed banks to grow to about $100 billion over the next four years. The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund. Depositors' money – insured up to $250,000 per account – is not at risk, with the FDIC backed by the government. Apart from the fund, the FDIC has about $66 billion in cash and securities available in reserve to cover losses at failed banks.
FDIC Pares Loss Aid for Bank Buyers
The sweetheart deals dangled by the U.S. government to lure buyers for failed banks aren't so sweet anymore. The Federal Deposit Insurance Corp. said it will absorb a smaller percentage of the losses on soured loans covered by the agreements routinely reached with buyers of collapsed banks. Such loss-sharing agreements have helped the FDIC get rid of banks that no one would have wanted if the buyer were forced to absorb all the potential losses on the failed bank's loan portfolio.
The agency said it will guarantee 80% of potential loan losses, down from as much as 95%. "We're confident that this step is in line with our least-cost obligations," an FDIC spokesman said. "The loss-sharing structures up until this point have worked well for the FDIC to help improve pricing and minimize losses, provide liquidity to the FDIC and move assets quickly back into the private sector." The change might make it more expensive for the FDIC to dispose of doomed banks, since some potential buyers could lose interest. In the long run, though, the diluted guarantees could lower the cost of the banking crisis if the FDIC pays out less money to the buyers of loans inherited from failed banks.
Last year, the FDIC entered into 94 loss-sharing agreements that back $122 billion of assets. More than 175 banks have failed since the start of 2009. The FDIC initially didn't offer to absorb losses on the loans of dead banks, but changed its mind to interest potential acquirers. Paul Miller Jr., a banking analyst at FBR Capital Markets, wrote in a research report Friday that the change will "simplify failed bank transactions for the FDIC." Buying failed banks still is a good deal even with less-generous terms from the government, he added. Some other analysts said the move could hurt share prices of likely acquirers of failed banks.
The FDIC is trying to drum up more interest in what is expected to be a steady stream of failures this year and next. Pension funds, private-equity firms, investment managers and other potential investors met with the FDIC on Monday to discuss "bringing responsible new investors into the banking system," FDIC Chairman Sheila Bair said. Kip Weissman, a longtime banking lawyer who works on mergers and acquisitions at law firm Luse Gorman Pomerenk & Schick, said bidding is fierce for banks with solid deposits and branch networks located in areas with attractive economic prospects. Still, he added, the "fire sales" and "assembly-line deals" fueled by the FDIC's loss-sharing agreements is likely to taper off.
More Foreclosures, Please . . .
by Barry Ritholtz
I have been dismayed about the latest actions out of Washington and Wall Street. The banks are now pushing all manner of mortgage mods and foreclosure abatements. These are little more than “extend & pretend” measures, designed to put off the day of reckoning. They are not only ineffective, they are counter-productive. They reward the reckless and punish the responsible, and create a moral hazard. Worse yet, they penalize middle America for the sake of giant Wall Street banks.It may sound counter-intuitive, but the best thing for the nation (but not necessarily the banks) is to allow the foreclosure process to proceed unimpeded. We need more, not less foreclosures.
How did we get to this bizarre place in history? A brief recap of our story so far:
It started with the ultra-low rates of 2001-04. It was aided and abetted by an abdication of traditional lending standards, at first by non-bank lenders, but eventually, by nearly all. The Lend-to-Sell-to-Securitizer NonBanks pushed lending standards ever lower to the point of non-existence. This increased the pool of potential mortgage buyers, credit worthiness be damned.
The net result of all this was a credit bubble. I estimate that making mortgage requirements disappear brought between 10 and 20 million marginal new home buyers into the real estate market during the 2,000s decade. This drove prices to unsustainable levels, leading to a huge boom and eventual bust cycle in housing.
Prices have fallen about 30% nationally from the 2005-06 housing peak. As the artificial demand created by free money and an accompanying gold rush mentality disappeared, the housing market collapsed.
Despite this, even down 30% or so, prices still remain elevated by historical metrics. The net result has been 5 million foreclosures and counting. One in four “Home-owers” are underwater — meaning, they owe more on their mortgages than their houses are worth. There are another 3-5 million likely foreclosures coming over the next 5+ years.
The net results of the credit bubble are as follows:
1) An enormous number of families living in homes they cannot afford.
2) Bank balance sheets laden with current bad loans and lots of potential future defaulting loans.
3) Real Estate Sales, despite being propped up with historic low mortgage rates and tax purchase credits, are continuing to slide.
4) A weak overall economy with a very slow, soft recovery.
Whether a function of populist politics or bad economics, the proposals so far appear to address items one and three. But upon closer examination, they do nothing of the kind. In fact, they are actually gaming the system to help issue two — the bad loans the banks are carrying.
Even worse, they are making issue #4 — the economy — increasingly problematic.
We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.
We own a home, and have a vacation property. Rooting for falling prices is “talking against my own book.”
Why is it so beneficial to allow foreclosures to proceed unimpeded? Consider the following benefits of foreclosure:
• Increasing Economic Activity: The areas of the country with the greatest foreclosure rates have seen the biggest increase in real estate activity. Look at California and Florida — they have seen enormous upticks in sales versus the lower foreclosure states.
The process moves real estate holdings from weak hands to stronger ones. When someone purchases a home they actually can afford, they end up spending quite a bit of money on additional goods and services. They do renovations, hire contractors, make durable goods purchases, buy cars. They do lawn work, plant gardens, paint and repair. They even hire baby sitters, go out to diner and movies, they spend money in the local community.
The people who are hanging on by their fingernails, however, do almost none of these things. They pay a vastly disproportionate amount of their incomes to service their mortgages. This is not productive economic activity.
• Helping Families: Foreclosures, wrenching thought hey may be, move over-stretched families into housing they can afford. They avoid a steady stream of all manner of excess fees. The banks squeeze whatever they can from delinquent homeowners, who end up futilely tossing $1000s of dollars down the drain.
Worse, the HAMP programs have been totally ineffective in keeping families in their homes. The vast majority ultimately default anyway. More fees paid, more debt accrued, for nothing. The last thing these families need is a banking fee orgy, before they ultimate lose the house anyway.
The HAMP programs have been an enormous taxpayer subsidized boondoggle for the banks, however.
• Punishing the Prudent: The boom and bust saw irresponsible and reckless behavior by lenders and home buyers alike. They overused leverage, disregarded risk, ignored history. Having the taxpayers subsidize this behavior presents a moral hazard.
Worse than that, it punishes the people who behaved prudent and responsibly. Those who refused to buy a home they could not afford, chose not to over-extend themselves, and have been saving for a down payment are the net losers in this.
By working so feverishly to artificially reduce foreclosures and prop up home prices, we punish the first time home buyer, the newlyweds, the savers who want to buy a house they can actually afford.
The net result of all these programs and subsidies for recklessness is that we prevent home prices from normalizing. The people who are punished the most are the group that was not reckless, speculative or foolish.
• Rewarding Bad Banks: Despite the helping families rhetoric, it is not what these mods are about. The various foreclosure abatements, mortgage mods and capital write-downs are little more than a game of kick the can down the road. All of these programs are part of a broad “Extend & Pretend” mind set. They are an extension of the FASB 157 rule changes that allows banks to hide their bad loans.
The entire set of proposals canbe described as “Whats good for the banks is good for America.” Only they are not. The various foreclosure programs are essentially a way the banks don’t have to take their write offs now. Avoid the hangover, have another shot of tequila, push the pain of into the future, regardless of economic cost.
Were the banks required to report their mortgages accurately and/or write them down, they would be revealed as insolvent.
~~~
Now we get to the ugly Truth: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar and at the expense of the middle class. These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics.Herbert Spencer wrote, "The ultimate result of shielding men from the effects of folly is to fill the world with fools." We have done precisely that.
US mortgage delinquencies rise to nearly 14 percent
Delinquencies on mortgages rose to nearly 14 percent in late 2009, led by a sharp increase in seriously overdue home loans held by the most credit-worthy borrowers, U.S. banking regulators said on Thursday. The percentage of current and performing mortgages fell to 86.4 percent at the end of the fourth quarter of 2009, down 0.9 percent from the previous three months, marking a decline for the seventh consecutive quarter, the report by the Office of the Comptroller of the Currency and the Office of Thrift Supervision said. It was also down 3.9 percent from a year earlier.
The decline was attributable to a 21.1 percent jump in mortgages 90 or more days past due, to 4.7 percent of all mortgages in the portfolio at the end of 2009. The increase in seriously delinquent mortgages was most pronounced among prime borrowers, with an increase of 16.5 percent in seriously delinquent mortgages during the fourth quarter. The jump in seriously delinquent mortgages is likely to lead to a rise in foreclosure actions, the report said. So-called prime mortgages are granted to the most credit-worthy borrowers, a sector that initially raised few worries when the housing bubble burst. The continued decline in performance of prime mortgages is a significant trend, given those mortgages accounted for 68 percent of all home loans within the portfolio.
The report by the U.S. Treasury Department units covers nearly 34 million loans totaling almost $6 trillion in principal balances and provides information on their performance through the end of the fourth quarter of 2009. The report defines "serious delinquencies" as those loans 60 days or more past due and loans delinquent to bankrupt borrowers. The OCC and OTS Mortgage Metrics Report provides performance data on first-lien residential mortgages serviced by national banks and federally regulated thrifts. The report covers all types of first-lien mortgages serviced by most of the industry's largest mortgage servicers. The mortgages in this portfolio comprise more than 64 percent of all mortgages outstanding in the United States.
Without the help of government, state and private loan modification programs, many of the homes backed by these delinquent loans could go into foreclosure. Foreclosures are by far one of the biggest threats to the U.S. housing market, which remains highly vulnerable to setbacks and heavily reliant on government intervention. "While servicers reported that HAMP (Home Affordable Modification Program) and proprietary foreclosure prevention programs will help a significant number of distressed homeowners, they indicated these programs are not expected to help all delinquent borrowers," the report said. "In this regard, servicers reported that they expect new foreclosure actions to increase in the upcoming quarters as many of the mortgages that are seriously delinquent may eventually result in foreclosure as alternatives that prevent foreclosure are exhausted," the report said.
Home forfeiture actions -- foreclosure sales, short sales, and deed-in-lieu-of-foreclosure actions -- increased by 8.6 percent from the previous quarter to 163,224. That is up 44.5 percent from a year earlier. The number of newly initiated foreclosures, however, dropped by 15.4 percent from the previous quarter to 312,529 after remaining steady the three prior quarters. But that is up 19.0 percent from a year earlier. The number was curtailed as more loans are held in a delinquent status for an extended period as borrowers and servicers pursue alternate workout solutions, the report said.
Lower Home Prices Can Fix What Government Can’t
by Caroline Baum
Thud! Four years after the peak of the housing bubble, home sales are slumping... again. New home sales, which lead the complex of housing indicators, fell to an all-time low of 308,000 in February, the fourth consecutive monthly decline. For existing home sales, it was the third consecutive drop after last year’s tax-credit- driven bounce. Homebuilder sentiment has rolled over. Housing starts are bumping along the bottom, with new construction too low to accommodate normal growth in households, according to Michael Carliner, a Potomac, Maryland, economic consultant specializing in housing.
Alas, all the Fed’s purchases and all the government’s men can’t put the residential real estate market together again.
Between them, the federal government and central bank can lower mortgage rates, modify mortgages, use their power to get private lenders to modify mortgages, and create incentives to move inventory, such as the first-time homebuyer’s tax credit. What they can’t do is manufacture enough artificial demand for an asset that was artificially inflated to begin with. Prices will have to fall, which is how supply is allocated in a market economy. (An occasional reminder is in order given the current spend-money-to-save-money mindset.)
The Federal Reserve will complete its purchase of $1.25 trillion agency mortgage-backed securities at the end of this month. Its efforts on our behalf have driven 30-year fixed-rate mortgage rates to half-century lows of sub-5 percent, "which should have been more stimulative than it was," Carliner says. Those who rely on econometric models -- the same models that did so swimmingly well in assessing risk and anticipating the financial fallout from the housing crash -- said the Fed single-handedly reduced mortgage rates by as much as 1 percentage point. Ex-Fed, mortgage rates will probably tick up.
The Obama administration’s Home Affordable Modification Program has been a disappointment, even to the Treasury, according to a report by the Special Inspector General for the Troubled Asset Relief Program. (The Treasury used $50 billion of TARP money as part of a $75 billion program to incentivize borrowers and lenders to modify mortgages.) One year into the program, 168,708 mortgages have received permanent modifications, according to the SIGTARP report. Aspects of the program make it "particularly vulnerable to re- defaults," including a failure to consider a homeowner’s other debt, an unaffordable second mortgage or the inability to meet increasing monthly payments at the end of five years. The recidivism rate among defaulted borrowers who get modified loans is high even in good times. These are not good times.
More than 11.3 million homeowners owed more than their homes were worth in the fourth quarter, according to First American CoreLogic, a provider of mortgage data and analytics in San Francisco. Borrowers may decide "it makes more economic sense for them to walk away from their mortgage notwithstanding the lower payments," SIGTARP says. And that’s the government’s outlook.
Perhaps another solution is in order. A novel idea not yet tried would be to do what other industries do to rid themselves of unsold merchandise. They hold a sale. Let prices fall until the goods find a buyer. I’m all for charity and doing what makes sense. If a lender decides it’s in his self-interest to reduce the loan balance on underwater or delinquent mortgages -- if modification is cheaper than foreclosure -- that’s between management and shareholders.
With government programs, those who lived within their means, who bought a home they could afford, are being asked to pay for the mistakes of others. Bankers and insurance companies weren’t the only ones who were greedy. In 2007, Newsweek’s Daniel Gross wrote a book entitled, "Pop! Why Bubbles Are Great for the Economy!" His thesis was that asset bubbles leave behind a usable infrastructure and are a net positive for the economy. Even then he was straining to fit the housing bubble into his bubbles-are-good framework. "The bubble achieved a goal that billions of federal dollars, and 30 years of good intentions, could not: gentrification and renewal in formerly some of the most wretched spots of the cities."
The bubble achieved another goal: it turned vast tracts of suburban housing into rotting wasteland. Economics is about the allocation of scarce resources. Investors overpaid for resources that were underutilized, in some cases for years. Money went into housing because prices were rising, financing was cheap and, as an added bonus, you got a roof over your head. Now we’re stuck with a glut. The percentage of loans that were seriously delinquent -- more than 90 days overdue -- rose to a record 9.67 percent in the fourth quarter, according to the Mortgage Bankers Association. Rates rose in all categories of loans, including subprime, prime and government-backed loans. Those numbers aren’t adjusted for seasonal variations.
Almost one-quarter of all residential properties with a mortgage were underwater in the fourth quarter, according to First American CoreLogic. What’s done is done. Throwing bad money after good makes no sense. The government can’t save housing without sapping something else of needed capital. The government’s efforts are "not only ineffective but counterproductive," Barry Ritholtz writes on his Big Picture blog. "They reward the reckless and punish the responsible, and create a moral hazard." Worse, Ritholtz says, "they penalize middle America for the sake of giant Wall Street banks." Help bankers? Now there’s an angle that should energize the masses.
Should taxpayers subsidize underwater homeowners?
by Keith Hennessey
The Obama administration will announce a major new stock market initiative on Friday that will directly tackle the problem of the millions of Americans who lost money betting on stocks. The government will buy loans from stock brokerage houses at the current value of the stocks in an investor’s portfolio, in an effort to stabilize the stock market, people briefed on the plan said. The government will also increase incentive payments to stock brokers who loaned on margin to their investing clients and now assume some of the losses of those clients. And it will require those stock brokers to cover some of the losses of unemployed investors for a minimum of three months.OK, I made that up. But how is it different from this, which is real?
The Obama administration will announce a major new housing initiative on Friday that will directly tackle the problem of the millions of Americans who owe more on their houses than they are worth. The government will buy loans from investors at the current value of the house in an effort to stabilize the market, people briefed on the plan said. The government will also increase incentive payments to lenders that cut the principal of borrowers in modification programs. And it will require lenders to cut the monthly payments of unemployed borrowers for a minimum of three months.
