Wednesday, August 18, 2010

August 18 2010: Fannie and Freddie: The Exit Doors are Shut

Alfred Palmer Bath House February 1942
"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."


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
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
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
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.

Government-sponsored mess
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
by AP

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.

Bust Time
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.

Foreclosure Pipeline
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.

Dollar Peg
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
by MyBudget360

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:

Source:  Fed Flow of Funds report

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:

Source:  FDIC

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:

Source:  FDIC

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 Record
U.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.

Some thoughts:
  • 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.


VK said...

And the great F&F farce goes on...

So does anyone here have an idea on what steps one can take post-collapse? What sort of ways can a person generate income or possibly run a businesses in the great abyss?

eeyores enigma said...

Hey Hey VK

Set yourself up a repair shop.

Repair what? you ask. Anything!!!!!!!

Start collecting the raw materials and machinery, preferably hand-powered or otherwise.

Set this up in a mobile situation so you have no overhead and can potentially move around a bit as conditions require.

The gypsies got it right…OoPs!

"France to deport hundreds of gypsies"

…maybe not.

--- said...

jal said...

The gypsies must have got it right. They have survived.

A new breed of gypsies will emerge. They will be living in their RV, FULL TIME, as they seek income AND avoid taxes and the fixed expenses of homeownership.
Homeschooling will take on a new meaning.

The modern version of the HOBBO CAMPS.

Caith said...

Nick Clegg, our Deputy Prime Minister, said of the cuts on the radio this morning "we are trying to fill a black hole." I think that's an excellent description of the likely effect.

James Madison said...

Stoneleigh wrote the following recently: “Credit expansions are based on Ponzi dynamics - the creation of multiple and mutually exclusive claims to the same pieces of underlying real wealth pie, as opposed to cutting the pie into a larger number of smaller pieces as currency inflation would do.”

Could someone please explain how bank loans create “multiple and mutually exclusive claims to the same” asset. I am not grasping this point.


Aaron Wissner said...

Thanks Ilargi, that was a great post. It was helpful to see all the GSE info all in one place; and Pimco's Gross's various quotes; and quite a few other things as well.

It occurs to me today that the government and banks could easily be considered to be one entity. This makes the understanding of deflation a bit more clear.

We give the "system" money, and since the system is the issuer, giving it to the system effectively destroys the money.

The system gives out (creates) some money in payrolls and transfer payments and whatnot, but does not give as much out as is given in.

I think that Thomas Greco's books on money help to illustrate those ideas of issuance of money, and destruction of money, pretty clearly.

I suspect there are other writers into monetary systems that do a fine job talking about issuance issues as well.

It seems that those working on so-called local currency initiatives often have the best understanding of money.

Shamba said...

VK, there are actually web sites giving classes in this kind of things. You may already know about them or not, Chris Martensen has some and a site called, I think.

the things I can remember are anything connected to producing food, gardens, cooking and preserving food, small motor repair and maintenance, stuff like capentry and construction, repairing and remaking clothing,
medical skills based on prevention and basic first aid, etc.
I'd think raising and caring for animals for transportation purposes would fit in there.

Also, any ability to teach these things also counts.

Sharon Astyk teaches Adapting classes online and that includes how to make a livelihood post-big whatever happening.

dislcaimer: I don't get a kick back for mentioning these websites and information! :)

peace, shamba

Eric Lilius said...

Tom Paxton has posted a new song:
I'm Changing My Name to Fanny Mae

rcg1950 said...

Ilargi said -
"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"

I think one of the characteristics of deflation is it's propensity to pit individuals and groups against one another. When times are good a few people win big and most will do just so so, but almost no one is a loser. That might cause some sense of unfairness and minor resentments, but, except for the pathologically greedy, it's a set of outcomes that most 'normal' people can abide. But, when the wealth pie is shrinking and standards of living are dropping then it becomes a different game - how to divvy up losses. This is not something at which humans appear to be very good. (it's why lifeboat stories are so dramatic) In fact, outside of real wars (the kind where national survival is at stake, not nasty imperial adventures presented as the former) and dire national emergencies, I can't think of situations in which most people collectively accept personal sacrifice for the social good. But maybe that's just a function of the time I happen to have been born into, and other times and places show H. sapiens in a more positive light.

Ilargi said...

" Shamba said...
VK, there are actually web sites giving classes in this kind of things."

The Automatic Earth will soon be doing this, together with Sharon Astyk et al.

And VK, I suggest you set up a good distillery. That should keep you busy for a while.


--- said...

Our leaders have been making very bad decisions for decades, and all of those bad decisions are starting to catch up with us.

Surely someone will explain to people lacking services that this is the price of "national security."

--- said...

VK: Probably one thing that will become spotty and rare, eventually, will be electricity. Candles might be a good bet.

Note from SOTB: lining the inside of a lampshade with tinfoil and arranging it over candles makes a serviceable reading lamp.

jal said...

Re.: post whatever preparations ...

I’ve been working on improving the yield of fava beans, (broad beans).

There is lots of info on the web. It is a staple food of the Mediterranean. Prior the introduction of the potato, it was a staple food in Europe,.

I’ve been a bean counter. :-)

I’ve selected the largest, most prolific beans for next year and I will be sharing with other gardeners.
I’ll find out if larger high yielding pods will improve the average yield from 5 to 7 beans and increase the bean size.

I did find out a few fact that wasn’t mentioned in the literature.

1. Some seeds will produce multiple stalks with pods.

2. Some seeds will produce a second crop of beans at ground level.

Under favorable conditions, the stalks grow to 2.5m, (6 ft.) and need to be supported from falling over.

More news as it happens.

Eric Lilius said...

The Transition Town movement includes, as a vital component, classes under the title " Reskilling". Locally to me, Transition Peterborough, Ontario is currently offering courses in Permaculture, gardening, soap making, preserving, cheesemaking.

Unknown said...


You never link this guy's articles, but they have tremendous value for comedic relief. I'm amazed they still allow comments, because in article after article the commentors tear the guy apart. You can pretty much read the articles and think, "OK, what is the opposite of what he's reporting. Ah, now I understand the world better." He appears to be a pure propaganda distribution outlet.


Phil said...

Time is running out for the West

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."

NZSanctuary said...

Ireland: A recession of the banks, by the banks, and for the banks
...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...

Ah, the concentration of wealth at work. How much property do you think the world's banks will end up owning?

andrew said...

