"Conversion of beverage containers to aviation oxygen cylinders. Removal from solution tank at a rubber factory in Akron, Ohio now producing metal essential for the Army. This bath, which follows the removal of the weld scale, gives the inside of the cylinder a further cleaning and removes all chemicals which may remain from the previous operation"
Ilargi: From a purely political point of view, it’s a simple story. Existing homeowners are a far more powerful force at the voting booth than potential owners, homebuyers, are. It’s therefore very much in the interest of the incumbent government to keep home prices as high as it can. Let them slide too much and you will pay for that at the next election. For potential buyers you can devise plans that lower interest rates and down payments, but that's all. More affordability simply through lower prices is not on the political table.
Still, in the "listening conference" on US housing policies - and Fannie Mae and Freddie Mac in particular- that started this week, it's not voters that have the biggest say. That is reserved, and how could it not be, for the financial industry. Not that the Obama administration has to hear the truth from the bankers anymore: Washington has long since realized that truth. Which is that without Fannie and Freddie, and the 80% stake the US took in them in 2008, as well as the unlimited financial guarantee issued by Tim Geithner at the end of 2009, it's not just the housing industry that would instantly collapse. The banking industry would, like a shadow, rapidly follow in its footsteps.
Which is why the conference is largely an elaborate piece of public spectacle, bereft of any true substance. It’s the government going through the motions of an exercise of which it knows the outcome beforehand, perhaps silently praying for a miracle to come forward, but at the same time not even remotely considering the one and only solution to the problem. Which is to get rid and Fannie and Freddie, let the share- and bondholders take the haircuts the deserve for investing in overtly bankrupt walking dead, take the losses that remain on the federal balance sheet, and let the housing and mortgage industries sort it out for themselves for a while. Say, 5 years.
And so what I’ve often labeled the biggest crime in US history continues unabated. There is, on a regular basis, lots to do about the various bail-out schemes for too big to fail institutions that have been initiated in the past two years, but the largest bail-out, consisting of Fannie, Freddie and increasingly also Ginnie Mae and the Federal Housing Administration, is hardly ever mentioned in the same vein.
Undoubtedly, this has a lot to do with the way the money is made available, as well as with the permission to hide the true value of all the paper involved in the industry, but it is still remarkable that the press hasn't been on top of it to a much greater extent. If it had been, we wouldn't perhaps have had to listen to Tim Geithner opening the conference trying to rationalize ongoing government -financial- support of the housing industry like this, reported by Ronald Orol at Marketwatch:
Geithner: Housing system needs government support"Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale,"
Really? Pray tell, what is an "adequate scale" of mortgage lending in a recession? And who decides that? Do we consider what the market will tolerate "adequate", or is that off the table from the get-go? Or does "adequate" simply indicate an ongoing level of lending and borrowing, against the grain if the recession, in which lenders can continue to lure people into loans that they should perhaps not have signed given the situation both the economy and they themselves are in? In other words, keep the financials afloat at the cost of the people?
At least Bill -Skin In The Game- Gross at Pimco, one of the largest holders of US mortgage backed securities, has a plan:
Gross recommended a major home refinancing program where homeowners with mortgages that have 5%, 6% or 7% down are reduced to the current 4% rates. "This home refinancing, to my way of thinking, where you take 5%, 6% or 7% mortgages and turn then into 4% mortgage would provide a push, a stimulus of $50 billion to $60 billion in consumption as well as potential lift of 5% or 10% in home prices," he said.
Sounds too good to be true. What's wrong here? Millions of homeowners get to live cheaper, enabling them to spend more, home prices would go up, and it would cost the government nary a penny. Why didn't anyone else think of that? Well, all you need to do is look at who indeed would pay the costs. Which is the lenders, who would now receive 2-3% less in monthly interest payments. Wall Street would never accept it, unless Washington makes up the difference. Which Washington would never accept to do.
It would also make homes less affordable for potential buyers, since prices ostensibly would rise. But even with today's record low mortgage rates, pending home sales are plummeting, while housing starts are anemic by "normal" July/August standards.
In other words, there is a fiction that says home prices need to remain high, in order to save both the banks and the government (if only because of its 80% Fannie and Freddie stake), while there is at the same time a reality that says sales are dragging through the gutter in the face of record low interest rates. And as is the case with so many plans and schemes the Obama administration has so far come up with, the fictional tale is based on the biggest fiction of them all: that economic growth must and will return, and wash all our sins away.
Bill Gross gives the government one more bit of reality, as Binyamin Appelbaum writes in the New York Times:
Geithner Affirms U.S. Role As Mortgage Backer"To suggest that there’s a large place for private financing in the future of American housing finance is unrealistic," Mr. Gross said. [..] Pimco would not invest in bundles of mortgages that lacked government insurance unless the borrowers had made down payments of 30 percent or more.
How'd you like them apples? Gross has the actual guts to paint a picture of, well, let's say, what a mortgage looked like prior to heavy-handed government meddling in the market. He also makes clear that he doesn't want that, though: his fortune was made precisely because the government is into the housing market up to its ears.
There are still plenty of Americans who will defend Fannie and Freddie for all the good they’ve done for people who couldn't have afforded a home through the past 70 years or so. It's time for them to wake up and smell the roses, or whatever it is this is starting to smell like. Fannie and Freddie have become nothing but tools for the financial industry to, first, raise home prices (the more potential buyers, the higher the prices) and second, to lure people into purchasing these now far more expensive homes that they can barely, or simply not, afford.
There is no recovery in the US, and there never was. There was a short headfake provided by trillions of dollars in taxpayer funds that were thrown at Wall Street, and of which barely anything has stuck to that wall. Foreclosures have remained at near-record levels, as has unemployment. Another quantitative easing scheme announced last week by Ben Bernanke is dead before it was born, because Washington has run out of ways in which to fool Americans into thinking green shoots are here, or just around the corner. Record low home sales at record low interest rates tell the entire story.
But the government, despite all this, isn’t done yet. It will take as long as it takes to kick the Fannie and Freddie solution down the road. Till the next election, and then the next one after that. And it does make sense to do this from their point of view, since there is no solution available that would leave either the banking system or their own political careers intact. There is no way out, the exit doors are shut. They can't keep alive both Wall Street and Main Street. And so they live for the moment, make the best of what they got, and, alongside their banking buddies, pocket as many more -taxpayer- bucks along the way as they can, and damn the American people.
See also: Fannie and Freddie: Hopelessly unproductive works
Geithner: Housing system needs government support
by Ronald D. Orol - MarketWatch
Without government backing for the housing finance system, future economic downturns could be harsher, Treasury Secretary Timothy Geithner said Tuesday at a conference on the future of housing finance. "Without such support, the risk is that future recessions could be more severe because the financial system would not have the capital to support mortgage lending on an adequate scale," Geithner said.
Geithner and other policy makers in discussing the future of Fannie Mae and Freddie Mac at a highly anticipated conference. The two mortgage giants were essentially nationalized at the peak of the crisis in 2008 to avoid losses and stem the credit contagion. So far, they've cost taxpayers roughly $145 billion in funds, used to cover their losses, with more losses expected on the horizon. And reform is still a long ways off. The Obama administration is still in the early stages of identifying its own proposal, which Congress is due to consider in January. After that, key lawmakers are expected to start drafting legislative efforts to reform the mortgage-giants.
Geithner added that different countries provide that support in a variety of ways, employing explicit and implicit approaches, but that the question that should be asked is "how much" government support should be provided. "It requires a broad reassessment of how much support the government should provide for housing finance," Geithner said. The goal of the conference is to come up with a system that would win the support of enough lawmakers on Capitol Hill to pass while also ensuring a fully functional housing market that doesn't rely on taxpayer infusions -- even in a severe economic downturn.
Many Republicans want to fully privatize the two entities altogether, while numerous Democrats want to enshrine a permanent government agency -- or agencies -- to buy and sell mortgages and mortgage securities. Geithner has said in the past that he's seeking a middle ground -- one in which the government would continue to offer some type of federal guarantee of mortgage loans to ensure that U.S. borrowers can easily finance the purchases of homes -- but has yet to provide specific details.
Shaun Donovan, secretary of the Department of Housing and Urban Development, agreed that the government should play a role in the housing system. However, he acknowledged that it should be reduced from where it is now, where 90% of all mortgage loans are guaranteed by Fannie and Freddie and the Federal Housing Administration. "To be clear the government's footprint in the housing market needs to be smaller than it is today," he told the conference.
PIMCO: Without guarantee, moribund housing market
Bill Gross, manager of the world's biggest bond fund at Pacific Investment Management Co., said that without government guarantees, mortgages would be hundreds of basis points higher, resulting in a moribund housing market for years. He added that PIMCO would not buy a privately insured mortgage pool unless it was made up of mortgages that each had at least a 30% down-payment.
He also warned that without a "positive fiscal stimulus" unemployment rates would continue to rise and approach double digits. Gross recommended a major home refinancing program where homeowners with mortgages that have 5%, 6% or 7% down are reduced to the current 4% rates. "This home refinancing, to my way of thinking, where you take 5%, 6% or 7% mortgages and turn then into 4% mortgage would provide a push, a stimulus of $50 billion to $60 billion in consumption as well as potential lift of 5% or 10% in home prices," he said.
Geithner Affirms U.S. Role As Mortgage Backer
by Binyamin Appelbaum - New York Times
The Obama administration has been barraged with ideas for reworking the government’s role in housing finance, spanning the spectrum from guaranteeing all mortgage loans to eliminating all federal subsidies for homeownership. Treasury Secretary Timothy F. Geithner, speaking Tuesday at a conference to discuss the possibilities, made clear that the administration was not pondering such radical kinds of surgery as it develops a proposal it hopes to unveil in January. Rather, Mr. Geithner — and the conference after his remarks — focused largely on drafting a new and improved version of the current system, in which the government subsidizes mortgage loans made by private companies.
Mr. Geithner said continued government support was important "to make sure that Americans can borrow at reasonable interest rates to buy a house even in a downturn." The absence of such support, Mr. Geithner said, would deepen future recessions because unsubsidized private companies would curtail lending. The administration convened dozens of leading experts on housing finance at the Treasury on Tuesday in a show of public engagement with the politically charged topic, including the future of the mortgage finance companies Fannie Mae and Freddie Mac. Almost two years have passed since the government took them over.
The slow pace of work has become a political liability. Republicans have hammered the decision not to address Fannie and Freddie in the legislation overhauling financial regulation that President Obama signed into law last month, arguing that Democrats should have focused on dealing with the two companies. Democrats have argued that it was impossible to deal with both issues at once, and that it made sense to delay debate until the housing market began to return to normal.
Mr. Geithner took a different line on Tuesday, however, asserting that the process of reforming housing finance was already well under way, beginning with President George W. Bush’s decision to seize the companies, and that the current administration has continued to reform the companies’ business practices. He also said that it remained important to take the time "to get reform right." "We must take this opportunity to build a more stable housing finance system that better protects American taxpayers," Mr. Geithner said.
Administration officials have been debating the possibilities almost since the day that Mr. Obama took office. Those discussions increasingly center on creating a better kind of backstop for mortgage lending, officials said. The current system relies on Fannie and Freddie, which buy loans from banks and other lenders, then sell packages of those loans to investors with a promise to cover any losses. Before 2008, investors assumed that the government, in turn, would backstop Fannie and Freddie. The federal takeover of the companies simply validated that assumption. It left unchanged the mechanism by which the government guarantees loans. Fannie and Freddie now buy about two-thirds of new mortgage loans.
A number of academics and representatives of the lending industry said at the conference that this decades-old model should be swept away. They argued that the government should assume a new, more limited role, offering insurance that would cover only catastrophic losses, like those after the collapse of a housing bubble. Ingrid Gould Ellen, an urban policy professor at New York University, said that private lenders should "hold the first risk" of absorbing losses. The government should step in only once private reserves, including private insurance, have been exhausted.
Others, however, argued that mortgage lending would not recover unless the government continued to play a more active role. More than 9 in 10 new mortgages now carry a government guarantee. Bill Gross, a founder of the Pacific Investment Management Company, a leading investor in mortgage securities, said those guarantees were necessary to persuade investors to put money into mortgages. "To suggest that there’s a large place for private financing in the future of American housing finance is unrealistic," Mr. Gross said. Mr. Gross said Pimco would not invest in bundles of mortgages that lacked government insurance unless the borrowers had made down payments of 30 percent or more.
The administration is still considering these and other options. The choice will reflect in large part a judgment about how hard the government should try to increase homeownership. Broader guarantees create greater risks for taxpayers, but also lower interest rates, bringing ownership within reach for more families. Shaun Donovan, the housing secretary and a host of the conference with Mr. Geithner, said that the administration remained committed to "broad access to homeownership, including options for those families who have historically been shut out of these markets."
Even if the current approach to guarantees is basically preserved, Fannie and Freddie are unlikely to survive in recognizable form. Taxpayers have spent more than $150 billion covering losses that the companies incurred in recent years, largely by investing in lower-quality mortgage loans to bolster profits. The companies, once broadly popular, are now badly tarnished. Largely untouched at the conference, however, was the question of how to get rid of them. Fannie and Freddie still own vast portfolios of troubled loans. Fannie, for example, expects to lose money on the loans it acquired in every year from 2005 to 2008 — loans that still make up 47 percent of its total holdings. The companies cannot be completely shut down until those losses are absorbed, a process expected to drag on for years.
US housing: Sunset Boulevard
by Suzanne Kapner - Financial Times
With one child at home and another on the way, Elise and Morgan Richardson of Idaho Falls began looking last spring to buy a home. "You get married, you have kids and you buy a house," says Mrs Richardson, 26. "That is just the order of things."
Buying a home has been a rite of passage for nearly two-thirds of the American population since the 1960s. But as the dream of ownership turned into a nightmare for borrowers who, thanks to easy credit during the recent boom, wound up in homes they could not afford when the market began to collapse four years ago, government officials are for the first time in decades seriously rethinking policies that promoted home ownership as a national birthright.
"The goals of housing policy should be that people are well housed, not necessarily that they are homeowners," says Raphael Bostic, a senior official at the Department of Housing and Urban Development. Mr Bostic’s views differ from the administrations of Presidents George W. Bush and Bill Clinton, which tried to expand ownership. "We want sustainable home ownership, not just home ownership for ownership’s sake," Mr Bostic says.
