The administration is expanding a Federal bailout program to allow those deeper “underwater” to refinance with Freddie Mac and Fannie Mae. While the program is supposed to help out homeowners facing foreclosures, critics have called it an expansion of the disastrous subprime loan program. The Wall Street Journal describes the refinancing scheme:
Strapped borrowers with mortgages worth up to 125% of their home’s value will now be eligible to refinance under the program, as long as they are not behind on their payments. Currently, the program caps eligibility at a loan-to-value ratio of 105%.
In addition, mortgage finance companies Fannie Mae and Freddie Mac said they would offer incentives to lenders to encourage certain underwater borrowers with 30-year fixed-rate mortgages to refinance into shorter-term loans.
Department of Housing and Urban Development Secretary Shaun Donovan announced the new higher loan-to-value limit while touring a foreclosure-ridden neighborhood of Las Vegas, with Senate Majority Leader Harry Reid (D., Nev.) and Rep. Dina Titus (D., Nev.).
The move is aimed at helping homeowners who have been unable to refinance into lower-rate mortgages because their homes have plummeted in value. But the effort could be hampered by rising mortgage rates.
However the Business Insider criticized the move, saying that “before your LTV ratio could only be 105%, because, well, as we’ve learned, fat loans relative to value are more likely to go bad. As many have described it, Obama’s solution to the housing crisis is: more subprime loans. Like the original subprime loans, they’re really only going to work out if home prices grow rapidly over the next few years, otherwise you’re looking at the perpetuation of people living underwater in their homes.”
The program’s expansion had already been rumored. Housing Wire in an article written a week ago, said that rising rates created a situation where those who needed it most were not qualifying for assistance. “Critics for months have said the LTV limit will not reach the borrowers who need it most — those who purchased more than three years ago, with little money down and when house prices hit a peak. And with mortgage rates edging back up in recent weeks from historic lows, refinancing in general for those who do qualify is growing difficult.” However, another Housing Wire article said that the real reason refinancing rates were down was that the refinance companies themselves had downsized so much that capacity problems were holding things back more than the number of qualified applicants.
the problem might lie not with the fundamentals of the refi program, but with the originators involved in facilitating refinancings, according to analysts: “A combination of reduction in the mortgage industry workforce coupled with funding shortfalls for non-bank lenders has hampered origination capacity versus the capacity in 2003.”
For instance, borrowers considered to be in the highest tier for refinance — FICO greater than 740 and current LTV less than 80% — are prepaying at about 45% CPR compared with 60% in the ‘03 refinance wave.
The capacity issues hampering originators’ efforts to push refinancings through the pipeline are also affecting modification efforts, the report concluded.
“There was no significant pick up in modification activity across various servicers this month,” analysts noted. “We believe that servicers are facing logistical hurdles in transitioning to the new MHA program. Furthermore, it will take some time for the loan modifications under the MHA program to appear in the remittance data because a modification under the MHA becomes permanent only after 3-month trial period.”
The news comes at a time when Freddie Mac and Fannie Mae were receiving large infusions of government money to stay afloat. The South Florida Business Journal says,
Mortgage giant Freddie Mac received $6.1 billion from the Treasury Department Tuesday to cover its first quarter shortfall, the company reported in a securities filing Wednesday. … Freddie Mac, and its government-sponsored sibling Fannie Mae, were put under federal conservatorship in September.
Freddie has thus far drawn on $50.7 billion from the Treasury. Fannie Mae has drawn $34.2 billion.
Both agencies had been previously described as “too big to fail”.
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42 Comments
1. no mo uro:Outcome equality, or bust.
The harder you push it, the worse it will fail.
Jul 1, 2009 - 2:28 pm 2. TonyB:typo – “…if home prices…”, not “…of…”
Jul 1, 2009 - 2:56 pm 3. Mongoose:All of this money, and one of the primary causes of the debacle is still in place and thriving.
And not a peep out of the American people.
Insanity. The media should be put in jail.
Yeehaaww!! let the good times roll.
We are going to end up busting the dollar over this nonsense (and stuff like it).
Straight out of Chavez’s playbook.
Jul 1, 2009 - 3:01 pm 4. wretchard:Thanks for pointing out the typo.
Jul 1, 2009 - 3:01 pm 5. Neil:The worst part is that it will worsen the unemployment situation. By propping up people who are underwater on their homes, it tempts people to remain “trapped” in their current location, rather than taking a foreclosure or loan modification and moving to where the jobs are.