The Administration is using tax dollars to subsidize some homeowners who are underwater on their mortgages. Today they are beefing up two housing programs with more money.
These programs are targeted at homeowners who could almost but not quite afford their mortgage. The idea is that, with some taxpayer subsidy, their lender will agree to reduce or delay some mortgage payments.
Who is eligible? Under one program, called HAMP, the Home Affordable Modification Program, you are eligible if you:
… live in an owner occupied principal residence, have a mortgage balance less than $729,750, owe monthly mortgage payments that are not affordable (greater than 31 percent of their income) and demonstrate a financial hardship. The new flexibilities for the modification initiative announced today continue to target this group of homeowners.
Excuse me? We’re going to subsidize someone with a mortgage balance of $700,000?!(Updated: A knowledgeable reader thinks my 5.25% interest rate was unreasonably low, so I’m changing the example to assume a 7% rate.)
Let’s do a quick back-of-the-envelope calculation. Suppose you have a mortgage balance of $700K, with 28 years left on your 30-year mortgage at a fixed 7% 5.25% . Your monthly mortgage payments would be almost $4,800. If that’s greater than 31% of your income, you make less than $186,000 per year.
Does it really make sense for the Administration to use taxpayer funds to subsidize someone making less than $186,000 per year to stay in a home with a $700,000 mortgage balance?!
We further learn the Administration intends to spend $50 billion of TARP money for these initiatives.
The Administration argues their goal “is to promote stability for both the housing market and homeowners.” Stability sounds good. The risk is that instead of solving the foreclosure problem, these policies may just prolong it. (The same could be said of some housing initiatives we did in the Bush Administration.) A core housing policy question is whether it’s better in the long run to buy time for struggling homeowners in the hope that they and the housing market will eventually recover, or instead to just rip off the band aid as quickly as possible.
Allow the housing market to adjust quickly by not trying to create artificial “stability” above a market-clearing price. Such an adjustment would be excruciating in the short run, and painful for many who would lose their homes. But like ripping off a band aid, it would get all the pain behind us, so that things could return to a normal and more stable growth pattern going forward. I don’t have the answer to this question, but I do get nervous with those who confidently assert that they can create stability, and that they know the right price at which stability should be maintained. Every little kid knows there’s less total pain if you rip off a band-aid quickly. The same may be true here.Buying a house is a big deal. So is getting a mortgage. As with any investment, when you buy a house and a mortgage you assume both upside and downside risk. You are responsible for both sides of that bet, not someone else.
Some homeowners were fooled or deceived into buying a bad adjustable rate mortgage (ARM). I feel bad for them and am willing to consider policies directed at them. At the same time, it’s hard to distinguish “fooled or deceived” ARM buyers from “savvy speculator” ARM buyers, so if we subsidize one we may end up subsidizing the other as well.
But now let’s look at a homeowner with a fixed rate mortgage who is “underwater” because his home has declined in value so that the house is worth less than the mortgage. His net worth has declined because the value of his home plummeted, and that’s tragic. But since he has a fixed rate mortgage, his monthly mortgage payment has not changed. The decline in the value of their home has not affected his ability to make his mortgage payment, and therefore to remain in that home.
He can continue to live in his home and wait for the value to appreciate, just as a stockholder can hold onto a stock after a decline and wait for the price to recover. I don’t see why taxpayers should subsidize him because he lost money on an investment, just as taxpayers shouldn’t subsidize him if he lost money in the stock market.
This homeowner may face some other financial hardship (see the underlined language above). Maybe he lost his job, or maybe he got hit by a bus and has high medical costs. This financial hardship may cause him to be unable to make his mortgage payments, and with the lost equity value, he cannot borrow against the value of his home. But again, this is no different than if he lost big in the stock market and then lost his job or got hit by a bus.
Imagine twin brothers, each with $180K of annual income. One rents, and the other has a $700,000 mortgage on a home that declined from $800,000 in value to $600,000 in value. Both brothers lose their jobs. Why should the renter pay higher taxes to subsidize his brother’s mortgage payments?
Losing a home due to financial hardship is tragic. Does that make it someone else’s responsibility? Why should a broad-based decline in housing prices shift responsibility for planning for a financial loss from a homeowner to taxpayers? Why do policymakers (on both sides of the aisle) think we should make taxpayers (some of whom struggle to make their own mortgage payments, and others of whom rent housing) subsidize someone who lost money on an investment?
I would like to hear a sound and compassionate policy argument that addresses my twin brother example. To make sure your argument works, please assume there is also a triplet brother who also rents but recently lost $200,000 in the stock market, and explain how your policy applies to him.
My conclusions:
- I would not use tax dollars to subsidize homeowners with fixed rate mortgages. It’s unfair to the taxpayers, those who rent, and those who might want to buy a home. It also slows down painful but inevitable housing market adjustments. I would treat a loss on a home’s value the same way I would treat an investment loss in the stock market. Both are private responsibilities of the investor.
- I would be willing to use some tax dollars to subsidize a subset of those homeowners who were fooled or deceived into buying bad adjustable rate mortgages. I would subsidize only the ones who, with a little taxpayer assistance, could afford to keep their home. The hard part is determining who was fooled or deceived. This subsidy would apply only to bad ARMs made in the past and therefore would not be designed as a permanent program.
- My solution would probably mean more foreclosures in the short run and more rapid housing price declines. I think it would also mean housing markets would adjust more rapidly. My goal would be to allow housing markets to adjust to their market-clearing levels as quickly as possible, based on the logic that this both minimizes total pain and gets it behind us.
- My recommendations would depend heavily on the numbers. Based on the numbers I saw in 2007 and 2008, in all of these policies the taxpayer subsidies per foreclosure avoided are huge. In addition, since it’s hard to distinguish empathetic cases from savvy investors who were placing bets, a significant fraction of the subsidies goes to people whom I believe do not deserve help. Both quantitative factors reinforce the principles that drive my conclusions.
Keith Hennessey is the former director of the National Economic Council
Mortgage Payment Spike Blunted
The struggling housing market appears as if it will sustain less damage than expected this year from a spike in the monthly payments on hundreds of thousands of exotic adjustable-rate mortgages. The number of such loans scheduled to adjust to higher payments this year has shrunk. Lower-than-expected interest rates, coupled with efforts to aggressively modify loans, are likely to mute payment shocks for some borrowers. Many others already have defaulted on their loans even before their payments adjusted upward. "The peaks of the reset wave are melting very quickly because the delinquency and foreclosure rates on these are loans are already very high," says Sam Khater, senior economist at First American CoreLogic.
The housing market still faces enormous challenges, and a full recovery is likely to take years. The threat posed by resetting payments, Mr. Khater says, is "a drop in the bucket" compared to problems posed by the sheer volume of borrowers who owe more than their homes are worth, known as being "under water." Still, for years, housing analysts have worried about the threat of an aftershock from a big spike in mortgage defaults from so-called option adjustable-rate mortgages, which require low minimum payments before resetting to sharply higher levels, and "interest-only" loans, for which no principal payments are due for several years.
Most option-ARM borrowers made minimal payments, so their loan balances grew. That sparked worries about what would happen when those loans "recast" and begin requiring full payments on larger loan balances, usually five years from when they were originated or when the balance reached a designated cap. Option ARMs may be among the most likely to benefit from the White House plan, announced on Friday, to force banks to consider writing down loan balances when modifying mortgages. Until now, the administration's Home Affordable Modification Program, or HAMP, has focused on lowering monthly payments by reducing interest rates and extending loan terms to 40 years.
A separate program could benefit borrowers who are current on their loans but under water by allowing investors to refinance those borrowers into loans backed by the Federal Housing Administration. Investors are most likely to refinance the riskiest loans that qualify. The majority of option ARMs are set to recast over the next two years. But the volume of outstanding loans has fallen sharply because many borrowers, prior to facing higher payments, received modifications, refinanced or defaulted. Option ARM volume peaked at 1.05 million active loans in March 2006. At the end of last year, there were 580,000 loans outstanding, according to First American CoreLogic.
Fitch Ratings estimates that nearly half of all option ARMs that were bundled and sold as securities were 60 days or more delinquent at the end of December, even though just 5% of option ARMs had faced recasts. Fitch estimates that another 7% have been modified. "The default process has already hit something resembling a peak," says Christopher Thornberg, an economist at Beacon Economics. "How much higher can it actually go?" The threat of defaults, to be sure, is not going away. It is likely to weigh for years on high-cost housing markets in California and other states that saw an explosion in option ARMs and interest-only loans during the housing bubble.
Today, more than three in four option ARMs are under water, according to Fitch Ratings, and one-third have a combined loan-to-value ratio of over 150%. Another 500,000 interest-only loans will begin resetting in the next two years. Many have fixed rates and require interest payments only for a five- or seven-year period, then move to adjustable rates and require full principal and interest payments. But because interest-rate benchmarks are currently so low, interest-only borrowers who face resets this year could see minimal payment increases or even decreases. Nevertheless, interest-only loans are likely to stress markets for years because so many borrowers are under water and because payments will go up once interest rates begin climbing.
Martha Shickley and her husband, who own a four-bedroom home north of Los Angeles, decided to stop paying their interest-only mortgage last August because they figured they wouldn't be able to afford their payments next year, when their loan will reset. "We're paying expensive rent here on a home that might already be under water and certainly will be soon," says Ms. Shickley. Ms. Shickley says she has heard nothing from her lender, J.P. Morgan Chase & Co., which acquired the loan when it acquired assets from failed lender Washington Mutual Inc. "They haven't even sent us the default notice," she says. J.P. Morgan declined to comment. For now, she and her husband are living rent free, using the savings to pay off debts. They have applied to their bank for a loan modification, and they hope to pull off a short sale, where the bank will allow the home to be sold for less than they owe. "We're ready to move on with our lives," she says.
Markets increasingly are discounting the likelihood of a default wave from option ARMs because banks with big portfolios have aggressively tried to refinance or modify them. Wells Fargo & Co., which inherited $120 billion in option ARMs when it bought Wachovia Corp. in 2008, says it expects just 528 loans to recast with big payment jumps over the next two years. Wells says it modified loans for some 52,600 borrowers last year that included $2.6 billion in principal write-downs. Most of those borrowers were put into loans that have five- or seven-year interest-only periods.
That won't completely fix borrowers' problems because they will face yet another reset, but it does buy them time. Late last year, banking regulators began telling banks that they shouldn't give borrowers interest-only mortgage modifications in most circumstances. "There is no relaxing, really," says Brenda English, a homeowner in Reseda, Calif., who had her option ARM modified into a loan with three-year interest-only payments at 4.25%. Her modified payments are around $25 less than what she paid before, but she says she's worried about what happens in three years. "It's just throwing it up in the air and hopefully the market will be better," she says.
Half of U.S. Home Loan Modifications Default Again
More than half of U.S. borrowers who received loan modifications on delinquent mortgages defaulted again after nine months, according to a federal report. The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months. U.S. homeowners are struggling to make payments as depressed housing prices leave them owing more than their properties are worth.
About 24 percent of properties with a mortgage were underwater in the fourth quarter, First American CoreLogic said last month. The median price of a U.S. home was $165,100 in February, down 28 percent from its peak in July 2006, according to the National Association of Realtors. Modifications are "clearly not working well and it’s not a surprise," said Sam Khater, a senior economist at First American CoreLogic in Tysons Corner, Virginia. "It’s pointless to rewrite these loans because they’re underwater." The number of homes with mortgage payments at least 60 days late climbed 2.39 million in the fourth quarter, up 13.1 percent from the prior three months and 49.6 percent from the year earlier period, the quarterly Mortgage Metrics report said.
President Barack Obama’s administration is pressuring lenders to alter loans to reduce the number of properties lost to foreclosure. About 4.5 million foreclosures filings are expected in 2010, according to RealtyTrac Inc., an Irvine, California-based seller of default data. A government watchdog report released today criticized the government’s main foreclosure prevention effort, the Home Affordable Modification Program, or HAMP, for "spreading out the foreclosure crisis" over several years by failing to help enough troubled borrowers. "The program will not be a long-term success if large amounts of borrowers simply re-default and end up facing foreclosure anyway," said the report by the Special Inspector General for the Troubled Asset Relief Program, prepared for a Congressional hearing today.
Assistant Treasury Secretary Herb Allison defended the program at the Congressional hearing, saying it has shown signs of stabilizing the housing market. The Mortgage Metrics data are based mostly on modifications made before HAMP, Joe Evers, deputy for large bank supervision at the Comptroller of the Currency, said in a phone interview today. Permanent loan changes under the government program accounted for only 21,000 of the total 594,000 modification plans initiated during the fourth quarter of 2009, making it too soon to evaluate the effectiveness of that plan, Evers said.
There were 168,708 delinquent loans permanently modified under HAMP as of the end of February, according to a Treasury Department report March 12. Borrowers were more likely to default when their monthly payments aren’t reduced enough in modifications to make staying in a home affordable, Evers said. "Our data show that when you reduce payments by 20 percent or more you have a tendency for lower re-default rates," he said from Washington.
The Mortgage Metrics report tracks 34 million mortgages with an outstanding balance of $6 trillion and is based on data from nine national banks and three thrifts. The data represent more than 64 percent of all first-lien mortgages. Modified loans in the portfolio of banks -- as opposed to loans owned by investors or government-sponsored enterprises such as Fannie Mae and Freddie Mac -- had the best record of avoiding re-default, the Mortgage Metrics report said.
The banks are free to design modification plans for individual borrowers, Bruce Krueger, a mortgage banking expert with the Office of the Comptroller, said in a phone interview. The HAMP program requires lenders to follow a path of concessions to modify loans, beginning with interest rate reductions, extended loan terms and principal forebearance. "It’s a very rigid process," Krueger said of the HAMP program. "If the loan is on the bank’s books itself, the servicer can do whatever the bank might allow."
Who Will Tell The President? Paul Volcker
by Simon Johnson
Against all the odds, a glimmer of hope for real financial reform begins to shine through. It’s not that anything definite has happened – in fact most of the recent Senate details are not encouraging - but rather that the broader political calculus has shifted in the right direction.Instead of seeing the big banks as inviolable, top people in Obama administration are beginning to see the advantage of taking them on – at least on the issue of consumer protection. Even Tim Geithner derided the banks recently as,
"those who told us all they were the masters of noble financial innovation and sophisticated risk management."
In part this is window dressing. But in part it recognizes political opportunity – the big banks are unpopular because they remain completely unreformed and unrepentant. And in part it responds to a very real danger – Senator Dodd’s bill is so obviously weak on "too big to fail" issues that it will be hard to paint its opponents as friends of big banks.Senator Richard Shelby knows this and is taking the offensive. The administration can convert an easy win into an own goal if it fails to toughen substantially Senator Dodd’s bill.
Fortunately, there is an easy way to address this issue.
Recall the political history of financial reform during the Obama administration. The economic team (Tim Geithner and Larry Summers) felt that no substantive change in the structure and incentives for deeply troubled parts of the financial system was necessary or even possible during the height of crisis. Consequently, they provided unlimited financial support to the country’s largest banks – communicated by the "stress tests" – with no conditions, and they also proposed an initial set of legislative changes that was slight.
Quite quickly, however, this strategy ran into trouble – because the largest banks immediately and demonstrably went back to their uncontrolled risk-taking ways, now based on obvious government guarantees. The lack of careful management within these banks is not an accident – it’s very much part of the design, which enables large bonuses to be paid at all levels; the point is not that individuals intentionally engender crisis every year, but the system runs through a loop that implies regular (and, in our view, increasing) government support over time. Too Big To Fail pays well; for the banks it is someone else’s problem to fix, and for policymakers the temptation is to kick all available cans down the road.
