Tuesday, February 24, 2009

Brief Observations, Post "State of the Union"

Here is President Obama, promising to do everything he said he was going to do and for the moment making it seem like it’s all possible while invoking a non-existent line-item veto to make it all cost less.

Here is Governor Jindal, Mardi Gras gumbo dripping off his lapel and still woozy from the post-Zulu parade festivities, saying no we shouldn’t let Obama do it, just wait for the Minutemen to show up.

Congressional Republicurs will recede to the background and the Republicur governors will come forward.

Let the games begin...

Wednesday, February 18, 2009

Death By Half Is Still Death

I am ever more deeply believing that the major banks of this country are zombies and have been since the initial crisis hit them last September. TARP was intended to prevent an immediate meltdown at the time and this is it did. It never had much of anything to do with liquidity and possibly may have been a last ditch effort for Bush people to funnel some Treasury cash to their cronies while keeping the banks themselves filled with employees drawing paychecks. I recognize that statement borders on conspiracy theory but we’ll see how things develop in the years ahead. Now, other than the employees (stockholders have already taken their hit), I wonder who at the top end of the pyramid will lose their valuables if the big banks eventually shutter, the zombies no longer able to gnaw on the brains of us taxpayers for sustenance? If they get nationalized we may never find out and instead continue to feel the cold air of day whiffle across our collective financial grey matter. Mmmm, feels like being at dinner with Hannibal Lecter. In other words, I don’t feel bold action is being taken and I wonder why?

The stimulus I am more optimistic about. This I believe is a leading edge for what will require by necessity more financial pumpitude down the line. The infrastructure projects will need to be expanded and maintained, particularly any aimed at developing a new energy grid. Gee, I’m going out on a limb supporting the ideas of the newest Nobel laureate in economics but I’m on the bus with Paul Krugman here that tax breaks don’t do much and we need to spend a lot more to build things up, get money in folks’ pockets and do it by keeping them busy on useful projects.

The foreclosure plan proposed today, well this one seems like a half-measure. I’ve written several times on this blog what I think should be done here to rebuild a housing market. Simply stated it requires a write down of mortgage principal available for everyone regardless of how they got in the situation they are in. We don’t have time to collectively shake our sanctimonious fingers at people who got bad loans through whatever means because getting the economy moving again is vastly more important. At some point, the wide net of devaluing homes will sweep up everyone and then all we’ll have is blame. You can’t eat blame. We’ll have time for that down the road (don’t you worry all you mortgage brokers, we’ll get around to auditing you eventually — yeah I know, it wasn’t just you, but I enjoy the fantasy).

The main focus of the plan is to slow the foreclosure rate so that folks can stay in the homes they are in now. And that’s ok as far as it goes. But for the purposes of a consumer economy, it doesn’t go far enough. This plan does nothing for the principal on loans, which will remain higher than the values of the homes they are on. Interest rates and terms may be stretched out to reduce payments, but the homeowners, although safe in their homes, are effectively trapped in them until such time in the future (at least four or five years in normal times for housing value appreciation, and much longer in the hardest hit places, California, Florida, Arizona, and Nevada) when home values manage to reach back up to where they were when the loans were initially made.

The trouble will be that by that point the banks, receiving regular payments, will have no incentive to approve short sales (the sale of a home for less than the amount due on the loan) so folks can’t relocate, can’t downsize or upsize depending on their circumstances (if they can upsize then they could presumably cover the difference in an undervalued home at closing, but then there’s no cash to pay towards a new home of any size). Meantime, we haven’t even hit bottom on devaluation and now we’re planning ahead for increases? We’ll end up back in the death spiral where the only way to get out is to default.

The only way to affect principal in this plan is through bankruptcy. That may work out for me since I’ve long planned to increase my law practice in that area, but honestly, it’s not good for the nation altogether. The banks will still end up losers in that kind of deal. But now, the homeowners end up having their credit destroyed which will make it difficult to impossible for them to remain involved in a consumer economy in any big way. Cash on the barrelhead for those folks only. In a world short on cash for consumers, that’s no way to run a recovery.

The only semi-reasonable explanation for why my friend Barry is taking this approach, which is feeling like a slowed down death instead of a guillotine on the one hand or a reprieve on the other, is pure political pragmatism. It comes back to doing what you can do. The Republicurs are convinced they have the nation’s ear with their constant trumpeting about tax and spend Democrats. And they’re right, they do have the ear. Except for my friend Barry himself, no Democrat seems yet to have figured out how to explain themselves in such a way that reaches people in the tasty little soundbites that they have to create to swing the discussion their way. It’s frustrating as hell because it doesn’t seem that tough but I haven’t been on TV and been asked the questions so I don’t know (though I’m working out my chops with occasional appearances on the friendly format of Progressive Blend Radio).

I’m halfway hoping that these are half-measures designed to work only so far while the Republicurs act like the philosophical Neanderthals they have become (read, dead-end). By the end of this year or the beginning of next, I’m hoping the results of policies to that point will demonstrate the absolute necessity to go all the way on stimulus spending and mortgage principal modification. At that point John Boner’s head can pop off in the well of the House and the remaining Republicurs can join their Whig forebears in the history books.

The only other thing that can get in the way of this, or anything else, would be something extremely nasty happening in foreign affairs, probably involving Pakistan as it continues to morph in to Talibanistan. In that case at least one thing I have going for me is I can make several wicked varieties of curry so I could have a peace offering in a pinch.

Tuesday, February 10, 2009

Stimulus: Pissing in the Ocean?

