Source: GoldPrice.org

Eugen Weinberg, the most accurate forecaster in the first quarter, agrees with investor sentiment, saying the following:

“A stronger economy would create more jewelry demand. If the economy stays weak or gets worse, then investors will be looking for a safe haven.”

He expects gold to rise to $1400 an ounce and a survey of 29 investors and analysts puts their median prediction close to $1500. I’ve always been hesitant about predictions (see The Black Swan by Nassim Taleb) but gold has been a good store of value during times of economic turmoil and is a great hedge against inflation. It’s quite telling indeed that the price of gold rose sharply even while we have been suffering from “deflationary pressures.”

Right now, however the Fed is on record that they will start monetizing debt and already basically doubled the monetary base:

Source: St. Louis Federal Reserve

Velocity is low and many banks aren’t lending, but still, with that kind of monetary expansion, there’s no reason to expect gold prices won’t continue to rise… be it to $1500 or beyond.

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Have loan delinquencies peaked?

By Jim Boswell, author of Crush Depth Alert

Yesterday (Tuesday) the Federal Deposit Insurance Corporation (FDIC) made public the bank-reported financial information for the second quarter 2010, and if you did not hear the good news from them, then now you can hear it from me. The news may be counter to that of the doomsayers, but nonetheless, every bit of good news should count in these days of negativity and doubt.

As reported for the period ending June 30, 2010, the banks have crossed a significant threshold. From here on out, expect things to get better.

For those of you who are not familiar with tracking delinquent loan information, Exhibit 1 shows the reported history of all the delinquent loans (residential, commercial, credit card, etc.) for all the banks who are insured by the FDIC from the fourth quarter of 2001 to yesterday’s reported second quarter of 2010.

Exhibit 1:

Let's hope a downward trend materializes.

For the first time since this Greatest Recession Since the Great Depression (GRSGD) began, bank delinquencies on the books of the more than 7800 banks that report to the FDIC are on the decline.  And Exhibit 1 shows the first point on what should continue to be a downward trend as loan delinquencies return to pre-GRSGD levels over the next few years.

Skeptical?  Then consider that this decline holds for every category of delinquency reported, which includes loans 30-90 days delinquent, loans more than 90-plus days delinquent, and loans essentially that are in foreclosure or will need to be written off.  Previous history (e.g., S&L crisis) shows us that as a result of a financial breakdown delinquencies rise, but there is a subsequent decline in somewhat the shape of a normal curve, and yesterday’s new data point is the first sign that the downward trend is beginning to take place.

Still skeptical?  Then consider that the sum total of the loan loss reserves as reported on all the banks’ balance sheets declined this past quarter, as well as the net income loan loss provisions and net charge-offs. This is the first decline in the loan loss reserves since those reserves started rising in the second quarter of 2007, and it is the second quarter in a row that loan loss provisions and net charge-offs have dropped.

Six month (year-to-date) income for the banks as reported yesterday is $40 billion and up for the second quarter in a row.  Although this level of income generation is only a little over 50% the level of the average quarterly composite net income prior to the GRSGD, it is significantly better than the total negative $8 billion in income that the banks reported for the entire nine quarter period prior to this calendar year.

With this FDIC supplied information we can now begin to calculate the true cost to the banks for the mistakes they made and which helped lead us into the GRSGD.  Considering that prior to the GRSGD the banks were on track to make a little less than $40 billion a quarter, then the losses to date have been approximately $400 billion.  Considering that most of these losses have already been accounted for and that bank net income is on track to return to pre-GRSGD levels, I estimate total bank losses will end up being approximately $500 billion.

Add to that the losses attributable to AIG, Fannie Mae, and Freddie Mac and the total cost to the major players involved in the housing financial fiasco (including the taxpayer) will come in under, but probably close to, $1 Trillion.

Now I do not mean to play down the significance of $1 Trillion in losses; however, compared to the doomsday projections that were being made early on in the GRSGD, we should be happy that the bill is no larger than it is.  Compared to the S&L crisis, the GRSGD is about 2-3 times worse after inflationary effects are factored in.  So yes, the GRSGD deserves its title, but the numbers do not justify continued panic or concern, and it is time we quit referring our current situation in relative terms to the Great Depression.

The only reason for a “double-dip” recession is if we concede to fear and negativity—generated and promulgated by the doomsayer economists who seem to love to babble about history that took place nearly eighty years ago and has no relevance to today’s globalnomic environment.

One trillion dollars?  That’s a lot of wasted money, but the bill is already mostly paid.  We don’t need to pay it a second or third time.  And based upon yesterday’s facts, I say it is time to move on America.  Things are going to get better.  Yes, we have some other debts to be paid, and it is time we start paying them.  But don’t get discouraged.  Believe it or not, life is good, and so are most of our businesses—large and small.