From summer 2009, leading banks also exuded arrogance – insulting the president and generally carrying on in a high and mighty fashion. The abuse of power by our ever more powerful bankers became increasingly obvious – as did their lobbying (Neal Wolin, Deputy Treasury Secretary, said this week that “big banks and Wall Street financial firms” spend $1.4 million per day on “lobbying and campaign contributions”; and “there are four financial lobbyists for every member of Congress”; good speech).
With perfect timing during the fall, in stepped Paul Volcker. Not someone ever accused of being a populist – let alone carrying a pitchfork – he pointed out, simply and forcefully (and publicly), that our biggest banks were out of control and must be reined in. With the political side of the White House increasingly anxious about the electoral effects of pandering to an apparent financial oligarchy, Volcker was able to persuade the president to adopt the Volcker Rules: a limit on the risk-taking by big banks and an effective cap on their size.
Unfortunately, the specifics of the Volcker Rules were not well thought through by Treasury and their cause was hardly championed with force. The Capitol Hill lobbying machine took over and mush duly appeared from Senator Dodd’s committee on the issue of systemic risk.
But Paul Volcker is not finished, not by a long way. Someone just needs to convince President Obama to call Senator Dodd (or meet again with Dodd and Barney Frank), to ask – politely but firmly – that the Volcker size cap on big banks be legislated, and actually tightened relative to the January proposal. The House already has the Kanjorski amendment, which is a step in the right direction.
On Tuesday, Volcker will go public again. But that’s not the most important conversation. His public appearance is just a way to communicate more directly with the political side of the White House.
Volcker’s point is simple. Without the Volcker Rules, the administration would be in much more difficulty than it is now; these proposals really helped to diffuse pressure. Now it’s time to make the Rules real – and this requires significantly reducing the size of our largest banks. Phase the rules in, as proposed in January, and there is no reason to think this will constrain our recovery.
Chris Dodd can start this ball rolling and Barney Frank would back him up. The consensus is ready to move. This is such an easy and obvious political win. Treasury and the White House economic team can be brought onside by being allowed to claim this was their idea all along – or they can say something along the lines of “the facts changed, so we changed our opinions”.
But if Paul Volcker doesn’t tell the president, who will?
States Seeking Cash Hope to Expand Taxes to Services
In the scramble to find something, anything, to generate more revenue, states are considering new taxes on virtually everything: garbage pickup, dating services, bowling night, haircuts, even clowns. "It’s hard enough doing what we do," grumbled John Luke, a plumber in the Philadelphia suburbs. His services would, for the first time, come with an added tax if the governor has his way.
Opponents of imposing taxes on services like funerals, legal advice, helicopter rides and dry cleaning argue that this push comes as businesses are barely clinging to life and can ill afford to see customers further put off by new taxes. This is especially true, they say, in states like Michigan and Pennsylvania, where some of the most sweeping proposals are being considered this spring. But this is also a period of economic gloom for states. Pension funds are in the red, federal stimulus help will soon vanish, and revenues from traditional sources like income and property taxes are slumping ever lower, with few elected officials willing to risk voter wrath by raising them.
"This is born out of necessity," said Gov. Edward G. Rendell of Pennsylvania, a Democrat. His proposed budget, being debated in Harrisburg, would tax services including accounting, advertising and data processing. Mr. Rendell argues that the state’s current sales tax system makes no sense. (Why, he asks, is the popcorn in his state’s movie theaters taxed, but the candy is not?) "Look, I’m not a crazy tax guy," Mr. Rendell said, reflecting on recent trims to the budget. "I know what we’ve cut the last two years, and I know how deep and painful the cuts have been. So I know that in the future there’s going to have to be a revenue increase, and this is the best of the alternatives, obviously none of which we’re happy about."
Michigan’s revenues, adjusted for inflation, have sunk to a level last seen in the 1960s. And that may be exactly what at long last pushes through wide acceptance for taxes on more services, according to supporters of the idea, who say it makes sense in an economy that has long been service-based. In the past, such taxes have never quite been able to survive the political tussle. A handful of states, including Delaware, Hawaii, New Mexico, South Dakota and Washington, already tax all sorts of services. Most states tax at least some services, particularly items like utilities. Nevertheless, few states have gone where political leaders in Michigan and Pennsylvania are now suggesting: adding scores of services to their states’ sales tax requirement and lowering the tax rate under a widened tax base. But from coast to coast, desperate governments are looking to tap into new revenue streams.
In Nebraska, a lawmaker has introduced a bill to tax armored car services, farm equipment repairs, shoe shines, taxidermy, reflexology and scooter repairs. In Kentucky, Jim Wayne, a state representative, and some fellow Democrats are proposing taxing high-end services: golf greens fees, limousine and hot-air-balloon rides, and private landscaping. In June, voters in Maine will decide whether to accept a state overhaul of its tax system that would newly tax services like tailor alterations, blimp rides, and entertainment provided by clowns, comedians and jugglers.
Though some say the proposed service taxes face opposition too fierce to succeed in many places, particularly in an election year, even some of the most ardent opponents predict that some of the taxes will scrape through. The current budget misery will probably "push the idea over the edge" in at least some states, said Robert D. Fowler, president and chief executive of the Small Business Association of Michigan. "And they won’t be any better off for it, either," said Mr. Fowler, who added that his members detested the notion. "It’s the wrong time, in the heat of just trying anything to find money, to have this discussion. "Yes, we need more money, but is this a step toward turning the economy around?" Mr. Fowler asked. "Taking more money out of peoples’ pockets? Putting more burdens on small business? It doesn’t seem like a recipe for a state turnaround."
In the 1930s, with property tax revenues shrinking because of the Great Depression, states began taxing the sales of items. It was simple, and at the time, the tax matched an economy largely based on goods. But as the nation’s economy shifted to one focused more on services, the tax system mostly did not budge. And so, in 2009, states raised $230 billion in sales taxes; had they taxed all services, too, according to Joseph Henchman of the Tax Foundation, a nonpartisan research group, they might have raised twice that.
Advocates say taxing services is simply a matter of fairness and good sense, and of spreading out the tax burden as widely as imaginable. If you pay tax for a ring, why should you be exempt from paying it for a manicure? But even those who agree in principle wrestle with the details. Should a bakery be taxed for the accounting work or lawn care it gets, only to pass along that cost to its customers in the price of cookies? Some in the world of taxes would describe that as pyramiding. And what to do about all the industries that would, naturally, line up for exemptions?
"In truth, a lot of people like this concept of being taxed on what they use," said Bill Farmer, a Republican state representative in Kentucky, who has suggested a tax on services if it was wed to the demise of the state’s income tax. "Then they say, ‘But please don’t tax me because I’m a lawyer.’ Or ‘But please don’t tax me because I’m a grass cutter, an accountant, anything.’ " (Mr. Farmer, for the record, is a tax accountant.)
In years past, large plans to tax services have become law, only to face sudden, sometimes embarrassing repeals in places like Florida and Maryland. In Michigan, lawmakers agreed in 2007 to a tax on services (in an episode Mr. Fowler recalls as "a last minute, midnight deal"), only to repeal it amid widespread public opposition the very day it went into effect. Supporters say the new plan in Michigan, put forth by Gov. Jennifer M. Granholm, a Democrat, would solve some of the earlier complaints. In addition to adding more than 100 types of services to the 26 the state already taxes, she says she wants to lower the sales tax rate to 5.5 percent from the current 6 percent, phase out a surcharge on a business tax and direct savings to education. Ultimately, says Robert J. Kleine, the Michigan treasurer, the tax on services would mean $1.8 billion a year in new revenue.
"The basic thing is that we need to update our tax structure," Mr. Kleine said. "We’ve got a 20th-century tax structure based on a different sort of economy. The tax base doesn’t grow as the economy grows." Ms. Granholm, like Mr. Rendell, cannot seek re-election this year because of term limits (something opponents of taxing services say provides a hint at how unpopular the whole idea must be with the voting public). Michael D. Bishop, the Republican majority leader in the State Senate, said this was one more case of Michigan’s problems being dumped onto consumers who "cannot afford anything else" and businesses who "are being run out on a rail."
People like Pete Tomassoni, whose third-generation bowling alley in Iron Mountain, Mich., has 20 percent less business so far this year than early last year, deemed taxation of his $3 games "a terrible idea." Still, some believe the notion is certain to grow more palatable as states grasp the depths of their woes. State Senator Cap Dierks of Nebraska, who has pushed for a services tax in part because of his worries about the mounting burdens of property taxes on farmers and ranchers, said he thought such taxes were inevitable. "I got a lot of negative vibes when I introduced it, but eventually, we’ll have to look at it," he said. "What else are you going to do?"
Greek bond issue will test rescue package
Greece is poised to launch a multi-billion-euro bond issue next week in a vital test of confidence in the rescue package agreed by eurozone leaders for the crisis-hit country. "We would like to return to the market within March," Petros Christodoulou, head of the public debt management agency, told the Financial Times on Friday. Athens wanted to borrow about €5bn ($6.7bn, £4.5bn) from the bond markets, he said. Mr Christodoulou’s comments followed the deal struck in Brussels between eurozone leaders on a rescue plan that included the International Monetary Fund and co-ordinated bilateral loans from eurozone countries at market interest rates.
Greek stocks and bonds rallied on the accord, reached after France and Germany agreed on the principles of a rescue, while the euro jumped against the dollar. George Papandreou, Greek prime minister, welcomed the agreement as "a very good outcome for our country". "The European Union leaders have succeeded in safeguarding our union and our common currency," he said at the end of the European Union summit in Brussels. He insisted, however, that he did not intend to ask for any money from Greece’s eurozone partners. "We hope we never need to ask, because we are doing our work," he said. "We have had a positive reaction both from our people and from the markets."
The deal on Greece amounted to a defeat for the European Central Bank, which had opposed greater International Monetary Fund involvement. In an FT video interview, Lorenzo Bini Smaghi, ECB executive board member, said that "delegating to the IMF is not a long-term solution". The eurozone needed a mechanism so "that if something like this happens again we have the instruments to deal with it". Greece is expected to issue either a three-year or seven-year bond, to be followed in April by a similar-sized issue. Athens needs to raise €10bn to refinance maturing debt over the next month. Analysts warned, though, that Greek bond yields, which move inversely to prices, would take time to fall. "Getting Greek spreads down to the level of Portugal’s may take eight to 12 months, and it will depend on our fiscal performance," said one Greek banker.
Greek Deal Gives Euro Time, Little Else
The euro-zone deal on a safety net for Greece helped to calm investors' worst fears, but the euro's woes aren't over. Euro-zone members agreed Thursday to provide backstop loans for Greece in conjunction with the International Monetary Fund. News of the accord helped to set off a relief rally for the euro, yet the common currency is still down 6.8% against the dollar this year. Friday, the euro was at $1.3415 from $1.3282 late Thursday. The euro was also trading up against Japan's currency, at 123.96 yen from 123.14 yen, while the dollar was at 92.53 yen from 92.71 yen. The dollar was buying 1.0669 Swis francs, from 1.0739 francs, and the British pound was at $1.4888 from $1.4817.
Thursday's "agreement has bought the euro some time but nothing more," said Michael Hewson, a currency strategist at CMC Markets in London. He and others said they still expect the common currency to fall toward $1.30 in the coming months. This week, Greece is expected to tap the public debt markets—the first test of whether the backstop will be sufficient to lower the rates the highly indebted country has to pay. The key issue is the need for the Greek government to reduce its borrowing costs in order to cut its ballooning budget deficit. Investors demand yields around 6.24% on Greece's 10-year bonds, nearly twice as high as the yield on the euro zone's benchmark German bond at 3.16%. After selling 10- and five-year bond issues this year, Greece's next deal is expected to be either three-year or a seven-year issue, more likely the latter.
Greece has to meet €11 billion ($14.6 billion) in debt-servicing obligations in April, according to data from the Greek Public Debt Management Agency PDMA. In May, a further €11.646 billion will be due. "If the market doesn't respond well to Greek issuance, this would increase the risk of contagion to Portugal and suggest that one of these countries may have to resort to the new mechanism for funding," said Jane Foley, director of currency research at Forex.com in London.
One factor working in Greece's favor: The European Central Bank will continue to accept the country's debt as collateral, albeit with a higher discount, even if Greece were to lose its A-minus ranking from Moody's Investors Service. But access to the public-debt markets is just one of the hurdles the weaker euro-zone countries and the common currency face. As Germany pressures other euro-zone members to reduce their fiscal gaps, economic growth will be the next problem weighing on the common currency, said Sebastien Galy, a currency strategist at PNB Paribas in New York. "Given the strong deflationary pressure built into this EU agreement…it suggests that the euro will head in the direction of $1.31," he said. That level could be reached by the end of [this] week, he added.
With Europe's economic growth probably lagging that of the U.S., gains in U.S. nonfarm payroll numbers for March, due out Friday morning, will fuel expectation that the Federal Reserve will tighten monetary policy ahead of the European Central Bank. That will boost demand for the dollar and add to the selling pressure on the euro. Economists expect the U.S. payrolls report to show solid jobs growth, with some forecasts ranging up to 300,000 jobs added. Ms. Foley noted that February payrolls were surprisingly robust, and that March's figures should be boosted by temporary hiring for the U.S. census.
The March payroll report "may have a lot of sway in when the Fed drops the 'extended period' line" from the statement that accompanies its interest-rate decisions, she said. Despite intense debate in the market, the Fed has so far shown little urgency in removing that phrase. In testimony to Congress Thursday, Fed Chairman Ben Bernanke said record-low interest rates are still needed to support the U.S. economy, as the "employment situation is very weak," but the central bank has to be ready to tighten credit to prevent inflation.
Europe has left Greece hanging in the wind
by Ambrose Evans-Pritchard
However you dress it, the Greek package agreed by EU leaders is a capitulation to German-Dutch demands. There will be no European debt union as long as Angela Merkel remains Iron Chancellor of Germany. The Frankfurter Allgemeine summed up the deal succinctly: "No member of Europe's monetary union should be liable for the debts of another state. Bilateral credit from Berlin for Athens is not the same as German acceptance of responsibility for Greek debt." This shatters the assumption since Maastricht that monetary union leads inexorably to fiscal union. By drawing the IMF into Euroland's affairs, Germany has broken the spell and reduced EMU to a fixed-exchange system with knobs on, like the 1930s Gold Standard that it so resembles. No wonder Jean-Claude Trichet at the European Central Bank is cross.
Far from stemming contagion, the deal leaves Club Med exposed. Underlying default risk has risen for Greece, Portugal, Italy and Spain, as well as for Ireland, Slovakia and Malta even if credit markets keep missing the point. The world's top holder of EU debt does understand. Greece is the "tip of the iceberg", said the deputy-governor of China's central bank. "The main concern today, obviously, is Spain and Italy." The 'rescue' resolves nothing for Greece, either short-term or long-term. The EU statement said "no decision has been taken to activate the mechanism." Precisely. The joint EU-IMF facility can be activated only ultima ratio – as a last resort – once Greece is shut out of debt markets and not until eurozone stability is threatened. "So they want Greece to reach the point of bankruptcy before they help us?" asked Greek opposition leader Antonis Samaras.
Greece is worse off than before. It cannot decide when to invoke the mechanism. It has given up its right as an IMF member to go to the fund when it wants, leaving it prisoner to Europe's deflation dictates. "The IMF would be a lot softer than Europe," said Ken Rogoff, the fund's former chief economist. Lorenzo Bini Smaghi, an ECB board member, said the deal has at least averted "Europe's Lehman". I agree that there is an equivalence of sorts between America's sub-prime and the Club Med bust and that a European banking system with wafer-thin capital buffers and a cupboard full of skeletons cannot risk a Greek debacle at this juncture, but what exactly has been averted? Roughly €22bn (£19.8bn) in joint IMF-EU funds might be available, some coming from states in trouble themselves. This is not enough. No encore is likely. Germany will not pay twice.