"...but it is still remarkable that the press hasn't been on top of it to a much greater extent."

Sometimes you write something that is startlingly naive coming from such an otherwise learned man.

Just one example for TAE consideration.

The Washington Post is an American icon. It's the newspaper that brought down a President of the United States in defense of the rule-of-law nearly forty years ago. But that was then, the paper is no longer your father's Washington Post.

The Post and the nation has been through the Reagan Revolution, the rise of global capitalism and the dominance of the "neoliberals" whose mantra is privatize all profits and make public all debt. They are working to "starve the beast" or reduce government to the point that as Grover Norquist put it, "we can drown it in a bathtub."

In that post-Watergate era, Stanley H. Kaplan, who founded Kaplan, Inc. in the midst of the Great Depression in 1938, sold it to The Washington Post Company in 1984. The tail has come to wag the dog though now. Starting in 1994 a Harvard MBA named Jonathan Grayer transformed Kaplan from an $80 million test prep company into a $2 billion global education industry giant roaming the planet for profits sake. The Washington Post has been turned into the company's propaganda mouthpiece. It's Kaplan's Washington Post now as Kaplan supplies 64% of the newspaper's operating revenues.

As the sub-prime mortgage like student loan scam of the US taxpayer has unfolded, it's clear that Kaplan Universities have been engaged in massive fraud. That has taken its toll on the Washington Post. Its stock is down 30% year-to-date. More market traders are "shorting", betting against The Washington Post today than at any time in two decades. The big money thinks The Post is down for the count.

But I defy you to find any editorial criticism or significant reporting on Kaplan's criminal activities.

Woody said...

VK, Stoneleigh, others
Re: Running abyssiness "in the great abyss?"

Wondering about the prospects for a small hardware store in a community 5 miles from the nearest small town. The community still has a few farmers, and lots of gardeners.

The store has a very respectable inventory, seems to do a reasonable business, drawing from perhaps 300-500 homes within a 5-mile radius. The nearest Lowes big box building supply is 15 miles away. The property includes several buildings with lots of space for extra inventory and/or expanded retail.

It would seem that their market may be well matched to a lower energy future, but who knows if a lower finance future will keep suppliers supplying?

The owner has recently developed serious health problems but he and his wife still run the place with the help of a couple of part-timers. Thinking of asking if they would like a business partner.

All comments appreciated!

deflationista said...

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jal said...

Woody said...
" ... Wondering about the prospects for a small hardware store ..."

Can you say "NO" to a mother with two emaciated children hanging to her apron string?

That kind of credit would destroy you. I've seen it happen.

If you can bargain and trade, wheel and deal ... go for it.


pasttense said...

Woody, some of us see the economy getting worse and worse. Because of all the fixed costs a retailer has, a 10% decline in sales will translate into a much greater decline in profits. I think the poor economy combined with the massive competition from the Walmart-type discounters on one hand and the Home Depot/Lowes type home centers on the other are bad news for hardware stores. Do a Google search. You will find articles such as:

Rototillerman said...

Someone asked yesterday for examples of how multiple claims to underlying real wealth can be created. Recently I ran across the term "rehypothecation," which may help explain how the situation of multiple claims arises. Suppose bank A borrows money from Bank B, and pledges some collateral with Bank B as part of the deal. The collateral might be a mortgage backed security that generates a revenue stream, for instance. Bank B then borrows money from bank C, and pledges the same collateral that it just got from bank A to bank C. Bank C pledges to bank D, ad infinitum. Now when things start to fall apart, who gets the collateral? I wish I could remember where I saw this explained, but google is your friend...

trichter said...

How are those austerity measures working out for Greece? Locally they are seeing up to 70% unemployment.

"There's really no work for me here anymore," says one Albanian employee, who goes by the name Eleni in Greece. "Many others have already gone back to Albania, where it's not any worse than here.

Tensions Rise in Greece as Austerity Measures Backfire

Bukko Boomeranger said...

Roto, the article you saw on rehypothecation was written by Gillian Tett of the Financial Times and it was in the previous edition of TAE. (Thank goodness for that, because to read it at the FincTimes, you have to be registered.) Perhaps you are like me, with your face so far into the financial info firehose that your head is spinning!

"Rehypothecation" is a wonderfully complicated euphemism for "selling the same sack of shit to a bunch of different people."

James Madison said...

Thanks Rototillerman and Bukko Cannuko for shedding light on my question concerning how multiple claims to underlying real wealth can be created via bank loans.

Given that the answers you gave were subtle (good grief, "rehypothecation" is a pretty obscure concept!); I don’t feel so foolish for missing Stoneleigh’s point.

Tom Therramus said...


"-do you really think the human population is going to double from here?"

Ben, Tx for calling me on this - doubling overstated the case. World population doubled over the last half century and is projected by the UN to rise from around 6 to 9 billion over the next 50 years.

Not to lose my inference though - which is that increasing numbers of people and declining resources may be an inflationary cocktail.

"-i thought you were a PO datahead. what happened?"

That has not changed, with the twist that it is not PO that concerns me per se, it is economic instability on the downside from PO.

What I surmise is that shocks resulting from spikes in oil price volatility are and will continue to kill our present economic arrangements one stab at a time (an article on this can be found at -

This idea is not new - Kopits, Ruben, Orlov Simmonds, Ruppert, own @Steve from Virginia and others- all basically suggest variants or relatives of same hypothesis - "the bumpy plateau" etc.

What is new is that when I derived my own measurements of this process I found that notable spikes in oil price instability had been occurring since the late 1990s.

This observation led me to speculate on what seem an overlooked factor. Namely that a fin-de-siecle zeitgeist may have been wrought by this instability that led to a behavior that "@Gravity - a commenter at TAE" describes as "asymmetric herding" in the financial industry.

This fin-de-siecle zeitgeist in turn may explain the impetus for the fraudulent expansion and subsequent criminal looting of the shadown banking system.

.. ergo the financial crisis of 2008 and ergo my own growing sense that "this time it is different".

Best wishes,

Tom Therramus

team10tim said...

Hey hey NZSanctuary,

"How much will the banks end up owning?" Reminded me of a short story tittled "how much land does a man really need". In the end 6 feet is all it takes.

Bigelow said...