Ownership rates have already fallen from their pre-crisis peak and any further decline could be damaging for Democrats as they head into the November midterm elections. Nearly 10 per cent of borrowers are at least 90 days behind on their mortgages in the average Congressional district, more than two-and-a-half times the rate on election day 2008, according to a Deutsche Bank study. Democratic districts tend to have more troubled borrowers than Republican districts, suggesting Democrats might face greater voter anger over housing.
At the same time, the Obama administration is under growing pressure to tackle the housing problem as taxpayer losses continue to balloon at Fannie Mae and Freddie Mac, the government-sponsored entities that are propping up the mortgage market by buying or guaranteeing almost all new loans being issued today. The debate is expected to heat up today at a Treasury conference that will bring together experts from the private and public sectors – including bank executives, scholars and directors of urban planning groups – and continue to accelerate into the autumn, when several Congressional leaders have promised to make housing reform a legislative priority.
Australia, Ireland, Spain and the UK all have higher home ownership rates than America, and although those countries have suffered from the housing bubble’s collapse, none has suffered quite as much as the US. One reason is that American home buyers had greater access to cheap credit, created by a Wall Street securitisation machine that bundled mortgages, many of which were high-risk subprime debt, into bonds and sold them to investors around the world.
But analysts also point to US public policy, which pushed ownership at the expense of rentals. The UK flirted with its own policy-induced bubble during the Thatcher era, when discounts made it affordable for lower-income tenants to buy council housing. But the Labour government that ruled from 1997 until earlier this year did not make the programme a priority and in 1999 Gordon Brown, then chancellor of the exchequer, did away with mortgage tax deductions.
Other European countries such as Germany have also scaled back ownership subsidies, according to Hans-Joachim Dübel, founder of Finpolconsult, a Berlin-based consultant, but US buyers are still eligible for a lucrative mortgage interest tax credit. And because European mortgages tend to be financed by banks, they often require higher downpayments than government-backed US loans. "Europeans have abandoned the idea that you can artificially push up ownership rates," says Mr Dübel. "It’s a lesson the US still has to learn."
US policymakers have long upheld the benefits of home ownership, including the creation of safer, more stable communities. Studies have even shown that children of homeowners perform better in school than children of tenants. But now some researchers are starting to rethink those assumptions, arguing that a community of renters can be just as stable, so long as those renters are encouraged to stay in their properties for a long time. New York City, which has a large number of renters and also communities that are civically minded, is a prime example. "The benefits of home ownership are largely a myth," says Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning think-tank.
The other argument for home ownership has been as a pure investment. Why throw away money on rent, when you can build equity in your home, often for similar monthly payments? While US house prices soared in the past decade, over the longer term they have generally increased about 1 per cent to 3 per cent a year, or no more than inflation. In that respect, stocks would have generated a far higher return. A $100 investment in housing in 1933 is now worth $178, adjusted for inflation. A similar investment in stocks would be worth $932 in today’s dollars, according to Robert Shiller, the Yale economist. The comparison does not account for dividends or the use of debt.
Buying a home also includes legal fees and other costs. For such costs to be recoverable, owners must usually stay in their homes at least five years – and that is in a normal market, not one where prices have declined 30 per cent since 2006, estimates Mr Baker.
Some government officials have started to play down the benefits of home ownership. Speaking in January at a meeting of the American Economic Association, Karen Pence, the Federal Reserve’s chief researcher for household and real estate, argued that homes were a terrible investment. Emphasising that she was speaking for herself and not on behalf of the Fed, Ms Pence said that unlike stocks and bonds, homes were an indivisible asset. "You can’t just slice off your bathroom and sell it," she said. And because home prices are closely tied to the job market, what amounts to the largest financial asset for most people would decline in value just when they needed it most.
There is another downside to generous subsidies funnelled to homeowners, namely that the US is potentially investing too little in other important areas such as education, infrastructure and technology. At the height of the housing bubble in 2006, for instance, mortgages accounted for nearly half of all US debt issued that year, about double the historical norm, according to Haver Analytics. "We’ve over-emphasised our investment in housing and neglected to invest in education and infrastructure," says Bill Gross, who, as the founder of Pimco, is the manager of the largest bond fund in the world. "We need to refocus on the production of ‘things’ rather than the production of financial products and houses."
Administration officials have hinted that they plan to do just that by scaling back some support for government-backed home loans in a broad overhaul of housing finance. But analysts caution that switching gears will be difficult. Any further decline in house prices could destabilise an economic recovery that has already begun to falter. They add that the government needs to do more to encourage affordable rentals, such as provide tax credits and other incentives to secure financing for these types of developments. "We are looking at ways to make that work better," says Mr Bostic, the HUD official. In spite of the best intentions, some experts warn, the US economy has become addicted to artificially high levels of home ownership and any attempt to wean itself could result in a painful withdrawal.
Mr and Mrs Richardson of Idaho Falls finally found the house of their dreams this summer, a five bedroom, two-bathroom colonial-syle property, which had gone into foreclosure and was on the market for $106,000. The couple only had $3,500 saved for a down payment, which normally would have put the home out of their price range. But a new programme offered by the Idaho state housing agency allowed the Richardsons to buy the home with only $1,000 deposit. If the Richardsons default on the loan, taxpayers will foot the bill, through an arrangement with Fannie Mae, which has agreed to repurchase loans from the programme, as long as they do not go bad within six months of issuance.
Susan Semba, the lending director for the Idaho Housing and Finance Association, which administers the programme, said she expects the new initiative to have default rates of about 7.5 per cent. That rate is lower than on loans insured by the Federal Housing Authority, which helps low-income borrowers by requiring down payments of only 3 per cent, but higher than the national average for conventional loans with down payments of 10 per cent or more.
Experts say that this programme is similar to policies that led to the housing mess in the first place. "Unless the economy comes back like gangbusters, homes in many of these areas will continue to fall and people who put little money down will quickly end up with no equity," says Danilo Pelletiere, the research director for the National Low Income Housing Coalition. "As policies go, it’s more of the same."
THE GOLDEN AGE
A sector that survived a world war buckles post-bubble
The notion that every American should own their own property dates at least to the Great Depression, when economic upheaval led to a proliferation of drifters and shanty towns. "We want to see a nation built of homeowners," said Herbert Hoover, at his 1929 presidential inauguration.
It would be five years before legislation was passed to bring that about. The 1934 National Housing act, part of President Franklin Roosevelt’s New Deal, attempted to make ownership more affordable. It established the Federal Housing Administration, which insured mortgages; and the Federal National Mortgage Association, or Fannie Mae, which buys mortgages from banks, freeing them to make further loans. A sibling agency, the Federal Home Loan Mortgage Corporation, or Freddie Mac, followed in 1970.
Back in the 1930s, the average home loan was of short duration, typically three to five years; required a large deposit; and carried high interest rates, putting it out of reach of most. At around that time, government agencies developed long-term loans, later followed by fixed rates, lending stability to the market and making mortgages more widely available.
But it was after the second world war that the age of home ownership came into its own. In addition to programmes guaranteeing loans to returning troops, a great migration to the suburbs fuelled the idea of ownership as an integral part of the American dream. By 1968, ownership rates had soared from 45 per cent to 64 per cent, where they stayed for the next three decades.
Then the game changed. Presidents Bill Clinton and George W. Bush introduced policies that helped create a housing bubble by promoting low deposits and relaxed lending standards. "One of the great successes of the United States in this century has been the partnership forged by the national government and the private sector to steadily expand the dream of home ownership to all Americans," Mr Clinton said in 1995.
A decade later, with ownership rates peaking at 69 per cent, the market was poised for a nose dive. By 2006, prices were starting to slide; they have since crashed almost to pre-bubble levels. Borrowers who had taken out subprime loans beyond their means with high interest rates, and those who had paid no deposit, soon wound up owing more than their homes were worth. The ripple effect on the economy triggered today’s high unemployment levels, making it hard even for prime borrowers to stay up to date with payments and creating an ever widening circle of defaults.
Ownership rates have already fallen to about 67 per cent, and most experts say they are likely to sink further. They "are trending downward", says Bill Gross, founder of Pimco, which runs the world’s largest bond fund. "The big question is what the correct percentage should be."
Factbox: Housing companies could face reform in 2011
by Alina Selyukh - Reuters
The Obama administration is preparing a plan to overhaul U.S. housing policy and mortgage finance giants Fannie Mae and Freddie Mac. Following is a description of existing U.S. housing companies' roles and operations:
Fannie Mae is a chartered government-sponsored enterprise (GSE) that operates in the secondary mortgage market. Fannie provides liquidity to lenders by purchasing loans and bundling them into mortgage-backed securities (MBS) for sale in the secondary market. It issues securities both domestically and internationally, gathering funds to buy mortgage-related assets for its portfolio, which is also built up through purchase of mortgage loans and MBS.
The U.S. government took over Fannie Mae on September 8, 2008, placing the company in conservatorship. It is regulated by the Federal Housing Finance Agency and has received an unlimited federal credit line. The U.S. government has spent more than $75 billion on Fannie as of May 2010. In May, Fannie asked for another $8.4 billion and then an additional $1.5 billion in taxpayer aid in August after posting a net loss of $3.1 billion for the second quarter 2010. Including the last request, the federal government will have directly fed $86 billion to Fannie Mae. Fannie's market share has slid to roughly 2 percent in the second quarter in 2010 from 68 percent a year earlier.
Freddie Mac also is a chartered government-sponsored enterprise (GSE) that operates in the secondary mortgage market. It too is a ward of the state. Like Fannie, Freddie securitizes residential mortgages for sale in the secondary market and purchases single-family and multifamily MBS for its mortgage-related investments portfolio. Also like Fannie, Freddie was placed in conservatorship in September 2008 by the FHFA. A week before Geithner convened a conference to plan the overhaul of the housing finance system, Freddie requested $1.8 billion in federal aid, bringing its total request since the takeover to more than $64 billion. In August, Freddie reported the best three-month performance in a year, posting a loss of $6 billion. It reported its year-to-date GSE market share in 2010 at 42 percent after a plunge to 37 percent in 2009.
Federal Home Loan Banks
FHLB is a cooperative of 12 regional banks that provide funding for community housing to lenders. Created by Congress, the system has been the largest source of community mortgage lending and community credit funds. The 12 banks are privately owned and regionally controlled; members include thrifts, commercial banks, credit unions, community development financial institutions and state housing finance agencies. FHLB stock is held at par value by more than 8,000 regulated financial institutions and is not publicly traded. Equity purchase is necessary to join the system and ensures self-capitalization of the entity. FHLB isn't supported by taxpayer money but enjoys special tax breaks.
Ginnie Mae, or the Government National Mortgage Association, is a government-owned corporation that issues securities explicitly backed by the U.S. government. This explicit guarantee distinguishes Ginnie from Fannie and Freddie. Ginnie also does not hold any of its own bonds. Ginnie Mae guarantees investors the timely payment of principal and interest on MBS backed by federally insured or guaranteed loans, mainly loans insured by the Federal Housing Administration or guaranteed by the Veterans Affairs Department. Ginnie Mae accounts for roughly 10 percent of the MBS market, ensuring timely payments on those securities, but it doesn't purchase, sell or issue securities itself.
Federal Housing Administration
The FHA is a federal regulator that is part of the Housing and Urban Development Department. It oversees Fannie, Freddie, FHLB and other mortgage lenders and provides mortgage insurance on loans made by the FHA-approved lenders for lower-income and first-time buyers. The agency now insures about 5.4 million single-family home mortgages at a combined value of $675 billion, making it the world's largest insurer of mortgages.
Together with Fannie and Freddie, the FHA backs 90 percent of new U.S. home mortgages. FHA picked up much of the slack as conventional loan lenders and private insurers were squeezed by the credit crunch in 2008. FHA runs on self-generated income without dipping into taxpayer money. However, federal agency Ginnie Mae guarantees the loans insured by the FHA, meaning taxpayers may be under the gun if FHA-backed mortgages get in trouble and the federal government has to pay out investors who own Ginnie Mae stock.
by FT Editorial
When the delegates gather on Tuesday at the US government’s conference on the future of housing finance, they must ponder this perverse fact: a political desire to make housing affordable is incarnated in policies and institutions that have made it politically and economically imperative to keep house prices high and rising.
The two government-sponsored enterprises for housing finance, Fannie Mae and Freddie Mac, hold or guarantee mortgages worth $5,400bn between them. With securitisation markets in a vegetative state, this dominance has only increased since they were put into conservatorship two years ago. Almost no new mortgage is being issued or securitised except through the conduit provided by the GSEs’ balance sheets.
Using the worst practices of the pre-crisis finance world, the GSEs pump-primed the housing bubble by erecting mountains of assets on slivers of capital. In 2007, a combined $71bn in stockholders’ equity supported a $5,000bn portfolio – 70 times as much. Pulled by the profit and pushed by Washington’s goals for affordable housing finance, they gorged on risky mortgages, giving grist to the subprime mill. Oiling the wheels was the perceived taxpayer backing (unseen in the federal balance sheet) of the GSEs’ obligations. Implicit though it is, the guarantee has in practice been honoured, not least through $400bn of public money set aside for them. So far, non-equity investors have not suffered.
There is a reason for this. Having helped create the mess we are in, Fannie Mae and Freddie Mac now stand in the way of solving it. Any fundamental redemption of the GSEs’ original sins – such as making clear that the taxpayer will not be on the hook for their losses – would send real estate and mortgage-backed securities into a tailspin. This is something the US is still not in a position to bear. Without a system of mortgage renegotiations that actually works, a tidal wave of foreclosures would destroy economic value. Until procedures for letting systemic institutions fail are put in place, cramming down mortgage assets would pull the rug away from under a barely recovering banking system.
The answer is not a return to the status quo ante. A good start would be honest accounting. If the cost of subsidising homeowners well into the middle class was more widely known, more narrowly targeted policies might start to look politically feasible. By then, the ground must be prepared for tackling the inevitable – and desirable – result of proper reform: house price falls.