Erik Nielsen from Goldman Sachs said Greece must raise €24.7bn by late May. The noose then tightens. Long-term debt amortisations are 7pc of GDP this year, 10.2pc on 2011, 11.8pc in 2012, 9.7pc in 2013, and 10.4pc in 2014. "Greece faces both a liquidity crisis and a solvency crisis. It is not clear that European policy-makers fully appreciate the scale of the problems," he wrote in a report, Here Comes The IMF. Mr Nielsen said Greek data released last month show that the budget deficit is 16pc of GDP on a "cash basis", rather than the official 12.7pc on an "accrual basis". The IMF is watching closely, having warned last June that Greece's "cash fiscal data show consistently weaker results than accrual data, which has been inadequately explained." Translation: the real deficit is 16pc. Greece is drowning.
Goldman Sachs said Athens must carry out a primary budget squeeze of 7pc of GDP to stabilize the debt at 120pc of GDP, and do so with a shrinking workforce. Even if achieved, it entails payments of 4pc of GDP to foreign creditors "in perpetuity". The IMF cure of devaluation is blocked by EMU. Mr Nielsen said Greece would have to carry out an "internal devaluation of at least 20pc to 25pc" to claw back competitiveness lost over a decade. This means wage cuts.
Latvia is going through this ordeal, but its debt is much lower. Its banks are mostly Swedish, creating a buffer. The strategic priority for Baltic states is to embed themselves into Europe's system to keep a revanchiste Russia off their backs, so Latvians have more stomach for austerity. Professor Rogoff, co-author of This Time It's Different: Eight Centuries Of Financial Folly, said Greece is the world's champion bankrupt, having been in default for half its sovereign history since 1821. "If a fiscal squeeze locks Greece into permanent recession and flattens the economy, it is not going to be politically sustainable," he said. Historically, defaults creep up late in the crisis, once the patience of creditors and victim runs out. They come in clusters.
I suspect that Greece has already gone beyond the point of no return with a public debt nearing 135pc of GDP by 2011 (Commission data). If so, the most likely way out is default within EMU. Athens can craft a "pre-emptive debt-restructuring" with the help of the IMF along the lines of Uruguay's controlled default in 2003. But first we must go through the etiquette of exhausting all the options. "The game plan is to hope for miraculous growth," said Mr Rogoff. Let us pray.
Doing business in China getting tougher for U.S. companies
Just a few years ago, the mantra in Silicon Valley went like this: What's your China strategy? A 2010 update could be: What's your China headache? China's allure is stronger than ever. It remains a cheap place to manufacture goods, and its rapidly growing domestic market includes 400 million Internet users and 700 million mobile-phone subscribers, numbers unmatched anywhere else in the world. But a country already known for obstacles is becoming less welcoming to foreign businesses.
Google's frayed relations with the Chinese government over intellectual property theft and censorship spotlight the growing discontent many Western companies are experiencing in the country. And American companies are certain to face even tougher conditions there if U.S.-China tensions continue to rise over issues such as China's currency controls, which experts say boost China's exports while limiting imports from the United States. "It was inevitable after a certain time they would no longer roll out the red carpet for foreign companies and give them special treatment," said Susan Shirk, a former deputy assistant secretary of state in the Clinton administration responsible for U.S. relations with China. "But now we don't have a level playing field. We have nontariff barriers (in China) designed to protect local companies."
Much like Google, other companies are reviewing their commitments to China, longtime Silicon Valley forecaster Paul Saffo said. "I think we will see more companies opt to quietly back away or at least limit their exposure in the Chinese market," he said. American corporations for decades have been China's biggest boosters. Companies from Hewlett-Packard to General Electric have collectively spent billions of dollars to set up world-class research and development centers there.
But as China's business sectors mature, the government is shifting its emphasis to nurturing its own corporate champions to become global competitors. It has been emboldened in its demands on foreign companies, experts say, by the nation's rising economic stature. China emerged quickly from the global recession while other countries, including the United States, are still mired in the slowdown. Though reluctant to complain publicly for fear of retribution from China, many U.S. companies are frustrated by official policies they say prop up homegrown companies at the expense of foreign competitors. The American Chamber of Commerce in Beijing released a survey last week that reported 37 percent of tech companies complained of lost sales because the Chinese government favors products from local companies over those from foreign corporations.
And they fear future preferential policies will skew the competition further. Silicon Valley giants HP, Intel and Applied Materials, all of which have extensive operations in China, declined to comment for this report, and several other valley companies with China operations did not respond to requests for interviews. But the Information Technology Industry Council, which represents many U.S. companies, said one example of the new hurdles its members face in China is government procurement policies requiring that products contain intellectual property developed and owned in China. That's a big chunk of business to miss out on. In 2008, the Chinese government spent an estimated $90 billion on tech and nontech products.
Tech companies also chafe against rules that require their products adopt China's local technology standards. That means they often must create two versions of a product: one for China and one for the global market. China Mobile, for example, is reportedly close to an agreement with Apple to use the iPhone on its 3G network — if Apple reconfigures the device to run on China's standard, which is used only in that country. Foreign companies are "caught between a rock and a hard place," said Daniel Slane, an Ohio businessman who chairs a panel created by Congress called the US-China Economic Security Review Commission. "They've invested a lot of money and they're making a lot of money, but they're starting to see the pendulum move. I think some of them are starting to get nervous."
Google on Monday stopped censoring its Chinese search results, redirecting traffic to an unfiltered site in Hong Kong after the Mountain View company's China operation was hit with cyber attacks. The company is paying a price for its decision to pull back: State-owned China Unicom, the nation's second-largest mobile operator, is removing Google's search function from new Android handsets it developed with Google. And popular Chinese Internet sites announced they would stop using Google's search feature.
On Wednesday, the world's largest Internet domain registration company, Go Daddy, said it, too, was rejecting China's censorship rules after regulators began requiring more detailed information — including photographs — of its Chinese customers. "The exchange of information is so much freer on the Internet and that really makes (the Chinese government) nervous," said Christine Jones, general counsel of Go Daddy, which has 27,000 domains under Chinese registration. "I wouldn't be surprised to see (other companies) follow suit." The public retreat of two companies from China doesn't make a trend, said Emily Parker, a senior fellow at the Asia Society's Center on US-China Relations. Google, she added, is a special case.
But Google is not alone in facing new challenges in China. Last summer, PC makers, including Palo Alto-based HP, ran into a roadblock when the government demanded that all new computers sold in China be preloaded with the so-called "Green Dam" Web-filtering software to block pornography and banned political sites. After a domestic and international uproar, the government indefinitely set aside the requirement. HP has said little publicly about the contretemps. China is clearly critical to the company's business. In 2008, HP sold more than 4.4 million PCs in China, making it the nation's second-largest computer vendor after Lenovo, according to the IDC research firm. China, along with India and Brazil, are three developing countries where HP sees huge growth opportunity, Executive Vice President Todd Bradley, the head of the company's PC division, told analysts last fall.
But tensions between the United States and China have surged in recent months. Earlier this month, more than 100 members of Congress called on the Obama administration to label China a "currency manipulator" because they believe it keeps its currency artificially low, giving Chinese companies an unfair advantage in global trade. "China is focused not on the world but on itself," said Ed Black, CEO of the Computer & Communications Industry Association. "We don't know how it will be in the long run. But right now it's a difficult situation."
Does This Bank Watchdog Have a Bite?
by Andrew Martin
For now at least, the nation’s front line for consumer financial protection resides on the 34th floor of a downtown office tower here, amid cubicles surrounded by posters that read, "Improving the Customer Experience — Be a LEADER in every call." The Office of the Comptroller of the Currency operates this service center, fielding thousands of complaints each year about the nation’s banks.
One recent morning, a woman groused that her credit card limit had been cut for no apparent reason. Another said her bank had continued to charge her for disputed transactions on her credit card. A man said he was charged overdraft fees on the same day he made several deposits. What many customers may not realize is that the man who oversees the operation used to represent the very banks they are complaining about.
John C. Dugan, a former bank lobbyist, has been comptroller since 2005 — when the mortgage boom was in full force — and he’s responsible for regulating banks with national charters, including giants like Citibank and Chase. Like his recent predecessors, Mr. Dugan often takes positions that align with banks, even as they have come under withering attack for their role in the financial crisis. For instance, he has opposed efforts by state officials who try to crack down on abusive consumer-lending practices, arguing that national banks aren’t in their jurisdiction. At the same time, he rarely imposes serious penalties related to consumer protection, particularly against the big banks.
"To have a regulator this partial and this helpful to the people he is supposed to regulate is, to say the least, very troubling," says the Iowa attorney general, Tom Miller, who has tangled with the O.C.C. "It’s a pretty warped view of public responsibility." Mr. Dugan casts himself as a zealous guardian of the safety and soundness of banks, a mission his agency sees as its first objective. As such, he has also taken positions that are at odds with the Obama administration and with other regulators, like opposing a proposal to limit banks’ ability to raise interest rates on existing credit card balances and opposing a special assessment on banks to shore up the fund that insures consumers’ deposits.
He has managed to do so mostly behind the scenes, avoiding the fusillades that have been directed at other bank regulators like the Federal Reserve chairman, Ben S. Bernanke. After all, who has heard of the Office of the Comptroller of the Currency? "I call them as I see them," says Mr. Dugan, who plans to step down when his term expires this summer. "I’ve done some unpopular things with the industry on things that they didn’t like. And I have done some unpopular things where people thought I was doing things that were too pro-bank."
Mr. Dugan has survived — even thrived — amid such criticism by retaining powerful allies, including the Treasury secretary, Timothy F. Geithner. Mr. Geithner has also been something of a piñata for critics, who contend that he, too, guards the welfare of banks at the expense of taxpayers and average consumers. The comptroller’s office is technically an arm of the Treasury Department, though Mr. Geithner has little day-to-day oversight. Mr. Geithner did not respond to multiple requests for comment. As Congress considers an overhaul of financial regulations, including a new agency for consumer financial protection, the recent track record of regulators like Mr. Dugan and Mr. Geithner hangs over the debate.
Last summer, President Obama proposed creating an independent consumer protection agency. But months of Congressional debate and furious lobbying by banks have undermined support for an independent agency. A main sticking point is determining what, if any, authority existing bank regulators should have over the agency if it is created. Some Republican senators — and Mr. Dugan — would like to protect the existing authority of the O.C.C. over national banks, arguing that a healthy banking system protects consumers.
Arthur E. Wilmarth Jr., a law professor at George Washington University, says that none of the current federal regulators, including the O.C.C., have been consumer guardians. By contrast, he said, attorneys general in New York and elsewhere have successfully rooted out consumer lending and investing abuses. "To me, the real bottom line is that 4 of the 16 largest national banks had to be bailed out or sold with federal TARP assistance in order to avoid failure," says Professor Wilmarth. This track record, he says, proves that the "quiet" approach of the O.C.C. and the Office of Thrift Supervision "failed either to protect consumers or to ensure the safety and soundness of major banks."
Mr. Dugan bristles at the notion that he is too easy on banks and says his agency’s record on consumer protection has been "vigorous and sustained." He says it is a "cheap shot" to suggest that his lobbying years color his viewpoint and that it demeans his employees and his years of public service. A 2005 appointee of President George W. Bush, Mr. Dugan came to the O.C.C. after working for 12 years as a lawyer and lobbyist representing the banking industry. Before that, he worked for the federal government, including stints as counsel for the Senate Banking Committee and as an assistant secretary in the Treasury Department.
Though acknowledging some missteps at the O.C.C., he is quick to say that others deserve more blame, like nonbank lenders who dished out subprime loans and sleepy state regulators overseeing them. Although the comptroller’s office oversees two-thirds of the nation’s assets held by commercial banks, Mr. Dugan points out that national banks represent just 17 percent of all assets from failed banks since the start of the financial crisis. Of course, that doesn’t account for national banks that avoided collapsing because of huge taxpayer bailouts — "too big to fail" banks like Citigroup and Bank of America. Mr. Dugan counters that most of the big banks repaid taxpayers with interest — unlike A.I.G., Fannie Mae and Freddie Mac.
"In the end," he says, "the fact that they got the money but took steps to fix themselves, to raise private equity, build loan-loss reserves to pay the government back quickly, will be viewed as a successful way to deal with a very difficult situation." In addition, Mr. Dugan says, the O.C.C. has issued guidance to banks on risky mortgages, credit cards and gift cards. He says he would have done more to protect consumers if he had the authority to write regulations. For now, that is left to the Federal Reserve. "I’m not trying to say we are perfect," he says, "but it’s a record that I think is good given the circumstances."
When Darrell McGraw, the attorney general of West Virginia, decided to sue Capital One Bank in 2005, alleging credit card abuses, his office expected to face a phalanx of high-priced defense lawyers. What it didn’t expect was that Capital One would get a hand from the federal government. As Mr. McGraw tells it, his legal team was thwarted every step of the way by Capital One and the O.C.C. While Capital One didn’t comply with Mr. McGraw’s subpoenas, it did apply for a national charter with the O.C.C., which it obtained in March 2008. Soon afterward, Capital One notified Mr. McGraw that he no longer had authority over it.
For more than a decade, the O.C.C. has beaten back state attorneys general who have tried to enforce state consumer laws against national banks, arguing that federal laws pre-empt those of the states: the O.C.C. has stopped Georgia from enforcing predatory lending laws, intervened in New York’s effort to investigate discriminatory lending and opposed a campaign by New England states to curb gift card fees.= "It’s always disheartening when the federal government becomes the refuge for scoundrels," Mr. McGraw says.
Last year, the White House suggested giving states more authority to enforce consumer laws against national banks. Lobbyists counterattacked and Congress weakened the proposal.
Mr. Dugan has made no secret of his opposition to increasing states’ authority. He argues that it could cripple national banking and be bad for consumers because it would create uneven standards and enforcement. West Virginia officials say they decided to pursue Capital One in part because of its state charter. Capital One says that it switched charters because it was evolving from a credit card company into a traditional bank and that the move had nothing to do with the West Virginia suit.
A federal judge reluctantly granted Capital One’s request to stop the West Virginia case once the bank obtained a national charter. "While I find that federal law requires this result, I am sympathetic to the defendant, whose lawful investigation was hijacked by Capital One’s conversion to a national bank," the judge, Joseph Goodwin, wrote. "It is questionable whether the O.C.C. will be as motivated or as effective in protecting the consumers of West Virginia." The O.C.C. asked Mr. McGraw’s office for its investigative files. In February, the agency announced that Capital One would pay $775,000 in restitution, which West Virginia said addressed only one of seven issues it had raised. Mr. McGraw said the penalty "is not even a drop in the bucket." The O.C.C. disputes the notion that it protected Capital One and says that its sanction was fair.
Critics maintain that the O.C.C.’s campaign against the states weakened crucial consumer protections and ultimately exacerbated the impact of the financial crisis. In addition, they say that the O.C.C.’s own oversight efforts were so tepid that risky mortgages, credit card abuses and overdraft fees proliferated. "It’s not that they want to displace the states," says Kathleen Keest, a lawyer for the Center for Responsible Lending. "It’s that they want to replace something with nothing."
While the debate over pre-emption dates back decades, critics say it culminated in 2004, when the O.C.C. issued sweeping rules blocking states’ ability to enforce consumer laws. The crackdown came just as the market for subprime loans was starting to explode. The O.C.C. and its critics disagree on the percentage of subprime and other risky mortgages originated by national banks: the O.C.C. says it was less than 15 percent of the total; others say more. But, critics say, the O.C.C. does not take into account the pivotal role that banks played in stoking the appetite for risky mortgages by securitizing the loans.
In addition, national banks remain the largest provider of credit cards, and some were engaged in controversial practices like over-the-limit fees. The nation’s big banks also tend to charge the highest overdraft fees and tack on other dubious fees, critics say. Even so, the O.C.C. only sparingly takes robust action on consumer protection issues, particularly against the big banks. Mr. Dugan maintains that this is because the agency works closely with banks and tries to stop problems before they metastasize and require stronger measures.