Jul 1, 2009 - 3:17 pm 6. Cetera:Those that take this deal are really going to hurt themselves in the long run. They most likely won’t be able to pay the mortgage off, and will open themselves to additional legal liability by accepting one of these new mortgages:
From http://market-ticker.denninger.net/archives/1138-Executive-Branch-Corruption.html:
“If you are underwater on your house and take a deal like this, you are as dumb as a box of rocks and have just consented to being bent over the table and violated repeatedly. That our government would propose “allowing” such a thing is fomenting financial rape upon The American Public. Period.
I will stake a case of scotch on the bet that there will be no “clear, plain” disclaimer on any such refinance “offer” containing the following language in 14-point block type:
CAUTION TO THE CONSUMER:
Refinancing of your mortgage under this program will turn your mortgage into a “recourse” loan in all 50 states. If your current mortgage is a purchase money first mortgage – that is, it was originally issued to purchase a property for you to live in as your principal residence, you may be immune under the law from collection of any amount exceeding the foreclosure recovery if you fail to pay. If you execute this refinance, you will permanently lose any such protection and may be subject to a suit for collection or even garnishment of your wages should you default. You are strongly advised to consult with both LEGAL and ACCOUNTING experts of your own choosing before signing this document to determine what, if any, rights you are WAIVING VOLUNTARILY by executing this document.
If you currently owe more on your loan than your home is worth IT MAY BE TO YOUR ULTIMATE BENEFIT TO INTENTIONALLY DEFAULT INSTEAD OF REFINANCE AND GIVE UP YOUR HOME. This is particularly true if the offered refinance extends the term of your loan or includes closing costs and fees into the new principal balance. ONLY QUALIFIED LEGAL AND ACCOUNTING ADVISERS CAN ANALYZE YOUR PERSONAL CREDIT, INCOME AND HOUSING SITUATION AND DETERMINE IF THIS REFINANCE IS IN YOUR BEST INTEREST AND YOU ARE STRONGLY ADVISED TO SEEK SUCH REPRESENTATION BEFORE EXECUTING THIS DOCUMENT. NO LOAN OFFICER OR GOVERNMENT EMPLOYEE CAN DO SO, AND ANY SUCH REPRESENTATION TO THE CONTRARY IS BOTH FALSE AND CRIMINAL FRAUD.”
Jul 1, 2009 - 3:26 pm 7. peterike:Money, money, money. It’s the economy stupid. Unless Barack is in charge. Then every hit to the employment rate is reported as “Encouraging news! Drop less than expected!”
As we approach 10% unemployment, I wonder how the media would have played this under GWB. No doubt every decimal point of uptick — 9.4, 9.5, 9.6… — would have made front page news as a “grim milestone” toward previously unthinkable, Euro-style unemployment. And every night we’d hear grim stories of laid off folks unable to make ends meet. Katie Couric would shed so many crododile tears that she could make them into a new handbag and shoes.
Yet it’s all a big yawn to the media. The only unemployment we hear about is laid off journalists (can’t go fast enough for me — Gannett just announced 1,400 more heads rolling). Meanwhile, we’re about to be bombarded with the latest Republican tiff over the Vanity Fair article on Sarah Palin. Talk about the gift that keeps on giving for Democrats and the media.
Who can keep up with O’s shock-and-awe dismantling of the country? I mean, my god, we’re just about at 10 PERCENT unemployment! This is catastrophic, yet it barely surfaces on the zeitgeist radar. What, us worry? The green jobs will save us! Government health care will save us!
What happens on the day that every single job is a government job? I guess we just all pass the same dollar bill around to one another and say we’ve been paid.
Jul 1, 2009 - 3:29 pm 8. Doug:Just goes to show:
Jul 1, 2009 - 3:58 pm 9. Doug:Unregulated free markets are a recipe for disaster.
U.S. Plan to Stem Foreclosures Is Mired in Paper Avalanche
Ms. Montenegro, an intern at a local company that seeks loan modifications, dials Washington Mutual to check on the status of an application for a homeowner whose income has plummeted. She endures a Muzak-scored purgatory while on hold. Syrupy-voiced customer service representatives chide her for landing in the wrong department. She learns that the documents her company sent in have simply vanished — for the third time since November.
“I don’t know what happened,” says a customer service officer who identifies himself as Chris. “I don’t know if there was a glitch in the system, whether it was transferred from one call center to the other.”
Think of the documents as being part of a pile massing inside the bank, Chris suggests. “This pile is not going to be moved forward at any point in time.”
