Mish's Global Economic Trend Analysis

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• 3 Fannie & Freddie Restructuring Options, None of them Right; Cheering the Demise of 30-Year Mortgages
• Atlas Shrugged movie part I coming April 15
• Wimpy Republican Leadership Yields to Tea Party; Term Limits and Balanced Budget Amendment Needed to Eliminate "Culture of Spending"
• Mubarak Steps Down, Military Takes Over; Live Feed Al Jazeera; Celebrations in Egypt
• Calculated Risk vs. Ron Paul on Soviet Style Central Planning

3 Fannie & Freddie Restructuring Options, None of them Right; Cheering the Demise of 30-Year Mortgages Posted: 11 Feb 2011 05:41 PM PST Obama want to reform Fannie and Freddie. There are a few options on the table, but Little Red Riding Hood does not think the porridge in any of the bowls is quite right. Please consider White House wants less government in mortgage system The Obama administration wants to shrink the government's role in the mortgage system -- a proposal that would remake decades of federal policy aimed at getting Americans to buy homes and would probably make home loans more expensive across the board. The Treasury Department rolled out a plan Friday to slowly dissolve Fannie Mae and Freddie Mac, the government-sponsored programs that bought up mortgages to encourage more lending and required bailouts during the 2008 financial crisis. The first option proposed by the administration would give the government no role beyond helping poorer and middle-class borrowers through agencies like the Federal Housing Administration, which provides insurance on mortgage loans. The second and third options would give the government a role as an insurer of mortgages, and each would prompt mortgage companies to pass along fees to borrowers. Under one, the government would step in to guarantee private mortgages during a severe economic downturn, such as another housing slump, but would provide limited support during normal times. The third option would be more complex. The government would insure a targeted range of mortgage investments that already are guaranteed by private insurers -- serving as a "reinsurance" broker to those financing companies. In the event the private insurers couldn't pay the owners of the mortgage investments, the government insurance would pay. The third option would leave the government with the largest role and probably have the smallest impact on mortgage rates. While lenders would have to pay fees, which would ordinarily drive rates higher, the government guarantees would also make mortgages a safer investment. That would attract more private money and hold rates down. The correct option is to get rid of Fannie, Freddie, the FHA and HUD. The government should not provide any backstop or any guarantees at any time. Unfortunately that option was not on the table. Some are concerned that private lending may dry up. If it did, so what? The government has no business promoting housing or taking on risks best suited for private markets. Here's the deal: If lenders knew there was no government guarantees, they would not make as many stupid loans. If they don't make stupid loans, there is far less risk that lending freezes up in the first place. Moreover, if somehow the lenders do go broke as a consequence of making poor loans, bondholders and shareholders will pay the price, not taxpayers. Pray tell, what is wrong with that? Cheering the Demise of 30-Year Mortgages In a free market, we may very well not see many 30-year loans issued. Why would any lending institute want to lend for 30 years at an interest rate of 5% anyway? We might even see new products like 8-year, 10-year, or 12-year loans. Such loans would help ensure equity paybacks quickly, reducing risk for everyone on both sides of the transaction. If that forces people to buy a smaller house, so be it. A home should be an affordable place to live, not a debt-trap or method of leveraged financial speculation for 30 years. Borrowing short and lending long for 30-years (while attempting to hedge in between) is a recipe for disaster. Fannie and Freddie have already gotten into serious trouble over it. If that practice stops, we will all be the better for it. Thus, we should all cheer the demise of 30-year loans. If we would just get government totally out of the way, housing will recover a lot quicker, with home prices far more stable, than with government guarantees or half-assed measures. It's time we remove the government crutch completely. For more on this line of thinking, please see Mortgage Rates Hit 1-Year High; NAR Whines for Government (Taxpayer) Support of Fannie, Freddie; "*" the NAR We have tried everything else, and everything else failed, so why not try the free market for a change. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Atlas Shrugged movie part I coming April 15 Posted: 11 Feb 2011 04:04 PM PST Fans of Ayn Rand's novel Atlas Shrugged will have a chance to see it in movie format April 15. Here is a YouTube clip. If the object does not play, here is the link to the trailer: http://www.atlasshruggedpart1.com/atlas-shrugged-movie-trailer Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Wimpy Republican Leadership Yields to Tea Party; Term Limits and Balanced Budget Amendment Needed to Eliminate "Culture of Spending" Posted: 11 Feb 2011 10:25 AM PST Hats off to new legislative representatives who steadfastly held to the position that more budget cuts are needed. Republican leaders reluctantly went along with those Tea Party demands (which of course shows just how wimpy Republican leadership is when it comes to really doing anything about the budget crisis). Democrats are screaming of course, clueless about why they lost the election, and what changes are needed. Please consider Republican Leaders Yield to a Push for More Budget Cuts In response to complaints from rank-and-file Republicans that the party was not fulfilling a campaign promise to roll back