2 Zombies to Tolerate for a While
by Andrew Ross Sorkin - New York Times
The Massachusetts Democrat had been watching a morning news program that had me on, and soon afterward he was calling my cellphone to fume about that morning’s discussion. The topic? Why it has taken the government so long to address the fate of the zombie mortgage giants, Fannie Mae and Freddie Mac. It is an issue that has been talked about a lot of late. On Tuesday, the Treasury secretary, Timothy F. Geithner, will convene a meeting of government officials and executives like Bill Gross of Pimco and Lewis Ranieri, the father of the mortgage-backed security, to delve into future housing policy and the role played by Fannie and Freddie.
On the television program that had stirred Mr. Frank, "Morning Joe" on MSNBC, the prevailing view was that any effort toward a resolution of Fannie and Freddie — government-created mortgage companies that were taken over by the government as the financial crisis mounted — had been put on the back burner during the overhaul of financial regulation. The consensus was that neither Democrats nor Republicans wanted to touch an issue that would dredge up decisions made by both parties over the last decade that looked bad in light of the financial crisis. Fannie and Freddie was now the third rail of American politics.
Mr. Frank was having none of that. "I take offense at the idea that we’ve done nothing," he told me. Far from dragging its feet, he insisted, the government took the bold step of putting Fannie and Freddie into conservatorship in 2008. "There was no political fear to not do it." I asked the question that I hear from so many Americans: Why hasn’t the government tried to unwind and replace Fannie and Freddie, which have so far cost taxpayers $145 billion, more than any other bailed-out firm?
His response was counterintuitive — and as unsatisfying as it may sound, he’s right. "There is no urgency," he said. Come again? "We’ve already abolished Fannie and Freddie," he said, referring to the government takeover. "Yes, we waited too long to fix it. But the money is not being lost by anything they are doing now."
In other words, the sinkhole that is Fannie and Freddie — Freddie just said it needed an additional $1.8 billion and the Congressional Budget Office says the combined companies could cost taxpayers $389 billion over the next decade — is not a function of those firms making new loans that have gone bad, but the continued "bleeding," as Mr. Frank put it, from previous loans made before the crisis that are still going belly-up.
More important, shutting down Fannie and Freddie and having the private market step in, as politically popular a sound-bite as that may be, is economically unfeasible. For better or worse, Fannie, Freddie and Ginnie Mae were behind 98 percent of all mortgages in this country so far this year, according to the Mortgage Service News. Pulling the rug out from under them would be pulling the rug from under the entire housing market as it continues to struggle. "Nobody in the private market thinks we’re ready," he said, adding that whatever legislation is developed, it will be "for a postrecession world."
That reality, however, is not changing the minds of many who are calling for a return to a private system that doesn’t depend on the government to subsidize housing. One of the more interesting ideas being floated is that the government-sponsored enterprises, Fannie and Freddie, would subsidize loans only for low-income families by lowering the size of a so-called conforming loan.
At the moment, Fannie and Freddie are buying up single-family mortgages for up to $417,000, and in some high-cost areas as much as $729,750, clearly benefiting families that don’t need the subsidy. Even if the size of a conforming loan were reduced — a prospect that troubles Mr. Frank — there will still need to be some sort of support for that marketplace because the big banks say they won’t service it.
"A clear government role will be necessary to support lending to lower-income borrowers because it is likely that underwriting standards will become more rigorous and funding for mortgage lending more difficult and costly," the deputy general counsel of Bank of America, Gregory A. Baer, wrote in a letter to the Treasury. (Critics of the banks will point to language like that to show why the bailouts are not helping ordinary Americans.)
No matter what the ultimate plan, the transition to get there will be painful. "Were the G.S.E.’s to cease buying mortgages or guaranteeing mortgage-backed securities, financing for buying homes today would be virtually nonexistent until the banks got back up on their feet. This would result in mortgage prices increasing, causing demand for housing to decrease, taking the value of homes even further down," Anthony Randazzo, director of economic research of the Reason Foundation, wrote in a letter to Mr. Geithner.
Nonetheless, Mr. Randazzo, whose foundation leans toward libertarian views, takes a much bolder step. "This means that prices have not been allowed to reach their natural bottom, from which a sustainable recovery could begin." And Mr. Randazzo wants to see housing prices truly bottom out. But allowing the housing market to collapse simply so it can rise again — a very free-market approach — is politically unpalatable, especially as the nation’s unemployment number still hovers near 10 percent. "It’s intellectually pretty difficult," Mr. Frank said.
Barney Frank says abolish Freddie, Fannie
by JoAnne Allen - Reuters
Fannie Mae and Freddie Mac should be abolished rather than reformed as part of the Obama administration's planned overhaul of the government's role in housing finance, Rep. Barney Frank, chairman of the House Financial Services committee, said on Tuesday. "They should be abolished," Frank said in an interview on Fox Business, when asked whether the mortgage giants should be elements in housing market reform. "They only question is what do you put in their place," Frank said.
The Federal Housing Administration should be fully self-financing and Freddie and Fannie should be replaced with a new mechanism to help subsidize housing, Frank said in the interview. "There is no more hybrid private-public," the Massachusetts Democrat suggested. "If we want to subsidize housing then we could do it upfront and let the budget be clear about that." Fannie Mae and Freddie Mac were government-sponsored enterprises, privately owned companies supported by the government, until the Bush administration took control of the companies in 2008 to save them from collapse.
Frank said that he does believe the federal government should have a role in building affordable rental housing but thinks money should go toward projects by private developers. On the question of whether the government should still provide some guarantees in the mortgage market, Frank said: "If we have it (guarantees), it has to be self-financed by the people who are benefiting." Frank commented after Treasury Secretary Timothy Geithner convened a Washington conference of housing industry leaders to hear ideas about reforms for the $10.7 trillion mortgage market.
The firms' pursuit of growth and profits helped precipitate the financial crisis of 2007-2009, but their vast resources also helped minimize its impact. Together, Fannie and Freddie and the Federal Housing Administration now back 90 percent of new U.S. home mortgages. Fannie and Freddie have received $150 billion in taxpayer bailout money.
In the Fox Business interview, Frank also was critical of public policy that promoted homeownership at any cost. He also said the federal government should not be a "backstop" in guaranteeing mortgages. "There were people in this society who for economic and, frankly, social reasons can't and shouldn't be homeowners," Frank said. "I think we should, particularly, stop this assumption that you put everybody into homeownership." "Public policy has been too much to try to push people into homeownership."
US house mortgage arrears mount
by Aline van Duyn and Anna Fifield - Financial Times
Mortgage delinquencies have risen in nearly all US congressional districts from the levels of the last election, highlighting the political pressure on US policymakers as they gather in Washington on Tuesday to tackle the housing crisis. Tim Geithner, Treasury secretary, and Shaun Donovan, housing secretary, are meeting investors, bankers and public policy experts to discuss housing finance. Investors continue to shun private-sector mortgages, with most new home loans now financed through Fannie Mae and Freddie Mac, the agencies taken over by the government in 2008.
Investors on Monday signalled growing concerns about the US economy, pushing bond yields down to the lowest levels since the height of the crisis. Ten-year Treasury yields dropped 9 basis points to 2.60 per cent, the lowest level since March 2009. Seven-year Treasury yields fell to a record low of 1.98 per cent. Mortgage rates have also plunged to record lows but falling borrowing costs have failed to revive the US housing market. Indeed, the Washington deliberations, which will centre on what the level of government support for Fannie and Freddie should be, comes amid continuing pain for homeowners.
In the average congressional district, serious mortgage delinquency rates – defined as borrowers more than three months behind on their payments – are 9.4 per cent, compared to 3.3 per cent at the time of the election in 2008 , according to a study by Deutsche Bank. "That pace of deterioration alone should put housing and mortgage finance on most political radars," said Steven Abrahams, managing director at Deutsche.
The pain remains concentrated in states such as Florida, California and Nevada. More than one in five borrowers are at least three months overdue on their mortgage payments in 23 congressional districts – including 13 in Florida, six in California and two in Nevada. Mr Abrahams said the importance of housing in congressional races raised the chances of dramatic proposals to boost the market, including forms of principal forgiveness and mass refinancings through Fannie and Freddie.
The problem facing the Democratic party in November is that even though the housing crisis began during the Bush administration, many voters blame President Barack Obama for their persisting economic woes. That has raised the chances that Republicans could take control of the House of Representatives. Two-thirds of Americans say the economy and jobs are the most important problems facing the country today, according to a Gallup poll published on Friday. National unemployment hit 9.5 per cent in July, up from 6.7 per cent in November 2008 . "Democratic fortunes are sinking where the economy has sunk," said David Wasserman, who monitors House races for the Cook Political Report. "That is especially true in the ‘foreclosure ring of fire’ in Florida, Nevada and California."
Banking execs say government needs to back mortgages
The call from business for less government has a notable exception: the mortgage market.
The Obama administration invited banking executives today to offer advice on changing the government’s role in backing the mortgage market. While they disagreed on the exact level of support needed, the group overwhelmingly advocated the government should maintain a large role in the $11 trillion market. If the government pulled out, executives said, millions of Americans wouldn’t be able to convince banks to take the risk of giving them home loans. Ending government support could lead to a spike in mortgage rates. That could deter many from buying homes, and banks, mortgage lenders and Realtors would lose money over time.
"It will take on a different form, but there is a role for government," Kevin Chavers, a managing director at Morgan Stanley, said in an interview. Most attendees agreed the time had come to do away with Fannie Mae and Freddie Mac. Rescuing the two mortgage giants has cost the government nearly $150 billion so far. Bill Gross, the managing director for bond giant Pimco, suggested Fannie and Freddie should be formally merged into the government. He also called on the administration to allow millions of homeowner to automatically refinance their loans to help stimulate the economy.
A more widely held view at the conference is for government to do away with Fannie and Freddie, and instead provide a guarantee that mortgage investors get paid even if borrowers default in droves. Figuring out a plan for Fannie and Freddie is also a political challenge for President Barack Obama and his party. Republicans have seized on the administration’s management of Fannie and Freddie to illustrate Democrats’ push for growing the reach of the federal government.
While the banking industry has joined Republicans in criticizing the administration for instituting stronger regulations of Wall Street, they understand the need for government to play a large role in the mortgage market. "There would be a lot of homeowners who wouldn’t be able to afford homes because we’d be dealing with higher interest rates." said S.A. Ibrahim, chief executive of mortgage insurer Radian Group Inc. Treasury Secretary Timothy Geithner pledged on Tuesday "fundamental change" to the structure of Fannie and Freddie. The mortgage giants profited tremendously during good times but burdened taxpayers with losses when the housing market went bust. He said the two companies weren’t the only cause of the financial crisis, but made it worse.
Fannie and Freddie buy mortgages and package them into securities with a guarantee against default. They have ensured that millions of Americans can get home loans — even after the housing market collapsed. The two companies, the Federal Housing Administration and the Veterans Administration together backed about 90 percent of loans made in the first half of the year, according to trade publication Inside Mortgage Finance. Geithner did not offer a specific exit strategy for Fannie and Freddie, but said that "it is our responsibility to make sure that we create a system that is not vulnerable to these same failures happening again." The administration is expected to offer a plan next year.
One option that dominated the discussion Tuesday is for the government to collect money from the mortgage industry and set up an insurance fund that could be used to cover losses during a severe downturn. This would prevent taxpayers from having to foot the bill for the industry. Some want the administration to take far more dramatic actions. Gross said Fannie and Freddie’s function should be consolidated into one government agency that would issue mortgage-backed securities. Without such a solid guarantee, mortgage rates would soar, he warned. He also told the administration that the economic recovery required more government stimulus, particularly in the housing market. He suggested the administration push for the automatic refinancing of millions homes backed by mortgage giants Fannie Mae and Fannie Mac.
Refinancing those homes at the lowest mortgage rates in decades would give Americans more money each month. That would boost consumer spending by $50 billion to $60 billion and lift housing prices by as much as 10 percent, he said. Without such stimulus in the next six months, Gross said, the economy will move at a "snail’s pace." Obama officials say they do not plan to enact such a program, which has been the subject of intense rumors on Wall Street in recent weeks.
Banks Face Fight Over Mortgage-Loan Buybacks
by Nick Timiraos and Aparajita Saha-Bubna - Wall Street Journal
While mortgage delinquencies are easing, banks are facing a new round of losses from loans made just before the financial crisis, and the fight to keep them off their balance sheets is intensifying. Leading the charge to make originators repurchase their loans are Fannie Mae and Freddie Mac, the two government-owned finance agencies that guaranteed the mortgages. The firms are sorting through delinquent loans for signs of any violations of the representations and warranties, known as "reps and warranties." In essence, they are looking for lies made by borrowers or lenders in loan applications.
Freddie last week said it would begin taking tougher action against banks that drag their feet on buybacks as it renegotiates its contracts to renew loan-sales agreements from those banks. Freddie said it had received $2.7 billion from lenders on repurchases during the first half of the year, up from $1.7 billion in the year-earlier period. The number of repurchase requests that haven't yet been satisfied jumped to $5.6 billion at the end of June, up from $3.8 billion six months earlier. While the company isn't likely to cut off its partners, it could use those renegotiations to force banks to settle up on repurchases.
Banks are pushing back. "It's a loan-by-loan fight," Bank of America Corp. Chief Executive Brian Moynihan told investors in March. "This will be a war that will go on for a while." On Aug. 6, Bank of America said it faces $11.1 billion in unresolved repurchase demands, up 46% in just six months. The bounced loans are mounting fast as investors try to deflect losses back to their sources and put an end to the lingering aftereffects of the financial meltdown. When banks receive repurchase requests, they often try to force other banks that originated the loans to repurchase them. Given the hundreds of billions in nonperforming mortgages at stake, "these battles could just go on for years," says Christopher Whalen, managing director for Institutional Risk Analytics. "We have at least two more years of misery."
Big banks may be getting close to facing the worst of their repurchase losses, since original buyers are currently scouring the worst years of underwriting, notably 2006 and 2007, says Gerard Cassidy, analyst at RBC Capital Markets. "As the industry works these loans off," he said, "they're not being replaced with loans underwritten as badly." The banks are marshaling lawyers and auditors to challenge loan put-backs and issue repurchase requests of their own.