In the last decade, the O.C.C. has issued 124 formal enforcement orders related to consumer protection, according to an O.C.C. report in October. Of those, only 10 required banks to pay restitution, one called for a refund and nine required civil penalties. The nation’s biggest banks and credit card issuers were rarely penalized for consumer abuses. Providian Financial, Wachovia Bank and Capital One were among the bigger banks that were handed enforcement orders.
Even the O.C.C.’s in-house watchdog — the Treasury Department’s inspector general — has criticized the agency. In a January report, the inspector cited multiple mistakes by O.C.C. examiners in the failure of Silverton Bank of Atlanta. For instance, the O.C.C. had identified "significant weaknesses" in Silverton’s operations when it applied for a national bank charter in April 2007, but it approved the application anyway, the report said. The receiver appointed by the Federal Deposit Insurance Corporation when the bank collapsed estimated that Silverton’s failure would cost taxpayers $1.26 billion.
Three weeks after Silverton’s collapse, the F.D.I.C. urged its board to approve a special assessment on banks to help shore up its depleted insurance fund. Mr. Dugan was the only board member to vote against the assessment, which eventually prevailed. Mr. Dugan said that he was concerned that added expenses would harm already-struggling banks and disproportionately affect big banks, most of which he oversees. Consumer advocates say they remain underwhelmed by Mr. Dugan’s efforts. "It’s hard to get help from an agency that thinks the banks are always right," said Travis B. Plunkett, legislative director of the Consumer Federation of America.
At the customer assistance operation here in Houston, employees tell callers to first try to resolve problems directly with their banks. On occasion, however, consumers are reimbursed as a result of O.C.C. intervention. Last year, the O.C.C. fielded 72,047 complaints — more than double the year before — and reimbursed $9.2 million. The woman who complained about her credit card limit was told to file a formal complaint, while the woman who disputed the fees was told that she was out of luck. The man who griped about overdraft fees got his money back.
Ambac regulator threads CDS needle
by Rolfe Winkler
To protect municipal bond insurance policies the Wisconsin insurance watchdog is forcing haircuts on holders of credit default swap contracts written by Ambac Financial, the troubled U.S. bond insurer. It’s an echo of what might have been done with American International Group in different circumstances.
Ambac got into trouble selling CDS protection on what proved to be toxic mortgage-backed bonds. As those bonds have gone bad, the protection buyers have been demanding payments — and receiving them in full, to the tune of $120 million a month. The problem for the regulator was that this cash outflow was on track to drain Ambac dry, leaving other policy-holders with no protection. Since Ambac also insures lots of municipal bonds, the fallout could have been felt across the United States.
So Sean Dilweg, the Wisconsin insurance commissioner, is pushing the troubled CDS contracts and some other losing policies into a segregated account that his department will try to wind down, a process known as rehabilitation. Meanwhile he has secured court approval to halt the payouts Ambac has been making.
Part of the plan is to cut a deal with the CDS counterparties. Dilweg expects they’ll get cash worth about 25 cents per dollar of coverage. They’ll also receive so-called surplus notes which could eventually yield more if the rehabilitation works out. Some holders of CDS contracts won’t be happy. They were supposed to get paid quickly even if Ambac ended up in rehabilitation. But others, including banks like Citigroup, are thrilled with the deal as they’ve already written off much of their exposure. Now they’ll get a little cash back.
New York’s former insurance regulator, Eric Dinallo, similarly negotiated big haircuts with CDS counterparties of monolines he regulated. He brokered a deal between XL Guarantee and Merrill Lynch, for instance, where Merrill took 13 cents on the dollar in exchange for tearing up CDS contracts. But AIG’s counterparties were notoriously paid out in full following the government’s 2008 bailout. The reasons include the complexity of the giant financial and insurance conglomerate and the fact that Tim Geithner’s Treasury and AIG’s various regulators lacked the legal power to dictate a wind-down.
Reforms working their way through the U.S. Congress are designed to give watchdogs that kind of power. Had they had it back in 2008 — along with the guts to take control of AIG’s massive book of bad assets at the peak of a crisis — the course of the bailout, and even the crisis, might have been a lot different.
Ambac & the Safe Harbors
by Stephen Lubben
Ambac, the former municipal bond insurer who decided it would be fun to write CDS on mortgage backed securities, has entered into an interesting arrangement in Wisconsin, that has some implications for those of us who think the safe harbors for derivatives in the Bankruptcy Code should be repealed, and replaced with more narrowly tailored provisions.
As I understand it, Ambac's insurance subsidiary has created a "segregated account" comprised mainly of its CDS contracts on collateralized debt obligations. Next that account has been placed into a rehabilitation proceeding by the Wisconsin insurance regulator, who has asked the State court for an injunction to prohibit the CDS counterparties from exercising their rights to terminate, etc. under the ipso facto provisions in the contracts. The State's brief pointedly notes that Wisconsin insurance law, unlike the federal Bankruptcy Code, contains no safe harbors for derivatives and that it will be impossible to unwind Ambac's contracts in a considered manner if the ipso facto provisions are enforceable. (The thud you just heard was ISDA's amicus brief arriving at the Wisconsin court).
I obviously share the concern that safe harbors make it near impossible to conduct an orderly reorganization or liquidation of a counterparty, and often increase the disruption to the financial markets as everyone rushes to close out and reestablish positions. But I have some concerns about the Ambac approach. For example, what is the legal basis for the "segregated account"? If it's a separate legal entity, do the CDS counterparties have an argument that their contract has been novated (i.e., assigned) without their consent? That could be a problem. If the segregated account is not a separate entity, how do you put part of a company into rehabilitation and keep the creditors from going after the part this is "out"?
I know insurance insolvency is different from bankruptcy, but the more I think about this, the more questions I have.
Rich Stunned by Recession Sell Munis for First Time
by Joe Mysak
For the first time in decades, the rich showed no confidence in state and local governments during a recession. The wave of selling began in the summer of 2007, when hedge funds and some mutual funds were forced to raise cash to meet redemptions. Municipal bonds retained the most value, and the rich didn’t hesitate to sell. Such selling accelerated in 2008, as the subprime meltdown claimed securities firms Bear Stearns Cos., sold at a fire sale, and Lehman Brothers Holdings Inc., which was forced to declare bankruptcy. The Dow Jones Industrial Average plunged to 7,449 from 13,364 at the start of the year. Real estate prices collapsed. Municipals went begging. Tax-exempt yields, normally around 90 percent of Treasuries, surged to more than 200 percent. Issuers canceled bond sales.
The rich did the unthinkable. They sold municipal bonds. Fear of a second Great Depression and the crackup of capitalism trumped the allure of tax-exempt income and a historical default rate of less than 1 percent. U.S. Treasury notes and insured certificates of deposit became the new investments of choice for those with the most to lose. This astonishing tale is told in the new edition of the Internal Revenue Service’s Statistics of Income Bulletin, which shows that in 2008, the latest year for which preliminary data is available, the richest taxpayers collected $7 billion less in tax-free interest than they did in 2007, an unprecedented drop of 15 percent.
In 2007, 1.58 million individual taxpayers with adjusted gross annual incomes of $200,000 and more claimed $46.3 billion in tax-exempt interest, almost 61 percent of the $76 billion total. One year later, only 1.44 million filers (out of a total of 143 million) who claimed tax-exempt interest made it into the $200,000-plus group. They reported receiving $39.3 billion of the total $72.6 billion in tax-free interest claimed. The IRS had no explanation for the drop. A spokesman said there was no technical reason behind the decline, such as a change in tax treatment. So all we have are the numbers to tell the story. The IRS only began asking filers to list the amount of tax- exempt interest they received for the 1987 tax year.
For those making $200,000 or more, the amount they claimed grew steadily, from $9.9 billion in 1987 to $28.9 billion in 2000. In 2001, it dropped for the first time, to $27 billion --a decline of 7 percent. It fell again in 2002, to $24.8 billion, and again in 2003, to $23.7 billion. Was that the first time the rich sold municipal bonds? There were reasons to think so. The dot-com bubble burst in 2000 and the Nasdaq Composite Index plummeted as low as 1,108 in October 2002 from a high of 5,133 in March 2000. In 2001, we had a recession. And of course there were the Sept. 11 terrorist attacks.
And yet those declines in tax-exempt interest reported don’t seem large enough to represent an I’m-shaken-to-the-core selloff. Perhaps the wealthiest investors didn’t sell their bonds so much as have their bonds taken away from them. The interest rates states and municipalities had to pay to borrow money, as measured by the Bond Buyer 20-General Obligation Bond Index, declined from a high of 6.09 percent in January 2000 to 4.21 percent in June 2003. Issuers took advantage of the drop to call or redeem outstanding high-coupon debt.
That same interest rate environment didn’t repeat in 2007 and 2008. Tax-exempt yields rose from 4.08 percent in March 2007 to a high of 6.01 percent in October 2008, before ending the year at 5.24 percent. There was also a lot of competition to buy municipal bonds in the late 1990s and early 2000s, as banks and securities firms built proprietary-trading operations. The latest edition of the IRS’s Statistics of Income Bulletin tells a number of stories besides the rich selling municipal bonds.
The first is the recession that began in December 2007 with the subprime mortgage meltdown claimed victims at the very top of the food chain. In 2007, there were more than 3 million filers with $250,000 or more in adjusted gross income. In 2008, that number fell to 2.84 million. Where did they go? It looks like they migrated. They didn’t go too far. The two tiers below $250,000 or more, namely from $200,000 to $250,000 and from $100,000 to $200,000, both showed increases in 2008 to accommodate the ranks of the downwardly mobile. How are we to account for the drop in total tax-exempt interest reported by individuals between 2007 ($76 billion) and 2008 ($72.6 billion)?
Municipal bonds, as an asset class, were screaming "buy me" in 2008. There should have been an increase in tax-exempt interest earned. Some investors did buy -- just not those at the very top. The total number of individuals reporting tax-exempt interest grew in 2008, to 6.4 million from 6.29 million the year before. How do we explain that drop in the amount of tax-exempt interest reported? It’s most likely a combination of reasons, all, again, inspired by fear: Some investors sold munis and bought CDs and Treasuries, and some shifted to shorter tax- exempt maturities, which pay less. I can’t wait until next March, when the next installment of The Rich and Their Municipal Bonds comes out.
Death of a Loophole, and Swiss Banks Will Mourn
by Gretchen Morgenson
Wtih all the hoopla over the health care bill, hardly anybody noticed that a job creation bill that President Obama signed on March 18 makes it much harder for United States citizens to avoid taxes by hiding money in overseas bank accounts. Nobody likes to pay taxes, of course. But for those of us dutifully handing over our share each year, there is nothing more maddening than stories of tax-avoidance schemes created by fee-hungry bankers for well-heeled clients.
We’ve heard a lot of these tales in recent years, alas. Foreign tax havens like Switzerland, Liechtenstein and some Caribbean countries thrive by keeping their clients’ money under wraps and safe from tax authorities’ reach. Now, Congress is attacking some of these schemes, courtesy of interesting provisions aimed at curbing tax avoidance that legislators wrote into the new jobs bill, known as the Hiring Incentives to Restore Employment Act. The most substantive section of the bill states that foreign financial institutions will face a 30 percent tax on their United States investments if they refuse to disclose information about accounts they have opened for American citizens in offshore jurisdictions. Another aspect of the bill eliminates a clever derivatives strategy used by investors to make their tax bills on dividends disappear.
Individuals have stashed an estimated $1 trillion in offshore accounts, the government says, allowing them to avoid up to $70 billion in taxes each year. The federal government estimates that abusive offshore schemes by corporations cost our Treasury an estimated $30 billion in tax revenue as well. Given our large and growing deficits, $100 billion in annual tax revenue would sure come in handy. "The bill is a huge step in the right direction because you cannot imagine how negligent we were with this stuff for years and years," said Lee Sheppard, contributing editor of Tax Notes, a tax journal in Washington. "We’re getting serious about tax enforcement on cross-border investment flows in a way that we never have before."
Under the bill, a 30 percent withholding tax would be imposed on foreign financial institutions that refuse to provide details on their United States clients’ accounts, such as who owns them and how much money moves through them. The tax would be assessed on earnings generated by investments these foreign institutions have in United States Treasury securities, stocks, bonds or debt and equity interests in American businesses.
The law was written broadly and covers banks, hedge funds, securities houses, derivatives dealers, commodity traders and private equity firms. Indeed, any financial firm that holds or trades assets for its own account or for clients must comply with the new reporting requirements.
It will be up to the Treasury Department to decide how the law applies to insurance companies. The Treasury will also have to create a system to withhold the tax from institutions that do not comply with the reporting requirements. It has until the end of 2012 to do so. "Before this bill was passed, the I.R.S. had no reliable way to learn about offshore accounts, and that gave people the opportunity to cheat the system," said Max Baucus, the Montana Democrat who leads the Senate Finance Committee and pushed for the bill’s reporting rules. "Tax evaders cost our country tens of billions of dollars every year in unpaid taxes, and honest, law-abiding taxpayers pay the price."
It might seem surprising that the bill sailed through the legislative process, given its implications for financial institutions. But United States banks had no interest in lobbying against it; in fact, they may well benefit from the law as potential customers find it harder to shelter money in foreign institutions. The law also closes a gaping tax loophole that allows investors who receive dividends on companies’ shares to pay no taxes on them. The Government Accountability Office estimates that billions of dollars in potential tax revenue are lost each year through the use of so-called dividend equivalent strategies.
Under our laws, dividends paid by United States companies to foreign shareholders are supposed to be taxed at 30 percent. But for many years, banks have structured deals using derivatives that allow clients to turn dividends into "dividend equivalents." Though these payments look like dividends, because they are embedded in a derivative they do not generate a tax.
Here’s how they work: Say a hedge fund holds shares in General Electric. By entering into a swap agreement with a financial institution, the fund can simultaneously sell its G.E. shares a few days before the dividend is issued and receive a derivative tied to the value of the shares and the dividend payment. After G.E. pays the dividend, the swap is canceled and the investor gets back the shares plus the dividend equivalent payment. The bank that did the trade typically charges a fee linked to the amount of tax savings the hedge fund reaps. The new law eliminates the tax-free aspect to this transaction, because it treats the swap payments as dividends.
Carl Levin, the Michigan Democrat who leads the Senate’s Permanent Subcommittee on Investigations, has been scrutinizing tax-avoidance schemes for years. His staff’s investigations turned up the dividend equivalent transactions that the law addresses. "We’ve got a ways to go, but these are significant steps," Mr. Levin said last week. He added that he still hopes to pass a law "that would allow us to take the same measures against foreign financial institutions that impede our tax-collection efforts that we do against our own."
While Ms. Sheppard predicted that the new law would have a big effect, she said there were more effective ways to clamp down on schemes. "If you really wanted to stop this, you would define tax evasion as a predicate act to money laundering," she said. "Currently the money-laundering information the banks give the government is not given to the I.R.S. for civil tax enforcement." Such a move would be deemed too radical by many. As a result, we must be content with incremental changes.
Robert M. Morgenthau, the former Manhattan district attorney who spent many years cracking down on tax-avoidance schemes, commended the new law. "When citizens don’t pay their taxes, then other citizens have to pick up the burden," he said. "It’s important that no group of people have immunity from U.S. laws, and this will go a long way to reaching these offshore accounts where U.S. citizens hide their earnings." With our nation’s debt levels swelling by the day, we all face the prospect of higher taxes levied to cover those obligations. That makes chasing down tax evaders more important than ever.
WaMu Files Chapter 11 Reorganization Plan
Washington Mutual Inc. filed a Chapter 11 plan on Friday, sketching out how it plans to distribute more than $7 billion accumulated in the wake of the largest banking failure in U.S. history, that of its former subsidiary Washington Mutual Bank, or WaMu. Documents filed in the U.S. Bankruptcy Court in Wilmington, Del. say the money must stretch across at least $8 billion worth of debts left behind when regulators seized Washington Mutual's prized thrift, WaMu, and sold it to J.P. Morgan Chase & Co. It's possible, but not certain, that creditors on the bottom ranks, such as holders of preferred equity shares, will see a return from the bankruptcy, court documents say. Common shareholders, however, will get nothing out of the case, Washington Mutual said.
