Economy Media

The NYT: Where, oh Where Has Our Little Bubble Gone?

You’ve really got to hand it to the New York Times this time: this is the most clueless headline ever:

Builders of New Homes Seeing No Sign of Recovery

Ok, let me refresh your memory: the thing that got us into this mess in the first place was loosely-given credit that allowed a glut of new home purchases over the course of a decade and a half. That includes an artificially-inflated demand for new home construction, as anyone who has ever driven through Mendon can tell you. We currently sit on a huge unsold stock level in the housing market and even existing home sales are down by 28 percent, per the same article.

I can appreciate the fact that new home construction is an industry like any other, with lots of individual tradesmen and professionals relying on that industry for employment. But the tone of the article suggests that, without a consonant recovery of pre-recession home building, there is no recovery. My suggestion to anyone relying on *new* home construction would be to find another niche within which to ply your trade, because we cannot sustain another “recovery” such as that.


Population Migration by Block: Evidence of the Subprime Legacy?

Via @flowingdata, we have a very interesting map, indeed:

Growth Rings – Maps Of U.S. Population Change, 2000-2010.

As the author points out, there is some notion of the suburban flight present in these maps, except to say that this flight is normally a pretty cyclical thing: people move out of the city and into the ‘burbs while their kids move out of the ‘burbs and into the city. These maps seem to display a much larger and more prolonged trend. He also points out the following:

Ah, the classic flight to the suburbs, but with a twist! Click through and look closely, and at the very center of the biggest cities – within a stone’s throw of downtown – you’ll see a tiny, resurgent dot of blue. Apparently, at some point in recent history, a home address amongst the skyscrapers became desirable again.

So we have an increase in population in the suburbs and exburbs, accompanied by an equal population boom in centers of cities. There’s a pretty easy explanation for this: subprime lending schemes.

I recall the map of Monroe County from the hight of the Subprime fallout and it looked almost exactly like the maps I’m seeing here. The center of Rochester was deep red, as were Mendon and other southern exburbs, while the more stable neighborhoods of Rochester and Brighton seemed almost unfazed by foreclosures. And that should not be surprising: “subprime,” or “less than desirable credit” mortgages happen in two populations most often: the poor, and the upwardly-mobile who are overextended.

So, while the author of this blog post interprets the blue patches as revitalization projects in downtown areas – and he may even be right in some cases – the map serves as evidence of the long-term effects that ten years of bad loans have had on suburban sprawl. It will be interesting to see some other map similar to this in ten years time.


What Does it Look Like When Fake Wealth Ablates?

[Ed note: Doh! Damned spelling]

Well, if you are the unfortunate bearer of the now-worthless piece of paper that banks used to make money, it looks like an eviction notice:

60 Minutes Investigates ‘Cutting Corners’ On Foreclosures (VIDEO).

I make this point over and over again, so my apologies if I sound like a broken record. Banks make money off shitty mortgages – literally making money out of thin air – and what happens when the money carousel stops? They recoup their losses by snatching back the homes they should never have lent money for in the first place.

And efforts to try to keep people in their homes – while noble perhaps – are just another tax on American working men and women, trying to fill in a hole with dirt we don’t have and never did. Not that there are a lot of alternatives, mind you.


Foreclosure Messes and Where We Are Now: A Quick Recap

… Well, ok. A recap, if not altogether quick…

I wanted to flag this story for my readers and give you a basic update of where things stand in the Subprime/ARM Mortgage/Foreclosure/Oblation of Fake Wealth story that’s dominated our economic landscape for lo, this past four years.

Bank of America holds a few trillion dollars (that’s right, trillion) in mortgage-backed securities it is responsible for, and the paperwork on the original mortgages is such a mess that there is dispute as to who actually owns what. Now the Fed is looking to force BofA to buy back some of the TARP assets it gave away during the 2008 bailout. All of this new scrutiny comes as the result of the foreclosure mess of late, where once again, the shoddy paperwork – in some cases, the non-existent paperwork – on mortgages led to even shoddier paperwork for the foreclosures.


Ok, here’s what happened. Back when things were ostensibly stable, banks were selling off more and more dubious mortgages to less and less qualified people. Many of those people didn’t even know there was a problem – after all, generally most of us take it on faith that banks not in the business of giving away money they don’t expect back. But behind the scenes, many mortgages were getting approved even when basic paperwork was either not filed or not checked. So, basically, there’s no particularly compelling evidence to suggest that anyone at all owns that mortgage, much less who should be held responsible when it goes into default.