They also have enlisted some assistance from mortgage insurers. Mortgage insurers can rescind insurance coverage on loans, which typically prompts Fannie and Freddie to kick back loans. Banks have begun paying insurers lump sums to avoid dealing with rescissions and triggering repurchase requests. Fannie warned it could face higher losses if insurers aren't rescinding loans, because that might yield fewer buyback opportunities for Fannie.
Banks also are complaining that Fannie and Freddie are kicking back loans that performed for two to three years if they can provide any pretext, such as undisclosed debt, faulty appraisals or bogus income, employment data or credit ratings. A representative for Bank of America said the bank has "an established history of working with the [government-sponsored enterprises] on repurchase requests and has generally established a mutual understanding of what represents a valid defect."
A representative for Wells Fargo & Co. said the bank "continues to have an open and productive relationship with the agencies, including Freddie Mac, as we work together to mutually resolve repurchase requests as quickly as possible." A spokesman for Citigroup Inc. said, "We believe we are appropriately positioned for repurchases with our current $727 million of reserves for that purpose." J.P. Morgan Chase & Co. declined to comment beyond the company's regulatory filing.
Efforts to claw back loan losses took a more aggressive turn last month, when the agency that regulates Fannie and Freddie, the Federal Housing Finance Agency, threw its weight behind a wider effort to collect repayment on defective loans within the so-called private-label securities issued during the bubble without agency backing by Wall Street firms. The FHFA sent out subpoenas to 64 issuers of mortgage-backed securities and other parties to probe for potential loan repurchases.
The Federal Reserve Bank of New York hinted earlier in August that it, too, could make some repurchase claims after reviewing investments it inherited through its 2008 rescues of Bear Stearns Cos. and American International Group Inc. So far, repurchase demands have hit hardest at banks that acquired the bubble's leading subprime-mortgage lenders as they tottered and fell. For example, analyst Chris Gamaitoni of Compass Point Research & Trading LLC predicts the biggest agency-related pretax loss of as much as $21.8 billion at Bank of America, which acquired Countrywide Financial Corp. in 2008. He projects pretax losses of as much $6.9 billion at Wells Fargo, $6.6 billion at J.P. Morgan and $4 billion at Citigroup.
Still, the rising level of repurchase activity hasn't cooled all analysts' enthusiasm. Betsy Graseck of Morgan Stanley, in a note published after BOFA's most recent repurchase announcement, says her estimates for its earnings already include $17 billion of "reps and warranty expenses" through 2014. While large banks should weather the storm, their efforts to push repurchases down the chain could squeeze smaller, nonbank mortgage lenders, which don't have deposits or other ready sources of cash. "It's become an epidemic," says David Lykken, a partner at Mortgage Banking Solutions, an Austin, Texas, consulting firm. "The choices are to negotiate, stand up and fight or go out of business."
US Home Builder Confidence Tanks Amid Economic Concerns
by Paul Jackson - HousingWire
Builder confidence in the market for newly built, single-family homes edged down for a third consecutive month in August, reaching levels not seen since March of 2009, according to a report released Monday. The latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI) fell by one point to 13, reflecting ongoing concerns about a tepid economic recovery. Reading below 50 generally indicate pessimism about general market conditions; the index hasn't been above 50 since early 2006.
"Builders are expressing the same concerns that they are hearing from consumers right now, particularly the sense that the overall economy and job market aren't gaining any traction," said NAHB Chairman Bob Jones, a home builder from Bloomfield Hills, Mich. "Meanwhile, many continue to report that problems with inaccurate appraisals, competition from the large number of distressed properties on the market, and tight consumer lending conditions are causing them to lose potential sales."
In other words, the nation's housing crisis may not be over yet. And if anything, the nation's bloated inventory of distressed and in-foreclosure homes is making it tough for new home sales. "Today's report reflects single-family home builders' concerns about current and future economic conditions and about the increasing hesitancy they are seeing among potential home buyers," added NAHB chief economist David Crowe. "It also reflects the frustration that builders are feeling regarding the effects that foreclosed property sales are having on the new-homes market, with 87 percent of respondents reporting that their market has been negatively impacted by foreclosures."
Even so, he noted, NAHB continues to project that modest job gains, historically low mortgage rates and pent-up demand will ensure a better housing market in the second half of 2010 than in the first half. It's not a projection that is shared by most economists, with many — included famed David Shiller, of the Case/Shiller housing price index — forecasting further housing price declines in the months ahead.
Two out of three of the HMI's component indexes fell in August, the NAHB said. Three out of four regions posted HMI declines in August, as well. A six-point decline to 18 in the Northeast partially offset a big gain in that region in the previous month, while the South and West each posted one-point declines to 13 and 8, respectively. The HMI for the Midwest held even at 15 in August.
Your House Might Be Underwater for Years
by Michael Carliner - Bloomberg
The housing market has usually led the economy into and out of recessions. It certainly led us into the latest slump. The same can’t be said of the recovery. If anything, housing today is stifling economic expansion. Rebounds in housing have typically been driven by declines in mortgage rates. Not this time. Rates on a 30-year mortgage have dropped to about 4.5 percent -- the lowest since the early 1950s -- with little effect. Tax credits and other programs to encourage buyers have done provided only a modest, temporary boost.
Other traditional measures of value, such as the size of monthly mortgage payments relative to income, show that housing is a bargain now. None of that matters because houses are bought with an eye toward the future and in anticipation of an eventual sale. We saw what happened in the boom in the middle of the decade -- even though prices soared, demand increased as consumers thought about how much money they would have made had they bought sooner. People bought homes, often with no plans to occupy with an eye toward selling and making a quick profit. In short, the housing market in the middle of the decade had all the characteristics of a bubble.
Now we’re seeing the opposite mindset. If a potential buyer believes that housing prices may fall more, then mortgage rates of 4.5 percent won’t attract home buyers. Rates could even drop to zero and it might not outweigh consumers’ negative perceptions. Household expectations of future U.S. home price appreciation aren’t directly measured, and are probably based on recent experience. If expectations reflect changes in home prices over the last three years, for example, consumers seem to anticipate annual house price declines of 3.7 percent to 10.4 percent, depending on which of the various house price indexes is used.
This pessimism is heightened by increased uncertainty, because home ownership typically ties up a high portion of an individual’s assets. Diversification isn’t likely to offset the risk associated with home ownership. What will it take to turn this attitude around? Only a sustained flow of favorable information is likely to alter negative perceptions of housing as an investment. The market is unlikely to provide such good news in the near term.
Declines to Come
More likely, market conditions will reinforce expectations of further price declines. Even with new home construction declining, there are too many houses for sale. And when the bounce provided by the home buyer tax credit ends, there will be renewed pressure on prices. It’s true that the inventory of new homes for sale has been reduced. But this is offset by the glut of homes currently and potentially in the market. The homeowner vacancy rate, or empty homes for sale as a share of all homeowner units, was at 2.5 percent in the second quarter of 2010. Between 1956 and 2006, the rate never exceeded 2 percent.
Moreover, Census Bureau data indicate that there was a net increase of 1.4 million single family homes in the rental market between 2005 and 2009. Although some of those homes became rentals as deliberate long-term investments, many were rented out only because the owners couldn’t sell. This is a hidden source of future downward pressure on prices: Should the market show signs of turning around, many of these homes will go back on the market for sale.
This doesn’t even take into account the large number of homes with defaulted mortgages in the foreclosure pipeline. On the demand side, while mortgage rates are low, plenty of households may have trouble meeting new, stricter lending standards. Then there are those consumers who would like to buy, but whose credit records were damaged by mortgage defaults or other difficulties repaying debt. They will be locked out of the housing finance system for years, so even if they want to buy their ability to borrow is nil, further limiting potential demand.
The attempt to stimulate housing demand with tax credits wasn’t foolhardy, but could only have a temporary effect. It has been criticized as merely changing the timing of home purchases. That is no doubt true. Yet, if that meant home purchases now rather than in 2012 or 2013, it would represent an excellent trade-off. As we have seen, though, much of the effect was only to shift sales from May or June to March or April, when the credits expired. Although existing home sales data, based on closings, haven’t yet shown the effect of the end of the tax credit, new home sales and contracts on existing homes have both fallen to record lows following the end of the tax credits.
The reality is that the real estate market won’t fully recover until builders and consumers start believing once again that housing is a relatively safe investment with reasonable returns, and that will take some time.
US housing starts rise less than expected
by Lucia Mutikani and Doug Palmer - Reuters
Housing starts rose but to a much weaker rate than expected in July, while permits for future home construction fell to their lowest level in more than a year, pointing to a weak economic recovery. The Commerce Department said on Tuesday housing starts rose 1.7 percent to a seasonally adjusted annual rate of 546,000 units. June's housing starts were revised to show an 8.7 percent fall, which was previously reported as a 5 percent drop.
Analysts polled by Reuters had expected housing starts to rise to 560,000 units. Compared to July last year, groundbreaking activity was down 7 percent. New building permits, which give a sense of future home construction, dropped 3.1 percent to a 565,000-unit pace last month, the lowest level since May 2009. That followed a 1.6 percent rise in June and compared to analysts' forecasts for a slip to 580,000 units.
Separately, prices paid at the farm and factory gate rose 0.2 percent last month, pulled by higher prices for food and consumer goods, the Labor Department said. The increase, which was in line with market expectations, was the first advance in producer prices in four months. John Canally, economist at LPL Financial in Boston said the PPI data should ease some market concerns about deflation. But he said the housing figures suggested an economic recovery that was listless. "That ties into a lot of other data recently that has the market worried about a double dip," he said. "We still think it's slow growth rather than a double dip, but each week that passes you tend to get a little more concerned if you don't get better activity indicators."
U.S. stock index futures initially pared gains after the reports, while the dollar held at weaker levels against the euro. U.S. Treasury debt prices were weaker. Data such as retail sales have suggested the economic slowdown that started in the second quarter will continue into the third quarter amid high unemployment. The end in April of a popular homebuyer tax credit has left a void in the housing market, depressing sales and building activity. Sentiment among home builders touched a 17-month low in August, a survey showed on Monday.
The rise in housing start last month reflected a 32.6 percent surge in groundbreaking activity in the volatile multifamily segment to an annual rate of 114,000 units. Single-family homes starts fell 4.2 percent to a 432,000-unit pace, the lowest since May 2009. Home completions tumbled a record 32.8 percent to an all-time low 587,000-unit pace. The inventory of total houses under construction fell 1.1 percent to a record low 444,000 units last month, while the total number of units authorized but not yet started dropped 1.5 percent 89,000 units.
Homebuyer Demand All But a 'Standstill'
by Jon Prior - HousingWire
After the tax credit induced "mini-boom" in the spring, home prices should remained pressured through the end of the year, according to the real estate data provider Altos Research. The average national house price was $474,946 in July, according to the Altos 10-city composite price index. The index fell "significantly" from its high in the summer of last year, when buyers were taking advantage of the homebuyer tax credit. It has declined for the past 11 months. The tax credit expired in April.
It's a 0.63% decrease from June but up 0.66% over the last three months. Asking prices for homes fell in 19 of the 26 markets tracked. The biggest declines came in Phoenix at 5.1%, Washington, D.C. at 4.1%, and Miami at 3.3%. While demand is dropping, supply is going up, according to Altos. According to the 10-city composite, there were 311,742 houses in inventory in July, up 2.2% from the previous month and up 3.8% over the last three.
Altos measured increases in 22 of the 26 markets. In Washington, D.C., inventories increased 5.6% in July from the previous month, the largest increase in the country. "The market, right now, is a veritable case study of the law of supply and demand," according to the report. "Right now, there's a whole lot of supply, but very, very little demand. The buyers that drove a flurry of activity during the spring have left a deafening silence in their wake."
According to the report, even through mortgage rates stay at all-time lows, buyers aren't being swayed, which means these supply and demand trends should continue through the rest of 2010.
"Increases in inventory nationwide show that demand simply isn't there. As the market continues to correct itself, and as we head into the seasonally weak fall and winter months, expect more increases in inventory, and likely deepening declines in asking prices," according to the report.
Time is running out for the West
by Ambrose Evans-Pritchard
The Great Recession has dramatically shrunk the time left for the big AAA states to prevent a full-blown sovereign debt crisis as their demographic time-bomb threatens, US rating agency Moody's has warned. "Genuinely adverse debt dynamics were only expected to materialise in 15 to 20 years. The crisis has 'fast-forwarded' history, eroding all the time available to adjust, " said the group's quarterly Sovereign Monitor. Moody's fears that the US will crash through its safety buffer by 2013 if growth falters (adverse scenario), with interest payments topping 14pc of tax revenues. The debt-to-revenue ratio has already doubled in three years to 430pc.
The US, UK, Germany, France, and Spain are all at risk of an "interest rate shock", either because they must roll over a cluster of short-term debt (US, France, Spain) or because deficits are so large. Countries that "fail to demonstrate the level of social cohesion required to stabilise debt" will lose their AAA rating. "Intra-generational" conflict between young and old requires careful handling. States that delay pension reform risk spiralling downwards. Moody's said the world had changed since Europe's debt crisis. None of the large sovereign states can still assume it is credit-worthy. "The burden of proof now falls on governments," it added.
Britain has the safety cushion of long debt maturities, but the structural deficit is causing debt "to grow an unsustainable rate": the UK is clearly one of the weaker countries in the AAA peer group. Moody's expects Britain's public debt to reach 90pc of GDP within three years. It warned that any slackening in fiscal tightening by the Government squeeze would lead to a "sharp rise" in funding costs if growth also slowed, with a nasty effect on debt dynamics.
The warning appears to vindicate the Coalition's claim that immediate belt-tightening is needed to restore confidence and head off a gilts crisis where markets would impose harsher measures. The current crisis differs starkly from the "one-off" debt spikes after the Second World War, when young economies were able to outgrow the debt burden. This time the threat lies ahead as the aging crisis drives up pension and health costs on a static tax base. "While the current stock of debt is large, it is dwarfed by the accumulation of future liabilities if policies do not change."
