Paul Munsch is the owner of St. Louis Paving in St. Louis, Missouri. He and his employees have faced years of bullying by the union bosses with whom President Obama continues to side.
Please listen to this video message. Note, the video starts out grainy, I believe on purpose.
I support the idea and the message, but not the candidate who put that video together. Nonetheless, it was very effective message.
I also support Rand Paul's national right-to-work legislation. No business owner should have to put up with such union bullying. Forced collective bargaining is slavery.
Fannie Mae and Freddie Mac have already cost US taxpayers over $200 billion. If Obama gets his way on mortgage writedowns, the GSEs estimate it would take another $100 billion.
Since such estimates are always overly-optimistic by a factor of 3 to 10, I estimate the cost to taxpayers would be $300 billion minimum.
The regulator for Fannie Mae and Freddie Mac told lawmakers that forcing the two mortgage firms to write down loan principal would require more than $100 billion in fresh taxpayer funds.
In a letter sent on Friday to the Republican and Democratic leaders of a House of Representatives government oversight panel, the Federal Housing Finance Agency explained why it has long opposed principal reductions for borrowers who owe more than their homes are worth.
It said it had determined that such reductions would be more costly for the two firms than allowing those troubled borrowers to default.
"Principal reduction never serves the long-term interest of the taxpayer when compared to foreclosure," FHFA's acting director, Edward DeMarco, wrote in the letter to lawmakers dated January 20.
About 22 percent of U.S. homes have negative equity totaling about $750 billion, according to CoreLogic.
"Given that any money spent on this endeavor would ultimately come from taxpayers and given that our analysis does not indicate a preservation of assets for Fannie Mae and Freddie Mac substantial enough to offset costs, an expenditure of this nature at this time would, in my judgment, require congressional action," DeMarco said in the letter.
Another barrier to principal writedowns, aside from pushing losses at the two firms even further, DeMarco said, was the costs associated with new technology and training to servicers that would be needed to launch a program that offers principal forgiveness.
The Federal Reserve, in a white paper to Congress earlier this month, said write-downs "had the potential to decrease the probability of default" and "improve migration between labor markets."
However, the Fed stopped short of endorsing such an initiative and noted concern that writing down loan balances would create a moral hazard -- the concept that rescue efforts breed further behavior that exacerbates the existing problem -- and could prompt other borrowers to stop making timely loan payments.
Calculating the Maximum Cost
At least we know an approximate maximum cap. Negative equity totals $750 billion. Add in cost on implementing the program, graft, fraud, etc. and the cap (right now) is a conservative $760 billion or so. Factor in declining property values and a conservative cap is $800 billion or so.
Obama Seeks Vote-Buying Opportunity
Notice the ridiculous comment by the Fed: write-downs "had the potential to decrease the probability of default". Of course they do.
Write off the entire loan and there would be no chance of default. That does not mean it's a smart thing to do. Unless of course you are President Obama seeking to buy votes in November.
What's interesting in the letter is that they promote principal reduction as costing $100 billion, but the "potential" savings of mods and forbearance is only a few percent. And the data they use has no assumptions for an increase in the overall number of foreclosures as negative equity grows. This whole thing smells of incompetence and corruption.
Mish says ... Exactly!
Not to mention vote buying and I am quite sure back-door bailouts of banks as well (who will be permitted to sell "assets" to Fannie and Freddie in advance).
Steen Jakobsen, chief economist for Saxo bank in Denmark, pinged me with an interesting set of comments this morning. Please consider the tale of the frog and the indebted princess.
This morning I had the pleasure of being on CNBC together with a pundit from a major investment bank. He claimed that if Greece went bankrupt then no one would lend them any money and it would leave them without trading partners. I countered that this would happen anyway if we continue to ignore the losses that creditors need to take on their Greek investments. Only through a Schumpeter-like "Destruction of Capital", after all, can we give Greece a fighting chance to survive.
Why is everyone so afraid of a default? Are we supposed to believe we have banished them forever?
History is full of nations going bankrupt – and in no circumstances has it ever meant a complete loss of trading, credit, etc. Quite the contrary - it's precisely the default and accompanying devaluation that often sows the seeds of a recovery.
Here, according to a Wikipedia article on sovereign defaults, are a few examples of major European sovereigns that have defaulted over the years:
Spain - 15 times! (1557, 1575, 1596, 1607, 1627, 1647, 1809, 1820, 1831, 1834, 1851, 1867, 1872, 1882, 1936-1939) Isn't it interesting that it defaulted most often when it was getting "something for nothing" in the form of New World gold riches?
Brazil - 10 times inside the last 115 years (1898, 1902, 1914, 1931, 1937, 1961, 1964, 1983, 1986-1987, 1990)
Russia (1839, 1885, 1918, 1947, 1957, 1991, 1998)
India (1958, 1969, 1972)
China (1921, 1932, 1939)
The complete list in the above link includes a list of 39 African sovereign defaults, 26 Asian sovereign defaults, a whopping 91 European sovereign defaults, and for the Americas, a stunning 154 sovereign defaults.
Wow! Could it be that some of the "competitiveness" the BRICs and other countries have today is based on episodes of cleaning the slate and declaring a new beginning? Why must we hang on forever to old debt and past mistakes?