Then the bottom fell out. And banks rushed to the Federal Government to get bailouts. And the government did bail them out, buying the “troubled” or defaulted-upon, assets in what became known as TARP. But they did so under the assumption that these mortgages were at least viable mortgages. Viable mortgages, even those in default, can be sold off and stabilized.

But now that banks are rushing to foreclose on more mortgages that didn’t fall under the auspices of the TARP bailout, they’re finding that lo and behold, they’re having terrible legal troubles doing it. Because, of course, they don’t have the proper paperwork. Because it never existed.

So, if you don’t have the paperwork to prove that someone owned the mortgage in the first place, you can’t file the paperwork to have that mortgage foreclosed upon. So, the banks have begun falsifying the foreclosure paperwork to cover for the falsified mortgage paperwork. And now that both investors and mortgage holders are suing for injunctions – and winning – the Fed has begun taking a closer look at the mortgages that it holds. Guess what? They’re crap, too.

Once again, we have come full-circle. Its back to the basic question of irresponsible lending and its back to the “troubled” mortgages that began the fallout three years ago.

There is, of course, another way to look at it: what’s really happening right now is banks, investors and the Federal Reserve all pushing the check around the table. In truth, what has happened over the last decade is that banks and investors – who include individuals and organizations alike – have made money off these CDO’s or Mortgage-Backed Securities. That money was entirely fictional, based on selling and buying back the same basic assets in ever-more complicated structures. A shell game, one might say, but one investors played on each other, generally with full knowledge that the ball had long since vanished.

The money was never there in the first place, but our entire economy has been operating as though it was. Everything that’s happened in the last three years – TARP, the Stimulus Package, the foreclosures, the layoffs, the vacant malls and stores – are all as a result of this monumental disappearance of fake wealth. That money is not coming back; we are not going to “recover,” in that sense. And banks will continue to try to push assets from place to place, holding off paying the piper as long as possible. And in the meanwhile, the economy will have to do the best it can without that money. Who can say for how long?


911, Subprime and the Zero Bound: How the Terrorists Really Are Winning

Its an uncomfortable thought, to be sure. But reality is not rooted in our personal comfort levels and an honest assessment of the situation says that, while Osama bin-Laden certainly could not have imagined it would actually work out this way, the attack on 911 really did strike a far more serious blow to our nation’s economy than we knew.

Certainly it was the stated goal of al-Qaeda to disrupt our financial centers. Certainly, we know that this much happened at least for a few days: the Stock Market stayed shuttered for several days before finally reopening and air travel was disrupted for a full day. But what followed was a very clear overreaction on the part of the Federal Reserve, knocking interest rates down to never-before-seen levels, bottoming out very near to Paul Krugman’s “zero bound” even before our current economic crisis. And interest rates never really did get back to pre-911 levels, or even half that.

The actual sub-prime mortgage fiasco, however, was not of post-911 origins. It’s origins are rooted well before 911 in the mid-90’s when a President Clinton looking to find ways to work with an intractable Republican Congress signed deregulatory laws that removed fetters in place since the Great Depression. And the derivative markets feeding off mortgage-backed securities was gaining a healthy head of steam well ahead of President Bush’s election.

But look what happens when you put together a down economy, an increasingly hungry securities market based on mortgages and an extremely low interest rate! There is no other sector of the economy that improved so much or displayed so many pro-political statistics than the housing sector throughout The Aughts. Every single Bush SOTU address hyped the increasing numbers of home owners. Fanny Mae and Freddy Mac took steps to actively encourage lower income home-ownership – indeed, as has been their charter for decades. And in the midst of this, what possible reason did anyone have to raise interest rates? Sure, it’s a proof against inflation – and what gains the interest rate made were precisely for this reason – but pressure to keep the markets happy and the good news coming made the White House extremely interested in convincing the Fed to keep the rates as low as possible.

Neither do I especially blame the Bush White House for this: we see now in the Obama Administration what happens when the economy dives. The simple lizard brain of politicians has to find that prospect unacceptable when an easy solution is at hand.

But now that the derivatives bubble has burst, a recession falls upon us as many such recessions fall upon us. Though undoubtably, it is a much bigger recessionary event than any I’ve ever seen in my lifetime. And in such a recession, the solution to the problem is easy: have the Fed lower interest rates. Lowering interest rates makes borrowing money more attractive, businesses make capital investments, spend money, hire workers and before you know it, the economy is back on track. Lowering interest rates also tends to lower prices on consumer goods, making purchases easier for consumers and the lowered interest rates encourage them to buy houses, cars and televisions. All good news for an economy in trouble.