“Valuation: In the financial crisis of 2007, the large magnitude of change in the valuation of financial assets and especially assets connected to the U.S. real estate market left many banks and all of the GSEs insolvent on a mark-to-market basis. Remember that > 50% of all assets in the U.S. banking system are related to real estate. The Fed's quantitative easing made this problem go away, temporarily, but the economic losses in these securities remain. These economic losses on home and commercial mortgages have also rolled down into the household and investor level, causing a sharp contraction in consumption. Something like a quarter of all residential mortgages are well under water and more like half have no equity. Likewise there are still huge, unrealized economic losses in the commercial real estate sector, losses which have occurred but are yet to be realized.”
Zombie Love: Do Fannie and Freddie Provide Any Benefit to the U.S. Economy? The Institutional Risk Analyst

Rumor said...


In addition to the helpful answers already providing to your question of pie claims, consider how money (debt) creation occurs via fractional reserve banking. Both the first few chapters of Chris Martenson's Crash Course and Paul Grignon's Money as Debt video (in the TAE primer list) illustrate how leverage quickly creates many multiple claims to a small underlying base of real wealth.

To wit, at a fractional reserve limit of 9:1 (quite a bit lower than what has been allowed lately!), a $100 deposit in Bank A leads to loans of $900. Those borrowers then spend their $900, created out of thin air, which ends up in new Banks B and C and so on. Those banks then use that thin-air money as deposits upon which to create new loans up to at 9:1 ratio, which money is spent and eventually makes its way back to more banks as deposits, which is then loaned out again at a 9:1 ratio. You can see where this goes. A simple $100 deposit eventually creates thousands and thousands of dollars in loans. This all continues working as long as most people pay back their loan, plus interest, more or less on schedule. But when the repayment system hits a considerable, widespread speedbump, for any number of reasons banks and other creditors start looking around for actual money to start paying off their own debts. That is, everyone starts looking for the real money (or assets) sitting somewhere upon which these loans have been made. And as you can see, there is very little of that to back the chain of leveraged claims. For every $100 of value that actually exists, thousands and thousands of dollars of claims exist. Plus interest.

Anonymous said...

The Ecstasy of Empire: How Close Is America’s Demise?
Without a revolution, Americans are history.

by Paul Craig Roberts

rcg1950 said...

For those who take Prechter's socionomics seriously: Scientific American's special single topic September issue this year is called: "The End". Topics (their description) as follows:

Eternal Fascinations with the End: Why We're Suckers for Stories of Our Own Demise
Our pattern-seeking brains and desire to be special help explain our fears of the apocalypse

Why Can't We Live Forever
As we grow old, our own cells begin to betray us. By unraveling the mysteries of aging, scientists may be able to make our lives longer and healthier

When Does Life Belong to the Living?
With thousands of people on the waiting lists for organs, doctors are bending the rules about when to declare that a donor is dead. Is it ethical to take one life and give it to another?

Dust to Dust
The brief, eventful afterlife of a human corpse

Good Riddance: Human Creations the World Would Be Better Off Without
Our highly selective list includes Teflon, dropped calls and the space shuttle

Last of Their Kind
The world's cultures have been disappearing, taking valuable knowledge with them, but there is reason to hope

Laying Odds on the Apocalypse
Could modern civilization really come to an end? Experts take stock of eight doomsday scenarios

How Much is Left?
A graphical accounting of the limits to what one planet can provide

Could Time End?
Yes. And no. For time to end seems both impossible and inevitable. Recent work in physics suggests a resolution to the paradox

What Comes Next
The flip side to every ending is a new beginning. We asked the visionary scientists on our advisory board

Rototillerman said...

I think that the other way that you effectively get multiple competing claims on real-world wealth (read: hard goods like land, productive capital tools, etc) is the leveraging effect that has gone for decades. Over the past 20, 30, 50 years the banking system, and later the shadow banking system, generated so much debt money that it now totally dwarfs the real world wealth pie. For now, that virtual wealth that was generated by being loaned into existence is loosely locked up in forms of virtual (paper or digital) wealth. It's not out there competing to buy productive farm land, for instance. How-some-ever... as time goes by and the system begins to wobble and start to look unstable... more people look to cash out of their virtual wealth world and buy into the real world wealth of land, tools, hard goods, etc. And in fact this is precisely what Stoneleigh has advocated, because it is the best way to preserve some useful productive capacity. In the late stages of the game there is likely to be a panic event, in which a great many people will desperately want out of the virtual wealth world. They either won't get much out, because the prices their pieces of paper will sell for won't fetch much, or even if they do get their nominal wealth out of the virtual world it will now be competing with everyone else's money for productive goods (like, say, farmland). Hence competing claims.

bluebird said...

If anyone wants to read an article in the Financial Times, just go to Google. Search either the name of the article, or just enter the url of the article.

--- said...

Rehypothecation: May I direct interested readers to a now obscure source on the doings of Iran-Contra, mistakenly termed a "political scandal" but truly the formation of an international (and mostly offshore) "shadow" economy comprised of: multiple hypothecations/drugs/guns.

One source, whom I can not recommend as a writer per se, but who was forced to testify before the Kerry Commission when the Senate investigated Iran-Contra, can be reviewed here:

I admit to feeling a little bewildered that the question came up - I figured it probably had been treated to death on this site. ???

The reason it sounds so preposterous is that any intelligent observer's mind raises an instant objection: "this is fraud!"

Well that's how things have been done on Wall Street legally for some time, thanks in particular to deregulation.

One way to do it, is keep creating "sleeve" corporations offshore, claim a loss on one enterprise, slip proceeds into another sleeve corporation, repeat steps ad infinitum, collecting insurance on the series of "failed enterprises" of all previous steps.

Another way is - remember how we heard the phrase how "assets" were "diced, chopped, scrambled" into enormous "investment vehicles?" (however they told it...) What evidently failed to come across in their words is that projected yields on all this funny-business accounting would figure into a lot of people's balance sheets.

Now that I type my way into this abyss, I realize it's utterly beyond the scope of a comment here, but the book linked above is the only kiss-and-tell I know of one of the scamscateers who set up the original black (off-books) economy which the public glimpsed back in the 80's during Iran-Contra... then promptly forgot in entirety.

Ilargi said...


Care to explain what any of that litany has to do with either Prechter or this site?


--- said...

OK, with apologies to our good hosts for reiterating something I think I put here a long time ago: multiple hypothecations...