18 Signs That America Is Rotting Right In Front Of Our Eyes
by Michael Snyder - Economic Collapse
Sometimes it isn't necessary to quote facts and figures about government debt, unemployment and the trade deficit in order to convey how badly America is decaying. The truth is that millions of Americans can watch America rotting right in front of their eyes by stepping out on their front porches. Record numbers of homes have been foreclosed on and in some of the most run down cities as many as a third of all houses have been abandoned. Unemployment remains at depressingly high levels and the number of Americans on food stamps continues to set new records month after month.
Due to severe budget cuts, class sizes are exploding and school programs are being eliminated. In some areas of the U.S. schools are even going to four day weeks. With little to no funding available, bridges are crumbling and street lights are being turned off in many communities. In some areas, asphalt roads are actually being ground up and turned back into gravel roads because they are less expensive to maintain. There aren't even as many police available to patrol America's decaying cities because budget problems have forced local communities across the U.S. to lay off tens of thousands of officers.
Once upon a time, the American people worked feverishly to construct beautiful, shining communities from coast to coast. But now we get to watch those communities literally crumble and decay in slow motion. Nothing lasts forever, but for those of us who truly love America it is an incredibly sad thing to witness what is now happening to the great nation that our forefathers built.
The following are 18 signs that America is rotting right in front of our eyes....
1 - Due to extreme budget cuts, school systems across the United States are requiring their students to bring more supplies with them than ever this year. In Moody, Alabama elementary school students are being told to bring paper towels, garbage bags and liquid soap with them to school. At Pauoa Elementary School in Honolulu, Hawaii all students are being required to show up with a four-pack of toilet paper.
2 - According to the American Association of School Administrators, 48 percent of all U.S. school districts are reporting budget cuts of 10 percent or less for the upcoming school year, and 30 percent of all U.S. school districts are reporting cuts of 11 to 25 percent.
3 - In Chicago, drastic budget cuts could result in an average class size of 37 students.
4 - The governor of Hawaii has completely shut down that state's schools on Fridays - moving teachers and students to a four day week.
5 - According to the Federal Highway Administration, approximately a third of America's major roadways are already in substandard condition.
6 - All over the United States, asphalt roads are being ground up and are being replaced with gravel because it is cheaper to maintain. The state of South Dakota has transformed over 100 miles of asphalt road into gravel over the past year, and 38 out of the 83 counties in the state of Michigan have now turned some of their asphalt roads into gravel roads.
7 - According to the U.S. Department of Transportation, more than 25 percent of America's nearly 600,000 bridges need significant repairs or are burdened with more traffic than they were designed to carry.
8 - In a desperate attempt to save money, the city of Colorado Springs turned off a third of its streetlights and put its police helicopters up for auction.
9 - The state of Arizona has eliminated funding for full-day kindergarten and has shut down a number of state parks.
10 - Over the past year, approximately 100 of New York's state parks and historic sites have had to cut services and reduce hours.
11 - In Georgia, the county of Clayton recently eliminated its entire public bus system in order to save 8 million dollars.
12 - Elsewhere in Georgia, 30,000 people recently turned out to pick up only 13,000 applications for government-subsidized housing. A near-riot ensued and 62 people were left injured. The amazing thing is that all of this commotion was just to get on a waiting list. There are no aid vouchers even available at this time.
13- In the city of Philadelphia, rolling fire station "brown outs" recently cost a 12 year old autistic boy named Frank Marasco his life.
14- Oakland, California Police Chief Anthony Batts says that due to severe budget cuts there are a number of crimes that his department will simply not be able to respond to any longer. The crimes that the Oakland police will no longer be responding to include grand theft, burglary, car wrecks, identity theft and vandalism.
15- The sheriff's department in Ashtabula County, Ohio has been slashed from 112 to 49 deputies, and there is now just one vehicle remaining to patrol all 720 square miles of the county.
16 - Of 315 municipalities the New Jersey State Policemen's union recently canvassed, more than half indicated that they were planning to lay off police officers.
17 - Not that the criminals are doing that much better. Things have gotten so bad in Camden, New Jersey that not even the drug dealers are spending their money anymore.
18 - Almost everyone knows someone who has been severely impacted by this economic downturn. A new Rasmussen Reports national telephone survey has found that 81 percent of American adults know someone who is out of work and looking for a job.
So can't the states just step up and start spending more money and fix these things?
Well, no. The truth is that the states are absolutely broke. Quite a few of the states are actually on the verge of default, and there is no getting around the fact that budget cuts that are much more severe are going to be required in the years ahead.
So can't the U.S. government step in and bail out the states?
Well, yes, but as we have detailed previously, the U.S. government is literally drowning in a sea of red ink. The U.S. government is already spending an amount of money equivalent to approximately 25.4 percent of GDP this year.
How much more money can the U.S. government possibly spend?
To get an idea of just how bad things are already, the IMF says that in order to fix the U.S. government budget deficit, taxes need to be doubled on every single U.S. citizen.
Are you ready to pay double the taxes?
No matter how you slice it, the U.S. is in a massive amount of financial trouble and the American people are starting to realize this fact. In fact, one new poll found that nearly two-thirds of Americans believe that the U.S. economy will get worse before it gets better.
But unfortunately things are not going to get "better" - at least in the long-term. The decay and the rot that have already set in are only going to get worse.
These problems did not appear overnight and they are not going to be solved overnight. Our leaders have been making very bad decisions for decades, and all of those bad decisions are starting to catch up with us.
China Cuts Long-Term US Treasuries By Most Ever as Yields Drop
by Wes Goodman and Daniel Kruger - Bloomberg
China cut its holdings of Treasury notes and bonds by the most ever, raising speculation a plunge in U.S. yields that sent two-year rates to a record low has made government securities unattractive. The Asian nation’s holdings of long-term Treasuries fell by $21.2 billion in June to $839.7 billion, a U.S. government report showed yesterday. Total Chinese investment in U.S. debt declined 2.8 percent to $843.7 billion, the least in a year, following a 3.6 percent slide in May.
China, America’s largest creditor, is cutting back after scrapping its currency peg in June, giving it less reason to buy dollars and invest them in Treasuries. China is also turning more bullish on Europe and Japan, purchasing bonds of both nations. The shift comes as President Barack Obama increases U.S. debt to record levels, counting on overseas investors to buy, as he borrows to sustain the U.S. economic expansion.
"This may have been opportunistic," said James Caron, head of U.S. interest-rate strategy in New York at Morgan Stanley, one of 18 primary dealers that trade with the Federal Reserve. "Look at the level of yields. If you’ve held a lot of Treasuries, you’ve done well." The two-year note yielded 0.51 percent as of 9:11 a.m. in London, after falling to a record 0.48 percent earlier today. The 0.625 percent security due July 2012 traded at 100 7/32, according to data compiled by Bloomberg.
Yields Will Rise
Two-year rates will climb to 0.85 percent by year-end, according to Bloomberg surveys of financial companies. Investors who purchased the securities today would lose 0.4 percent if the projection is correct, according to Bloomberg data. "Buying now is a big risk," said Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. "I don’t recommend it." Economic growth in the U.S., while weaker than expected, is still strong enough to send yields higher, he said. U.S. gross domestic product will expand at a 2.55 percent rate in the last six months of 2010, according to the median of 67 estimates in a Bloomberg survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month.
The People’s Bank of China on June 19 ended its currency’s two-year peg to the dollar, saying it would allow greater "flexibility" in the exchange rate. The yuan has since strengthened 0.5 percent. The central bank limits the yuan’s appreciation by selling the currency and buying dollars, a policy that has contributed to its accumulation of the world’s largest foreign-exchange reserves and led to the build-up of its Treasury holdings.
China will keep adding to its holdings of foreign debt as long as the nation has a trade surplus, news website Hexun reported, citing Liang Meng, a researcher at the People’s Bank of China. The country recently reduced its holdings of U.S. debt and increased its holding of Japanese bonds due to asset safety concerns, Liang was cited as saying. The nation also gains foreign currency from trade and invests it in overseas bonds.
‘Quite a Lot’
China, which has $2.45 trillion in foreign-exchange reserves, is becoming more optimistic on Europe and Japan. The nation has been buying "quite a lot" of European bonds, said Yu Yongding, a former adviser to the People’s Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan’s Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($20.3 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.
"Diversification should be a basic principle," Yu, president of the China Society of World Economy, said in an interview last week, adding a "top-level Chinese central banker" told him to convey to European policy makers China’s confidence in the region’s economy and currency. "We didn’t sell any European bonds or assets. Instead we bought quite a lot." China held 10 percent of the $8.18 trillion in publicly traded U.S. debt as of July. Investors in Japan hold the second- largest position in Treasuries with $803.6 billion of the securities, or 9.8 percent.
China needs a strong U.S. dollar, said Kenneth Lieberthal, a senior fellow specializing in China at the Brookings Institution, a research group on Washington. "I don’t think we’re going to see any massive flight from China’s holdings of U.S. debt," Lieberthal said on Bloomberg Television. "That would be self defeating and they well recognize that."
US banks get securities buy-back window
by Francesco Guerrera and Justin Baer - Financial Times
The Dodd-Frank financial reform bill has opened a 90-day window for banks to buy back $118bn (€92bn) in high-cost securities, a move that would enable them to replace the instruments with cheaper capital but is likely to cause tensions with regulators and investors. Wall Street executives and lawyers say several banks are considering redeeming "trust preferred securities" (Trups) – a hybrid of debt and equity – by taking advantage of a clause triggered by the new rules.
Trups – equity instruments that pay interest like bonds – became popular in the financial crisis when banks sold more than $40bn-worth to investors ranging from Warren Buffett to small savers. Financial groups are interested in buying back the securities because Trups are an expensive form of capital. Banks needed to offer high interest rates to entice investors. Banks have an extra incentive to redeem Trups because the new law states that they will no longer count as tier one capital – a key gauge of financial strength – from 2013.
The banks can buy back the securities now because most Trups’ contracts state that a legal change gives issuers three months to redeem them at face value. The removal of Trups from tier one capital amounts to such an event, lawyers say. "It is a big issue," said a top US lawyer. "The question for banks is: do you want to keep paying high interest rates knowing that Trups are going to lose their status as tier one?"
However, some executives counter that redeeming Trups could upset regulators, who are against reductions in bank capital, and investors, who bought them to hold for the long term. "Banks may find it desirable to redeem Trups but they have to think about what they are going to say to investors next time they want to raise capital," said Chip MacDonald at law firm Jones Day.
The dilemma over Trups is emblematic of the regulatory morass faced by banks trying to navigate the effects of the new US law as well as ongoing uncertainty over new international capital standards. Moody’s estimates that US banks have about $118bn of Trups outstanding. The securities account for a significant part of tier one capital at lenders like Bank of America, JPMorgan Chase, Morgan Stanley and Citigroup, according to the credit rating agency.
The great American un-recovery
Banking failures and swindling the wealth from working and middle class Americans. Household assets off by $11 trillion from 2007 peak.
The economic profession and bankers on Wall Street have taken a hit to their credibility with missing the biggest recession since the Great Depression. It is understandable for the average person on the street to miss something as nuanced as a tiny recession but for a group of professionals whose mission statement involves understanding the economy and then to miss the biggest economic headwinds in a century is just inexcusable. This is no tiny recession. We have witnessed the unfortunate destruction of trillions of dollars and untold damage to the American working and middle class. Yet we are told from these same professionals that we are in a recovery. There is plenty of room to remain skeptical about this group.
If we look at the wealth destruction of U.S. households it becomes obvious why there is little feeling of recovery going around:
To clarify the chart, we are looking at the peak value of all household assets without liabilities in 2007. At this point, all assets were valued at $65.86 trillion. Today, the market value is closer to $54.56 trillion. So if Americans feel poorer they should because we are $11.3 trillion away from the peak reached three years ago. This is an incredible amount of wealth destruction. This is why working and middle class families have been pushed off the financial ledge and are facing some of the toughest times in generations.
The too big to fail banks have benefitted from this economic calamity by solidifying their financial prowess by co-opting the government and providing generous handouts to their lot. An incredible amount of money flowed into the banking sector and it breaks down as follows:
Source: It Takes a Pillage
The Federal Reserve has put the most money in play here yet this is one of the least understood institutions in America. If they handed out the largest amount of money, then why do we so rarely hear about them in the mainstream media? It is a good question but speaks more to the fact that banks have bought out plenty of players in key industries to carry their message. The working and middle class were largely taken for a ride. Of course, some money was thrown down to the public but it looks like this in comparison:
Source: It Takes a Pillage
And then you wonder how it is feasible for some banks to charge Americans 79.99 percent interest rates on credit cards. It almost begs for laws to outlaw usury. Yet the current government apparatus seems to be ineffectual at controlling the Wall Street machine. The recovery seems to be trickling down to a few hands but the vast majority of Americans are starting to wonder what is going on with this un-recovery. It is a chapter from 1984 where many are asking each other if things are truly better since the mainstream media and government say it is so. Clearly it is not and $11 trillion in destroyed wealth is going to put us into a very serious recession. Sure the bailout amount nearly equals the amount of household wealth destroyed but somehow this money is filtering its way back to the top 1 percent of the country.
I’ve talked about the large number of bank failures that will total at least 1,000 when all is said and done. Back in early 2009 we saw the emerging trend of a consolidation of power in the banking sector:
Today there are 7,932 institutions as of the first quarter in 2010. These institutions hold over $13 trillion in total assets. A large portion of this is shaky commercial and industrial real estate loans.
The number of institutions officially in trouble keeps growing:
You have to wonder what people are looking at when they think we are in a recovery. Is it the 40 million Americans now receiving food stamps? Is it the nearly 15 million Americans with no work? The only group that seems to be recovering is the banking sector but that isn’t news. Welcome to the un-recovery.
Alan Greenspan And His Disciples Are Intrinsically Terrible Regulators
by William K. Black - Benzinga
Neoclassical economists have long been convinced that they would make exemplary regulators – and that the unique advantage they would bring to the task is their knowledge that those that regulated the least would regulate the best.
Consider two crises in which economists controlled regulation – the S&L debacle and the U.S. nonprime crisis. Dick Pratt (Federal Home Loan Bank Board Chairman in 1981-83) and Alan Greenspan (Federal Reserve Chairman in 1987-2006) failed because of bad theory, methodology, and crippling ideology. These deficiencies interacted and led them to adopt regulatory policies that were intensely criminogenic. Dick Pratt and Alan Greenspan shared an ideological hate for regulation. They both pushed deregulation in circumstances where even neoclassical economic theory predicted would be disastrous.