The United States still operates the most powerful economy in the world and it is long past time that we start taking that responsibility seriously—something we cannot do if we are fearful and constantly complaining and negative.

So with that being said, I will leave with a few additional tidbits of good news relating to the FDIC information provided yesterday. The total Equity to total Asset ratio (11.40%) for the banks is higher than any prior period in this last decade.  Subtracting Nonperforming Assets from Equity results in a still somewhat low ratio when compared to Assets  (7.51%), but that is a significant improvement of more than 0.5% from just the quarter before.  And the banks “too big to fail”?  Well they all have been making money as well.  In fact, the four largest banks in the United States (JP Morgan/Chase; Citigroup; Wells Fargo, and Bank of America)  accounted for a little more than half of the $40 billion in year-to-date banking profits.

But despite all the above, if you still want to look at the darker side of things, feel free to ask for my list of problem banks for 2010 by emailing me at quanta.analytics@gmx.com.  There are still quite a few banks that still need fixing.

And you can take all of this to the bank and deposit it.

Jim Boswell has an M.B.A. degree from The Wharton School (University of Pennsylvania), an M.P.A. from School of Public and Environmental Affairs (Indiana University), and a B.A. degree from Hanover College. His recently published book, Crush Depth Alert, Fourth Lloyd Productions, explains in detail with supporting exhibits, graphs, and tables the factors that led up to the recent financial crisis while offering solutions on how to move forward.

You can purchase Crush Depth Alert here.

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Late in the fall of 1988 the accounting firm, Coopers & Lybrand (C&L), won a competitive award to construct a computer system that collected the monthly security and loan information relating to Ginnie Mae’s mortgage-backed security program. As a C&L consultant with a math major and a Wharton M.B.A., I was put in charge of testing the system as it was being developed.

Shortly after putting the system up live, the S&L crisis began to show its ugly head. Because a simple rudimentary system that I had developed during testing to rank and evaluate the security-issuing banks showed the recent defaulting issuers at the top of my list, I was put in charge of the risk monitoring portion of the C&L contract—and subsequently for twelve years I directed the staff of about fifteen young “hot shot analysts” to design, develop, and monitor the risk of Ginnie Mae’s program.

During that entire period, every month we received computer updates on more than 400,000 securities and the 7 million FHA and VA loans that backed those securities. As a result of that work in the early 1990s I wrote a couple of articles relating to housing risk for the Mortgage Banking Magazine and one published as part of Jess Lederman’s Handbook on Mortgage Banking. In 1995, as a result of my team’s effort, I was awarded a Vice-Presidential Achievement Award issued through the Department of the Treasury.

In 2000, C&L (now PricewaterhouseCoopers) lost the Ginnie Mae contract and after 25-years working and living in the wonderful city of Washington, DC, I left the city and moved back to my little home town in Indiana to semi-retire.

Early in 2001, fearing the ever-increasing oligopoly-like power of Fannie Mae and Freddie Mac (the GSEs), the Primary Mortgage Insurance (PMI) companies proposed to Congress a program called PMI Choice, which would have allowed Ginnie Mae to compete against the GSEs for the securitization of “conventional-type” loans. Knowing of my previous history with Ginnie Mae, I was hired by another accounting firm, Ernst & Young, to evaluate the risk considerations associated with PMI Choice.

In August 2001 I completed my analysis and wrote a twelve-page synopsis which essentially said that something needed to be done to thwart the power of the GSEs. Knowing full well that if PMI Choice was implemented correctly, Ginnie Mae could easily have competed against the money-making machines and bloated bureaucracies of the GSEs and gain control of mortgage rate policy. Thus, I recommended that the Federal Reserve be brought into the dialogue to evaluate the consideration of PMI Choice.

One month later, even before my risk portion could be rolled up into a more complete PMI Choice evaluation document, the events of 9/11 took place and all the country’s attention shifted away from anything to do with financial or economic matters towards war and homeland security. As a result PMI Choice died a quick death and I semi-retired from the mortgage-backed security industry for a second time.

In 2003, after watching a Congressional hearing on CSPAN one morning regarding problems associated with Fannie Mae’s management, thinking that I might have some insight to offer on the subject, I sat down and wrote the Republican Chair of the Housing Banking Committee a one-page letter and enclosed my twelve-page risk synopsis that I had written earlier as part of the PMI Choice project.

In return I received a thank you letter. As I discovered a short period later, at the time Congress was much more concerned about investigating minor accounting irregularities than anything having to do with the GSE’s influence on the economy so I assume my risk synopsis was simply buried somewhere in their paperwork.

In 2005 the Ginnie Mae risk contract came up for renewal and the federal branch of IBM contacted me and asked if I would be interested in helping them develop a proposal for the work. Already knowing that the GSEs were primarily responsible for driving up nationwide housing prices beyond reasonable risk means, I saw this as an opportunity to reopen the question of PMI Choice.