Creditors and shareholders at the time were outraged at the regulatory takeover and sale to J.P. Morgan Chase for $1.9 billion. They slammed the deal as an unwarranted bargain for J.P. Morgan, which had tried to buy WaMu outright, and a fumble by regulators. Even before Washington Mutual's Chapter 11 plan was filed, the distribution scheme faced opposition from shareholders who stood to be shut out, and from creditors of WaMu. The filing of the plan followed the announcement of a broad-ranging proposed settlement among WaMu's former parent, J.P. Morgan Chase and regulators. Settlement terms were a disappointment to shareholders of the parent company and creditors of WaMu, which has $13 billion of debt of its own, separate from the parent's company debt.
If approved by the bankruptcy court, the settlement will end a series of legal actions spawned by the WaMu seizure, and divide up billions of dollars among the thrift's former owner, its new owner, and the regulators who brokered the deal. Shareholders say the company traded away $20 billion worth of legal claims too cheaply in the settlement. In a press release, Washington Mutual said J.P. Morgan, WaMu's new owner, has signed on to the settlement, but the Federal Deposit Insurance Corp. has not. The company said it is "hopeful" the FDIC will agree to support the settlement "in the near future."
The FDIC is serving as receiver for WaMu's creditors, and it has been hit with lawsuits over the deal. The proposed settlement calls for J.P. Morgan to hand over to Washington Mutual some $4 billion cash that was in the parent company's accounts at WaMu when the thrift was seized, in September 2008. WaMu's new and former owners and regulators will share tax refunds that could be as much as $5.8 billion, plan documents say. Parent company Washington Mutual's split of the tax refunds will be from $1.8 billion to $2 billion, the plan says.
Bank of America, Wells Fargo probably won't pay income tax for 2009
by Christina Rexrode
This tax season will be kind to Bank of America and Wells Fargo: It appears that neither bank will have to pay federal income taxes for 2009. Bank of America probably won't pay federal taxes because it lost money in the U.S. for the year. Wells Fargo was profitable, but can write down its tax bill because of losses at Wachovia, which it rescued from a near collapse. The idea of the country's No. 1 and No. 4 banks not paying federal income taxes may be anathema to millions of Americans who are grumbling as they fill out their own tax forms this month. But tax experts say the banks' situation is hardly unique.
"Oh, yeah, this happens all the time," said Robert Willens, an expert on tax accounting who runs a New York firm with the same name. "Especially now, with companies suffering such severe losses." Bob McIntyre, at Citizens for Tax Justice, said he opposes the government giving corporations such a break. "If you go out and try to make money and you don't do it, why should the government pay you for your losses?" McIntyre said. "It's as simple as that."
For 2009, Bank of America netted a $2.3 billion benefit related to income taxes, according to its annual report: It had a benefit of $3.6 billion from the federal government, and an expense of $1.3 billion that it paid to different state and foreign governments. It's not unusual for a company's debt to the federal government to vary widely from its debt to state governments, as appears to be the case with Bank of America, said Douglas Shackelford, a tax professor at UNC Chapel Hill. The federal government often offers more tax deductions than the states; for example, Bank of America wrote down its federal taxable income with credits from low-income housing and losses on foreign subsidiary stock. Company tax returns aren't public, so it's difficult to say for certain how much a company pays to, or receives from, tax coffers in any year .
The bank's $3.6 billion current federal tax benefit for 2009 came in a year when it lost $1 billion in the U.S., according to its latest annual report. For the previous year, when the bank had profits of $3.3 billion in the U.S., it listed a current federal tax expense of $5.1 billion. Wells Fargo was profitable in 2009, with $8 billion in earnings applicable to common shareholders. But its tax payments were reduced because of Wachovia's losses. Wells netted an overall tax benefit of $4.1 billion in 2009. It got a benefit worth nearly $4 billion from the federal government, and another worth $334 million from state governments. It had an expense of $164 million in foreign taxes. Wells did record an overall income tax expense of $5.3 billion, but that was offset by the tax benefits of the Wachovia losses.
Tax breaks and stimulus
The topic of corporate tax breaks has gained buzz recently because of a provision in the 2009 stimulus bill, which allows companies to "carry back" their losses for 2008 and 2009 to the previous five years, instead of just the previous two years. Homebuilders and other industries that suffered big losses in 2008 and 2009, but made a lot of money in the years before that, stand to gain billions in refunds. However, the stimulus bill provision does not apply for Bank of America and Wells Fargo, because companies that received TARP loans are ineligible. UNC's Shackelford said the argument for carrybacks stems from the belief that it's "arbitrary" that taxes are collected on an annual basis. "There's no reason we couldn't collect them on a monthly basis or a two-year basis. Then your losses and gains would be offset over the period," he said. "The carryback enables you to not be penalized because your losses got bunched in a different year from your gains."
The stimulus bill provision, he said, was helped by business lobbying. "There's an awful lot of companies that paid a lot of taxes in the 2004 period, then they lost a lot of money, and they went to their legislators and said, 'Please help us,'" Shackelford said. McIntyre, at Citizens for Tax Justice, co-authored a report in 2004 related to carrybacks, after the Bush administration expanded many corporate tax breaks. The report examined 275 of the country's largest companies and found that nearly one-third paid no federal income taxes in at least one year from 2001 to 2003. The companies overall were profitable in those years, but took advantage of tax breaks. "If you or I lose money in the stock market, we don't get to carry back our losses to any significant degree," said McIntyre. His group works on closing tax breaks for corporations. "Getting a refund from the past, that's just weird," he added.
Bank-Tax Concept Gains Momentum
The U.S. and European governments are moving toward a consensus on taxing large banks to cover the cost of any future bailouts rather than asking taxpayers to foot the bill, as happened regularly in past banking crises. The tax proposals vary. Germany and Sweden would use the money to fund a "resolution authority" that would use the money to shut troubled banks whose failure would put the broader economy at risk. Others, such as France, would assess the fee after a crisis passed. The U.S. is split. Congress is moving toward imposing a levy to build a fund before a crisis. The Obama administration favors the post-crisis option, a difference that will be worked out as financial-regulation legislation moves through Congress.
The proposals face opposition from banks, who argue that the levies are discriminatory and would limit their capacity to lend. "Global policy makers should be very cautious about advancing any public policy that removes capital from the system—be it in the form of a tax, a fee or otherwise," said Rob Nichols, president of the Financial Services Forum, a trade association of large U.S. financial institutions. The possible bank taxes are part of a wave of potential bank regulations on tap in the coming months. In the U.S., now that health-care legislation is effectively complete, Congress and the administration are turning to financial regulation, which would create a consumer-finance-protection agency, and also enact rules limiting the businesses in which banks can operate and the levels of capital they must hold. Similar efforts are under way in Europe, where the International Monetary Fund is proposing a resolution agency for the European Union.
Officials in the U.S., Europe and the IMF say the bank-tax concept has gained so much momentum that it is likely to be on the agenda when of the Group of 20 industrial and developing nations meet in Canada in June. "Reforms would put in practice the principle that large institutions should bear the costs of any losses to the taxpayer," U.S. Treasury Secretary Timothy Geithner said in a speech last week. French Finance Minister Christine Lagarde called a bank tax "an interesting concept which can take several forms" in an interview earlier this month with French newspaper "Les Echos."
In the U.S., the House and the Senate banking committees have approved proposals to assess banks in advance to finance future rescues. The Obama administration prefers to impose a levy after a crisis, arguing that establishing a fund in advance could encourage bankers to take too much risk because the fund could become a way to finance troubled banks, rather than shut them down. The administration's proposal would use a temporary government loan to handle crises and then recoup the money from banks later after a crisis. To recoup payments for the recent crisis, the Treasury has proposed a "financial crisis responsibility fee" on the short-term liabilities of banks with assets of more than $50 billion.
In the U.K., Prime Minister Gordon Brown has been championing a global levy, including one in which revenues would be used to help pay down deficits, though will only press ahead if there is an international consensus. The opposition Conservative Party says it will press ahead regardless, though the fee's size will depend on how far other countries follow The U.S. and U.K., which have a similar approach to markets and business, often see eye-to-eye on banking regulation. But a number of countries in continental Europe are also backing the idea. Sweden last year put in place a "stability fee," that requires banks to pay levies into a fund that is eventually expected to grow to 2.5% of gross domestic product. German Chancellor Angela Merkel backs a similar fee and plans to present a plan to her cabinet for approval on Wednesday. She views the levies as part of new financial regulations that she wants taken up by the G-20, said a government spokesman.
The IMF plans to recommend a bank tax when global economic officials convene in Washington in April and is leaning toward a fee in advance to fund a resolution authority, said officials involved with the IMF effort. That recommendation is likely to be influential with other countries. Support for a bank tax isn't unanimous among the G-20. Canada, which now has an outsized role in the group's deliberations because it hosts this year's meeting, opposes a tax on its banks. "We are rejecting it out of hand," said Canadian Finance Minister Jim Flaherty. Instead, Canada, whose banks weathered the crisis well, is pressing the G-20 to stiffen leverage requirements to avert problems, a proposal that has already been on the group's agenda. India and China haven't taken firm positions.
In past banking crises in Sweden, Britain, the U.S. and Asia, taxpayers picked up the cost of bailing out troubled institutions because the government had to act quickly to contain the problem and the banks had been so battered they couldn't repay the money. But both the politics and economics have changed in the past two years in the U.S. and Europe, where a banking crisis provoked the deepest recession since the Great Depression. Populist anger is rising over the costs of the bailout, and major banks have recovered so quickly that they have profits that can be taxed.
Strikes and strife are only just beginning
Rarely do chief executives who have presided over a corporate catastrophe resign in a dignified fashion. Instead, they cling on – promising, absurdly, that they owe it to their shareholders to work with every bone in their bodies to restore the company to former glories – until eventually and brutally they are shot dead in the saddle. That's where we find ourselves in British politics today. Devoid of new ideas, exhausted, riddled with scandal, and faced with the Herculean task of slaying the leviathan of public spending that they created, Labour ministers ask to be given another chance to prove themselves.
Having allowed the legacy of the Thatcherite revolution to be squandered on a largely chaotic expansion of the public sector, the Government now demands a further five years to put it all into reverse and set things right again. If there were not, according to the polls, some chance of Gordon Brown actually getting it, the idea would be laughable. The threatened wave of strikes, at British Airways and Network Rail, is only a foretaste of a decade of industrial unrest to come as government departments attempt to come to grips with the overspending of the past.
It is no accident that our "spring of discontent" should be happening in companies that were formerly state owned; the public sector remains a bastion of union influence and labour protectionism. More than 50 per cent of public-sector workers belong to a union, against little more than 15 per cent in privately owned businesses. Recent union rhetoric demonstrates blinkered refusal to accept the need for cuts, compromise and modernisation.
Even the Chancellor now concedes that when the axe falls it will need to be deeper and tougher than anything attempted under Margaret Thatcher. Using published Treasury projections, the Institute for Fiscal Studies calculates that after taking account of "protected" areas of spending such as health and schools, the cuts elsewhere in public services and administration will have to be of the order of 25 per cent. In the event of a fully blown funding crisis, they would be deeper still.
Nothing quite like it has been attempted since the 1930s. Is Labour, still trailing the vestiges of its socialist roots, substantially funded by union donations, and politically dedicated to the provision of state-funded services and welfare, really up to the job? If Labour ministers were being asked to poison their own children, the task that awaits could scarcely be grimmer. The reason the Chancellor is not telling us how he might do it is not just because he fears the truth would cost votes, but because he doesn't know. The £20 billion of cuts "identified" – which gets us less than half way there – are comically vague, and in the case of the £550 million the National Health Service hopes to save by persuading its workers to take fewer sickies, patently ridiculous. I'm not saying it is impossible to make public services more productive and efficient, but in private business these gains are driven by competition, the battle for survival and the profit motive.
There are no such disciplines in the public sector, where execution is notoriously poor and political whim and patronage are prone to undermine even the most basic of cost-cutting initiatives. It's much easier for governments to address the deficit by raising taxes or top-slicing benefits than by facing down the unions by taking the axe to departmental spending. What hope is there of achieving the planned £11 billion of efficiency gains in a culture where non-genuine sick days are quite widely regarded as extra holiday entitlement? It's not going to happen, or not until the country is imbued with a sense of crisis.
I don't confine my accusations of delusion to Labour and the public sector. The High Court this week bizarrely backed an £11 million compensation claim by a City banker against his former employers. And bankers more generally are again paying themselves multi-million pound bonuses as if nothing had changed. A sense of entitlement quite at odds with the country's reduced circumstances, or the competitive threat from developing nations without any of these same legacy costs, seems to run through society from top to bottom like the lettering in a stick of Brighton rock.
Inability to recognise reality is partly explained by the way in which western policymakers sought to protect their citizens from the economic contraction with unprecedented quantities of public support. Many people might reasonably wonder what sort of a crisis sees restaurants still stuffed to capacity and British unemployment at less than 8 per cent. In his Budget speech this week, the Chancellor boasted that the Government had been right to rebuild public services and right to support the economy. What he didn't say was that you can only borrow for so long to sustain a lifestyle beyond your means.
My worry is that the country, as much as the Labour leadership, is not yet reconciled to this unappetising prospect, in which case we can look forward to a decade likely to be as politically divisive as it is socially and economically turbulent. The fallout from this crisis may be just beginning.
Burgeoning Canadian prison budgets spared the axe
Ottawa will spend more money on federal prisons in coming years – a rare exception to government-wide restraint and a sharp contrast to efforts by cash-strapped American states to save money through lower inmate populations. New figures released this week show the budget for Corrections Canada is projected to rise 27 per cent from the 2010-2011 fiscal year to 2012-13, when it will reach $3.1-billion. More than 4,000 new positions will be created at correctional institutions and parole offices across the country, with estimates of a 25-per-cent increase in employees during the same period.
The spike in spending is clearly linked in a government report to the Conservatives’ suite of law-and-order crime bills, which legislate longer prison sentences for a range of offences and limit the opportunities for parole. Even with this new spending, the government warns the extra burden may put staff and inmates in harm’s way. “The risk is that longer periods of time in federal custody will put additional pressures on an aging physical infrastructure and potentially increase risks to the safety and security of staff and offenders,” warns a report prepared by Corrections Canada and signed by Public Safety Minister Vic Toews. The Conservative push comes despite declining crime rates in Canada, but amid polls showing the popularity of tough-on-crime measures.
On an average day last year, Corrections Canada was responsible for 13,287 federally incarcerated offenders and 8,726 offenders in the community. These numbers are expected to increase, but the report does not say by how much. In contrast, in the United States – where incarceration rates have risen by a startling 705 per cent over the last four decades – several states are now undoing measures that restrict access to parole and require longer incarceration periods, partly due to budget pressures created by the economic downturn. As a result, the number of state prisoners in the U.S. dropped last year for the first time in nearly 40 years, according to a survey of detention data released this month by the Pew Center on the States. California has reduced the number of convicts returning to incarceration by changing parole violation rules, while Michigan has reduced its inmate population by 6,000 by waiving some measures requiring convicts to serve 100 per cent of their sentence in prison. However, the number of federally incarcerated inmates continues to climb in the U.S.
Mr. Toews told The Globe and Mail on Friday that he was not aware of developments in the United States, but defended the planned Correctional Service Canada budget increase. “Security is obviously an important issue for this government and we’re moving on that file,” he said. “I’m not familiar with the American system. I know what is necessary in order to ensure that the Canadian public is safe and that prisoners are well treated.” The government released the three-year spending projections for Corrections Canada on Thursday as part of two boxes of reports given to Parliament by all federal departments. While the release comes more than three weeks after the 2010 budget, officials say much of the work on the reports was completed before the budget’s announcement that departmental spending would be frozen at 2010-11 levels as part of the government’s effort to erase the deficit.