Except there’s no place for interest rates to go: they’re up against a nearly zero-percent interest rate and cannot possibly go lower. The primary tool in the fight against a recession is completely robbed from us. We are not powerless to stop the rising tide of unemployment nor to hold ourselves up against the looming threat of deflation that economists worry is the next step. But we certainly are without our best set of tools, and we certainly won’t be getting out of our current economic hole for a reasonably long period of time. I’d be amazed if we got anywhere near 5 percent unemployment in the next three years, though I’m not an economist.

And so I suspect that writers of history books a century from now will note with diminishing counter-argument that the events of September 11th were hugely developmental to the dark economic “Great Recession” or “Depression” that we now live in.



It bears mentioning – as often as possible, to as many people as possible – that the exact same greed that got us into the current economic crisis with the shady profit structures of the Subprime crisis is what drives “the Markets.” Keep in mind whenever you read or watch news reports about how “the Markets” just don’t like the Obama plans, or how they lack specificity, that banks are publicly traded companies. Of course the market goes down regardless of what the president says: no matter what he says, anything realistic is going to suck for the banks and the markets.

If you’ve ever wondered why I’ve stopped posting articles about the stock market to the news section, this is why. We have been conditioned by the media and their corporate handlers that “confidence in the marketplace” is the only thing we’re supposed to care about. It’s a crock of shit. The markets are where rich people get richer by betting on “the ponies.”


Dawning on the Obvious

The Pew Research Center’s People Polling website shows that an increasing majority of Americans are becoming aware that the country’s serious slide into recession may end up being a slide into a Depression. Among the more interesting statistics are that four times the number of people report joblessness as the most serious issue facing us right now, a clear indication that the economic problems once shoved off by the media as simple a poor and irresponsible people issue in the Subprime Mortgage Crisis has hit home for a plurality of Americans.

And it is with this as a backdrop that Republicans choose to fight against the stimulus package. Bravo! Fight on, noble dipshits.


Suprime: How Small Minded Journalism Yeilds Small Minded Policy

It remains an enduring frustration of mine that journalists seem to feel the need to ask politicians questions which are “on the minds of voters,” without respect to whether or not those questions are at all reasonable to the situation. Typically, I find such excuses as “what’s on the minds of voters,” to be small minded ways of injecting the journalist’s own viewpoint into the discussion. Surely, if the journalist thought it, someone else must have thought it as well, therefore it is “on the minds of voters.”

The best current example of this is the discussion of the ARM mortgage crisis which has been the underpinning of so much of our current economic crisis. When ever someone wants to discuss ways to help home owners struggling with either Subprime or other ARM mortgages which are sapping their personal economics, the first question someone asks is one of the two as follows:

  1. “But what about Joe the Irresponsible Person, who is living in a $500,000 home, but is only making $50,000? Why should the American taxpayers pay for his irresponsibility?”
  2. “Well, what happens when one house on the block gets financial assistance from the government? What stops everybody else on the street from taking a vacation from paying for their mortgages? What stops them from just becoming another welfare mortgage home?”

My answer to both of these question is: show me a concrete example of either of these two things happening anywhere, and then show me what percentage of the problem these examples represent. Then, we’ll talk.

The truth is that in terms of price to income ratio – the relationship between the average home price and the income of the owner – is overvalued by an average of 10%. 10% of your income is quite a bit of money, but it’s not ten times your income, which is the example cited in #1 above. That would be 1000%. Certainly, an average can include a huge range of values and we do know that such excesses as our example do exist. But just as certainly, they must necessarily be a slim minority to fit into the relatively narrow average.

Meanwhile, the second question is basically a way to say, “I’d never do anything like that, but my neighbors are total dicks.” It’s an abstraction for which there is – to my knowledge – no concrete example.

But journalists seem compelled to ask those questions anyway. This lends some credibility to what is clearly an otherwise silly concept and forces our policy to reflect concerns over phantom problems. It is not a sound basis for policy making. It is not the seed of an intelligent, effective discussion of substantive issues.

But it sure seems that way, doesn’t it?


Ross Perot’s Fund a Casualty of Falling Market

Appropos of nothing, I suppose, but the WSJ is reporting that Ross Perot’s fund made up of mortgage backed securities has been forced to liquidate it’s former 1.2 billion dollars of assets.


Countrywide: K-Mart Mortgages Regulated by Walmart Regulators

Via Dean Baker, as reported by the Washington Post:

When Countrywide Financial felt pressured by federal agencies charged with overseeing it, executives at the giant mortgage lender simply switched regulators in the spring of 2007.