So you see a bunch of credit cards being given to everything with a pulse at, say, a Costco. You see them roping tv sets, puters, etc onto/into car/trunks, and you think gee, aren't they worried about getting paid back?

Nonsense, debt IS currency, and when people fail to repay, there are interest penalties, so the value of the debt grows on people's balance sheets. They WANT people to fail to pay, meanwhile bouncing the initial debt package all over the marketplace. That's how you grow "money."

The first owner of the Costco debt assumes half these new debtors will welch on that "12 months interest-free" part of the deal, and that the instant 18% (or 36%, or whatever) penalty WILL - in the future - be due and payable. Before that future comes about, they have added that assumed profit to their asset column. Also before that bright future yield comes true, they assume the debt is worth x% more, and they sell it to Mr. Someone Else, but meanwhile have obtained loans from lenders assuming they make that future profit. They take all those new loans to another lender, and say, everybody else lends to us, and look at all the profits we will make off all our debt schemes, please loan us three times as much based on our books, so that we can perpetuate this all by doing this ten more times, and presto, they get the loan.

So the Costco debt is still in use as collateral for the first guy, but also for Mr. Someone Else, who since combined the future projected yield of all that Costco debt with his projected future yields from his other scams, and went to a lender, asking to borrow money based on his wonderful fiscal future, so now he has a loan in which that Costco debt serves as collateral.

Then Mr. Someone Else projects some new arbitrary value on the interest penalties of that debt, plus all HIS other scams, wraps it all into a "complex investment vehicle" and sells it to Mr. Third Party. Thus the Costco debt becomes a part of the collateral for three parties.

It is important to understand that all this can happen long before that year is up, and before all those Costco debtors have coughed up a penny.

In fact all this buying/selling of the initial Costco debt might transpire within a week. None of the Costco debtors necessarily ever either will pay the debts, or necessarily will fail to repay in time, hence negating all those projected yields.

Mr. Third Party combines his new investment vehicle with other such hokum, projects future revenues, takes the affair to a lender saying, see how much money I'll make, and gets loans based on that. Then sells the collateral (yes, they do that) to another party, and so on, and so on...

The means of doing this are infinite. But sometimes it helps to follow the funny money trail from your back yard out, instead of from Wall Street back. Very crude and oversimplified, but maybe that will help someone understand the racket.

rcg1950 said...

Ilargi asked:

Care to explain what any of that litany has to do with either Prechter or this site?

As I understand it, socionomics suggests that social mood leads/causes economic outcomes. Often mentioned is that 'the crash of 1929 didn't cause the depression, but rather a depressive social mood was (among other things) what caused the crash.'

Scientific American has since it's founding over 150 years ago been almost utopian in its faith in technological progress and a booster of American techno-industrialism. So I think it is at the very least of interest, and perhaps symptomatic of the social mood here when a publication of SA's stature and history decides to devote it's most important issue of the year with the decidedly ominous sounding name of THE END. I'm curiously to see how it will actually be presented. I expect it will, in 'the end' soft peddle the pessimism. We'll see.

Hope this answers your question.

scandia said...

I don't usually read the Toronto Star but a neighbour left the Aug 17th edition at my door. The headline of the business section read that the TD bank says housing is overvalued by 10%. The article ends by saying other Cdn economists say residential RE is overvalued by as much as 25%
What will that mean to the Cdn taxpayer when CMHC guarantees the mortgages written by banks. Does CMHC now have a seriously overvalued portfolio?
Is CMHC the Cdn equivalent of Fannie and Freddie?
Perhaps things are not so different in Canada afterall.

Rumor said...


Does CMHC now have a seriously overvalued portfolio?


Is CMHC the Cdn equivalent of Fannie and Freddie?


I'm pretty sure these were rhetorical questions, but for the benefit of folks who haven't read the AmericaCanada blog, there is this excellent treatise on the CMHC.

LynnHarding said...

@hija de papi
Are you suggesting that the Iran Contra affair set up a mechanism that is somehow partly responsible for what is happening today? Can you explain? I looked at the website you suggested and the author is giving financial advice.

scandia said...

@Rumor, thanks for that link about CMHC. I hadn't realized how deep we are into the mortgage debt doodoo, guaranteed by the taxpayer. What smucks we are!
All I can say is, " Oh my gawd, we are doomed !"

el gallinazo said...

Tom Therramus said...


"-do you really think the human population is going to double from here?"

Ben, Tx for calling me on this - doubling overstated the case. World population doubled over the last half century and is projected by the UN to rise from around 6 to 9 billion over the next 50 years."

Reminds me of the centenarian who when interviewed on his 100th figured he was good to go for another hundred. All he needed was an oil change.

pasttense said...

"What's truly amazing is how little has changed in the past two years of global financial turmoil":

TAE Summary said...

* Post collapse business ideas
- Mobile repair shop
- Grow, cook and preserve fava beans
- Small motor maintenance
- Remaking clothing
- Medical skills
- Raising and caring for animals
- Teaching
- Distilling
- Candle making
- Soap making
- Cheesemaking
- Community hardware store
- Making tinfoil shades for readers
- Kickbacks for plugging doomer websites

* Time is running out for the west; France deports gypsies; Greek Austerity measures cause unemployment; American empire is near its end; Ireland bank vaults are full of tractors

* Debt is a black hole; Banks will suck in all the wealth; Black holes are 6 feet in diameter

* Bank loans create multiple claims to the same slice of excrement; Rehypothecation euphemizes chicanery; The fin-de-siecle zeitgeist verklaart the sombra banca система

* The government and the banks are the same entity; The system giveth and the system taketh; Blessed be the name of the system

* Deflation pits individuals against each other; Build your lifeboat now before the lifeboat dramas begins; Google Ads tempts TAE readers to jump lifeboat

* Shutting off the electricity will stop terrorism

* And now for something completely different: Our pattern seeking brains help explain how as we grow old it is ethical to avoid teflon until time ends

* The human population will probably not double until we colonize Mars

* Word of the day : Scamscateer : S-C-A (Amoral men on Wall Street ) M-S-C (See you'll lose your shirt) A-T-E-E-R

ben said...

pipped at the post, LG. 9B: now that's peering into the abyss!

thanks for your earnest reply, tom. i don't see how the idea of economic instability post-PO constitutes much of a twist.

great post on the racket, HDP. funny.

--- said...