The reports to Parliament largely appear to reflect that edict, as most departments project declines in spending and staffing over the coming years. They also hint that controversial cuts lie on the horizon. For instance, the documents project a 25-per-cent reduction of the overall budget at Environment Canada. That includes slicing the department’s budget for “climate change and clean air” from $242-million in 2010-2011 to $76-million in 2012-13. The documents caution that these reductions may not materialize, as programs set to expire may ultimately be renewed, which would then add to the department’s budget. A similar caution is included in the report from Agriculture Canada, which is projected to lose 42 per cent of its budget. The department’s report projects spending on “food safety and biosecurity” will drop from $154-million in 2010-2011 to $90-million in 2012-13. Finance Minister Jim Flaherty has said that part of the government’s plan for balancing the books will be to not renew some programs that expire.
Whistleblower to CFTC in JPM Silver Manipulation Struck by Hit and Run Car In London
by Jesse
I am glad that although Mr. Maguire and his wife are shaken they will apparently be all right.
The related story on his allegations regarding manipulation in the silver market is here.
I hesitate to say anything more at this point, except curiouser and curiouser.As reported by Adrian Douglas, the Director of GATA who has been the contact for Mr. Andrew T. Maguire, and on the GATA website"On March 25th at the CFTC Public Hearing on Precious Metals GATA made a dramatic revelation of a whistleblower source, Andrew Maguire, who has first hand evidence of gold and silver market manipulation by JPMorganChase, and who had tipped off the CFTC in advance of manipulation in gold and silver some months ago.
On March 26th while out shopping with his wife in the London area, Mr. Maguire's car was hit by a car careening out of a side road. The driver of the vehicle then tried to escape.
When a pedestrian eye-witness attempted to block the driver's escape he accelerated at him and would have hit him had the pedestrian not jumped out of the way. The car then hit two other cars in escaping. The driver was apprehended by the police after police helicopters were used in a high speed chase.
Andrew and his wife were hospitalized with minor injuries. They were discharged from hospital today and should make a full recovery."
‘Worthless’ Homes Targeted as Japan Pushes Renovation
Japan’s government, faced with more houses than households, is encouraging people to renovate their homes as a step toward creating a strong resale market. Prime Minister Yukio Hatoyama’s administration is offering environmental incentives to homeowners to remodel, rather than follow the postwar scrap-and-build policy of tearing down old houses. The ruling Democratic Party of Japan aims to boost sales of existing homes and extend their lifespan from an average of 30 years, compared with 55 in the U.S.
"Right now a man’s castle becomes worthless after 25 years and is industrial waste in 40," said Takeshi Maeda, a DPJ lawmaker who helped draft the provisions. "We want homeowners to be able to make money by renting their houses or selling them so they have value as an asset just like in other countries." Hatoyama has been struggling with persistent deflation and soaring debt since becoming premier in September and has seen his popularity decline by more than half. He pledged to reduce spending on construction, an industry that long supported the Liberal Democratic Party, which the DPJ last year ousted from more than 50 years of controlling government.
With new home sales at a 46-year-low, builders are shifting their focus to renovation. Shares of Sekisui House Ltd., Daiwa House Industry Co. Ltd., and Sumitomo Realty and Development Co. Ltd. have risen since details of Hatoyama’s 7.2-trillion yen ($78 billion) stimulus plan, which includes the renovation incentives, began emerging in December. Executives say they’re adapting as Japan’s population decreases in one of the world’s fastest-aging countries. "The renovation market will grow, and the market may be eventually controlled by a few big firms," said Katsunori Takahashi, head of Tokyo-based Sumitomo Realty’s remodeling unit. "Right now our goal is to increase our share."
Japanese typically buy property for the value of the land, tear down the existing building and construct a new one. The country has 57.6 million homes and 50 million families, according to Internal Affairs Ministry data. Only 13 percent of all housing sales are of pre-owned homes in Japan, compared with 78 percent in the U.S., according to government statistics. Shares in Osaka-based Sekisui House have risen 19 percent since Dec. 1. Shares in Daiwa, also in Osaka, have gone up 17 percent and those of Sumitomo 12 percent. The broader Topix benchmark index is up 13 percent in that time. Daiwa, Japan’s largest home builder, aims to triple revenue from its remodeling business, from 38 billion yen now, by next year, division head Kikuo Usutani said.
"Housing starts are declining and we’re facing a graying population with a low birth rate," Usutani said in an interview. "So we’re strengthening the renovation sector." Almost 23 percent of the country’s 126 million people will be older than 65 this year, compared with 13 percent in the U.S., according to Bloomberg data. Japan is the world’s oldest society, with a median age of 44, according to the United Nations’ World Population Ageing 2009 report. Hatoyama’s stimulus includes 100 billion yen in incentives for improving home insulation. Homeowners who install double- paned windows get a rebate of as much as 300,000 yen, in line with the premier’s goal of cutting greenhouse-gas emissions 25 percent by 2020. The plan also includes 500 billion yen to encourage new home sales.
"Initial uncertainty about the DPJ policy was eased by assurances the government wants to promote renovation without ignoring new housing," said Masahiro Mochizuki, an analyst at Credit Suisse in Tokyo. "The housing market will improve as the DPJ policy takes effect." Takashi Ishizawa, an analyst at Mizuho Securities in Tokyo, said the program is unlikely to significantly boost remodeling. "Japanese home builders have been scrapping old houses and building new ones in the past because it’s most lucrative," he said. "It will be difficult to suddenly shift focus to the second-hand homes."
Hatoyama’s approval rating fell to 32 percent in an Asahi newspaper poll taken March 13-14, down from 71 percent right after he came to office in September. The paper surveyed 2,082 voters and didn’t provide a margin of error. Yano Research Institute, a Tokyo-based marketing firm, said in February that Japan’s renovation market will rise 9.4 percent to 5.8 trillion yen in 2015 from 5.3 trillion yen in 2009. New housing starts last year fell 28 percent to 788,410 units, the lowest level since 1964. "Renovation is the only sector where home builders can expect growth," said Junichiro Hata, secretary-general of the Housing Renovation Promotion Council, a Tokyo-based trade group.
The government’s push dovetails with a Sekisui House discount of as much as 150,000 yen to homeowners who improve energy efficiency when remodeling. "It’s a timely policy," Sekisui spokesman Hidehiro Yamaguchi said. "Competition is getting severe." Some Japanese are realizing that remodeling is more efficient and less expensive than tearing down. Masashi Kato, a 46-year-old Tokyo homemaker, recently spent 3 million yen refitting her condominium to add a bedroom for her son. "Renovation is an efficient way of using space according to changing needs," Kato said. "We should change the Japanese people’s tendency to buy new things and discard old ones."
Tough times for white South African squatters
Sitting in a deck chair at a white South African squatter camp, Ann le Roux, 60, holds a yellowing photo from her daughter's wedding day. Taken not long after Nelson Mandela became the country's first black president in 1994, it shows Le Roux standing with her Afrikaans husband and their daughter outside their home in Melville, an upmarket Johannesburg neighborhood. Sixteen years later, she lives in a caravan and a tent shared with seven other people, including her daughter and four grandchildren, at a squatter camp for poor white South Africans.
She is one of a growing number of whites living below the poverty line in South Africa who blame affirmative action and the ANC-led elected government for their plight. Le Roux had to sell her house after her husband died and she lost her job as a secretary at the city planning council -- where she had worked for 26 years -- after she took time off work to recover from the loss of her husband. "They wouldn't take me back because of the political situation," she says, looking down at the fading photo. "Our color here is not the right color now in South Africa," Le Roux says, echoing the complaint of many impoverished whites, mostly Afrikaners who are descendants of early Dutch and French settlers.
While most white South Africans still enjoy lives of privilege and relative wealth, the number of poor whites has risen steadily over the past 15 years. White unemployment nearly doubled between 1995 and 2005, according to the country's Institute for Security Studies. Seeking to reverse decades of racial inequality, the ruling ANC government introduced affirmative action laws that promote employment for blacks and aim to give black South Africans a bigger slice of the economy. This shift in racial hiring practices coupled with the fallout from the global financial crisis means many poor white South Africans have fallen on hard times. At least 450,000 white South Africans, 10 percent of the total white population, live below the poverty line and 100,000 are struggling just to survive, according to civil organizations and largely white trade union Solidarity. South Africa's population is about 50 million.
Many poor whites have ended up in places like Coronation Park, in Krugersdorp west of Johannesburg, a leafy former caravan site beside a water reservoir and a public picnic park frequented by middle-class families at weekends. Ringed by yellow-brown hills of earth dug up by generations of gold miners, the park was used by the British as a concentration camp for Afrikaners during the Anglo-Boer war at the start of the 20th century. Now it's home to some 400 white squatters living in cramped tents and caravans and sharing a single ablution block. Cats and dogs roam noisily through the camp, dodging heaps of rubbish, piles of scrap metal and abandoned car parts.
Water is heated and food cooked on open camp fires. The local council cut electricity to the camp after failing to evict the white squatters. The council wanted to develop the area into a wide screen viewing area for soccer matches ahead of the soccer World Cup, which South Africa hosts in June and July. Some residents, including three black South Africans, have lived there for years. Others arrived in recent weeks. "If you're out of work and you haven't got money, where must you go to? No one wants to help you -- this is the only place to go to," says Dennis Boshoff, 38.
South African President Jacob Zuma visited a white squatter camp near the capital Pretoria last year ahead of his election, saying he was "shocked and surprised." "The vast number in black poverty does not mean we must ignore white poverty, which is becoming an embarrassment to talk about," Zuma said at the time. White poverty in South Africa is a politically sensitive subject that gets little attention, but it is not new. Under apartheid, introduced in 1948, whites enjoyed vast protection and sheltered employment. The weakest and least educated whites were protected by the civil service and state-owned industries operating as job-creation schemes, guaranteeing even the poorest whites a home and livelihood.
But with that economic safety net now gone, South Africa's unskilled whites find themselves on the wrong side of history, gaining little sympathy from those who perceive them as having profited unfairly during the brutal apartheid years. Trade union Solidarity says there are around 430,000 whites who live in squatter camps. Around the capital Pretoria alone there are 80 squatter settlements. There are over 2,000 much larger black squatter camps across South Africa. Formerly comfortable Afrikaners recently forced to live on the fringes of society see themselves as victims of "reverse-apartheid" that they say puts them at an even greater disadvantage than the millions of poor black South Africans.
"Blacks get more than whites at the moment. They're being pulled forward against us. That's why all of us are here. It's very unfair because they told us it was going to be equal, but it's not equal," said Boshoff. This feeling of victimization and abandonment by the state has forged at the camp a collective sense of fatalism, isolation and firm reliance on their Calvinist religion. Each of the camp's ramshackle huts and tents is adorned with religious paraphernalia and an Afrikaans language bible.
Many poor white communities also struggle with alcoholism, violence and abuse but at Coronation Park, social problems have declined. "We kicked a lot of the worst ones out and the fighting and violence has gone down," said Hugo Van Niekerk, who has managed the camp over the past few years. Van Niekerk, who solicits donations and helps community members find odd jobs, successfully fought an eviction order last year from the local municipality but he expects little help from the council or government on housing. "We won't get houses from this government. If we were black maybe yes, but we are white."
Sickness Stalks Indian Farmers Using Chemical Banned in Europe
Seven-year-old Yeshaswini Gowda lies on the floor of her home in southern India unable to talk or walk. Her mother blames the severe disability on endosulfan, an insecticide banned in 60 countries. "When I was pregnant, helicopters used to spray endosulfan in the nearby cashew plantations and at times it used to fall on my body," said Damayanty Gowda, 28, in the village of Nidle in Karnataka state. "My two other children died and it can’t be due to anything but the chemical."
Indian officials aren’t so sure. While a 2007 European Union report tied endosulfan to physical and mental illnesses and deaths, India’s federal government says there’s no evidence that long-term exposure carries health risks. Indian companies led by Hindustan Insecticides Ltd. are the world’s biggest producers and the government has vowed to vote against including the pesticide on a United Nations list of dangerous chemicals at a conference in Geneva from Oct. 11.
The dispute underscores the dilemma India faces in balancing health concerns while feeding the world’s second-most populous nation after the weakest monsoon since 1972 propelled food-price inflation to among the highest in Asia. Environment Minister Jairam Ramesh last month halted cultivation of the country’s first genetically modified vegetable -- an eggplant designed to resist attacks by common pests and, its backers said, reduce the need for pesticides -- due to health concerns.
Some countries feel endosulfan is "a persistent pollutant," Pankaj Kumar, joint secretary at the Ministry of Agriculture in New Delhi, said in a phone interview. "The data available with us indicates otherwise. It’s an issue of scientific evidence." The EU wants endosulfan, first registered in the U.S. in 1954 by Hoechst AG, included in the UN Environment Program’s Stockholm Convention that aims to control and eliminate toxic carbon compounds. "Excessive and improper application and handling of endosulfan have been linked to congenital physical disorders, mental retardations and deaths in farm workers and villagers in developing countries in Africa, southern Asia and Latin America," according to a 2007 EU proposal to the UN to support placing the chemical on the list of prohibited substances.
Bayer CropScience ceased production of endosulfan in 2007 and will stop its sale globally this year after a phase-out period ends, spokesman Utz Klages said in an e-mailed statement from the firm’s headquarters in Monheim, Germany. "We are aware that crop protection products may not be used correctly under certain circumstances in some Third World nations," Bayer CropScience said on its Web site. India, along with Australia, Brazil, China and the U.S., continues to use endosulfan, arguing it’s affordable and safe, the farm ministry’s Kumar said. In India, it’s also sprayed on rice, potatoes and tomatoes. In the U.S., the Environmental Protection Agency says ecological and occupational risks posed by endosulfan can likely be mitigated to "levels below concern" through changes to pesticide labeling and formulations.
Indian manufacturers led by Excel Crop Care Ltd., Coromandel International Ltd. and Hindustan Insecticides export about a third of total output, N. Ramamurthy, general manager of marketing at Hindustan Insecticides, said. Endosulfan accounts for at least a third of revenue, the companies say. "It was a safe product for the last 45 years and sold in more than 60 countries," Dipesh Shroff, managing director of Mumbai-based Excel Crop Care, said. "You can’t blame a product just because it is banned in Europe."
Health and government officials in India’s southern states disagree. There is an adverse link between endosulfan and human health, said Thelma Narayan, an epidemiologist and co-founder of the Society for Community Health Awareness, Research and Action based in Bangalore, Karnataka’s capital. "It violates the right to one’s health and the government is sidestepping its responsibilities," she said, citing research in villages where endosulfan was applied. In the neighboring state of Kerala’s Padre village, where the Plantation Corporation of Kerala aerially sprayed endosulfan for 20 years up to 2000, a 2002 study by India’s state- administered National Institute of Occupational Health found that children exposed to endosulfan had congenital abnormalities and neurobehavioral disorders.
A government panel in 2004 said health problems in the village were not linked to endosulfan use. As a "precaution" it stopped the corporation spraying the chemical. The findings and recommendations were endorsed by the federal government. Karnataka state followed Kerala and stopped aerial application in 2001 after two decades of dousing cashew plantations. State Chief Minister B.S. Yeddyurappa linked the pesticide to disabilities in 231 people, according to a statement on his Web site. The government gave 211 families compensation of 50,000 rupees ($2,273) last month, it said.
The Gowdas in Nidle village received compensation, deputy administrative officer N. Manikya said. Still, although 118 people, including Yeshaswini, have severe disabilities, "it is not clear if these are being caused by endosulfan," he said. In neighboring Kokadda village, where endosulfan was used on cashew plants, Gracy D’Souza says the connection is clear. Her 20-year-old son Santosh Menezes lies on a mattress unable to walk or speak. "The government gave us compensation and 1,000 rupees every month for medical expenses," D’Souza said. "We were exposed to the aerial spray for at least 10 years."
42 comments:
@mobilehvac in response to your question in the previous post...