However, I also knew that if the program was really going to work that Ginnie Mae would have to take the lead and so I began referring to the concept as Ginnie Choice (in lieu of PMI Choice) to IBM. In the process of bringing my IBM colleagues up to date, I said I thought it would help our chances if we could get the Federal Reserve to support our effort. I was fully aware the Federal Reserve Chairman had said that housing was his second biggest economic risk concern after Energy, so I thought the Fed might be interested in gaining control of mortgage rate policy and thus Ginnie Choice.

The IBM partner leading the proposal effort had a Harvard M.B.A. and agreed with that approach. As a result, the IBM partner contacted an old friend that was supposedly one of the leading housing experts at the Federal Reserve and talked to the individual about Ginnie Choice in a brief phone call. The next day I received the following email, which I still keep for documentation purposes:

“I spoke yesterday with my friend who is one of the leading Housing PhD economists at the Fed. We chatted about a few things, including Ginnie Choice. He said that something like Ginnie Choice has not been considered by the Fed, and that he thought it would need a Democratic administration to make it a possibility. The prevailing Republican view (and his personal/professional view too) is that the private sector competitors to Fannie/Freddie will gradually erode their market share (currently 45% of the MBS market).”

Well, needless to say, someone who had spent twelve years analyzing in detail the banking risk of a $600 billion portfolio of mortgage-backed securities, including the period of the S&L crisis, could not argue about the wisdom of putting such faith in the “big banks” with such a distinguished Fed housing expert, so again the concept of Choice was dropped with less than any serious consideration. Shortly thereafter, I semi-retired from the mortgage-backed security business for the third time in 2006.

In the summer of 2008, the world of housing risk, finally began to blow up as I had been fearing that it would, so on the coaxing of a highly respected colleague of mine, Tristan Yates, I decided to once again get back into the game.

In August 2008 prior to the Government’s taking over control of the GSEs, I wrote an opinion piece for an internet magazine, Minyanville, which explained facts about the GSEs that have still not been made otherwise public.

Later, in the fall of 2008 I went into the Federal Reserve website and found the names and email addresses of eighteen different economists that seemed to have something to do with housing analysis. I then began randomly choosing about six a day and sending an individual email detailing various pieces of evidence that I had accumulated over the years relating to the GSEs and housing risk. I did this for two weeks without receiving a single response then gave up on the Federal Reserve again.

Frustrated with my seemingly waning influence, in February 2009, using my Linked-in profile, I made available through the internet something I called My Solution to the Current Global Financial Crisis. Over the next year that piece of work received approximately 1400 hits, but no further inquiries. By this time I had gone way past any type of Choice program and was proposing additional solutions.

Sticking to my guns, in the first two months of 2010 I sat down and wrote a book called Crush Depth Alert (Fourth Lloyd Productions), subtitled Solutions for Supplying Power to America’s Distressed Financial Systems. Subsequent to the writing of that book which goes in to much greater detail regarding all the above, including taking on the bogus TARP program, I have had articles published by Business Insider, The Street, Seeking Alpha, and SwiftEconomics. Despite all of the above, however, I have yet to be contacted by anyone involved in the current Administration. And in full disclosure I have been a Democrat my entire life and now consider myself an Independent.

On Friday, August 28, 2010, the Chairman of the Federal Reserve assured the public that the Fed was ready, willing, and able to step in and take action if it was deemed necessary to do so to avoid a double-dip recession.

And now with that confidence builder, I have decided to semi-retire for the fourth and what I think will be the final time from the mortgage-backed security industry.

Jim Boswell has an M.B.A. degree from The Wharton School (University of Pennsylvania), an M.P.A. from School of Public and Environmental Affairs (Indiana University), and a B.A. degree from Hanover College. His recently published book, Crush Depth Alert, Fourth Lloyd Productions, explains in detail with supporting exhibits, graphs, and tables the factors that led up to the recent financial crisis while offering solutions on how to move forward.

You can purchase Crush Depth Alert here.

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Who needs health insurance anyway?

Arguments over intent of the Commerce Clause, and its practical application to modern America, have gone on for years. But it isn’t really subjective intent of the founders that matters here. It is words on the page, and what those words meant in the context of their time to the people who would vote to ratify the Constitution. At the time of the founders, “to regulate” meant to “make regular”. In other words, to prevent states from imposing trade barriers on each other. And, in fact, “commerce” at the time meant “trade”. So industry wasn’t subject to federal trade concerns until beaver pelts were being sent across state lines.