Pratt deregulated at a time when virtually every savings and loan (S&L) was insolvent on a market value basis – which neoclassical economics predicts will maximize "moral hazard." Greenspan refused to regulate at a time when it was becoming the norm for mortgage lenders to engage in deliberate "adverse selection" – which meant that the "expected value" of their loans was negative.
Deliberate adverse selection is a hallmark of "accounting control fraud" (those that control a seemingly legitimate entity use accounting as their fraud "weapon"). The FBI warned publicly in September 2006 that there was an "epidemic" of mortgage fraud and predicted that it would cause a financial "crisis" if it were not stopped. Greenspan took no meaningful action against the fraud. He was the prisoner of the "efficient market hypothesis."
Material accounting control fraud cannot exist under even the weakest variants of the efficient market hypothesis, so Greenspan believed such frauds could not exist (even though he served as an expert for the most notorious S&L accounting control fraud – Charles Keating’s Lincoln Savings). Greenspan (and Bernanke until 2008 – after the barn had burned down) refused to use the Fed’s unique statutory authority under HOEPA (passed in 1994) to regulate the otherwise unregulated mortgage bankers that originated most of the nonprime loans.
Neoclassical economists are proud of their methodology – econometrics – and believe that it makes them the only "social scientists" worthy of the word "scientists." Standard econometric studies, however, fail catastrophically whenever a financial bubble is inflating or when there is substantial accounting control fraud. Regulators that base their policies on econometric studies in either of these environments will encourage accounting control fraud.
The typical econometric study uses either income or stock price as the dependent variable to test putative independent variables’ association with improved firm performance. Stock price is largely driven by reported income. The problem is that disastrous business practices optimize accounting control frauds and hyper-inflate financial bubbles. The worst lending practices display the strongest positive association with reported accounting income – right up the point that everything collapses and the true (negative) "sign" of the correlation emerges.
The recipe for a lender engaged in accounting control fraud that seeks to maximize reported accounting income has four ingredients: (1) extreme growth, (2) lend even to the uncreditworthy – at premium yields, (3) extreme leverage, and (4) provide only minimal general loss reserves (ALLL). Lenders that follow this recipe are mathematically guaranteed to report record income in the near term – which makes their officers wealthy given modern executive compensation. George Akerlof (Nobel Laureate in Economics in 2001) and Paul Romer emphasized that accounting fraud was "a sure thing" in their famous 1993 article (Looting: The Economic Underworld of Bankruptcy for Profit).
Absent a bailout or subsidy, the lender will eventually fail, but the senior officers will can walk away wealthy. At any given time, particular assets (which lack a readily verifiable market value) and industries (because of weak regulation and supervision) will provide a superior environment for accounting control fraud. This causes such frauds to cluster and, particularly if entry is easy, can lead to epidemics of accounting control fraud in an industry. This causes financial bubbles to hyper-inflate, which allows the frauds to extend the (fictional) profits and hide the (real) losses by refinancing bad loans.
The accounting fraud recipe causes regulators that rely on econometrics studies to make the worst possible policy decisions. Making bad loans at a premium yield, combined with extreme growth and liquidity, and minimal loss reserves simultaneously maximizes fictional income and real losses. The econometric study will show that making bad loans exhibits a powerful positive correlation with income. Greenspan kept getting this wrong. During the S&L debacle he endorsed an econometric study by George Benston that concluded that we were insane to restrict "direct investments" by S&Ls because the 33 S&Ls that made substantial amounts of direct investments were exceptionally profitable. Greenspan also opined that Lincoln Savings posed "no foreseeable risk" to the FSLIC insurance fund. Two years later, all 33 of the S&Ls had failed. Lincoln Savings was the most expensive S&L failure.
Pratt made the same blunder. He modeled the federal S&L deregulation bill (the Garn-St Germain Act of 1982) on the State of Texas’ deregulatory bill – because Texas S&Ls reported that they were the most profitable in the nation. S&Ls based in Texas ultimately caused over 40% of the total S&L losses. Their high reported profitability was driven by the Texas accounting control frauds. Pratt could not have chosen a worse model for federal deregulation than Texas. Passage of the Garn-St Germain Act sparked a "competition in laxity" with the States. California "won" the "race to the bottom" by providing no significant regulation or supervision. Neoclassical economists applauded this competition because their ideology and theories led them to assure the nation that the greater the deregulation the stronger our economy would be.
Federal S&L deregulation occurred nearly 30 years ago. The inability of neoclassical economists to learn from the recurrent financial disasters and epidemics of accounting control fraud demonstrate that we are dealing with a faith-based economics. America continues to export failed economic theory and theoclassical economists. Until we break their grip on policy we will continue to suffer recurrent, intensifying financial crises. In my next several columns I’ll discuss the perverse regulatory policies we are following that are delaying and weakening our economic recovery and making future crises more likely and more severe.
Voters Back Tough Steps to Reduce Budget Deficit
by Jonathan Weisman - Wall Street Journal
Frustrated voters, fixing on the $1.5 trillion federal deficit as a symbol of Washington's paralysis, appear increasingly willing to take drastic steps to address the red ink. Leonard Anderson, 56 years old, a Richmond, Va., drug-maker engineer and a Republican, said he would be willing to accept a national sales tax to raise revenues. Kimberly Moore, 46, a Richmond Democrat and bank information-technology analyst, said everyone will have to accept budget cuts. And at 67, Paul DesJardins, a Henrico, Va., Republican, said he would accept higher Medicare co-payments and deductibles.
"As Americans, we're all going to have to cut back and take less," said Lois Profitt, a 58-year-old small-business owner and political independent from Chesterfield, Va. With the November midterm elections looming, voters appear ahead of Washington in grappling with the tough choices to come, according to national polling and a focus group commissioned by The Wall Street Journal in the bellwether city of Richmond.
That is a source of political peril for both Democratic and Republican parties, which are trying to talk about the deficit without addressing the specifics of how they would tackle it. Leaders on both sides of the aisle worry about being attacked if they produce a package of painful spending cuts or tax increases. And to reinforce lawmakers' anxiety, voters remain divided about what ought to be done. "It's a brutal predicament for politicians because the rhetoric of deficit cutting is enormously popular, but the details are incredibly unpopular," said Matt Bennett, a vice president at the Democratic group Third Way, which has polled extensively on the issue.
For meaningful deficit reduction to happen, Republicans and Democrats likely would have to work together to slash spending or raise taxes. Instead, Republicans are attacking Democrats for planning to allow some Bush-era tax cuts to lapse. Democrats are accusing Republicans of plotting the privatization of Social Security. And neither party has convinced Americans it is serious about the problem. Republicans are seen as the party most trusted to reduce the deficit by 32%, compared to 24% for Democrats, according to a new Wall Street Journal/NBC News poll. But a plurality of 40% see no difference between the two parties on the issue.
The White House professes to be relatively sanguine about the short-term deficits, half of which stem from collapsing tax receipts and rising spending on programs associated with the recession. The president has largely kicked deficit reduction to a bipartisan commission that will report back in December. "If Barack Obama wasn't serious about this, he wouldn't have set it up," White House press secretary Robert Gibbs said of the commission. "We're not going to eliminate three gimmicks and a loophole and call it a day."
But the president may run into opposition in his own party. A group of liberal economists argue that deficit cutting now would kill off the struggling recovery and send the deficit soaring higher. And complicating matters for Democrats, some liberal interest groups argue that Social Security is sound and in no need of serious change. Voters seem more impatient and say they want their political leaders to take a stand. "I wish the politicians would be hard-a—, and be like, 'You know what? It's going to be horrible for the next few years, but you've got to shut up," ' said Jennifer Ciminelli, a 35-year-old political independent in Richmond, Va., and one of 12 Virginians who participated in the Journal's focus group. It included four independents, four Republicans and four Democrats.
Virginia is a new swing state that voted for President Barack Obama in 2008 then elected a Republican governor, Bob McDonnell, the next year. Most of the focus group hailed from the congressional district of House Minority Whip Eric Cantor, a rising force in Republican politics who has made fiscal rectitude as well as tax cutting a mantra. Some came from the district of Rep. Bobby Scott, a liberal Democrat. Just to the west and south is the district of freshman Democratic Rep. Tom Perriello, one of the most embattled incumbents in the country.
Even among such diverse voices, the nation's fiscal problems were a central concern. At $1.47 trillion, the federal deficit this fiscal year exceeds all defense and nondefense spending at Congress's discretion by $110 million. In other words, lawmakers could eliminate the entire military, all federal education, agricultural, housing programs, federal prisons, the Central Intelligence Agency, Federal Bureau of Investigations, Coast Guard and border patrol, and the nation would still be in the red.
Half of the current deficit stems from falling tax revenues and rising spending on programs associated with the recession, such as unemployment insurance and food stamps, along with temporary measures such as the stimulus and the Wall Street bailout. The administration projects the deficit—now at 10% of the economy—will fall to 3.4% of the gross domestic product by 2014 as these programs end and the economy recovers.
But then long-term demographic problems kick in, which in some ways dwarf the short-term deficit spike. With the baby boom generation retiring, the deficit will begin rising again because of rising Social Security, Medicare and Medicaid spending. The accumulated debt held by the public will exceed 77% of the economy within a decade, not including the debt the government owes itself for raiding Social Security taxes for decades. "The country's going to deteriorate," said Mary Beth Davis, a 27-year-old professional photographer and Democratic-leaning independent from Midlothian, Va. "It already is."
Washington is making a show of tackling the problem. Republicans have started resisting politically inviting bills—such as a recent bill to prevent layoffs of teachers and police officers—in an effort to regain the mantle of fiscal rectitude. And a group of House Democrats last month broke with their leaders to propose unpopular spending cuts that they say are necessary to win the public's trust on the issue, such as cutting agriculture subsidies. "The deficit plays into people's anxieties," said Rep. Peter Welch (D., Vt.), a founding member of the House's new Spending Cuts and Deficit Reduction Working Group. "They believe all this government spending is making their positions more precarious without helping them personally."
But the leadership of both parties have steadfastly resisted offering solutions. Mr. Cantor, who would likely become House majority leader if his party wins back control, pointed to the experience of his colleague, Rep. Paul Ryan (R., Wis.). Mr. Ryan's detailed "road map" to a balanced budget has been attacked by Democrats who have tried to tie his proposals, such as a voucher system for Medicare, to the GOP leadership.
Mr. Cantor acknowledged a hunger for straight talk on the deficit. But he added, "We have to embark on an incremental approach to rebuild confidence, so we can live up to what people want." Mr. Ryan has drawn a different conclusion. On Tuesday, he said, he was putting air in his wife's tire in Janesville, Wis., when a constituent asked him about his deficit plan. The voter wasn't taken aback as Mr. Ryan spelled out big cuts in domestic spending. "These things are thought of as such third rails," said Mr. Ryan. "They become a political weapon to be used against you. But people are ready for this stuff. They're ready to hear the truth."
The focus group, however, also showed evidence of the perils most in Washington seek to avoid. Craig Christmas, 38, a Democrat and public-school guidance counselor, said he didn't want to cut education or see his taxes rise. Randy Rowekamp, 61, a retired information-services worker from Midlothian, Va., who describes himself as an independent who leans Republican, railed against Washington profligacy and was reluctant to embrace specific cuts. "You hurt people. There are people living on Social Security. If you start taking that away or lowering it, you're impacting a person's life," he cautioned. Ms. Davis, the photographer, adamantly opposed raising the eligibility age for Medicare.
"This is a mirror of what Americans think," exclaimed Ms. Moore, the bank analyst, sounding exasperated. "You have an electorate that is impossibly fickle and difficult to please but who cannot articulate exactly what needs to be done." Such frustrations emerge nationally in the most recent Wall Street Journal/NBC News poll. In it, 74% said it would be acceptable to change Medicare to provide larger subsidies for low-income seniors, while cutting subsidies for the more affluent. Sixty-four percent would accept capping Medicare and Medicaid payments to health-care providers, while 58% backed subjecting incomes over $107,000 to Social Security taxes.
But 57% found cuts to national security and defense weapons systems unacceptable. Slowly raising the retirement age to 70 to reduce Social Security costs was acceptable to only 36% of those polled. Raising the eligibility age for Medicare was even less popular. "Folks want to cut the deficit, but they say, 'Don't touch my Social Security. Don't touch my Medicare. Don't cut defense spending, and don't raise my taxes,"' said Rep. Gary C. Peters (D, Mich.), another member of the House budget-cutting task force. "This is going to take courage."
Still, veterans of the budget wars see one reason for optimism in the subtle shifts in public opinion. Unlike politicians, most Americans don't seem to place partisan blame on one party or another, so neither party can claim the high ground. "There's no end in sight, and it's both parties," said Dani Saunders, 31, a conservative independent who keeps the books for her husband's Richmond tattoo parlor.
The Low-Interest-Rate Trap
by John Rubino - Dollar Collapse
Pretend for a second that you recently retired with a decent amount of money in the bank, and all you have to do is generate a paltry 5% to live in comfort for the rest of your days. But lately that’s been easier said than done. Your money market fund yields less than 1%. Your bond funds are around 3% and your bank CDs are are down to half the rate of a couple of years ago. Stocks, meanwhile, are down over the past decade and way too volatile in any event. If you don’t find a way to generate that 5% you’ll have to start eating into capital, which screws up your plan, possibly leaving you with more life than money a decade hence.
Now pretend that you’re running a multi-billion dollar pension fund. You’ve promised the trustees a 7% return and they’ve calibrated contributions and payouts accordingly. But nothing in the investment-grade realm gets you anywhere near 7%. If you come up short, the plan’s recipients won’t get paid in a decade or – the ultimate horror – you’ll have to ask the folks paying in to contribute more, which means you’ll probably be scapegoated out of a job. In either case, what do you do? Apparently you start buying junk bonds. According to Saturday’s Wall Street Journal, junk issuance is soaring as desperate investors snap up whatever paper promises to get them the yield they’ve come to depend on. Here’s an excerpt:
'Junk’ Bonds Hit RecordU.S. companies issued risky "junk" bonds at a record clip this week, taking advantage of keen investor appetite for returns amid declining interest rates and tepid stock markets. The borrowing binge comes as the Federal Reserve keeps interest rates near zero and yields on U.S. government debt are near record lows. Those low rates have spread across a variety of markets, making it cheaper for companies with low credit ratings to borrow from investors.