@ LynnHarding

Off the top of the memory (will hunt down book if necessary), Oliver Stone was said to tout something like getting 5,000 people to raise x million $$$ by frauds.

Essentially IC amounted to this: through a combination of offshore frauds, melting down banks (the Savings&Loan crisis financed IC), and trading drugs/weapons, a scheme was created whereby a 50,000 man army (the Contras) were established by a group of conspirators within the state department etc.

They were openly charged with involvement in/knowledge of trading guns for drugs, then selling the drugs on the US street market. Several excellent journalists have died exposing this, notably Gary Webb who "committed suicide by shooting himself twice in the head with a .38." I recommend reading up on his work to understand more about that.

The people found guilty were pardoned in 2000 and now are occupying top positions in the state department and the pentagon/aparatchiks.

These people are experts at knocking over banks/financial entities from the inside out. This is how modern day heists are done. Play up bubbles, short the market. Also they will illegally water down stock through legal loopholes, taking various shares to offshore accounts, later discretely destroying the value of peons who are playing by stateside rules. To be brief.

It was a totally feral operation, a covert, unified effort - the Senate used the word "conspiracy" - to create an off-books economy.

To my astonishment one can still read about the charges brought against key players here:

Unfortunately the public was sold a watered down concept of what was done, and why, to where people believe it was some kind of political scandal. Nope. It was an "off-books" economy which is what finances black ops. Still running strong.

NZSanctuary said...

World population is almost 7 billion (by standard estimates) – that 6 billion figure is getting old.

Lynne said...

scandia -

My personal opinion is that there are markets in Canada that are overvalued by much more than 25% For instance, an average 40 year-old bungalow in Burnaby (Burnaby for goodness sake!) can run over $720 000 Cdn if it's near a half decent school. The entire lower Mainland is insanely priced. I know that bubble is starting to pop - something like a 40% drop in sales over the past month, but still, how Canadians can continue to pay prices even close to this, I have no idea. Some folks one paycheck away from disaster, I suspect.

In central B.C. houses are on the market much longer than three years ago. Prices have not dropped a huge amount yet, but the cost of renting is dropping, with owners sort of competing for good renters. This in contrast to an almost zero vacancy rate three years ago.

This must be what Stoneleigh refers to as the housing market going illiquid rather quickly....


(sorry if this got posted more than once, I'm not so techno savvy...)

Frank said...

@el G.

One of your brethren paid us a visit yesterday: turkey vulture. I have to say that neither our birds nor our dogs seemed welcoming.

Ventriloquist said...

Ilargi said...

And VK, I suggest you set up a good distillery. That should keep you busy for a while.

This is a suggestion of value far, far beyond what it may seem on the surface.

Distillation of alcoholic beverages is actually a relatively straightforward craft that can be learned, practiced, and excelled at by any intelligent person.

I've personally researched much of the available literature on setting up a home-based distillery, and have found it to be a not-insurmountable project.

Think of the possibilities . . . a completely local-based system of providing a community with high-quality distilled beverages made with grains/fruits/vegetables (potatoes) that are grown within the local base.

It is, frankly, easier that you might think.

However . . . and this is a VERY


If you ever choose to set up such an operation, however much you may see it as contributing to the local economy and contributing to your own income, be VERY aware that this is currently a completely illegal operation that will subject you to scrutiny by the BATF (Bureau of Alcohol, Tobacco, and Firearms), and may cost you severely.

However, research is not illegal whatsoever, and preparation by purchasing several key items is not either.

It is all possible.


soundOfSilence said...

I know your control over the Google ads is somewhat limited (I just found it somewhat amusing that there's still interest only loans getting pushed)...

Looks like you can still get interest only loans with the interest only period up to 30 years.

Maybe real estate will recover in 30 years ... :-)

Scholastica said...

Bless you, TAE Summary!

Nassim said...


I don't know about the US laws regarding the setting up of a licensed distillery, however in Saudi Arabia it is not possible to obtain a license in any shape or form.

Around 1980, I was at Aramco in Dhahran and there was an almighty explosion in the "Camp"

The Saudi police from the nearest town (Al Khobar) showed up and Aramco's own police would not let them in until the mess and all the evidence had been removed. Essentially, an American VP of Aramco was making "Sadiki" (a disgusting alcohol made from sugar) on a semi-industrial scale for resale and the apparatus blew up and demolished his villa.

I just thought that you should be aware that the process itself can be dangerous

Bukko Boomeranger said...

Nassim: That sadiki still sounds as dangerous as a meth lab. Crystal methedrine -- THERE'S a business idea for when anarchy makes those nettlesome laws fall by the wayside! Raw materials might be hard to come by, though. But opium poppies are easy to grow. Booze and drugs -- sure money-makers in The Grim World of the Afterscape.

scandia said...

FYI there is an excellent article by Robert Fisk in The Independent on the US " withdrawal" from Iraq. He makes the point that Tony Blair's royalty generosity from his book does not include the million Iraqis killed in his illegal invasion of Iraq .

RE Iran, the US and Israel blinked. Bolton has been unchallenged in his assessment that the attack on Iran must happen this week-end before the fuel rods are activated. To attack after the activation would spread radiation to kingdom come.In other words, now or not.
Yesterday the US says Israel has a year's grace before attacking Iran. BLINK.

Frank said...

@Scandia, Bolton is a fool, and Vladimir Putin is not. If Putin says those rods are going to a civilian power reactor, they are. There is no A bomb related reason for Israel to attack a power plant. It wants to hit the enrichment facilities, which are elsewhere. Even if Iran has a nefarious plan to reprocess the spent fuel into weapons, first it has to get spent, then it has to go elsewhere for the reprocessing. The elsewhere is what Israel wants to blow up.

Bolton's claim depends on Bra-doohickus being a military site, and Putin would only lie if he was sure of getting away with it. He wouldn't on this, so no lie.

Remember, Bolton is enough of a whack job that a Republican senate wouldn't confirm him.

@Ventriloquist, I read an article recently about "micro distilleries". It is possible to get a license in the US for personal sized distillery. I've no clue what the deal would be for VK in Kenya.

jal said...

Do you want to drink it or use it for your power needs?

Those growing fruits that are not “market quality” or have a surplus of fruits could have a secondary source of income.

A distillery is also very helpful in extracting those useful oils from flowers, herbs and spices etc.


Anonymous said...

Iraq War Vet Camilo Mejia: US Withdrawal Plan Marks "Privatization of Military Occupation"

scandia said...