I have never owned a stock. However I did notice a quote from an economist at CIBC bank who was advising, " It's not time to push the sell button just yet. " I thought of you. Note he did not advise that it is time to buy.
"Bayer CropScience ceased production of endosulfan in 2007 and will stop its sale globally this year after a phase-out period ends, spokesman Utz Klages said in an e-mailed statement from the firm’s headquarters in Monheim, Germany. "We are aware that crop protection products may not be used correctly under certain circumstances in some Third World nations," Bayer CropScience said on its Web site"
Yeah, it's banned in 60 countries, but they have just spent the last 3 years selling off their remaining stock to countries whose laws are more lax. Then they go on to say that it might not be "used correctly under certain circumstances" – as if that is the problem with the poison they sell. The amount of retarded BS that is spouted by the corporatocracy is beyond belief... Crop Protection Products? Haha! Yeah, there is a War on Terror, too :)
I'm still waiting for attacks on out of control military spending.
I saw, months ago, that attacks on social security and medicare were very popular. Easy targets and so in line with "America". Now enormous military budgets and out of control military retirements, well, won't see much of that here. We'll see starving in the streets and old folks begging on street corners before we'll allow anything about killing people. There's so much money to be made. I read this blog often. Even contributed to it. But, you know, I'm starting to wonder about my wisdom. Piss and moan about the same stuff the mass media is. Maybe the folks here aren't so different after all.
"I saw, months ago, that attacks on social security and medicare were very popular."
Not here, not from me.
Now enormous military budgets and out of control military retirements, well, won't see much of that here.
It's true that the media don't want to touch that hot potato. But then, in all western countries, that would be tantamount to sacrilege.
I'm not so sure I like your undertone of "before we'll allow anything about killing people." though. I have opinions about lots of things, but that doesn't mean I'll vent them all here. This is about the economy.
.
@ Zeke, Not sure what you are saying? Are you suggesting that TAE move from a financial blog to a political one? If so that may be a valid question as the crisis has become political.
So what would you like to see that is different?
If anyone is not convinced the banks are priority numero uno the whole housing bailout baloney is all the proof anyone could ever need. Baloney is just a big hot dog.
scandia,
Because you have been focusing lately on the unholy attributes of the papacy, I thought you might be interested in a little bit of papal history contained in Uri Avnery's latest article on Counterpunch.
Some people in the articles selected demand more foreclosures and the feckless punished for their lack of foresight, in a true Protestan spirit. I see. They also criticize the government for not being harsh enough on them.
How selfish and shortsighted are some people!
This reminds me of a short story by Moliere.
A Savage American in the 18th Century goes to Paris -where he was regarded as the epitome of The Good Savage- and when asked his opinion about (pre-revolutionary) France, he says, words to that effect:
- I saw people unbelievably rich, and many, many more poor people on the streets. I don't understand why the poor don't go to the homes of the rich, kill them and take what they need.
Since there are so many Bible thumping, hymn singing people around, may I remind you that the Deuteronomio orders not to glean the last heads of corn from the fields, rather leave them for the widow and the orphan?
Else the orphan will take revenge, when hair grows on his forearms.
Let's have an article about how the social security system is supported by workers earning less than 80,000 and not by investors earning more than that.
They'd have a solvent social security system if they taxed the goddamn welfare queen CEO's incomes as much as they tax the lowly wage earner's income.
Furthermore they tax secondary earners completely out of the paid workforce.
And yeah if they didn't finance war profiteering there'd be enough social security at home.
If I see quoted another half assed article priming the public to dump social security 'because we can no longer afford it' without explaining the inequity of FICA taxes, I will have to agree with Zeke.
Holy $hit.
The number 1 and number 4 bank aren't going to pay tax? SOB's!!!
Grrrrr, aaaarrrggghhhhh!!!!
VK,
Calm down Grandson, it's perfectly logical not to tax insolvent institutions. Doing so would only make them more insolvent. Given all the bond money the Government has hoovered up trying to make them look solvent, that would just be silly. Think about what might happen if the Taxman kicked down their door and all they had to offer was a bag full of really stinky MBS. Much too big a risk. :)
Health and employment are uncontrollable; Age at your own risk; Not all can retire at once; Some suggest rotating retirement where we take turns emptying each other's bed pans
-TAE Summary
@Armando
Sorry if I have read you wrong, but are you suggesting that people shouldn't be foreclosed on? That we should support those who are underwater on their mortgages? That we are lacking compassion or not thinking of the consequences?
If so, then you are being short-sighted, naive and perpetrating a myth that says that things will recover soon.
Remember, the proposed reform is for the banking industry's benefit, not for the people who are drowning in debt.
"J U B I L L E E"
The federal government still hasn't figured out that bailing out housing will just put more pressure on rentals and those that own rental property. A zero sum game.
Hello.
I was wondering if anybody knew what the GDP used to calculate the pc increase in fiscal spending and government debt over the next years? I can't remember remember reading anything about it. Do they use the 100pc increased exports GDP that Obama wants? Or perhaps the more realistic approach where the GDP shrinks as the global economy cools down. And just how many jobs do they think will have survived?
Do we really know if the gov.debt could be 100pc of GDP by 2020, or 200pc by 2015?
NZSanc,
I've been hearing for years about unregulated pesticide use in 3rd world countries specifically Asia (although I also understand that in many other parts of the world the same problem exists). Friends of mine who have lived in Asia for extended periods tell me that it is hard to find a fruit or vegetable that isn't coated in what is often sticky chemical smelling stuff.
This is criminal. Shame on all of them!
@Carpe diem.
I was in Kerala in '01 and a fellow packer warned me about eating fruit that felt in any way sticky or greasy on the surface peel/skin, don't recall exactly but am pretty sure he mentioned avoiding cashews and other stuff as well, in my ignorance I regarded him as an obsessive greenie and was having way too good a time to care about such trivialities as poisoning myself,
I'm older, wiser and possibly more toxic internally now.
Z.
Do we really know if the gov.debt could be 100pc of GDP by 2020, or 200pc by 2015?
Government debt to GDP ratio is currently much higher, say 130% of Debt to GDP. Given that the Govt. has implicitly backed Fannie and Freddie with an unlimited loss guarantee provision.
The accounts of Fannie and Freddie should be on the US accounts. This would see Debt explode to around 20-21 Trillion (GSE's accounting for 6 Trillion in mortgage debt + current debt limit at 14.1 Trillion or so which at this rate is going to be breached by October this year)
So officially we'll breach 100% this year. Unofficially it was breached in August 2008.
Total Debt to GDP by the way is close to 600-700% of GDP if one accounts for it the way corporations do. Present liabilities across all sectors in the country (54 Trillion) + all future liabilities totalling upto 65-100 Trillion.
@Zeke
First of all, articles you read here don't represent I&S's editorial viewpoint. Most **are** from the MSM and many are quite absurd. But one must stay aware of the toxic waste being feed to the sheeple. Ilargi often points out the absurdity of the following articles in his opening comments. As a long time lurker, you must be aware of this.
Second, does anyone in this comment section feel that old age entitlements should be cut in favor of increased military spending? If yes, please overwhelm the comment section.
Third, straight social security should not be conflated with Medicare. The first is a rather efficient, cleanly run organization that disperses monthly stipends to the elderly which are just large enough to live on with great difficulty. (Not so difficult, for the moment, in third world countries.) Furthermore, pissants paid $2.5T into the fictitious lockbox. The fact that the oligarchs chose to piss the money away on Humvees is irrelevant. It is owed to SS and must be paid. Medicare is a very ugly beast because it fleeces the taxpayer with all the Usakistan evils of Big Pharma and Big Medicine. As a former plumber from St. John, USVI, many of these multimillion dollar villas were owned by physicians. Very common.
My late mother in her 80's and 90's would visit physicians at great expense to the taxpayer as a social event.
gylangirl,
Jubilee was the policy of a theocratic government. The priestly class has always clearly understood the risk to their dominance of allowing wealth to accumulate in the commercial class. Remember the GOLDen Rule(s).
As it happens, we have been privileged to live in a plutocracy. Where the steady accumulation of the gold (not actually referring to PM's here) by the commercial class has made possible things like air travel, chunnels, MTV, GPS, The Simpsons, etc.
The number 1 goal (ever wonder why we are so vigorously encouraged to chant, We're Number 1?) of any ocracy is to keep its kind on top. Ipso facto, until such time as we install a theocracy (something to be regarded with much trepidation) there will be, No Jubilee.
"The fact that the oligarchs chose to piss the money away on Humvees is irrelevant. It is owed to SS and must be paid."
Er.... it may be "owed" to the SS trust fund but that does not mean that it MUST be paid. That which cannot be satisfied won't be (not in real terms)....it is just as simple as that.
Panama Red said...
does anyone in this comment section feel that old age entitlements should be cut in favor of increased military spending? If yes, please overwhelm the comment section.
Oh, you Panamaniac you! I was warming up my aged and afflicted fingers to meet your challenge, before it hit me that you had restricted the opportunity to anyone. So, of course it wouldn't be right for Nobody to do it. In any event, me time-ravaged fingers probably would have given out well before the comment section got flooded. :)
@Wolf
I am well aware that the oligarchs may default on their SS obligations, even before the "SS lock box" is liquidated. What I see as somewhat more likely is that they will cut SS payments and drain the SS trust fund at a slower rate, perhaps until it is empty prior to a complete default. I used the term MUST as a moral imperative, not as a law of physics. Of course, moral imperatives and $2 will buy you a cup of coffee with the scum who are running the show.
Wolf at the Door said...
Er.... it may be "owed" to the SS trust fund but that does not mean that it MUST be paid. That which cannot be satisfied won't be (not in real terms)....it is just as simple as that.
Ah Wolfie, we geezers do so enjoy being reminded of how screwed we are. We can, however, be thankful that the time approaches when we may no longer know it. I can only imagine the anguish being visited upon the minds of young whippersnappers who for years now have presumed they were going to enjoy perhaps 40 or 50 years of laying about indulging in sybaritic pleasures. :)
Banks and customers live in a symbiotic relationship, in our societies one can not exist without the other. I believe that the basic problem is that you think that what you earn and possess is owed to you personally, to your abilities, hard work, foresight (indeed), education, inheritance and what not.
That you are the Master of your Destiny, and the Captain of your Ship, as some fool said.
You are not.
What you have you owe to your society, is the product and result of a complex history, in which the whole world also has taken part, the accumulation of capital, knowledge and labour.
If you are a medical doctor, your skills are the result not of your insignificant personal abilities and worth, rather the result of 2.000 years of medical science, in which you paid no part.
A more capable doctor in Cuba or Kenya will earn practically nothing in comparison.
A living place, some kind of dwelling, is the most basic human right after food and if Americans are cheated out of their houses and the USA can not provide even basic homes for its citizens -remember that the Soviets DID provide living quarters for all, never mind the quality- it will have the most terrible consequences for everybody.
Solutions? Let the ones who get paid for that provide them.
@ VK: "Total Debt to GDP by the way is close to 600-700% of GDP if one accounts for it the way corporations do. Present liabilities across all sectors in the country (54 Trillion) + all future liabilities totalling up to 65-100 Trillion."
I wish this statement was the one we saw in MSM, it really is the truth, hence why we don't see it mentioned as such.
Eyeballing this site will give you agida:
http://www.usdebtclock.org/
Normally, I choose to link stories on The Onion for their humor value. This one comes closer to being topical than humorous.
Increasing Number Of Parents Opting To Have Children School-Homed
Zander,
Thank you for sharing. Rather puts me off visiting certain places or going with a suitcase full of power bars and bottled water!
Never to late to detox yourself though. Do a daily sauna for a few months and can't hurt to do a liver detox/heavy metal cleanse. There are some great products on the market to be found at a reputable health food store. You'll be back to your internally pristine self in no time!
:)
" carpe diem said...
Zander,
Never to late to detox yourself though. Do a daily sauna for a few months and can't hurt to do a liver detox/heavy metal cleanse. There are some great products on the market to be found at a reputable health food store. You'll be back to your internally pristine self in no time!"
Didn't he say the toxins made him wiser? What would happen if he detoxifies?
Didn't he say the toxins made him wiser? What would happen if he detoxifies?
Ignorance is bliss :)
Ilargi,
I can definitely attribute an increase in wisdom to significant contact with urushiol, the toxic oil produced by poison oak. Now you've got me questioning the word of Plato. Could it be that Ole Socrates actually got all his wisdom from tipling hemlock and just accidentally overdosed in his old age? Maybe I better stop taking my liver cleansing herbs before I get totally stupid. :)
VK said...
Ignorance is bliss :)
So, Grandson, are you saying there is more to this sign than meets to eye?
I.M. Nobody,
The story you linked to on school-homed children is certainly reflective of reality in our culture today. The militarism and violence in public schools (military recruiters and JROTC are in every high school in our county) was one factor that prompted my husband and myself to homeschool our children from K to 12. For the most part, people feel they need the corrupt institutions to survive and thrive, whether churches for spirituality, industrial farming practices for food, schools for learning and physicians and Big Pharma to be healthy, etc.
I have neighbors whose kids are raised by the public schools. The children eat breakfast, lunch and snacks at school and go to before and after school care. They are normally away from home 12 hours. Parents can hardly wait to have the children out of the house after holidays and summer vacations. Yes, very sad, especially when families sacrifice their children and slave for two incomes in order to pay for the luxuries they do not need, such as MacMansion mortgages and furnishings, and SUVs, for example. Yesterday's luxuries have become today's needs!
The institutions of our time support and cover up each other's corruption.
@ made him wiser.........
It may or may not have made me wiser,but the additional ear which started growing on my forehead on returning is a real bugger when I'm trying to put on a deerstalker hat before a days fishing. OTOH you can listen to your fave music at low volume late at night in crystal clarity without disturbing pedantic neighbours.
Z.
"zander said...
@ made him wiser.........
It may or may not have made me wiser"
Well, you inhaled the toxins and claim you are now wiser. There's therefore no way you can prove the toxins didn't cause this.
@ scandia
If you can, try to catch the reptiles address to the Labour faithful today, his phoney US/UK hybrid accent at the intro of the speech is the best example ever of this mans deceit, it's laughable, made doubly so by his extreme... "orangeness" is about the only way I can describe it, false tan just about sums him up
Phoney tony indeed.
Z
Grandpa Nobody,
Bliss is in Texas! A good brew, some sunshine and a good match on the tubes.
Also in reference to your counterpunch article, the guys at AIPAC must be slacking off. The banking lobby have earned their favours.
@ Ilargi......"therefore no way you can prove the toxins didn't cause this".
Indeed, and therefore I'm going to embark on a new drinking career this very weekend using a tipple of guinness with a dash of lime and mercury in the hope that this time next year I will have found solutions to most, maybe all, of the more serious problems facing humanity today.
Z.
New post up.
States of Bewilderment: The Mad Hatter reigns supreme
.
There are good poisons and bad poisons! As for poisons making one wiser - well I will approach that idea with some healthy scepticism along with raised eyebrows.
I certainly wouldn't want a body filled with pesticides but I certainly would consider botox!!
;)
@oilwelldoctor, re: "The federal government still hasn't figured out that bailing out housing will just put more pressure on rentals and those that own rental property. A zero sum game."
I don't mean to sound callous here, but a zero sum game seems like it might be an improvement when hardworking families are being kicked out of their homes while owners of rental properties are arguably being propped up. The implication seems to be that landlords with more than enough need to be protected while average hardworking families can be left twisting in the wind.
It seems to me that the distribution of wealth is so skewed in this country that milder forms of economic inequality are overlooked. Right now we are starting to some elements of class warfare in terms of disgust with the oligarchy, but I don't think it would be unprecedented or surprising if some of those sentiments started to bleed over against the bourgeoisie.
I mean... it's obviously disgusting when the top 1% keeps getting richer while the bottom 50% keeps suffering more and more, but what about that upper percentile that "merely" owns five or six duplexes (in addition to their personal McMansions) while the bottom 50% get fleeced for their last few pennies and find themselves driven into the streets?
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