Corporate borrowers with less than investment-grade ratings sold $15.4 billion in junk bonds this week, a record total for a single week, according to data provider Dealogic. The month-to-date total, $21.1 billion, is especially high for August, typically a quiet month that has seen an average of just $6.5 billion in issuance over the past decade. For the year, the volume of U.S. junk bonds has exceeded $155 billion, 80% higher than in the year-ago period and easily on pace to surpass the record $163.6 billion total for 2009.
Investors have been snapping up the new non-investment-grade bonds, having grown frustrated with stocks and with the meager yields on safer government and high-grade corporate bonds. "Even though high-yield bond yields have come [down], versus other asset classes, they’re still comparatively attractive, especially when you consider the direction of default today," says Darin Schmalz, a director in leveraged finance at Fitch Ratings. "When you take into account other investment options for investors, and a benign default rate, the high-yield asset class is still pretty attractive."
In recent decades, following periods of economic slowdown, companies have tended to enjoy lower borrowing rates, which has helped credit markets recover and kept lower-rated companies afloat, says Christopher Garman, head of high-yield research firm Garman Research. When the Fed keeps borrowing rates so low, "you see investors piling more into the high-yield market," he says. "It becomes part of a virtuous cycle that allows lower-rated companies to refinance their liabilities."
Companies are using most of the proceeds of the junk-bond offerings to refinance more expensive debt, or in some cases to pay special dividends to their private-equity owners. Many of the refinancings are for companies that took on massive debt over the last decade. The refinancings, on the whole, are positive for the economy, because they help companies with too much debt avoid default or bankruptcy. But they do little to create new economic growth, and in some cases simply delay an inevitable reckoning.
- This is exactly what the government is hoping for in pushing yields down to zero. Forcing conservative investors to reach for yield saves the day in the short run by funneling extra liquidity to the sector of the economy that is most in danger of imploding. So the military industrial complex/welfare state lives to borrow and spend another day.
- One of the signs that a system headed for a crack-up is deteriorating credit quality. In other words, when low-quality entities are doing most of the borrowing, trouble will ensue. For more on this, look into the work of Hyman Minsky, an economist who seems to have understood today’s world pretty well.
- This quote deserves a closer look: "When you take into account other investment options for investors, and a benign default rate, the high-yield asset class is still pretty attractive." The only possible response to this is that they really should make a financial history course mandatory for money managers. The fact is that in every bubble, default rates are nice and low when capital is flowing in and then spike when the money stops. Jeeze, it was just a few years ago that housing analysts were using the low default rate on mortgages and credit cards to dismiss the possibility of a housing bust.
- Obviously we’re once again solving a near-term problem by creating a much bigger one a few years down the road. What happens to retirees when their savings and pension funds are vaporized by the inevitable junk bond bust? More than likely they’ll panic and go to all cash, which will 1) crash the stock and bond markets, 2) leave them without enough income to meet their obligations, and 3) provoke another massive bailout at taxpayer expense. That is, unless the dollar tanks in the meantime, in which case it’s game over for everyone.
Judge Won't Approve Citi-SEC Pact
by Kara Scannell - Wall Street Journal
A federal judge refused to approve the Securities and Exchange Commission's $75 million settlement with Citigroup Inc. over the bank's disclosure of subprime-mortgage problems, saying she is "baffled" by the proposed pact. The move by U.S. District Judge Ellen Segal Huvelle represents another challenge for the SEC as it tries to punish financial institutions blamed for the financial crisis.
The judge, striking a frustrated tone, fired several questions at the SEC, among them why it pursued only two individuals in the case and why Citigroup shareholders should have to pay for the alleged sins of bank executives. "I look at this and say, 'Why would I find this fair and reasonable?'" the judge told both sides at a 90-minute hearing. "You expect the court to rubber-stamp, but we can't."
The SEC and Citigroup said they would respond to the judge's request for additional legal briefs. She set a hearing for mid-September. Monday's action throws into question a settlement reached last month over allegations that Citigroup understated its exposure to subprime assets in 2007 by nearly $40 billion. The SEC says the bank misled investors in conference calls by saying its subprime exposure was $13 billion, when it was actually more than $50 billion.
The SEC also brought cases against two individuals, Citigroup's then-chief financial officer, Gary Crittenden, and its then-head of investor relations, Arthur Tildesley Jr. Those cases were filed in administrative court and fall outside the jurisdiction of Judge Huvelle. Both men settled without admitting or denying wrongdoing, wIth Mr. Crittenden agreeing to pay $100,000 and Mr. Tildesley $80,000. If the judge is satisfied with the new briefs by the SEC and Citigroup, she could approve the settlement. If she rejects it, the two sides would have to reach a new settlement more to the judge's liking or take the case to trial.
Judge Huvelle drew several comparisons to a case involving Bank of America Corp.'s disclosures during its acquisition in late 2008 of Merrill Lynch. Last year, federal Judge Jed Rakoff rejected the SEC's $33 million settlement with Bank of America, citing similar concerns about whether the agency pursued individuals vigorously enough and whether Bank of America shareholders were getting a fair deal. On the eve of a trial, Judge Rakoff signed off reluctantly on a settlement in which Bank of America agreed to pay a $150 million fine and take remedial actions.
The increased attention by federal judges over SEC settlements points to the delicate balance the SEC must strike as it pursues cases stemming from the 2008 crisis. It wants to hold senior executives accountable and create a deterrent for corporate wrongdoing, while avoiding excessive collateral damage for shareholders who were already victimized. The SEC has debated corporate fines for years. Democrats on the commission say they are the best way to deter others, while Republican commissioners have expressed concern about the double hit to shareholders.
Meanwhile, lawmakers and others are growing impatient at the relatively small number of senior executives charged in connection with Wall Street's near-collapse. The Justice Department and SEC dropped their investigation into a former American International Group executive involved in mortgage-related losses without filing charges. In the SEC's civil case against Goldman Sachs Group Inc., the only individual charged was a lower-level trader, who is fighting the allegations. A judge approved the SEC's $550 million settlement with Goldman itself.
The SEC has said it can only bring charges where it has enough evidence. Defense lawyers say in many cases the multibillion-dollar losses by financial firms were the result of poor business decisions, not intentional fraud. In the Citigroup case, Judge Huvelle said there was no "guidepost" to determine whether $75 million was a fair penalty. SEC lawyer Erica Williams said the SEC's economists analyzed the benefit to Citigroup during the period at issue in the complaint and determined the high end of the range was $123 million.
The judge asked why Messrs. Crittenden and Tildesley were charged but no other executive who knew about the bank's exposure, although the SEC's complaint referred to other senior officers at the bank. She cited concerns that senior executives who enjoyed big compensation wouldn't be sharing in the $75 million bill. "You've focused on two individuals and I can't for the life of me figure out why," the judge told the SEC lawyers. Ms. Williams said Mr. Crittenden spoke on the investor calls while Mr. Tildesley drafted and approved the disclosure statements.
Brad Karp, a lawyer representing Citigroup, told the judge the entire "mess" of subprime losses across Wall Street "is being looked at today with a profound hindsight bias." He said there was a breakdown in communication between Citigroup's banking and disclosure side. He said Mr. Crittenden was provided with information from business units that, if analyzed, would have allowed him to detect some "cracks" in the mortgages, but "he didn't pick up on that." The judge said that sounded "rather thin" and later suggested the two men "could only be culpable if they knew" the size of the exposure. She added, "You can't prosecute a company on the basis of a [internal] miscommunication."
Ireland: A recession of the banks, by the banks, and for the banks
by P O Neill - Fistful of Euros
Some stories heard in rural Ireland this summer. A farmer goes into an embattled tractor dealer and reaches an understanding on the purchase of an expensive tractor. The farmer then goes to his local bank manager to get financing to purchase the tractor; as agriculture is not doing too badly despite the recession, there is some hope. But the bank has an unexpected response: we can’t give you a loan to buy that tractor, but we can finance one very like it — that we recently reposessed. So banks are in the farm machinery business, at the expense of actual farm machinery businesses.
A recreational golf player reports that it’s a good time to play golf in Ireland. Some local courses that had gotten shabby and run-down are finally having some needed working capital put into them, and now they look good. How did this happen? The banks took them over and will do anything to attract a bit of business, even if it means putting in some additional money. Then there’s the miseries of the hotel business, which have featured in the national newspapers.
Apparently the hotels being run by banks have gotten hold of the forthcoming wedding parties at neighbouring hotels, and are calling the couples directly with offers of a better deal — enough of a better deal to cover the lost deposit at their original booking. And finally, one of the big fish: the well-known department store Arnott’s, now being run by Ulster Bank (RBS subsidiary) and Anglo Irish Bank (of which more in a moment).
The big picture is that the Irish debt crisis has put the banks into lines of business that they never planned to be in. With the result that significant sectors of the Irish domestic economy are now being run by them. But there is a strange flip side to this situation. There is exactly one sector of the economy that the government has declared off-limits from the process of debt distress, restructuring, and external management — the banking sector. And so it is that unlimited public funds are available to keep solvent what would otherwise be insolvent banks, the €24 billion or so directed to Anglo Irish Bank being the epitome of this problem.
And sometimes we wonder if the external prognosticators looking at Ireland have fully grasped the role of the banks in the Irish economic shambles. Why did the government’s favourite bedtime scary monster, "the markets", react so badly to the European Commission approving the €24 billion for Anglo, a figure that has been known in general terms for months and was, within a couple of billion, confirmed by the Minister of Finance to the Dail a few months ago? Was it the first time that the headline number crossed the Reuters screen, or was it the government’s inability to say that it’s this €24 billion and not another eurocent more into a dead bank?
Anyway, another day brings another bit of dysfunction. Recognizing the scale of the restructuring that needs to be done, you’d think there would be a rush to get it done as quickly as possible and reduce some of the debt overhang. Not necessarily. Restructuring typically means new equity and all the existing stakeholders — including creditors — taking a loss. But the Central Bank of Ireland has blocked any loan writedowns for assets headed to the National Asset Management Agency (NAMA), meaning that even banks that see the value in taking a steep haircut and letting new equity come in to a troubled client can’t do it. Maybe NAMA can do it a year from now. Is it worth letting such decisions fester for another year? The government seems to think so.
A few more conversations seek to establish whether anyone in Ireland is feeling optimistic, besides the golf players. Well, the boats are still out in West Cork and an enquiry as to the occupation of the owners returns the answer — doctors and lawyers. The Electricity Supply Board had a great year for profits and a new electricity levy — which despite its green labelling, will mainly finance carbon-dioxide emitting peat power plants — will be on everyone’s bills just in time for winter.
A friend at an architecture firm explains that after slashing employment 75 percent, overseas business is now back up and some laid off people might get their jobs back. Apparently Middle East oil money is creating good work for people willing to travel. And as the next wave of emigration gets started, 20 years after the last one was ending, it’s currently viewed as an experience that is important when you live in a small country rather than as an indication of long-term gloom. Go abroad, get the training, come back when things are a bit better.
And yet it’s not clear that the worst is over. The banks haven’t yet made a big move on distressed home mortgages and no one is clear what will happen when forebearance is no longer a viable strategy. Notwithstanding the government’s attempts to compare tax revenue to "profile" (i.e. a very recent projection), the fact is that tax revenue is stagnant at last year’s depression-like levels despite an apparent recovery in economic statistics. And while there are those desperate hotels, the tourists (or at least those who stray from the cautiously priced package tours) will still find fussy and expensive restaurants (plus VAT).
Are there any tricks left in the bag? The government is looking at privatization, most likely as a way to realize a large amount of cash at fairly short notice — essentially a portfolio switch of state-owned companies for all the bank liabilities it has taken on. And there are some bizarre Thatcherite echoes in the possible appearance of a poll tax by the end of the year (dressed up as a "flat rate" water charge or property tax). The public sector unions are back onside for now with a deal guaranteeing no further pay cuts and postponed pension reform for incumbents, so some semblance of the "social harmony" (i.e. lack of riots) that has so impressed international commentators is still there.
But, if you don’t work for the government directly or indirectly (as with the doctors and lawyers) or for some type of export operation, do you have any firm idea what you’ll be doing 3 years from now? For a country facing such inponderables, the statis in its politics is remarkable. But that’s for another post.
Denmark Starts to Trim Its Admired Safety Net
by Liz Alderman - New York Times
How long is too long to be paid to go without a job? As extended unemployment swells almost everywhere across the advanced industrial world, that question is turning into a lightning rod for governments. For years, Denmark was held out as a model to countries with high unemployment and as a progressive touchstone to liberals in the United States. The Danes, despite their lavish social welfare state, managed to keep joblessness remarkably low.
But now Denmark, which allows employers to hire and fire at will while relying on an elaborate system of training, subsidies for those between jobs and aggressive measures to press the unemployed into available openings, is facing its own strains. As a result, it is beginning to tighten up. Struggling to keep its budget under control after the financial crisis, the government in June cut into its benefits system, the world’s most generous, by limiting unemployment payments to two years instead of four.
Having found that recipients either get work right away or take any job as their checks run out, officials are also redoubling longstanding efforts to move Danes more quickly out of the safety net. "The cold fact is that the longer you are out of a job, the more difficult it is to get a job," Claus Hjort Frederiksen, the Danish finance minister, said during an interview. "Four years of unemployment is a luxury we can no longer allow ourselves."
In the United States, where the Senate passed an unemployment insurance extension last month only after a long battle, the debate over how to treat persistent joblessness has mounted as well. It pits those who argue that decent benefits are necessary to support workers and their families when companies are doing little hiring against those who contend that longer benefits periods discourage job-seeking. Another fight is brewing over putting more federal dollars toward retraining.