Like many folks I’ve been trying to wrap my brain around the causes, effects, and consequences of the economic meltdown we are enduring while still trying to maintain a semblance of my own personal economic existence. As I’ve mentioned in earlier posts, I’m in the real estate business and I’m in south Florida, so I’ve been feeling the effects of this downturn for going on 4 years now. Business has been steadily declining since hurricane Wilma hit here in October 2005. For me, I manage because I have very low overhead and can operate in a variety of fields, but for real estate specialists, stand alone title companies, and real estate sales offices, well, there are a lot of shuttered storefronts they used to occupy. And there are a lot of empty homes around here as well with many more soon to come empty.

So I heard a figure regarding the amount of debt that is actually hanging out there waiting to fall all over us. The figure is incomprehensible to people outside the astronomy business. It’s 1.14 quadrillion dollars. That is a thousand trillion. Every trillion is a thousand billion and each billion is a thousand million. That 1.14 quadrillion (and I am intentionally NOT italicizing or otherwise emphasizing the number. If it doesn’t already pop your eyes out to see the word, then more emphasis won’t help) is the amount calculated to be owed to the end-holders of the so-called derivative debt held throughout the world. That is compared to the total estimated Gross Domestic Product of the entire world which is approximately 60 trillion dollars. Yes that is correct — the debt owed is almost 20 times the actual value of everything OF value on the planet. (I am also not making links here because a simple Google search of these figures will provide you with numerous references from all manner of sites, both reputable and otherwise).

I will once again make reference to my first assessment of the financial crisis in that it’s not really a problem of credit in and of itself. The problem is that so much credit has already been extended that there is no way that the collateral which backs it can ever hope to come close to even cover a bankruptcy level of pennies on the dollar. Value is the problem. There isn’t any. The banks blew it. They are dead. Giving them money to revive is a false hope. They are dead. Not comatose, not faltering, not on the precipice, not pinin’ for the fjords, but dead.

The bank bailout (TARP) was nothing it was billed to be in the sense of saving the economy — at least not in the long term. It was a very expensive stopgap. Or at least it seems expensive to us mere mortals. The purpose of the TARP had much more to do with stopping the imminent complete meltdown of the world financial system while the US was in the midst of a tumultuous presidential campaign. The failure to include oversight meant that instead of going to lending, it went to cover salaries of the banks’ employees. And yeah, also to immoral bonuses to executives who made bad bets because there was no downside to them for losing on such risk —hence executive life under the Bush administration. But mostly it probably went to salaries for bank tellers and the like.

Further payments to banks won’t solve the problem, and I can’t see how at this point any so-called “bad bank” can soak up the level of bad debt that is out there. I’ve heard it said that the mortgage crisis, the foreclosures being endured in the marketplace, don’t really infect everything like the “bad apple theory” says. But my understanding of how these derivatives work defines them as classic bad apples.

Let’s say you have a bunch of loans that were made in 2004. Some in that bunch were $500,000 no-downpayment loans, pic-a-pay deals allowing $400 per month regardless of interest rate. The unpaid interest gets tacked on as additional principle to be recalculated later. The buyer is an unemployed janitor but it’s a no-doc loan so no one is checking anyway. “Don’t worry in a few years of steady payments your credit rating will improve and you can refinance for a regular 30 year fixed at a better rate and for more than you’re borrowing now because the values always go up my friend.” Well 5 years later, the loan resets, the pic-a-pay option is no longer valid and now it’s a $3,000 per month payment on a house now worth $300,000. I don’t care where our friend washes floors now, he’s out on his ass pretty quick.

But his loan lives on because it was sold off in pieces long ago. Complicated math algorithms, which I admit I can sense more than explain, take pieces of the $500,000 loan, its expected interest, and the time at which they all accrue over a 30 year period, and bundle them together with other pieces of other home loans, commercial loans, credit card debt, and other instruments of financial encumbrance, into a package which then gets insured in similar pieces, and then bet on to either stay solvent or not. Soon it all becomes a giant greasy clot of financial promises which can never be kept. But as long as not too many of the internal debts go bad, the dishes can continue to be spun in the air. Well folks, too many went bad. The banks holding them can’t pay. We can throw money at them forever and they will never be worth anything. Unless we get to Zimbabwean levels of inflation of course, which is possible, and that might not still cover it.

I’m afraid the stimulus bill isn’t what you think it is either. It’s not intended to save the economy. $800,000,000,000 when you’re staring down the barrel of a $1.14 quadrillion ($1,140,000,000,000,000) is pissing in the ocean. You might feel warm where you stand, but it doesn’t last long or go far from its source. The bill is intended to keep people busy doing the important work of making sure this country can be self-sufficient when we get to the other end of this thing. Self-sufficiency is not the American way anymore. Premature globalization has made Ross Perot a genius as so many major industries no longer manufacture any products in this country anymore. And we don’t power the things we still do here with our own energy supplies. No one in power can say it because of the effect it would have on markets, though it gets slyly referred to all the time, but the world’s finances are already shot and we’re just now trying to get a jump on the cleanup before the full extent of the filth rolls over on us. If I’m right and that’s what the stimulus is really for, then it probably isn’t enough. More of these will come down the line as reality finally sets in. Whether the republicurs get on the bus as well will largely determine their survival as a viable party.

The stimulus is to pay paychecks for folks who will build whatever it is that’s about to get built. I’m wondering when the banks will finally be shuttered, our accounts guaranteed by that New Deal stroke of genius, the FDIC, and someone can tell us no one has a mortgage to pay anymore. THAT would free up some spending money. Especially if we don’t have to pay the credit cards off anymore either. If that happens, hell I’m selling off the gold necklace I have stashed away safely on ebay to someone in the Chinese Politburo and using the cash to open a community bank on my front porch.