@Frank, appreciate your comments on Bolton/attack on Iran. It is my understanding the spent fuel rods will be returned to Russia?
It is my perception that the US/Israel have said that if Iran activates this site it is cause for war. In the sense of perception of the US/Israel position favouring a strike against Iranian disobedience then they did blink.

Anonymous said...

Andrew Leonard at found this smart blog entry.

Ironic, is it not? Socialized investment banking, the result of unfettered self-interest in combination with unregulated conflicts of interest, may accomplish what generations of coal miners, steel and auto workers, teamsters, teachers unions, and union organizers could not.

Capitalist Myopia

Heathercita said...


A hypo: if you had the money to pay off your student loan or your house which would you? Or some other variation? Seems like one shouldn't pay off or down the house because prices will only drop further and if need be, one could negotiate a sale-off to the bank. Student loans are now mainly govt owned, so interest rates should remain relatively low. Ideas? Thanks so much for everything.

Ilargi said...


That would depend on a lot of different variables. Like what country you talk about, how high both (or more) debts are.

One thing is important to note in the US: not even bankruptcy gets you out of student debts, while many home loans are non-recourse. On top of that, the MERS (electronic mortgage registry) issue has risen again, Ellen Brown has a piece on, and a riposte is at Useful reading material.


Greenpa said...

for those considering stills, etc; keep in mind that what goes into a still can also go into a pig. And that dry cured bacon, ham, etc is traditionally a pretty much equivalent store of value, portable, durable, and much less illegal.

Greenpa said...

TAE Summary said...
* Post collapse business ideas

Once again, my favorite has been ignored.

From over on Sharons:

Prometh; "Better off planting tobacco and building a still. If it gets that bad, your neighbors will be lined up to give you their gold."
"That's always been part of my plan... But I can't quite decide whether selling bootleg whisky to the desperate is ethical."
Posted by: Dunc
Ethics are going to be tricky. We may need to ask very different questions from those we're taught, and used to.
For example; Dunc- what if EVERYONE is desperate? Which is quite likely?
Something I joke about- and am not sure if I am/should- my backup plan is to open a brothel.
Ok, now after you're done laughing...
Are brothels going to disappear? Very no. They'll certainly get more common, as women become more desperate and law enforcement vanishes. And they'll get more consistently abusive, to boot. Take a good look at the stories coming out of Iraq and Afghanistan. Horrifying.
So- would it be good; or bad; to open a brothel where the women are "protected", and good behavior is enforced?
a); I'd make money; b) the women and their children would be "safer"; c) business would be taken from the more abusive places. d), we could sell lots of Dunc's bootleg whisky, making more money for both of us; e) the brothel would have a protected status; since the locals would not want it to disappear; making local security better...
Am I joking? Frankly; I'm not entirely sure.
Help me out, Sharon. :-)
Posted by: Greenpa | August 5, 2010 12:13 PM"

Sharon didn't help me out. I'm just puzzled by the reticence about this. :-)

I brought this up over on Rob Hopkins' a couple years back, too; when they talked about "re-skilling". Apart from a few very mild humorous comments, nobody was taking me seriously.

I just don't understand.

Greenpa said...

"Rehypothecation euphemizes chicanery"

Now THERE is a bestselling T shirt, if I ever saw one; right up and there and surpassing "eschew obfuscation".

Bukko Boomeranger said...

Just a side note as a thank-you to I&S for the way this blog lets me learn new lingo. I was going over more of the articles and read up on "trups." Words like that, "rehypothecation" and other arcane financial terms fascinate me, because in my previous career I was a wordsmith. Now, in the medical field, we use a lot of specialized jargon and complicated, hard-to-pronounce words. But at least the stuff we talk about refers to real diseases, body functions and chemicals. The made-up words of finance are all about chimerical bullshit. I guess they have to make it confusing so no one will twig to what a scam the entire money system is.

CT-Hilltopper said...


I had to start laughing when I saw your advice to a previous poster to set up a distillery to take advantage of a post-collapse situation.

My grandfather, God love him, made money during the last depression by making his own moonshine in the hills of Kentucky. He didn't get rich, but between his farming and the moonshining he managed to keep food on the table and shoes on their feet. It was enough to get them through.

Thanks for bringing that family memory back to me.

team10tim said...


You should move to New Zealand. Brothels and home distilling are both legal.

Stoneleigh said...


I think one of the characteristics of deflation is it's propensity to pit individuals and groups against one another. When times are good a few people win big and most will do just so so, but almost no one is a loser. That might cause some sense of unfairness and minor resentments, but, except for the pathologically greedy, it's a set of outcomes that most 'normal' people can abide. But, when the wealth pie is shrinking and standards of living are dropping then it becomes a different game - how to divvy up losses. This is not something at which humans appear to be very good.

Exactly. There is a fundamental shift in collective psychology that leads to fighting over a shrinking wealth pie. This dynamic appears to be characteristic of humanity. To make matters, much of the shrinking wealth pie can be destroyed in the process of fighting over it, which only strengthens the propensity toward conflict. We haven't seen this yet, but we will, and we aren't going to like it.

Stoneleigh said...


Wondering about the prospects for a small hardware store in a community 5 miles from the nearest small town. The community still has a few farmers, and lots of gardeners.

I like that idea :)

Supplying essentials to people who will need them is something that could work. Keeping it low-tech is good, as would be partnering with people who know how to use your inventory to keep things going far beyond their design-life.

anon10 said...

Wal-Mart Stores on Tuesday reported its fifth consecutive quarterly sales decline at domestic stores open at least a year. Traffic also declined at U.S. stores for the third straight quarter. That's worrying, because the company offered aggressive discounts during that time in a bid to revive sales, and it usually benefits from customers trading down in times of economic hardship.

Economic Pain Fails to Boost Wal-Mart

Heathercita said...

Thank you, Ilargi, much appreciated.

Ventriloquist said...

From a comment on ZH today, set to poetry by myself --

In the next generation,

the next score or so of years,

the governments of the west are going to

crumble and fall,

replaced for awhile with



totalitarian efforts.

The Internet will become

so clogged

with commercial skullduggery

that it will be


And 3 or 4 billion people

are going to die


due to







and general stupidity.



btraven said...