Similar concerns loom in debt-ridden countries like Spain and Portugal, where the costs of high long-term unemployment have governments straining for a solution. Such European countries could profit, many economists say, from adopting the more dynamic parts of Denmark’s "flexicurity" system. But now that the global recession has exposed chinks in its armor, Denmark’s efforts to find a new balance between job market flexibility and security for workers are setting off alarm bells in the country. "We have a famous flexicurity model, but now it’s all flex and no security," complained Kim Simonsen, chairman of HK, one of Denmark’s largest trade unions.
To be sure, Denmark is not abandoning the welfare state. Government spending accounts for about half of gross domestic product, and few Danes complain about a top income tax rate of 50 percent that generously finances unemployment, pensions, health care and other accoutrements that, studies claim, make Danes the happiest people on earth. Hardly anyone in Denmark, a small, tranquil country of 5.5 million people, falls through the cracks. The constitution even guarantees Danes the right to work and to receive public assistance if they stumble.
But sustaining a benevolent nanny state is proving to be challenging even for the notably generous Danes. "It’s no surprise the government is saying that programs that are highly expensive and give a Rolls-Royce treatment to citizens have to be trimmed," said Iain Begg, a professor at the London School of Economics. "So the search will now be on for labor market policies that deliver more people in work with less money, which has an inevitable air of the holy grail about it."
In Denmark, employers have carte blanche to hire and fire, and in most cases laid-off people are guaranteed about 80 percent of their wages in benefits, a figure capped for high earners. In turn, they must participate in retraining and job placement programs tailored to get them back to work, which the government has intensified. Each year, a remarkable 30 percent of Danes change jobs, knowing the system will allow them to pay rent and buy food so they can focus on landing a new position. About 80 percent belong to unions, which manage the workplace, help run the unemployment insurance program and press the laid-off into retraining.
But as the financial crisis erased jobs, the government, Denmark’s largest employer, has had to provide more temporary work and intensify coaching. Unemployment is at 4.2 percent today, lower than most European countries, though more than twice the 1.7 percent rate two years ago. As in Germany and some other European countries, hundreds of Danish employers have also embraced government-subsidized short-work programs, a tactic adopted to keep a lid on unemployment. The plans allow companies to cut working hours to hold onto highly skilled workers, rather than laying them off when times are tough.
Danish politicians say their program is still working well.
But unions argue that the cutbacks in the safety net go too far, and they are planning to press companies to lengthen the typical one- to three-month notice period before dismissals. Business leaders fear that would push Denmark toward the type of rigid systems found in Spain, Italy and France, where it can take a year or more to lay off most employees, which drains finances and raises the danger of more job cuts. "If unions start requiring longer job-cut notices in exchange for reduced benefits, you’ll lose the flexibility to adapt to changes in the economy," said Stine Pilegaard Jespersen, head of labor market policy at the Danish Chamber of Commerce.
Inger Skouby, at 58 a longtime nurse, has seen the system shift from the inside. She was in and out of unemployment for nearly four years after she fell ill. She took a year off for treatment, paid for by the state. She then tapped jobless pay, receiving about 80 percent of her former wage. To get with the times, she received information technology training, leading to a telemarketing position until the financial crisis hit. When she returned to unemployment, she said, the government had tightened up, requiring weekly job applications, meetings with job counselors, and repetitive training that produced scant results. She was put into a work program as a school secretary, until something better came along.
Many others spoke in interviews about being required to take make-work or menial jobs that have eroded their morale. "Before, it wasn’t like this," Mrs. Skouby said. "Now, it’s about controlling people." Lisbeth Halvorsen, 30, had her first brush with unemployment last month, after her part-time teaching job expired. She will get 70 percent of her salary, but is frantically sending résumés to get out of the system as soon as possible. The government has created a lot of incentive to do so, she said. To improve its job activation program, Denmark has outsourced some of it to private companies, which receive bonus payments for every person placed into job training or a new job.
That has led to cases where laid-off workers spend an entire month in courses to improve their résumés, or tied up in "sit-around-and-drink-coffee meetings" to obtain unemployment checks. Occasionally, they offend Danish sensibilities. Torben Frederiksen, 32, a plumber out of work for three months, said his employment center forbade him from attending his mother’s funeral because it conflicted with a meeting with his counselor. "They told me that a funeral was no excuse for missing my appointment," he said. Mr. Frederiksen went anyway, and was granted another meeting.
From the perspective of Claus Hjort Frederiksen, the finance minister, Denmark is carefully laying the groundwork for the future by changing its policies to make more people eligible for work when the economy picks up. "In two years, we expect to be out of the crisis," he said, "and we’ll need to be ready."
Coal Power Industry: Biggest US Expansion In 2 Decades, Emissions Equivalent To Putting 22 Million Cars On The Road
by Matthew Brown - Huffington Post
Utilities across the country are building dozens of old-style coal plants that will cement the industry's standing as the largest industrial source of climate-changing gases for years to come. An Associated Press examination of U.S. Department of Energy records and information provided by utilities and trade groups shows that more than 30 traditional coal plants have been built since 2008 or are under construction. The construction wave stretches from Arizona to Illinois and South Carolina to Washington, and comes despite growing public wariness over the high environmental and social costs of fossil fuels, demonstrated by tragic mine disasters in West Virginia, the Gulf oil spill and wars in the Middle East.
The expansion, the industry's largest in two decades, represents an acknowledgment that highly touted "clean coal" technology is still a long ways from becoming a reality and underscores a renewed confidence among utilities that proposals to regulate carbon emissions will fail. The Senate last month scrapped the leading bill to curb carbon emissions following opposition from Republicans and coal-state Democrats. "Building a coal-fired power plant today is betting that we are not going to put a serious financial cost on emitting carbon dioxide," said Severin Borenstein, director of the Energy Institute at the University of California-Berkeley. "That may be true, but unless most of the scientists are way off the mark, that's pretty bad public policy."
Federal officials have long struggled to balance coal's hidden costs against its more conspicuous role in providing half the nation's electricity. Hoping for a technological solution, the Obama administration devoted $3.4 billion in stimulus spending to foster "clean-coal" plants that can capture and store greenhouse gases. Yet new investments in traditional coal plants total at least 10 times that amount – more than $35 billion. Utilities say they are clinging to coal because its abundance makes it cheaper than natural gas or nuclear power and more reliable than intermittent power sources such as wind and solar. Still, the price of coal plants is rising and consumers in some areas served by the new facilities will see their electricity bill rise by up to 30 percent.
Industry representatives say those increases would be even steeper if utilities switched to more expensive fuels or were forced to adopt emission-reduction measures. Approval of the plants has come from state and federal agencies that do not factor in emissions of carbon dioxide, considered the leading culprit behind global warming. Scientists and environmentalists have tried to stop the coal rush with some success, turning back dozens of plants through lawsuits and other legal challenges. As a result, current construction is far more modest than projected a few years ago when 151 new plants were forecast by federal regulators. But analysts say the projects that prevailed are more than enough to ensure coal's continued dominance in the power industry for years to come.
Sixteen large plants have fired up since 2008 and 16 more are under construction, according to records examined by the AP. Combined, they will produce an estimated 17,900 megawatts of electricity, sufficient to power up to 15.6 million homes – roughly the number of homes in California and Arizona combined. They also will generate about 125 million tons of greenhouse gases annually, according to emissions figures from utilities and the Center for Global Development. That's the equivalent of putting 22 million additional automobiles on the road. The new plants do not capture carbon dioxide. That's despite the stimulus spending and an additional $687 million spent by the Department of Energy on clean coal programs.
DOE spokesman John Grasser acknowledged the new plants represent a missed chance to rein in carbon emissions. But he said more opportunities would arise as electricity consumption increases.
Experts say the widespread application of carbon-neutralizing technologies for coal plants remains at least 15 to 20 years away. "This is not something that's going to happen tomorrow," Grasser said. "You have to do the required research and development and take steps along the way."
Producing clean coal power appears straightforward: Separate the carbon dioxide before it goes up the smokestack, then store it underground in geological formations. Experimental trials have been successful but putting the concept into commercial practice has been stymied by high costs and the difficulty of isolating carbon dioxide from other gases. "We are pushing the envelope as far as what's possible," said Jon LaCour, manager for the 115-megawatt Wygen III coal plant, which came online in northeastern Wyoming this spring. "We have no way of capturing carbon."
Inside the plant, a ton of coal per minute rumbles off conveyor belts from the nearby WyoDak mine. Hulking steel pulverizers crush the fuel to the consistency of baby powder, fans blow it into a giant furnace and the coal goes up in flames that can top 1,700 degrees Fahrenheit, producing steam to generate electricity. WyGen is more efficient than earlier plants, burning about 20 percent less coal. Yet the process itself has changed little since Thomas Edison built the first plant in 1882 in Manhattan. And while dramatic advances have been made at the back end of coal plants – where Wygen's operator, Black Hills Power, removes most of the nitrogen oxides, sulfur dioxide and other acid-rain pollutants – efforts to curb greenhouse gases have lagged.
Black Hills spent $80 million on pollution controls for WyGen, bumping up its price tag to $247 million. Like most of the new fleet of plants, space was left at WyGen for the future installation of carbon-capture equipment. As climate change emerged as a global dilemma in recent years, the coal industry at times appeared on the ropes. Environmentalists trumpeted 100 plants dropped or delayed. Regulators imposed tighter emission limits for acid rain pollutants and reined in destructive mining practices. And the recession dampened consumer demand for power, prompting some utilities to scrap expansion plans. But coal has not gone away. "The reason coal burns in this country is not because anyone likes the smog. It's the cost," said Daniel Scott, a coal industry analyst with Dahlman Rose & Company in New York.
Plumes of Gulf oil spreading east on sea floor
by CNN Wire Staff
A new report set to be released Tuesday renews concerns about the long-term environmental impact of the Gulf Coast oil disaster, and efforts to permanently plug the ruptured BP oil well have been delayed again. Researchers at the University of South Florida have concluded that oil from the Deepwater Horizon spill may have settled to the bottom of the Gulf of Mexico further east than previously suspected -- and at levels toxic to marine life.
Initial findings from a new survey of the Gulf conclude that dispersants may have sent droplets of crude to the ocean floor, where it has turned up at the bottom of an undersea canyon within 40 miles of the Florida Panhandle. The results are scheduled to be released Tuesday, but CNN obtained a summary of the initial conclusions Monday night. Plankton and other organisms at the base of the food chain showed a "strong toxic response" to the crude, and the oil could well up onto the continental shelf and resurface later, according to researchers.
"The dispersant is moving the oil down out of the surface and into the deeper waters, where it can affect phytoplankton and other marine life," said John Paul, a marine microbiologist at USF.
The spill erupted April 20 with an explosion that sank the offshore drilling platform Deepwater Horizon. The blast killed 11 men and uncapped an undersea gusher that spewed an estimated 205 million gallons of oil into the Gulf before it was temporarily shut on July 15.
Retired Coast Guard Adm. Thad Allen, the federal government's point man in the Gulf, said Monday that attempts to permanently seal the well won't start until the latest potential problem is evaluated. Allen said engineers are now concerned about how to manage the risk of pressure in the annulus, a ring that surrounds the casing pipe at the center of the well shaft. The "timelines won't be known until we get a recommendation on the course of action," Allen said.
Scientists began new pressure tests last week to gauge the effects of the mud and cement poured into the well from above during the "static kill" procedure that started August 3. From those pressure readings, they believe that either some of the cement breached the casing pipe and leaked into the annulus, or cement came up into the annulus from the bottom. The scientists believe that process may have trapped some oil between the cement and the top of the well, inside the annulus. Now, given that new variable, they're trying to figure out how to safely maintain the pressure within the well before launching the "bottom kill," a procedure aimed at sealing the well from below.
Allen told reporters that when it comes to giving a green light to the "bottom kill" of the well through the nearby relief well, "nobody wants to make that declaration any more than I do." But the process "will not start until we figure out how to manage the risk of pressure in the annulus." "We're using an overabundance of caution," he said. Allen said crews could remove the capping stack that sealed the oil in the well on July 15, then replace the well's blowout preventer with a new one stored on the nearby Development Driller II in the Gulf. Allen said a new blowout preventer would be "rated at much higher pressure levels than the annulus."
The other option would require BP to devise a pressure-relief device for the current capping stack. Once crews get their marching orders, it will take them about 96 hours to prepare, drill the final 50 feet of a relief well and intercept the main well. Then, the bottom kill process of plugging the well from below would begin. More state restrictions on fishing in the Gulf of Mexico were lifted Monday as the fall shrimping season began.
The oil spill has hobbled fishermen across the Gulf as federal and state authorities put much of its waters off-limits due to safety concerns. With the well capped on a temporary basis for a month, the National Oceanographic and Atmospheric Administration and the Gulf states have begun lifting those restrictions -- but Louisiana shrimpers like Anthony Bourgeoif say more needs to be done, and soon.
"It's open down over here with small shrimp, where it should be open over there where the big shrimp are," Bourgeoif said. "Can't make no money with no little shrimp, man." Bourgeoif said he planned to go out, because "I ain't made nothing since the BP spill." But he was concerned that inspectors might find signs of oil in his catch and make him dump it. "So why go out there and catch it if they're just going to be dumped, and I ain't going to make no money off it?" he asked. "I've got to make money. I've got four grandkids I'm raising, man."
Deborah Long, a spokeswoman for the Southern Shrimp Alliance, said it will likely take days to assess what impact the spill has had on the Gulf catch. And while some shrimpers are eager to get back out, many are still working for the well's owner, BP, which has hired many boats to skim oil off the surface and lay protective booms along the shorelines. BP acknowledged Monday that the disruption the oil spill has caused to lives across the Gulf coast has built up tension among residents. In response, the company announced Monday it is providing a total of $52 million to five behavioral health support and outreach programs.
BP released a statement saying it would give the federal Substance Abuse and Mental Health Services Administration $10 million; the Florida Department of Children and Families, $3 million; the Louisiana Department of Health and Hospitals, $15 million; and the departments of mental health in Mississippi and Alabama, $12 million each. "We appreciate that there is a great deal of stress and anxiety across the region, and as part of our determination to make things right for the people of the region, we are providing this assistance now to help make sure individuals who need help know where to turn," said Lamar McKay, president of BP America and incoming leader of BP's Gulf Coast Restoration Organization.