Ms. Montenegro and her colleagues suffer these sorts of excruciating exchanges all day long. It is a potent indication of the difficulties afflicting the $75 billion taxpayer-financed program created by the Obama administration in an effort to avoid foreclosure for as many as four million distressed homeowners.
Jul 1, 2009 - 4:02 pm 10. Doug:Mr. Wasser has already negotiated a solution: GMAC will accept only $270,000 in repayment, allowing the couple to get a fixed rate mortgage from another bank.
But that suddenly is in disarray. The Piercys have been making their payments, but GMAC has been putting their checks aside, holding the money as “loss mitigation fees,” until their application is completed. It has notified credit bureaus that their loan is more than 90 days delinquent, which has lowered their credit score, disqualifying them for the next mortgage.
Mr. Wasser reaches GMAC’s loss mitigation department. He asks for the delinquency to be removed from their status. But that must be handled by a different department: customer service. He is transferred there, where Jessica picks up the call.
“We are not going to amend,” she says, after a strained back and forth. If Mr. Wasser wants it otherwise, he will have to talk to loss mitigation.
“I just talked to them five minutes ago,” he tells Jessica.
“No, you didn’t.”
“Are you accusing me of lying?”
Mr. Wasser asks for Jessica’s employee identification number, but the line goes dead. Jessica has apparently hung up.
Jul 1, 2009 - 4:06 pm 11. Walt:My home is my castle, we heard the man say
Jul 1, 2009 - 4:29 pm 12. WSL:So what if the mortgage is due
Obama’s my man, he say not have to pay
My mortgage is paid off by you
With Fannie and Freddie behind me I’m set
To live here as long as I want
With Dems now in power I’ll take what I get
And if the bank takes it I’ll punt
Is this a great country, I’ll say that it is
When people like me without jobs
Can buy a new house with some dough that aint his
And live there like middle class slobs
And anyone questioning what’s going on
Is seen as a GOP tool
Although to be honest they’re wise to the con
It’s just that they want to be cool
They think that it’s awful that people like me
Who cannot afford to pay rent
Are denied owning houses as good as Spike Lee
Even though I don’t own a red cent
@7 pererike: “What happens on the day that every single job is a government job? I guess we just all pass the same dollar bill around to one another and say we’ve been paid.”
Actually, there’s a story making the rounds that illustrates just this theme.
It is May. In a small town on the South Coast of France, holiday season is in full swing, but it is raining so there is not too much business happening. Everyone is heavily in debt.
Luckily, a rich Russian tourist arrives in the foyer of the small local hotel. He asks for a room and puts a Euro100 note on the reception counter, takes a key and goes to inspect the room located up the stairs on the third floor.
The hotel owner takes the banknote and hurriedly rushes to his meat supplier to whom he owes E100.
The butcher takes the money and races to his supplier to pay his debt.
The wholesaler rushes to the farmer to pay E100 for pigs he purchased some time ago.
The farmer triumphantly gives the E100 note to a local prostitute who gave him her services on credit.
The prostitute goes quickly to the hotel, as she owed the hotel for her hourly room use to entertain clients.
At that moment, the rich Russian comes down to reception and informs the hotel owner that the proposed room is unsatisfactory, takes his E100 back and departs.
There was no profit or income. But everyone no longer has any debt and the small town people look optimistically towards their future.
COULD THIS BE THE SOLUTION to the Global Financial Crisis? Or, is there a catch here?
Jul 1, 2009 - 4:59 pm 13. Gordon:You owe $125 on a $100 house? And the solution is to borrow that on a new loan? Reminds me of the punchline to an old Lone (loan?) Ranger/Tonto joke:
LR–Wait!! There’s a dust cloud! Maybe help’s coming! Gimme the binoculars.
Jul 1, 2009 - 5:13 pm 14. buddy larsen:T: Well? Is it help? Is it the cavalry?
LR: Nope–more Indians.
No catch if everyone dies right then and needs no evening meal. Then, still no catch if their heirs inherit a debt-free system. However, if say, the hotel owner has debt to service…woops!
Jul 1, 2009 - 5:16 pm 15. whiskey:Yes, exactly out of Chavez, Castro, Morales, and Mugabe’s playbook
This is also why Obama backs Zelaya. He wants also a phony plebiscite that he can “win” to make him President for Life.
Most of his patronage network, particularly Women, will be happy to go along. They are the important ones, the Black/Hispanic/Gay groupings are still too small.
Jul 1, 2009 - 5:17 pm 16. buddy larsen:Lone Ranger: “What do we do NOW, Tonto?”