domestic spending this year by $100 billion, the chairman of the House Appropriations Committee said his panel would abandon its initial plan and draw up a new one to slice spending more aggressively. The reversal was the most concrete demonstration yet that the wave of fiscal conservatives who catapulted Republicans into the House majority is reshaping the political and policy calculations being made by the party leadership. Senate Democrats, who will have to negotiate with their Republican counterparts in the House, quickly criticized the plan. "In many cases, these proposals may mean taking workers off the assembly line or taking teachers out of the classroom or police off our streets," Senator Harry Reid, the Nevada Democrat and majority leader, said. The initial Republican plan called for $35 billion in cuts for the balance of this year, which has more than seven months yet to run. Republican leaders had said that figure was equivalent to about $74 billion in cuts had they been applied to the full fiscal year, measured against the budget request made last year by the Obama administration. But that argument rang hollow to many conservative Republicans who did not relish the idea of explaining to constituents why the new majority was coming up short of the pledge. After Republicans challenged the plan in a closed-door party meeting on Wednesday, Mr. Rogers and his fellow Appropriations Committee leaders say they now intend to provide new cuts that would meet the target of eliminating $100 billion from Mr. Obama's request in "one fell swoop." Even with added cuts, the budget plan is unlikely to satisfy all Republicans. Some want even deeper reductions, and others are insisting that any budget bill bar the government from spending money to carry out the new health care law — a provision certain to be summarily rejected by Senate Democrats and the White House. "If we don't fight on this ground, there will not be ground this good to fight on again," said Representative Steve King, Republican of Iowa. He said he was inclined to oppose any measure if the health care law was spared. The widening division between House Republicans and Senate Democrats raises the prospect that they will be unable to reach agreement to finance the government through Sept. 30 and will instead have to rely on a series of brief extensions. In the event of a total impasse, the government could shut down as it did in 1995. Republican officials would not divulge details of their planned cuts. But previous disclosures by the Appropriations Committee showed the reductions would reach deep into energy, environmental, education, transportation and housing programs, and totally eliminate more than 60 other federal initiatives. For Smaller Government, Elect Shorter Lawmakers Notice how it was new members of Congress forcing the issue. For all their blowhard talk, a lousy $35 billion was the best the Republican leadership could come up with to reduce a $1.4 trillion deficit. In light of that pathetic effort, are we are supposed to believe Republicans are going to balance the budget? Caroline Baum questioned that idea recently in For Smaller Government, Elect Shorter Lawmakers. The Republican majority in the U.S. House of Representatives is promising to cut $100 billion from domestic spending this year. The Tea Party caucus's response? I'll see your $100 billion and raise you $2.4 trillion over 10 years. Both groups are barking up the wrong tree or, to use a more appropriate animal analogy, putting the cart before the horse. The road to real deficit reduction, not a cosmetic nip and tuck, runs through term limits. If Americans are truly interested in shrinking the size of government -- one of the takeaways from the 2010 midterm election -- they can start by limiting the amount of time lawmakers are allowed to serve. This would require a constitutional amendment (see U.S. Term Limits, Inc. v. Thornton, 1995), no mean feat, requiring as it does approval by a two-thirds majority in Congress. But not impossible either. Recent events in the Middle East demonstrate just how potent people power can be. Would it surprise you to learn that newbies in Congress (those who have served six years or less in the House and 12 or less in the Senate) are more likely to vote for fiscal restraint than veteran lawmakers? Or that this finding was based on votes taken from 1995 through 1998, when Republicans controlled both houses of Congress? Even Newt Gingrich's class of '94, determined to shrink the size and scope of government, couldn't buck the Old Guard, according to the results of this Cato Institute study. In the last two years, the spending increases in bills proposed by freshman House Democrats were 60 percent lower than those sponsored by their more senior colleagues, according to Peter Sepp, vice president for communications at the National Taxpayers' Union. The GOP freshmen proposed 15 percent more cuts in spending than the old-timers. It turns out the old adage is true: The longer they stay, the more they spend. It's what political scientist James L. Payne calls "The Culture of Spending," the title of his 1991 book. "What goes on is a socialization process: a nicer way of saying indoctrination," Payne said in a telephone interview. "One is surrounded by people who have a biased reason for arguing that federal spending is good, necessary, wise and proper. There's no reason for anyone to enter this process if he believes it's unwise or unethical." Clearly the Paul family, father Ron and son Rand, stands out as an exception. Like most human beings, lawmakers want to help. So they blithely vote for more spending because, quite simply, if they don't put their hand in the cookie jar, someone else will. When was the last time a constituent walked into his congressman's office and asked for cuts in popular government programs? Unless you believe in fairy tales, a prerequisite for smaller government is short-term legislators. Balanced Budget Amendment Needed as Well Republicans scream and holler for smaller government, yet never act on it. Why? Because they are always worried about getting reelected thus fear cutting programs that voters may want. Term limits would eliminate that worry. A balanced budget amendment would sure help too. Want that pet project? OK but raise taxes to pay for it. Want to waste $trillions on needless defense programs? Some thing, have the guts and decency to raise taxes enough to pay for it. Otherwise the Fed may monetize the debt, debasing the currency. Then again, as long as sweeping changes are being made, let's get rid of the Fed too. Democrats and Republican hypocrites alike refuse to do what they were elected to do. Term limits and a balanced budget amendment would force them. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Mubarak Steps Down, Military Takes Over; Live Feed Al Jazeera; Celebrations in Egypt Posted: 11 Feb 2011 09:16 AM PST Crowds in Tahrir Square in Cairo are jubilant today as Mubarak Steps Down, Ceding Power to Military President Hosni Mubarak of Egypt turned over all power to the military and left the Egyptian capital for his resort home in Sharm el-Sheik, Vice President Omar Suleiman announced on state television on Friday. The Egyptian military issued a communiqué pledging to carry out a variety of constitutional reforms in a statement notable for its commanding tone. The military's statement alluded to the delegation of power to Mr. Suleiman and it suggested that the military would supervise implementation of the reforms. Mr. Mubarak "has charged the high council of the armed forces to administer the affairs of the country," he said in his statement. Live Feed Al Jazeera Here is a link to the Live Feed From Al Jazeera Live Feed MSNBC Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Calculated Risk vs. Ron Paul on Soviet Style Central Planning Posted: 11 Feb 2011 02:05 AM PST On Wednesday, my friend Calculated Risk wrote a post that many have asked me about. In case you missed it, please see I come to praise Bernanke Right now I think the Fed is doing an excellent job with monetary policy, and I was very pleased that Bernanke stayed away from specifics on the deficit (not his responsibility). In Praise of Soviet Central Planning Bernanke deserves as much praise as Soviet Central planners for being right about something once every 10 years. After all, the Fed is nothing more than a group of Soviet-style central planners, primarily academic wonks with no real word experience. Those planners (and their supporters) think the Fed can divine where interest rates should be to support dual or triple mandates, when mathematically it's not even possible to achieve the stated mission (Please see Dual Mandates, the Price of Gold, and Tinfoil Hats for more about Fed mandates). For decades, all the Fed has done is blow serial bubble after serial bubble with increasing boom-bust amplitude, occasionally (by mathematical necessity) crossing the zero-line where things appear to be relatively normal, at least for a while. Unfortunately things are not normal. Bernanke has reignited bubbles in the stock market and junk bonds, and commodity speculation. Bernanke on Fiscal Policy Calculated Risk praised Bernanke for staying away from specifics on fiscal policy but that does not hold up to scrutiny. Fox News has the full text of Bernanke's Remarks to House Budget Committee for those who are interested. Here are a few snips. In thinking about achieving fiscal sustainability, it is useful to apply the concept of the primary budget deficit, which is the government budget deficit excluding interest payments on the national debt. To stabilize the ratio of federal debt to the GDP -- a useful benchmark for assessing fiscal sustainability -- the primary budget deficit must be reduced to zero. Under the CBO projection that I noted earlier, the primary budget deficit is expected to be 2 percent of GDP in 2015 and then rise to almost 3 percent of GDP in 2020 and 6 percent of GDP in 2030. These projections provide a gauge of the adjustments that will be necessary to attain fiscal sustainability. To put the budget on a sustainable trajectory, policy actions -- either reductions in spending, increases in revenues, or some combination of the two -- will have to be taken to eventually close these primary budget gaps. By definition, the unsustainable trajectories of deficits and debt that the CBO outlines cannot actually happen, because creditors would never be willing to lend to a government with debt, relative to national income, that is rising without limit. One way or the other, fiscal adjustments sufficient to stabilize the federal budget must occur at some point. The question is whether these adjustments will take place through a careful and deliberative process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether the needed fiscal adjustments will come as a rapid and painful response to a looming or actual fiscal crisis. Acting now to develop a credible program to reduce future deficits would not only enhance economic growth and stability in the long run, but could also yield substantial near-term benefits in terms of lower long-term interest rates and increased consumer and business confidence. Plans recently put forward by the President's National Commission on Fiscal Responsibility and Reform and other prominent groups provide useful starting points for a much- needed national conversation. Although these proposals differ on many details, they demonstrate that realistic solutions to our fiscal problems do exist. Of course, economic growth is affected not only by the levels of taxes and spending, but also by their composition and structure. I hope that, in addressing our long-term fiscal challenges, the Congress and the Administration will undertake reforms to the government's tax policies and spending priorities that serve not only to reduce the deficit, but also to enhance the