The benefits were clear: Countrywide’s new regulator, the Office of Thrift Supervision, promised more flexible oversight of issues related to the bank’s mortgage lending. For OTS, which depends on fees paid by banks it regulates and competes with other regulators to land the largest financial firms, Countrywide was a lucrative catch.

But OTS was not an effective regulator. This year, the government has seized three of the largest institutions regulated by OTS, including IndyMac Bancorp, Washington Mutual — the largest bank in U.S. history to go bust — and on Friday evening, Downey Savings and Loan Association. The total assets of the OTS thrifts to fail this year: $355.7 billion. Three others were forced to sell to avoid failure, including Countrywide.

Hmm. . I’m thinking this is a clue to the problem. Did you happen to notice that the regulatory agency is dependent on fees paid to it by the companies it regulates? In other words, companies that it regulates that don’t make money are of no value to them, because they can’t pay for the regulation. That’s a strong incentive to keep companies profitable in George Bush’s administration, I am thinking.

I’m all for companies paying their way: they have to pay to dispose of their waste, they have to pay to get ISO certification, I would probably be OK with them having to pay for their regulatory duties as well. Still, the monies paid them aught not to factor into their budget, but rather be rolled into the general funds of the government. Or given away to starving children in Africa. But tying a regulatory body to the fortunes of the regulated is as clear a conflict of interest as one could imagine.


Bernanke Testifies Before Congress: Live Now!

Fed Chairman Ben Bernanke is getting grilled on the bailout and the capital reinvestment portion.  Why isn’t it required that banks lend?  What is the pricing of the illiquid assets being bought out under the original bailout?  He’s not looking happy.  Watch it live now:


A Number Worth Watching: The TED

Once again with the caveat that I am most certainly not an economist, I will endevour to explain some of what is happening in markets right now in a way I hope makes sense to people.  I do this in part because I’ve been working to try to make things I’m learning over the months more accessible for those trying to figure out what’s going on.  Basically, I’d like to make things easier on people than they’ve been on me.  Also, I attempt this because I’ve overheard friends of mine discussing the Stock Market’s rise and fall as though they were indicators of anything accurate.  It isn’t, but that’s what we’ve largely been expected to believe.

In the particular case of this particular financial crisis, the number to watch is not the NASDAQ or the Dow.  It is the TED.  The who?  The T-bills to Euro-Dollar comparison rate.

In simplest terms, you can think of the TED as a benchmark of the willingness of banks to lend to other banks globally.  It’s based on a comparison between the current rate of interest on a Treasury Bill versus what’s known as the LIBOR, or London Inter-Bank Offered Rate (of interest, in other words).

The LIBOR is the rate at which banks typically lend to one another.  The TED is the difference between that rate and the T-Bills interest rate, which is considered to be a relatively stable benchmark.  As the TED goes up, things get bad.  Typically, the number hovers around 30 (or a 0.3% difference between the two).  Currently, it’s at around 465.  That basically means no bank is willing to lend to any other bank.  Until that number drops, our financial woes continue unabated, irrespective of the Dow’s current position.

So, that’s the bottom line of the TED and why we need to keep an eye on it.  As a basic explanation for why the rate is so high, think in terms of your own bank loans, like a mortgage.  I guess we’ll pretend the whole Subprime irresponsible lending thing never happened when we discuss this. . .

If you apply for a mortgage through FHA, you will be required to provide proof of employment because the bank would obviously like some proof that you will have the capital to pay back the mortgage.  If the amount of the mortgage relative to your income is fairly high or if you’re employment history is short, then there is a good chance you may now or in the near future have a problem repaying the loan.  If they give you a mortgage at all, the bank will probably enforce a higher interest rate on you.

The LIBOR works in roughly – very roughly – the same way.  It is the amount of interest imposed on a loan between banks.  In our current situation, there is a very good chance that some of the banks who have invested in risky enterprises may collapse.  And that’s a lot of banks, worldwide.  Moreover, those same banks are holding onto assets that might have otherwise been used like cash (like easily-tradeable capital) that are now worthless.  So, these banks have very little capital on hand to repay loans and are at risk of going belly-up before they’re done paying.

The relative risk of lending to these institutions has gone up dramatically.  At the same time, banks who might do the lending don’t necessarily want to be left with IOU’s instead of cash while they themselves are in danger of collapsing.  That’s still more incentive to raise rates.  Unfortunately, it now appears that rates have been raised to the point where no one can get a loan from anyone else.  Since lending between banks is the kernel from which most world economies draw capital, that means a frozen credit market equals a frozen economy.

So, there you go.  If you’d like to read more about the TED, you can check out this Wiki and this blog post, which I found to be quite instructive.