Tonto: “What do you mean ‘we’, Paleface?”
********
Jul 1, 2009 - 5:18 pm 17. E. Nigma:Check out Instapundit, the photo underneath the pic of Deroy Murdock –the Betsy Ross flag –
The pattern here, writ large (with homage to Doug and Cetera for pointing out the micro, personal problem) is that this is more capital destruction.
1. refinancing Chrysler and GM, with expenditure of TARP money (Bush and Obama)
2. the Stimulus Bill (or the Nancy and Barack shell game show)
3. cap and trade; creating a false futures market that the big trading houses will doubtlessly profit from, but which will rob wealth from the productive and working people
4. government mandated health care “reform”
This, along with the huge amount of borrowing and the depreciation of the dollar, is all part of a piece; destruction of capital. Allowing people to refinance mortgages that are already “under water” is throwing good money after bad. The incredible mis-allocation of money (capital) by this government is staggering. You would almost think it was on purpose, wouldn’t you? No one could be this stupid on purpose, could they?
Could they?
Jul 1, 2009 - 5:42 pm 18. RWE:“…they’re really only going to work out if home prices grow rapidly over the next few years, otherwise you’re looking at the perpetuation of people living underwater in their homes.”
Okay, and why is this a problem? If you qualified for the loan amount for the house and did not lose your job, then whathell do you care if you are underwater? After, all your property taxes should go down, making it cheaper to own the house. If you did lose your job you can’t pay anyway.
Well, here is an answer…. because that situation keeps you from borrowing even more on the house and buying a big flat screen digital TV for every room and a new car every couple of years and getting a boat and a motorcycle and adding a swimming pool and…
So the people whose bad habits caused all of this would have to lose them bad habits. And we can’t have that. They voted for Prince
Jul 1, 2009 - 5:48 pm 19. Dave the Kapampangan:Obamachaevlli.
Nanny Obananarama says: “The solution to everything is to borrow more money!”
Citizen: “But what happens when it’s time to pay it back?”
Nanny Obananarama: “Simple! Increase taxes on the middle class, as long as you don’t call it that. Call it a beer and cigarette and gasoline surcharge (just like the telephone company does), or an alternative energy support surcharge, or say it’s for the children. They’ll bail us out as long as they don’t know their bailing us out.”
Jul 1, 2009 - 5:51 pm 20. Leo Linbeck III:too big to fail
This must be another typo. The correct expression is two pigs to veil.
L3
Jul 1, 2009 - 7:10 pm 21. Doug:“No one could be this stupid on purpose, could they?
Could they?”
—
No.
But what you see as a problem,
they see as an opportunity.
The smaller the economy relative to Govt, the easier it is to maintain and increase control.
Jul 1, 2009 - 7:21 pm 22. buddy larsen:“We gotta level that playing field!”
>>”Uh, boss, the playing field is full of displaced persons, we can’t tell whether it’s level yet.”
“Well, clear them away, you fool!”
>>”yessir yessir yessir!!!”
Jul 1, 2009 - 8:53 pm 23. MarkJ:Saul Alinsky’s Rule for Radicals #11:
“If you push a negative hard and deep enough, it will break through into its counterside… every positive has its negative.”
This seems to be what Obama is attempting to do: keep digging a hole until he breaks through to the other, presumably more glorious, side.
Unfortunately for Obama, he seems to utterly discount the posssibility that there may not actually be a “counterside.” If this is the case, then he’s all but begging for a future “damnatio memoriae” of the first magnitude.
Jul 1, 2009 - 9:18 pm 24. Doug:More unfortunately, we, and moreso our offspring, will be left with the result.
Jul 1, 2009 - 9:21 pm 25. buddy larsen:markj/23; –in the event of ‘no counterside’, any guesses as to how the left will write the history?
Hint: “Garofalo” (imho).
Jul 1, 2009 - 9:59 pm 26. ledger:I can imagine Obama declaring:
“FICO are racists. I have signed a Presidential order giving all African Ameircans FICO scores of 780.”
{Sniff}
Jul 2, 2009 - 2:19 am 27. Clioman:“Too big to fail” is politician-speak for “Big enough to hire a lobbyist.”
Jul 2, 2009 - 5:50 am 28. buckets:Doug @ 10,
It’s worse than you know. With the advent of securitization of mortgages, a mortgage promissory note is passed around and abused like a whiskey bottle at a frat party. Owners of the note now have even started selling the “servicing” rights to mortgage loans; a bank may own [parts of] your note, but another outfit may own the right to collect payments on the note.