The Commerce Clause is pretty clearly written to make interstate commerce regular. Ironically, this has been one major thorn in the side for affordable health insurance. Each state has its own health insurance mandates and rules. They protect domestic insurers from competition by barring entry to products licensed by other states. Some states require that you pay for more expensive policies with coverage you don’t want, such as acupuncture or chiropractic. The end result is state-by-state health insurance oligopolies.

In the world of legal medical marijuana in California, the feds involve themselves by shutting down dispensaries or busting individual citizens for smoking medical marijuana at home. It is deemed an “economic activity” and justified by their interpretation of the Commerce Clause. As the administration fights the flurry of state lawsuits coming in for the individual mandate, and California braces for a vote on Proposition 19 in November to legalize marijuana, we’ll all see just how far the feds can stretch the Commerce Clause.

Some people think the Constitution should have little to no bearing over modern governing. After all, times have changed. But if the words in the Constitution mean nothing, or whatever today’s courts want them to mean, government has a license to do whatever they want; or certainly extend themselves into what should be our private lives.

The clause written as a restriction on states has given Congress the go ahead to regulate noncommercial, local, and purely private behavior. In the following video, John Eastman (Chapman University Law Professor) and Erwin Chemerinsky (Founding Dean, University of California, Irvine School of Law) discuss whether the government has abused the Commerce Clause:

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Follow SwiftEconomics on Twitter ]]> http://www.swifteconomics.com/2010/08/29/the-power-of-the-commerce-clause/feed/ 5 http://www.swifteconomics.com/2010/08/27/its-time-for-a-fair-tax/ http://www.swifteconomics.com/2010/08/27/its-time-for-a-fair-tax/#comments Fri, 27 Aug 2010 18:39:19 +0000 Ryan http://www.swifteconomics.com/?p=6964 If 67,000 pages could be a microcosm, the U.S. tax code demonstrates so much of what is wrong with this country. The tax code is confusing, divisive, superfluous, and esoteric at times. Libertarians would call it highly immoral and it absolutely fosters the lobbying culture in Washington where everyone is seeking a break and a handout. If individuals even had time to become familiar with all 67,000 pages, the average American wouldn’t understand it. So why do we do this to ourselves? Or rather, why does our government do this to us?

Taxes could be this simple…fill in the blanks:

Total income = $X
State tax rate = Y%
Federal tax rate = Z%

State taxes = $X * Y%
Federal taxes = $X * Z%

Now I know there are people out there who struggle with math. But I’m pretty sure they could figure this out, or find help from some good Samaritan who could help them punch this into a calculator.

If you wanted to have graduated tax brackets, and a progressive tax system, the government could make a table available online for income cutoffs and associated tax rates to use in this uncomplicated plan.

Taxes shouldn’t be rocket science. There shouldn’t be an entire profession dedicated to deciphering the tax code and doing people’s taxes for them. It is an unbearable waste of human capital, time, and energy. Thinking about the creative energy lost every year in this country due to becoming compliant with our tax code is astonishing. It is a burden on our lives, an unnecessary source of stress and fear, and something none of us should tolerate any longer. Intuitively we all understand this come tax time every year.

There should be no deductions, tax credits, write-offs, and other manipulations meant to facilitate handouts to certain people or industries (corn ethanol and hybrid cars anyone) or drive capital to certain parts of the economy (housing perhaps, through the incentive of deducting interest). There are so many different sources of taxes including personal and corporate income (an offshoot being capital gains), payroll, property, sales, excise, gift, estate, etc. Obviously it is all with the goal of generating ample revenue to fund both necessary and unnecessary projects. In doing so, the taxpayer is increasingly on the hook to pay for the debt of past projects and the newest “must have” initiative for the public welfare.

In the following Seinfeld clip, Kramer hilariously admits to Jerry, like many of us, that he has no idea what a write-off is:

Amen Jerry. I’ve spent copious amounts of time preparing my taxes, worrying about my taxes, and fearing the Internal Revenue Service (IRS) that I’d like to have back. The tax code as it stands is insane, and our affluent leaders themselves can’t even comply with it. I think in the midst of the worst economic conditions since the Great Depression, it’s safe to say we have enough to worry about. The quick fill-in-the-blank method above would be appreciated.

Yet there is an even easier and more efficient way for government to collect tax revenues: a Fair Tax; a single broad national consumption tax on retail sales to replace all federal income taxes. A Fair Tax would be collected by merchants and then distributed to the government. Imagine it: a world with no tax returns for individuals, only for retail businesses. It sounds so simple. Surely it wouldn’t work, or wouldn’t produce enough revenue, or somehow make the United States fall to her knees, right? Well, no actually, simple works just fine in this case.