long-term growth potential of our economy -- for example, by reducing disincentives to work and to save, by encouraging investment in the skills of our workforce as well as new machinery and equipment, by promoting research and development, and by providing necessary public infrastructure. Our nation cannot reasonably expect to grow its way out of our fiscal imbalances, but a more productive economy will ease the tradeoffs that we face. Bernanke Warns of "Rapid and Painful Response to a Looming Fiscal Crisis" Bernanke has also warned Congress about a "Rapid and Painful Response to a Looming Fiscal Crisis", a concept I agree with. Quoting the economist Herbert Stein that "if something cannot go on forever, it will stop," Bernanke said that the federal government must stabilize its budget. The question, he said, "is whether these adjustment will take place through a ... process that weighs priorities and gives people adequate time to adjust to changes in government programs or tax policies, or whether there will be a rapid and painful response to a looming or actual fiscal crisis." Rapid and Painful Response to a Looming Fiscal Crisis I suggest Congress should listen to one of the few things Bernanke has ever said that made any sense. The correct Congressional response is to take Bernanke at his word and not raise the debt ceiling. Bernanke Talks out of Both Sides of his Mouth at Once As much as I can praise Bernanke's concern over a "Rapid and Painful Response to a Looming Fiscal Crisis", Bernanke is a hypocrite. He does not want Congress to do anything now. In fact, Bernanke warned Congress not to take fiscal action now. In effect, Bernanke is telling Congress what to do, and when to do it. He even suggested specific actions in regards to corporate income taxes. Regardless of whether or not you agree with Bernanke, if that is not specifically commenting on fiscal policy, what the hell is it? Chicken soup? Tomorrow, Tomorrow, I Love You Tomorrow Keynesian and Monetarist clown never want to do anything "now". Should by some miracle the recovery pick up steam, they will not want to do anything "then" either, for fear of killing the recovery. More importantly, the very idea that a group of currency cranks and academic wonks can divine where interest rates should be is complete totalitarian silliness. One can argue that things would be worse if Bernanke did not act but that is speculation. Had Bernanke not acted, bondholders would not have been bailed out, too big to fail would have bitten the dust and we would have had a chance for someone like Bill Black to come in, remove all the bank boards of directors, and put in sound management. Instead, we bailed out the banks at taxpayer expense, the "too big to fail" got even bigger, we did not reinstall Glass-Steagall (one piece of regulation I am in favor of), nor did we tackle any fundamental issues that caused the crisis. Too Soon To Judge Calculated Risk argues Bernanke made the right decisions the past couple years. If (big if) Bernake did, it is irrelevant. Praising Bernanke now is like praising a doctor for successfully amputating the cancerous leg of a patient after he first amputated the wrong one. The Fed has made so many mistakes amplified over the years, that some decisions are likely to be correct (or appear to be correct at any particular point in time). Realistically, we cannot make a determination now as to the success or failure of the Fed's recent actions. Perhaps we can make a determination 10 or 20 years from now. Even then, there will be debate as to what might have happened had there not been a Fed that bailed out banks at the expense of taxpayers and those on fixed income. (For a discussion of the problems of those on fixed income, please see Hello Ben Bernanke, Meet "Stephanie") Ron Paul: QE2 Is a Total Failure Ron Paul says QE2 Is a Total Failure and Bernanke Is Delusional About Inflation QE2 is a "total failure," except for those folks who work on Wall Street," Rep. Paul says. "It hasn't done anything for Main Street; hasn't done anything to give us real jobs; hasn't done anything for people who are losing their houses." As for inflation, "I think there's plenty," Rep. Paul says, citing "skyrocketing" commodity prices and rising food prices. One problem is the Fed's reliance on core CPI, which famously excludes food and energy and relies on hedonic adjustments. "They rig that number," he says. "[Bernanke] looks at government stats that are fudged to reassure him he doesn't have to do anything." "We're trying to correct the massive problems we had this decade with more" of the same policies, he laments. "He's supposed to give us full employment and stable prices and we have neither. How did the Fed do?" Rep. Paul says he'd support stripping the Fed of its dual mandate - full employment and price stability - as others in Congress have discussed. But he doesn't think it will do much good and continue to push for a full audit of the Fed and some "competition" for the dollar, as you'll see in part 2 of this interview. Central Planning Delusion Ron Paul: "It is delusional to think that one person could know what the money supply should be and interest rates should be, and that you can do total central economic planning through monetary policy is positively baffling. ... I would like to get the monopoly power away from this cartel that pretends they know how to run this entire economy." I do not agree with Ron Paul about everything. However, those statements are impossible to logically refute. Moreover, theory and practice are the same, as numerous Fed-sponsored bubbles prove. By the way, please do not make more out of this post than exists. I agree with Calculated Risk on many things, but vehemently disagree with him on the role of the Fed. We talked on the phone an hour before I wrote this, and we agree to disagree. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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