This has lead to a tremendous disconnect: the servicing company that you send your mortgage payment to does not give a damn about you. The servicers only care about the trusts and securitization pools that own the note, because that’s who they have to keep happy.
What’s even worse is that the servicers make almost no profit on regular, on time payments from homeowners. Solution: screw the homeowner by “losing” checks, “accidentally” applying them late, charging unexplained late fees, placing unneeded insurance on the property despite the homeowner’s objection, etc. Also, if they can force the homeowner into foreclosure, it’s bonus fees and costs for the servicer!
Nothing will change as long the servicers have no incentive to treat the homeowner fairly and legally. Occasionally the servicers get tagged with class action lawsuits or spanked by good attorneys during a foreclosure case, but for the most part they get away with it.
If the Dems really cared the smallest bit about homeowners, they would address this enormous problem. Everyone who knows anything about the sleazy mortgage industry knows this, but the Dems have been bought off already. So the Dems will mouth platitudes, while taking money from Big Mortgage and not doing a thing to solve the problem.
Jul 2, 2009 - 6:40 am 29. buddy larsen:buckets, if they really gave a damn about anything but the Party, they’d've not added several trillion of debt but would have stimulated (now and not ‘maybe later’) by some tax holidays which would’ve dropped new cash into faltering ‘demand’ –on the very next round of paychecks. Just like if they were really worried about carbon and electricity we’d have a hundred new nuclear power plants abuilding as we speak.
As far as Big Mortgage, one wonders if it comprehends in any way the pressure vessel it’s sitting atop with this (thank our lucky stars for this reprieve we’re frittering) current 5.3 long mortgage rate.
Jul 2, 2009 - 7:10 am 30. Cetera:WSL/12:
The hotel gets screwed twice. The entire debt chain can be seen to have originated with their decision to let the prostitute rent the room on credit/debt.
Is the chain any different if the hotel just forgives the prostitute’s debt, who in turn forgives the farmer’s, who forgives the wholesaler, who forgives the butcher, who forgives the supplier to the hotel, who then forgives the hotel’s debt?
I would argue that there is no difference between the two. The problem now becomes, however, that the hotel still can’t book a client for profit. If they can’t get someone to pay for their service, then they can’t purchase any additional meat, which then still ripples right back through the economy to come back to the hooker. Eventually, everyone realizes that no one is trustworthy, and the farmer survives because he actually produces something and can live off of that. Everyone else is destitute, and unless they can trade something of value to the farmer, they die.
Or perhaps they all become farmers, until they can rebuild their economy. The farmer will trade for the hooker’s services, and she’ll eventually want nice things, so the farmer will trade for someone who can make clothes or jewelry, and it’ll all slowly build back up.
This leads directly into the reason why debt is inherently deflationary. The government is trying to do exactly what the story does, inserting money, letting everyone pay everything off, and then pulling the money back out. Its all bookkeeping and balance sheets to them. The killer, the reality that will bite them in the ass, is interest, and lack of faith in money.
For a while, everything is just peachy. Debt spends just like cash. But you have to pay interest on that debt. Servicing debt takes money out of your cash flow that does absolutely nothing. It is just lost forever from the person having to pay the interest. Because your cash flow has now decreased due to interest payments (assuming all other factors remain the same, like you don’t lose your job or take a paycut) you actually have less money to spend each month. You have less dollars to allocate, so each dollar has to go farther for you. You’ve decreased your own dollar supply voluntarily, and essentially raised the value of each of those remaining dollars, as each one is now more important than ever to make sure all the necessary bills get paid. Until you pay off the debt and can stop paying interest, you’ve deflated your personal money supply.
Assuming you never take on more debt, and you rebalance your life to live within your new means, once the debt is paid off, you’ll feel a personal inflationary pressure, as suddenly you have more money than you are accustomed to, and you can spend more on things that are of less value.
If you don’t rebalance your life, and instead go further into debt, you have even more interest to pay to service your debt. Your debt load is higher, and the entities loaning you money realize that you now are an increased credit risk, even if the odds are still very much in your favor that you’ll pay everything off. Increased risk means increased interest rates, as they try to make their money back sooner incase something happens. Increased interest rates means more of the cashflow disappears into debt service, producing nothing. Further deflationary pressure affects your pocketbook. A rebalance here means things are tough, but livable. However, a continued failure to balance cashflow inevitably results in bankruptcy, a complete lack of dollars, and if you are a nation, a depression.