Watch The Secret of Oz

This movie makes it easy to understand the only solution to the "financial crisis" is to end the debt-as-money paradigm. In the U.S. this means the end of the Federal Reserve and the issuance of "greenbacks."

The solution is really that simple.

team10tim said...

Greenpa, I posted my last comment accidentally before it was finished.

No one really addresses your proposition because it is an uncomfortable and taboo subject. The same reason no one talks about population control. But, now that the energy expansion is drawing to a close there are some unpleasant truths to deal with.

The problem with talking about prostitution is that religion, moral and social norms, and emotional convictions overheat the discussion before it has made any headway. Drugs, booze, population control, prostitution, birth control, and abortion all fall under the same contentious blanket. Namely that people are going to satisfy their urges whether it's permitted or not and doing so will have consequences, mostly negative.

These types of messy problems can be addressed in two ways, easy answers or hard choices. Easy answers are popular, simplistic, and ineffective, for example prohibition. Hard choices only manage a problem, they don't solve it. But hard choices are difficult to reach and perpetually unsatisfactory, precisely because they were only mitigated and not solved.

So, back to your proposal. It's definitely a viable enterprise and I have no doubt that you would run a first class brothel. From what I can glean of you from your posts I think you would make an excellent madame :) Furthermore, I'd rather have you running the local brothel than some greedy, power hungry schmuck, the conditions would be nicer for employees and patrons both, health and hygeine scrupulously maintained, equitable rates and compensations for all, and I suspect I would even like your taste in women.

The problem with Greenpa's Brothel is that no one is prepared to discuss it. You see, here in America we do easy answers not hard choices. Your brothel will likely be persecuted and in high demand at the same time regardless of how you run the operation. Managing the transition from highly illegal black market sex parlor to friendly neighborhood brothel with roots in the community is going to be an order of magnatude harder than bringing crops to market in a drought with a bad back and arthritis in both hands.

team10tim said...

Hindenburg Omen confirmed link

Bukko Boomeranger said...

Stoneleigh said...

There is a fundamental shift in collective psychology that leads to fighting over a shrinking wealth pie. This dynamic appears to be characteristic of humanity. To make matters, much of the shrinking wealth pie can be destroyed in the process of fighting over it, which only strengthens the propensity toward conflict.

Is there any school of thought, in economics or psychology, that envisions how to manage shrinkage instead of growth? Fractional reserve Ponzinomics is all about the logic of cancer cells. Have any deep thinkers come up with a countervailing ideology that's akin to a weight loss program for bloated companies/countries/species (such as our own)? There MUST be a philosophy of "controlled descent" a la Sully Sullenberger for large-scale enterprises.

If not, would someone please come up with a "Das Kapital of Collapse"? Hurry up, because there's not much writing time, and the publicity will require some heavy damn lifting. Stoneleigh, devising an entirely new realm of socioeconomics seems like a good job to delegate to you. Go girl!

zander said...

Check these statistics on the US housing market. Jeez.


Ilargi said...

In case you haven't heard yet, Wikileaks founder Julian Assange has been "arrested in absentia" in Sweden on rape charges.

Seems obvious that someone under the scrutiny he is, and planning to release a ton more documents, would compromise himself and his entire effort like that.

Newsweek reports that the Pentagon has been provided "pre-leak" access to the next batch of damning files, even with redacting powers.

Wonder what Assange thinks of that now.


bluebird said...

About Julian Assange, perhaps it is a setup. People will focus on his personal behavior trying to dig up dirt rather than the documents released.

Ilargi said...

"About Julian Assange, perhaps it is a setup...."

Perhaps? No, for sure.

He's not nearly stupid enough to engage in such activities (two women, one count of rape and one of molestation, I understand) mere days -and if ever, of course- before releasing sensitive documents.

There are people putting their lives on the line, literally, for Assange's projects. He's well aware of that. And endangering it all through this sort of thing would be very far from his mind.

They could have dropped embezzlement charges, something along those lines, but they went for the jugular. Most charges can be denied and proven false, even if it takes a long time. Rape becomes his word against hers, and is therefore likely to last much longer.

It's like the Americans who think Obama's a muslim: the facts don't matter, it's the picture that's formed in the unconscious that does, the one that lingers no matter what is proven.


rcg1950 said...

Bukko Canukko asked...

Is there any school of thought, in economics or psychology, that envisions how to manage shrinkage instead of growth? ... Have any deep thinkers come up with a countervailing ideology that's akin to a weight loss program for bloated companies/countries/species (such as our own)?

4th Century Christianity?

Steve Lee said...

Assange is no longer a
rape suspect.

Ilargi said...

"Steve said...
Assange is no longer a rape suspect."

Saw that.

Who'll be accused of false statements now?


Bukko Boomeranger said...

Re: Assange-rape -- it's an old trick. Remember the child molestation charges against Scott Horton, the Iraq weapons inspector? They came after he tried to thwart realPresident Cheeney's war effort by claiming, correctly, that Saddam Hussein no longer had a nuclear or poison gas program. So local police and prosecutors in Connecticut, I think it was, ginned up charges that Horton used the Internet to try and lure a 15-year-old girl to a gas station hookup for nasty purposes. The charges were never proven in court (hush-hush settlement) but to this day, when Horton's name comes up in the context of "Bush lied" arguments, pro-warnuts say "Horton = molester" to discount the truth he told.

Lesser-known to Americans is what happened not once, but TWICE, to Anwar Ibrahim, a Malaysian politician who dared challenge the ruling class there. He was accused of homosexual sodomy when it looked like he would unseat the power structure, and actually served years of prison time over it. Most Malaysians now realize the "justice" system is a fraud, and Ibrahim is again respected, but the damage was done and the rulers got another 10 years in power.

TPTB know that nothing gets an emotion-level reaction like sex crimes. Massive financial fraud? Ah, that's a frontal-lobe thing when it comes to the buttons it pushes in our brain. But sex? Goes right to the limbic system for getting us hot and bothered over misbehaviour. Bill Clinton, anyone?

D. Benton Smith said...

Hi, Ilargi & Stoneleigh

I know you haven't seen me around these parts for a quite a while, but it's not from lack of interest. I still read TAE at every opportunity... just haven't had sufficient brain time to post comments that might contribute anything useful to the mix... and the current crew seems to be doing just fine.