A Fair Tax would be progressive, given the assumption that the greater one’s income and net worth, the more they consume. So not to worry “social justice” crowd, the rich will still pay more. Before April 15th this year, a study by the Tax Policy Center was cited estimating that 47 percent of taxpayers owed no federal income tax for 2009. Many conservative talking heads clasped onto the statistic and claimed that “47 percent of all Americans don’t pay any taxes.” All the more reason not to watch TV news. Conservative people proclaim figures like “the top 10% of income earners pay 70% of taxes” all the time. It is actually more nuanced then that. These figures deal in federal income tax, and as highlighted above, there are a bajillion different types of taxes. When opened up to consider total taxation at the local, state, and federal levels, our tax system isn’t nearly as progressive as the conservative shills make it sound.

Source: Citizens for Tax Justice

Source: Citizens for Tax Justice

As Citizens for Tax Justice puts it:

“It’s true that many taxpayers don’t pay federal income taxes, but they still pay federal payroll taxes (and some federal excise taxes) and also pay state and local taxes. Most of these other taxes are regressive, meaning they take a larger share of a poor or middle-class family’s income than they take from a rich family. This largely offsets the progressivity of the federal income tax.”

Why hasn’t a Fair Tax happened already? Despite more traction in recent years, it still remains on the relative outskirts. People have been pushing it since at least 1994 with substantial resources. I imagine the Fair Tax remains on the back-burner because such a system would limit the politician’s ability to acquire power, influence, and wealth, as well as redistribute that wealth. Some politicians claim a Fair Tax would not yield enough revenue. Fair Tax supporters have produced studies suggesting the plan would be revenue-neutral at a 23% consumption tax rate. Even if revenue was less, I view that as a good thing. It would force government to cut spending. Recently Federal Reserve Chairman Ben Bernanke testified that federal debt “…is already expected to be greater than 70% of GDP…at the end of 2012.” And that by 2020, “…federal debt would balloon to more than 100% of GDP,” provided taxes are not raised and budgets are not cut. Needless to say, cutting spending might be a smart idea here real soon. It also would be smart to explore new ways of increasing government revenues. The Laffer curve tells us that at some point, tax revenues decline as a result of increased tax rates. As we stare down the barrel of a jobless non-recovery, it would be smart to at least attempt to widen the tax base without increasing income taxes on the wealthier end of society. They tend to be the folks creating jobs. Call me crazy, but maybe we should stop doing the same things over and over again and expecting different results. The tax code is no exception.

The Fair Tax movement has come up with a rebate plan, where lawful U.S. residents receive a check every month equal to the estimated total Fair Tax paid on poverty level spending, as outlined by the The Department of Social and Health Services (DSHS). These prebates, as they’ve been coined, would help people purchase some of the basic costs of living tax free. They would also partially offset the regressive feature of the Fair Tax on income, while eliminating and reimbursing all federal taxes for those below the poverty line. The Fair Tax is regressive on income because eventually a person’s income gets high enough to where they tend to spend less of each additional dollar. Now you always have exceptions like former NBA player Antoine Walker who went bankrupt after $110 million of career earnings. Walker was underwater on at least two multi-million dollar estates in Miami and Chicago, and rumors have him trying to keep up gambling with Michael Jordan. Some rich people do actually spend all their money. But most do not spend the same percentage of the 1,000,000th dollar they earn in a year as they do the first. Recall, though, that the Fair Tax is progressive on consumption, and that it is a consumption tax. As discussed above, low and moderate income Americans pay far more in FICA taxes (payroll/employment tax) than income taxes. This means that those spending at twice the poverty level would pay a Fair Tax of only 11.5 percent, which is lower than the income and payroll tax burden they bear today.

The Fair Tax has been designed to only replace federal income taxes. Tax policy at the state and local levels would not be effected by it, although, whose to say the plan couldn’t be tweaked so that states, cities, and counties could be covered by consumption taxes, too? My chief concern is with federal income taxes because they are subject to tax code that could fill the FDR Presidential Library. Beyond that, DC itself is a cess pool. Until there’s a paradigm shift in culture there, we’re not going to achieve meaningful solutions to the multitude of problems we face on a national level. That is why scrapping the tax code is essential. It creates many special favors and handouts, which breeds the lobbyist culture. If we moved to a Fair Tax, not only would each and every one of us get back hours and days of our lives doing taxes every year (or the accountant’s lives), there would no longer be a lobbying community in Washington.

One major weakness of the current tax system is that it relies on people both reporting their income honestly, and, understanding the confusing, endless rules to become compliant. How many people would you say achieve both? The IRS also takes billions of dollars to fund in order to oversee and enforce the current system. By eliminating all individual tax returns, there will be far less for the Treasury to oversee making them more efficient and effective. The IRS racks up $265 billion a year in compliance costs and still comes up $350 billion a year short of what is owed.