The only time debt is ever a good thing is if the value gained from whatever was financed is worth more than the interest paid servicing the debt.
If you have to take a loan to buy a car, and the car allows you to get a job making more money than you could by walking, and that additional income is greater than the cost of servicing that debt in interest and total payoff, then the debt is a net positive. If the debt doesn’t purchase something that will outweigh the cost of the debt in the long run, then it is deflationary, and very, very bad.
That’s why the stimulus plan isn’t working, that’s why TARP isn’t working, or anything else that will come out of Obama or Congress won’t work. They are just trying to spend, so everyone has some money, but they aren’t doing anything productive with that money. They aren’t fixing anything. They aren’t building farms, or energy production, or infrastructure. They are just delaying the inevitable reckoning of the final balance sheets. Bad things are headed our way, and they are only being made worse by the goings-on in D.C.
I didn’t even get to the belief in the value of money, but this post is already too long, and I’ve got a meeting. Got to run…
Jul 2, 2009 - 7:53 am 31. Mongoose:E. Nigma: It is really about the destruction of the (mostly White)Middle Classes.
Lenin never had it so good.
They are well on their way to succeeding. We must remember, BTW, that Obama is just a figure head in all of this. Getting rid of him will not solve the problem.
The hard Left has finally come out in the open for their fatal pounce on Capitalism.
Jul 2, 2009 - 8:47 am 32. Jrod:#28 Buckets said:
“What’s even worse is that the servicers make almost no profit on regular, on time payments from homeowners. Solution: screw the homeowner by “losing” checks, “accidentally” applying them late, charging unexplained late fees, placing unneeded insurance on the property despite the homeowner’s objection, etc. Also, if they can force the homeowner into foreclosure, it’s bonus fees and costs for the servicer!”
I refinanced a property recently and was inexplicably assigned flood insurance where none existed (or was required) before. All of the property taxes and homeowner’s insurance payments are made automatically from an escrow account per my request. Upon review of that statement I was puzzled by the appearance of a flood insurance policy in my name when I had not been consulted let alone signed anything. I called the loan originator to inquire and they admitted it was a “mistake” which of course could be the truth–or not. I am glad I am one of those people who reads his statements as well as the fine print.
Just makes me wonder how many other people are being “mistakenly” billed for unnecessary insurance or the equivalent where their only realistic chance of catching the mistake is by looking at a statement that tends to only come annually.
Jul 2, 2009 - 9:31 am 33. buddy larsen:cetera/30; Debt spends just like cash –if only the term “money” wasn’t so broad, if there existed two terms, one for money and another for “credit money”, we’d better understand the particular chains we as individuals link ourselves into. “Interest” is time, it’s rent onthe capital, rent buys use-time of property;
mongoose/31; We must remember, BTW, that Obama is just a figure head in all of this –just for fun, keep an eye out for all the symbols and logos that use a sunburst graphic. The disc with a rim of flames. yeah, i know –it’s nertz. but….
Jul 2, 2009 - 9:39 am 34. Whitehall:Certera,
Excellent analysis!
I can add that the carbon cap ‘n trade scheme doesn’t make more energy either. As you note, it will be like borrowing to buy a flat screen TV or other non-productive asset.
The wind mills and solar panels they want to encourage are ultimately a waste of resources and have marginal, at best, energy return on energy invested (EROEI). That’s why they are touted as “job creators” but jobs are a surrogute for energy investment. Hence the FEWEST jobs an energy source creates is the best metric. By that measure, nuclear power is our best option and we’ve got a dozen that are shovel-ready NOW.
As to mortgages, why not make them 100 year terms? That’s just about interest only. That would provide some relief in cash flow for the owners.
Jul 2, 2009 - 10:14 am 35. WSL:@30 cetera: RE: my parable @12:
Jul 2, 2009 - 10:23 am 36. Roderick Reilly:I appreciate your carefully crafted critique to my post. One of your concluding sentences states, “They are just trying to spend, so everyone has some money, but they aren’t doing anything productive with that money.” which more or less was my point. There is too much emphasis on keeping money moving without regard for whether or not it produces anything. And that, as you pointed out, is why the Stimulus Plan or any of its illegitimate offspring cannot work. Even more troubling is that so few in DC understand this.
“”"”"”This is also why Obama backs Zelaya. He wants also a phony plebiscite that he can “win” to make him President for Life.”"”"”"”