Today Stoneleigh wrote: "...There is a fundamental shift in collective psychology that leads to fighting over a shrinking wealth pie. This dynamic appears to be characteristic of humanity. To make matters, much of the shrinking wealth pie can be destroyed in the process of fighting over it, which only strengthens the propensity toward conflict. We haven't seen this yet, but we will, and we aren't going to like it."

We have not yet, indeed, seen this dynamic in full play, but we have perhaps seen it's baby brother.

The westerly "dry land farming" part of the so-called 'Heartland' of America is littered with literally thousands of the almost-but not-quite-fully-dead remnants of towns and villages that were once thriving (albeit small) centers of farm-based commerce and all that went with it.

Schools, clubs, theaters, retail stores, high school marching bands and loyal orders of moose, elks, lions, masons and various other odd fellows.

That stuff and the people who created it are profoundly gone now. What's left in its place is only picturesque and pathetic on the surface. Beneath the genteel decay it's seriously bad, and getting worse.

A study of the events and processes that created these myriad mini hells would make a good introductory chapter to any doomsday book about what's coming next.

Of course the difference is that outside of these shrinking towns were growing thriving cities one could escape to, and even a certain amount of money and nostalgic appreciation that could trickle back into the old hometowns as a sort of halfhearted 'Life Support' system.

When the plug gets pulled on that, we'll see what happens. These are the places that grow all that we have to eat, yet they are barely alive themselves.

It's going to get interesting... but I wouldn't call it pretty.

scandia said...

Bukko Canukko said, " But Sex? goes right to the limbic system for getting us hot and bothered over misbehavior."
Bukko, I think you just answered Greenpa's question as to why it is difficult to discuss a brothel as a viable enterprise post collapse.

g-minor said...


That would be Scott Ritter (not Horton) but the point, of course, stands. You can add Eliot Spitzer to the list of those whose sexual behaviors were used to punish them for confronting TPTB.

soundOfSilence said...

Steve said...

Assange is no longer a rape suspect.

I'll forgot the "stories" of exploding cigars, ricin umbrellas, bacteria treated wetsuits and whatnot that the CIA may or may not be capable of... as well as any discussion of whether or not the "leak" was right or wrong.

At this point what are to we conclude? The Swedish prosecutors are really the "Keystone Kops" in disguise?

I think the salient point remains's the picture that's formed in the unconscious... But then that's part of the basis of herding behavior. And we all know where that can get us.

Bigelow said...

“Our program is a professional service to the financial industry; rats are being trained to become superior traders in the financial markets”

Now I've seen everything.

Bigelow said...

Swedish rape warrant for Wikileaks' Assange cancelled -BBC

Bukko Boomeranger said...

Right you are on Scott's surname, g-minor. Horton is another anti-war writer, and I mixed them up. One difference between Ritter, Assange and Ibrahim vs. Spitzer is that at least Spitz was actually guilty as smeared.

Ironic how Spitzer, who was at least working for righteousness when he wasn't kinking it up with call girls, did the honourable thing and resigned. (Good to see he's making a comeback as a TV newsman.) Meanwhile, Mark Sanford, David Vitter and a host of other corporate servant-critters whose names I won't list because I might screw them up too, have clung to office after their limbic escapades have been revealed. I think if your heart's in the right place, even when your "parts" aren't, you're more likely to do the right thing when busted. But if you're venal through and through, you keep right on plugging. (Naughty pun intended,.)

scandia said...

There is an article on McClatchy about a night time US raid on an Afgan village. I can easily empathize with the villagers, asleep in their beds,the peaceful glow of family returned home for Ramadan...suddenly a yankee doodle dandy hollers that everybody get outside or else! Imagine it please.
If you were asleep in your bed and a yankee doodle dandy hollers for you to get into the street pronto what would you do? Would you comply?
Anyway the article says there are 1000 special op missions PER MONTH in Afganistan! With that committment to terror it is hard to imagine where Nato finds time for torture and bribery.But they do.
I notice that Americans are offended at the Moslem cultural centre in New York. I just want to say that America offends the entire world by shaking down villages in the dark of night, drones wiping out entire wedding parties, bombings,building prisons in a country not their own,mercanaries operating outside the law. How many millions more must die for the " sacred" ground of 911, a ground that has become a river of blood flowing around the world. In this context I find the sensibilities of New Yorkers over a cultural centre absurdly distubing.
Hey Nato, did someone forget to tell you that it is Ramadan?
Not a cool move to escalate death and destruction during a sacred Moslem religious holiday.
I hang my head in shame that Canada is party to this bloodbath,that Christians around the world support Nato's reign of terror.Nothing like a little fear and terror to convert a few to the fold,eh.Worked for the Catholics.
And if that weren't bad enough everybody will be flat broke for generations, excepting " the white shoe boys " that is.
I do not know the family who lost 3 sons to the yankee doodle dandyman but I do sit thousands of miles away in a small Cdn town and grieve with them in spirit.

Jim R said...

Bukko, I was just going to mention that the media always seem to miss the juicy stories about corporocratically-connected kinkmeisters.

rcg1950, regarding your assessment of SciAm, it sounds about right. I think it's gone downhill in the last few decades to where it's on a par with PopSci or Analog (the Sci Fi journal). Analog may be better now I think of it.

But I can still recall the theme for the September 1970 issue: "The Energy Crisis". As I recall it had articles on Hubbert's peak, solar, NaS batteries, the "hydrogen economy" and other such things. It was my introduction to these topics. Forty years later and other than one little peep from Jimmy Carter, there's been no serious discussion of it in the MSM.

jal said...

DIYer said...
“But I can still recall the theme for the September 1970 issue: "The Energy Crisis". As I recall it had articles on Hubbert's peak, solar, NaS batteries, the "hydrogen economy" and other such things. It was my introduction to these topics. Forty years later and other than one little peep from Jimmy Carter, there's been no serious discussion of it in the MSM.”

That would be the time of Trudeau, Petrocanada and the flower children.
He looked into the sun, (reality), and was made impotent to make the needed changes.

Bigelow said...

Keith Olbermann Special Comment: There Is No 'Ground Zero Mosque'

Ilargi said...

New post up.

America's Corporate Headquarters


Ric said...

It's one of those ideas you have to do without talking about. JFrankA at this forum: Running a legal brothel where it's illegal...sorta suggests that in the US it's easier to run an outcall escort service or swing club, as long as you keep the cops happy. He writes:

There are three things people will always buy no matter what financial situtation they are in: Food, Sex, and way to escape.