The entire underground economy, from the drug trade to the organ commodities market, does not directly contribute to the federal tax base. Stolen money and goods do not directly contribute to the federal tax base. And people choosing not to report income from what may be legal endeavors does not contribute. Illegal immigration can also result in unrealized income as the government doesn’t necessarily see any of the fruits of their labor. A consumption tax would capture revenues from the good old fashioned dishonest, criminals, and illegal immigrants working under the table. It would also allow workers to keep their entire paychecks and retirees to keep their entire pensions and retirement savings accounts such as 401(k)s and IRAs. In a country driven by consumption, and a world where fifty somethings just lost half their net worth, this would be an especially appealing tax system.

The efficiency of collecting tax revenues from retail purchases makes sense on every level. No more lobbyists, no more fights about new taxes, an honest system both from the administrator and citizen point of view, ease, cost-effectiveness, and peace of mind. If the government ever cared about the peace of mind of their citizens, this would be the way to show it. We could phase out the current system over time, say a 5-year period of reducing the current tax burden and implementing the consumption tax. We could make sure the consumption tax produced sufficient revenue (increasing it if need be). Let’s stop allowing politicians to use tax favors like currency and misallocate resources through the tax code. Let’s get our financial mess in order and tax citizens what we need, in one manner, to cover the basics. Let’s stop playing class warfare and opt instead for simplicity and fairness.

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“Existing home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, dropped 27.2 percent to a seasonally adjusted annual rate of 3.83 million units in July from a downwardly revised 5.26 million in June, and are 25.5 percent below the 5.14 million-unit level in July 2009.

Sales are at the lowest level since the total existing-home sales series launched in 1999, and single family sales – accounting for the bulk of transactions – are at the lowest level since May of 1995.”

Distressed sales have ticked up from 31% to 32% from July 2009 to July 2010. Furthermore:

“Total housing inventory at the end of July increased 2.5 percent to 3.98 million existing homes available for sale, which represents a 12.5-month supply at the current sales pace, up from an 8.9-month supply in June.”

A six month inventory is usually seen as equilibrium with anything less being a seller’s market and anything more being a buyer’s market. A 12.5 month supply represents a very distressed market where the buyers can pretty much dictate terms.

The article blames this huge year over year decline on the expiration of the first time home buyers tax credit. (It expired at the end of April, but buyers if under contract by April 31st, had until the end of June to close.) The National Association of Realtors chief economist, Lawrence Yun, said that for this reason “…there is not likely to be any measurable change in home prices going forward.”

And indeed, home prices actually rose in July, up 0.7% to $182,600. A very small increase, but surprising given the decline in demand for housing.

Existing Home Sales

,Existing Home Prices

So is Yun, right, are these prices sustainable? I doubt it. First there’s the fact that according to the NAR, we’re pretty much in a perpetual state of “it’s never been a better time to buy a house” and I see no reason their chief economist would deviate from the party line. Unfortunately, there are other poor indicators and the report even mentions these, but without discussing their ramifications of course. For example:

“…the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 4.56 percent in July from 4.74 percent in June; the rate was 5.22 percent in July 2009. Last week, Freddie Mac reported the 30-year fixed was down to 4.42 percent.”

Can these record low interest rates go any lower? Can they even stay that low for long? What happens if we start having inflation? Furthermore, the first time home buyer tax credit was not the only thing at play here. As the report states, “A parallel NAR practitioner survey shows first-time buyers purchased 38 percent of homes in July, down from 43 percent in June.”

That means that whereas there were 2.26 million first time home buyers in June and 1.46 million in July. Even if the number of first time home buyers in July had been identical to June, sales would have fallen from 5.14 million in 2009 to 4.64 million in 2010; a drop of almost 10%!

And typically, price drops follow sales drops and there’s no reason to think that won’t be the case this time. Real estate is by no means out of the woods.
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Yes they make such things so you don’t even need to retrofit your dog leash for said purpose. Amazon.com has a delightful assortment of well-named “child safety tethers” such as the Kid Keeper Safety Harness, the Mommy’s Helper Kid Keeper and the Sunshine Kids Sure Steps Safety Strap (a mouthful of movement-restricting goodness if there ever was one).

Example 1:

Ahhhhhhh, So cute...

Just going for a little stroll

Freeeeedddddoooooommmmmm!!!!!!!

The website www.smallplanetkids.com specializes in such child safety harnesses, because “exploring is important for your child” (exploring the five foot radius around their parents, that is). Oh, but “I’m concerned that my child would not like to wear the harness, how should I approach it?” Worry not, that’s simple:

“Present it with a positive attitude to your child – as a cool new thing for them to wear. We also suggest to let them wear the harness without the lead at first. It is very comfortable and children really like our cheerful patterns.”

Or you could just tell him to sit down, roll over and you’ll give him a special, yummy treat. Thaaaaatttt’s a goooooodddddd boy! Thaaaaatttt’s a gooooooooooooodddddd boy!