Actually, Whiskey, I suspect Obama’s plan is much simpler than that: After he serves two terms (assuming that he gets that far), his wife, Michelle, will run for President. The Obama/Acorn machine, assisted by the likes of the New Black Panther Party and the Nation of Islam, will clear the primary path for Michelle. This way, the Obamas can rule for 16 years between them. Keith Ellison and Jesse Jackson Jr. will have been groomed as replacements beyond the Obama terms, and will likely have been VPs under one or the other of the Obamas.
Jul 2, 2009 - 10:31 am 37. Whitehall:WSL – #35
There was the surprising drop in the velocity of money last year. The Fed and TARP tried to counterbalance that drop with a flood of money.
The story about the hotel shows the velocity issue well. With no ready cash, there is no velocity and no economic activity. Friedman’s analysis of the Great Depression pointed to the Fed REDUCING the supply of money in response to the stock market crash. With less supply, the velocity slows as people hoard their cash. One repeatedly hears stories about there being NO MONEY.
This time around, the Fed responded by pushing money into the system.
So why did the velocity drop so suddenly? Supposedly, the housing defaults took all the equity out of certain commercial paper marketers and they had to stop their trading activities. Someone else may be able to elaborate.
Jul 2, 2009 - 11:16 am 38. Cetera:37/Whitehall:
The velocity dropped, because the trust level dropped. In the end, the entire banking system is based upon math, and the math is never wrong, and never lies. People occasionally have to relearn that, and sometimes that lesson is painful.
In the story above, the hotel only exists due to the demand from external travelers/businessmen. The prostitute is unable to provide enough business to support the hotel, which is why the hotel needed the Russian gentleman to pay the bill. They basically stole the money from him, and by luck had the money return to them fast enough that they were able to give it back when he asked for it. Theoretically they are out of their interest free debt, but they are no better off than they were before. They have no customers, no cash flow, and no profit. Should they need to purchase meat from their vendor again, they will have to do so purely on credit once again.
When the vendor realizes that fact, he’s going to start hording anything of value. That can be cash, it can be guns and ammo, gold, whatever. He no longer believes that his customary cashflow from the hotel is safe and reliable, and he may need to survive on what he has on hand for an undetermined period of time. The only way to prepare for that is to protect what you have right now, and stop giving anything away.
This trickles down to the butcher, who’s cash flow depends on the vendor selling the meat, which eventually trickles down to the farmer. There’s no cashflow, the velocity of money is zero, because while they may have goods and services of value, they no longer trust that the people they do business with is good for it long term. It doesn’t matter if they have the money now, the threat that they may not in the future is very real, and there is no way that the farmer is going to pass on his produce to someone who can pay now if they can’t pay later and the farmer then would not have those goods that he could survive on if he hadn’t given them away.
That is the picture the banks are looking at. Why should they loan money out to anyone if the likelihood is that even those with the best credit and the least risk would still likely default, though no fault of their own, because everyone else around them does. When the whole structure collapses, everyone falls and everyone gets buried, regardless of who screwed up.
The housing bubble was so bad that it may prove to be impossible to recover from. In some areas, this is definitely true. Housing prices will never recover in places. Ever. As long as those living in them have sufficient cash flow to continue to pay off the debt, continue living in them, and not worry about equity, it doesn’t matter. Unfortunately, nearly everyone doesn’t fit that category. Cash flow for the public at large is decreasing. Those that buy U.S. debt look at us like the hotel management, and wonder why they should bother. At some point in the future, they may decide that they are much better off holding on to what they have, as they don’t think we’ll ever pay off what we owe. As that happens, the interest rates we need to pay on debt that need to be serviced (the average duration of Treasuries right now are less than 4 years, and those need to be payed off or rolled over) and new debt issued will be higher. More of the national budget will go to just paying the interest, and that means that even more has to be borrowed just to keep the current level of spending up, not to mention the new health care, etc.
Taxes go up (which drives spending down, as it cuts into the populace’s cash flow) to make up the difference, which is what Cap and Trade is for. The government has to have more money. It isn’t an option. They have to. California has to have more money.
An increase in taxes hurts the economy, which means that revenue drops from what they expected out of the new taxes, which means either more debt, or more taxes. It becomes self-feeding cycle, moving faster and faster. The only solution is to cut spending as much as possible, and try to pay some of that debt off. This is completely foreign to all current politicians, on both sides of the isle. Without extreme budget cuts, the train wreck is inevitable. The only undetermined factor is the final timing.
What caused all of this? Bubbles. Exactly where it started is hard to point out. Different people have different opinions. By the time we got to the tech stock bubble, and the tech stock collapse, it was apparent things were very bad.
Rather than allow for defaults, a reset, and things to fix themselves, the housing bubble was purposefully inflated.
http://market-ticker.denninger.net/archives/1124-None-Of-This-Was-A-Mistake.html
http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html
” The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
Judging by Mr. Greenspan’s remarkably cheerful recent testimony, he still thinks he can pull that off. But the Fed chairman’s crystal ball has been cloudy lately; remember how he urged Congress to cut taxes to head off the risk of excessive budget surpluses? And a sober look at recent data is not encouraging.
…
Bear in mind also that government officials have a stake in accentuating the positive. The administration needs a recovery because, with deficits exploding, the only way it can justify that tax cut is by pretending that it was just what the economy needed. Mr. Greenspan needs one to avoid awkward questions about his own role in creating the stock market bubble.”
The housing bubble was created to fix the economy, rather than letting it fail and reset. Housing prices became extremely inflated. People took out new, refinanced, loans and home equity lines of credit, because their existing houses were valued at so much more than what they paid for.
Every refinance that took out more money than what the owners originally paid for, in essense, basically allowed the owners to sell themselves the house again at a much higher price.
This can work to an advantage, especially if you do something useful with that money. But most people bought plasma screen TVs, a new Hummer, maybe a boat, or whatever. They bought stuff, most of it imported. 70% of the U.S. economy is consumption. It was driven by the bubbles.
Our affluence was an illusion we sold ourselves, as we sold ourselves what we already “owned” at exorbitant prices. At some point, we have to service that debt or pay it off. When the initial money runs out (it has), the music stops. There aren’t even close to enough chairs for people to sit in. People start seeing the bubble for what it was, and realize they need to hold on to what they can. The trust in the system is gone.
The government, rather than admit defeat, apologize for their screwups, take their lumps, and watch us all suffer for a few years as we start to work our way out of this mess, are instead trying to blow another bubble to save themselves. They are blowing the government bubble. There are no more bubbles to be blown after this. This is the last bubble. When this bubble collapses (if it ever gets fully inflated) it will be devastating. It’ll make the Great Depression look like a tiny dip.
This can be prevented. We need to stop spending. Government needs to cut their budgets in half, and then half again. We need cheap, cheap, cheap energy. Cheap energy would lower a lot of costs, allowing us to service the debt easier, and get rid of it. Nuclear is the only way to go right now. Green energy, wind energy, solar energy, is currently too expensive and only exacerbates the problem. We’d be better off with just oil from our own supplies (ANWR, the Gulf, and anywhere we can get it).
Cheap energy leads to cheap food and lower cost of living, which allows us to service the debt. We have to actually make stuff again, not just consume. We have to all live within our means. Its gonna suck, its gonna be painful. But we’ll all survive. If we continue on the road we are on, we may not all survive. As it is, we’re looking at a shrink in the GDP of ~20%. If we try this bubble, it’ll be worse.
Jul 2, 2009 - 12:54 pm 39. Cetera:Sorry about the book there. The quote in the middle also doesn’t stand out. Is there a quick listing of codes to use here for bold, italics, indents, hyperlinks, etc?
Jul 2, 2009 - 1:22 pm 40. Thalpy:How much longer are we going to allow President Obama to repair the unbroken? This is flimflam at its best. People even now speak about how the Great One will be remembered–you don’t have to remember him if he hasn’t gone away.
Jul 3, 2009 - 8:31 am 41. Whitehall:When I was a young man in college, studying nuclear engineering, the American nuclear industry was unrivaled. Our designs were the most efficient and most powerful and the safest. They were sold, copied or imitated around the globe. The first wave of construction employed many thousands with good salary and wages – the just rewards for honest, productive labor.
Today, we still have a limited capability but components are fabricated across the globe. Some critical ones have only a single foreign supplier. There is no remaining US-owned nuclear reactor vendor.
The Left has done its best to destroy the US nuclear industry and it has almost completed its work. The US is weaker and poorer because of the political attacks from the radical Left.
Jul 3, 2009 - 8:51 am 42. buddy larsen:cetera/39; naw, it wasn’t a ‘book’ –it was interesting and well writ.
to start with the easiest, italics, just put a right alligator in front followed by an i and a left alligator and in the back do it again but add a slash between the first alligator and the i
(i’d make it simpler but it would ‘take’ and the bones would disappear)
Jul 3, 2009 - 1:04 pmSorry, comments for this entry are closed at this time.