Of course some take it too far (more so than just using it in the first place), this woman was actually jailed for this kid leash-assisted stunt:

I know those terrible two’s and ADHD inflicted yet Ritalin addicted kids can be a nightmare. But count your blessings; your young daughters haven’t discovered Justin Bieber yet! And your young sons haven’t discovered what comprises about half of the Internet!

Nevertheless, as a childless man myself, one could conceivably view me as hypocritical. But a stalwart social critic I must remain. So for the love of God people, don’t put your kid on a Goddamn leash!

For more of this humorous, but rather disturbing trend, see here. And keep your eyes open for kid poop bags, coming soon to a store near you…
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“As of March 31 this year, 6.3 percent of mortgages held by Fannie and Freddie are either seriously delinquent or in foreclosure. Although that’s down slightly from the figure three months earlier, it represents a big one-year rise (from 3.9 percent in early 2009).”

So what is to be done? Treasury Secretary Tim Geithner went so far as to bring up the possibility of giving Fannie and Freddie an “elegant funeral,” but he made it clear he doesn’t want to see the government out of the mortgage business. The article discusses other economists falling all over the map on the issue. Some want them reformed to not be profit-seeking, others want the GSE’s role in the mortgage market significantly reduced and one, Bill Gross, “suggested that government guarantees should apply to virtually all mortgages.”

Regardless, the difficult position these GSE’s are in right now could see their debt obligations tacked onto the government’s already enormous debt:

“An exit strategy could involve adding Fannie and Freddie’s roughly $5 trillion in obligations, in effect, to a federal balance sheet that already includes $13.3 trillion in federal government debts. The GSE obligations would be a different animal, because those liabilities would need to be covered by taxpayers only if things went bad in the housing market.

But the nation has just seen things go bad in the housing market.”

And it should be noted, as evidenced by the high rate of delinquencies, the housing market is still not doing particularly well.

My take is we should remember that it was Fannie Mae who started the whole securitization craze in an insane push for more home ownership and as Peter Schiff put it, “[created] a conflict of interest between the real estate market and mortgage market… [and] corrupted an industry in which the availability and cost of credit are of central economic importance.” (Crash Proof, pg. 126) And it was that securitization, along with the massive influx of capital made available by the Federal Reserve, that were the primary causes of the housing boom and the subsequent housing bust. In the end, phasing out these institutions, or at least reducing their role in the economy is the right step to take. Remember, the best way for there to be “affordable housing” is for housing to stay affordable. Fannie’s and Freddie’s incentives for people to take out more loans and drive up housing prices accomplishes the exact opposite. And needless to say, even if it’s “better” debt, adding $5 trillion more to the federal balance sheet is not something I’m particularly looking forward too.

Where is Howard Beale when we need him?  Two years into the Greatest Recession Since the Great Depression (GRSGD) and our financial leaders are still telling us that we need to be patient while waiting for our economic recovery.

It’s time to wake up, America.  There is no reason to wait.  So let’s stick our collective heads out the window and scream in unison, “We’re mad as hell, and we’re not going to take it anymore.  We want new leadership.  And here is why.”

If there is any symbol that represents the beginning of the GRSGD, it should be the Troubled Asset Relief Program (TARP).  Remember TARP?  Remember how our American leadership dolled out $45 billion to Bank of America and Citigroup and another $25 billion to JP Morgan/Chase and Wells Fargo back in the fall of 2008?

Remember how we were told that these funds were necessary to avoid a complete collapse of our financial system?  Remember how Congress did not even know or understand how the money was going to be used or who it was going to before they signed it into legislation?  Then remember how nearly all that money was paid back within a year of our leaders’ graciousness?

Well, as a sanity check on that earlier claim, it is interesting to look at the financial condition of the above mentioned “too large to fail banks” as they reported quarterly to the Federal Deposit Insurance Corporation (FDIC) at the time of TARP (09/30/2008) and most recently (03/31/2010).

Exhibit 1 provides a fairly good financial picture of those banks for those two different time periods—eighteen months apart:

Source: Federal Deposit Insurance Corporation (Industry Statistics)

Does it strike anyone strange that in the 2008 fall of our despair that Bank of America needed $45 billion to survive when they were reporting an annualized net income of $12.7 billion to the FDIC with $192 billion in equity on their books?  And does it surprise anyone that Bank of America paid back that $45 billion with interest, and now based upon their first quarter results of 2010 are showing increased equity ($219 billion) and continued profits with a projected annualized net income of $10.5 billion?

Take a look at the books of the other three banks in Exhibit 1.  My question for you, America, is this?  How in the world could our financial leadership ignore this information when they started putting their panic argument together for TARP which essentially then started the GRSGD?

During the S&L crisis in the early1990s, there was no where near the panic we experienced as part of this GRSGD.  Those of us who were working in the government financial sector back during that period learned very quickly how to identify banks and savings and loan institutions that were in trouble.  It did not take a rocket scientist?  There were two fundamental gauges: (1) Equity; and (2) Non-performing assets (NPA).  If a bank did not have enough Equity to cover losses associated with non-performing assets (delinquent and real estate owned loans), the bank was indeed in trouble.

Clearly the FDIC learned that during the S&L crisis, as my analytical group did while supporting Ginnie Mae with the analytical risk of its mortgage-backed security program.  Doubt me?  Then let’s take a look at the most recent (03/31/2010) quarterly data submitted for the seven banks that the FDIC shutdown last weekend (taking their total for the year up past the century mark to 102).  The same financial factors shown in Exhibit 1 are shown in Exhibit 2 for those seven banks.

Source: Federal Deposit Insurance Corporation (Industry Statistics)

Note the distinct difference between the Equity versus NPA statistics shown for the banks in Exhibit 2 versus those of Exhibit 1.  Note the difference in annualized net income amounts and Equity.  If that does not make you want to stick your head out the window and scream about our leadership during this crisis, which has now stretched out for nearly two years, then I don’t even think Howard Beale could help us today.

Who came up with the design and rationale for TARP?  The same people who came up with design and rationale for the latest financial reform bill, which also missed the target.  Yes, the banks had problems, but the problems were not with derivatives (derivatives are a zero sum game with both winners and losers), but with the amount of non-performing assets on the books.

My question now is: If our leadership did not understand banking data and the real “housing” problem that led us into the GRSGD, why should we continue to count on them now?  After two years of the GRSGD, we have paid the bill for most of our housing problems (not counting Fannie Mae and Freddie Mac) in unemployment and taxpayer losses.

It is time for our country to move on with new vigor and with new financial leadership.  The world may have a right to be angry with our recent fiduciary-irresponsibility, but that same world still looks toward America for leadership and direction, especially in terms of economic direction.

There is no need for patience.  Recovery should be now, and the best way to start is to make the necessary “financial” leadership changes at the top and then to implement the 4.0% bond solution discussed in an earlier article on Business Insider.

Patience is a virtue, but poor performance is not.

Jim Boswell has an M.B.A. degree from The Wharton School (University of Pennsylvania), an M.P.A. from School of Public and Environmental Affairs (Indiana University), and a B.A. degree from Hanover College. His recently published book, Crush Depth Alert, Fourth Lloyd Productions, explains in detail with supporting exhibits, graphs, and tables the factors that led up to the recent financial crisis while offering solutions on how to move forward.

You can purchase Crush Depth Alert here.

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“The truth is the mandate’s not essential to the plan anyway. It never was essential to the plan. They did it in Massachusetts and had a mandate, but we have universal health care for kids in my state without a mandate… We just said all comers will have to get insurance and you can’t charge — this is why our bill is so much better than what they passed — you can’t charge more than 20 percent above the basic rate; in the Senate it’s 300 percent, based on age. The fact of the matter is that I thought the president was right in the campaign. Academically you want a mandate. The American people aren’t going to put up with a mandate. I made this prediction before and I’m going to make it again: by the time this thing goes into effect in 2014, I think the mandate will be gone either through the courts or because it’s unpopular. You don’t need it. There will be two or three percent of the people who cheat. That is not enough to bring the system to a halt and people don’t like to be told what to do.”

Dean is partially right. He supported the public option, which is in many ways is similar to what they did in Massachusetts. While Massachusetts doesn’t officially have a public option, it did significantly expand Medicaid, which acts as a pseudo-public option for some people. Indeed, a recent article in Boston.com noted that “Since April 1… the owners of about 90 small companies terminated their insurance plans with Braintree-based broker Jeff Rich and indicated in a follow-up survey that they were relying on publicly-funded insurance for their employees.” Prices have also skyrocketed making the health reform in Massachusetts a dismal failure. So Dean is wrong about the public option. And then of course, there’s this:

Never gets old does it? Regardless, Dean is right about the individual mandate; it is unpopular and it should be. Obama is now trying to defend it in the courts under the taxing power of Congress, even though he denied it was a tax for over a year! And according to Rassmussen, 60% favor a repeal of Obamacare, despite the Obama administration spending $700,000 on an ad campaign starring Andy Griffith (taxpayer financed of course) to “correct the record” after the bill had already been passed.

And more will likely join the chorus of repeal if the mandate is ever officially introduced. An increase in the demand for health insurance-as every economist knows-will increase prices. Any subsidies to manage those costs will increase taxes (and increase prices some more). If people really understood economics, there’s no way they would support the mandate (and if Supreme Court understands the Constitution, there’s no way they’ll rule it constitutional). So it’s certainly nice to see some high up opposition to this nonsense coming from the Democratic party.

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