Down with the pro-zombie Keynesians and up with the lessons from history!
Also…please, please let this talk about whether or not the ECB is doing QE stop right now. The ECB's balance sheet is up 38% since July 1st of last year. The same period saw the Fed's balance increase by one per cent! Talk about printing money.
It seems that the Princess Merko-zy did indeed kiss the frog and it morphed into a hopelessly indebted Club Med Prince. And then they lived happily ever after? My compatriot Hans Christian Andersen would have been proud of today's politicians and their penchant for perpetuating fantasy.
The only problem? Domestic banks in the PIIGS countries are fast concentrating their exposure to their own sovereign's debt, and this is increasing the leverage in the system and the risk of systemic contagion. The LTRO is merely a massive dose of morphine applied to reduce he pain from the mortal wound that the EU has inflicted on its finances over the years. It has succeeded in reducing the pain, but the problem remains that ever increasing doses will be needed to hide the pain until that wound kills the patient if the EU refuses to go in and perform emergency surgery.
Finally, the stress indicators have now more or less "mean-reverted" back to 200 day moving-average from here we need more than just hope to keep the game going. Note how ECB deposit and the REPO value continues down, while the banking stress has diminished – for a while.
I am off to the one country in Europe which makes sense: Switzerland. Safe travels.
Given Switzerland's currency peg, I do not think the Swiss Central Bank makes that much sense either. Perhaps in relative terms.
Berlin appeared to soften its longstanding resistance to increasing the funds only hours after the International Monetary Fund warned that the eurozone needed more money to build "a larger firewall" to prevent the crisis from spreading to its core economies.
In return the German chancellor wants eurozone heads of government to sign up to rules to cut budget deficits and public debt that are much tougher than those currently foreseen by eurozone governments.
For Ms Merkel, increasing the fund risks a showdown with a restive parliament that is sceptical of further exposing German taxpayers to the rescue effort. But she is now said to be willing to take that risk if she can put her stamp on the budget rules in the fiscal compact.
"We think we can get the ESM approved if we link it to solid new budget rules," a German official said. One European official in turn said Germany was "framing the debate" about budget rules with a possible trade-off on the size of the bailout fund.
David Stockman former budget director for President Reagan, appeared on Bill Moyers and presented his message about money, Wall Street financiers, and crony capitalism.
Money dominates politics, distorting free markets and endangering democracy. "As a result," Stockman says, "we have neither capitalism nor democracy. We have crony capitalism."
Stockman shares details on how the courtship of politics and high finance have turned our economy into a private club that rewards the super-rich and corporations, leaving average Americans wondering how it could happen and who's really in charge.
"We now have an entitled class of Wall Street financiers and of corporate CEOs who believe the government is there to do… whatever it takes in order to keep the game going and their stock price moving upward," Stockman tells Moyers.
Click on the above link for a full transcript. Here are a few select quotes.
DAVID STOCKMAN: A massive amount of resources are being devoted, being allocated or being channeled into pure financial speculation that has no gain to society as a whole, has no real economic contribution to the process by which GNP is created, GDP is created and growth occurs.
By 2007 40 percent of all the profits in the American economy were coming from finance companies. 40 percent. Historically it was 15 percent.
So the financialization means that as we attracted more and more resources and capital, and we made speculation easier and easier, and we funded it with almost free overnight money, managed and manipulated by the Fed, that's how the economy got financialized. But that is a casino. Casinos -- they're, you know, places for people to go if they want to speculate and wager. But they're not part of a healthy, constructive economy.
BILL MOYERS: What do you mean by the free money that banks are using overnight?
Well, by that we mean when the Fed, the Federal Reserve sets the so-called federal funds rate at ten basis points, where it is today, that more or less guarantees banks can go into the Fed window, the discount window, and borrow at ten basis points.
And then you take that money and you buy a government bond that is yielding two percent or three percent. Or buy some corporate bonds that are yielding five percent. Or if you want to really get aggressive, buy some Australian dollars that have been going up. Or buy some cotton futures. And this is really what has been going on in our markets.
The cheap funding, which is guaranteed by the Fed, the investment of that cheap funding into speculative assets and then pocketing the spread. And you can make huge amounts of money as long as the music doesn't stop. And when the music stops then all of a sudden, the cheap, overnight money dries up. This is what's happening in Europe today. This is what happened in 2008.
And then people are stuck with all these risky assets, and they can't fund them. They owe cash to the people they borrowed overnight from or on a weekly basis. That's what creates the so-called contagion. That's what creates the downward spiral. Now, unless we let those burn out, it'll be done over and over. In other words, if, you know, if a lesson isn't learned, then the error will be repeated over and over.
BILL MOYERS: The Bush administration came to the rescue of some of the county's largest financial institutions, to the tune of 700 billion tax-payer dollars. DAVID STOCKMAN: We elect a new government because the public said, you know, "We're scared. We want a change." And who did we get? We got Larry Summers. We got the same guy who had been one of the original architects of the policy in the 1990s, the financialization policy, the too big to fail policy.
Who else did we get? We got Geithner as Secretary of the Treasury. He had been at the Fed in New York in October 2008 bailing out everybody in sight. General Electric got bailed out. Morgan Stanley, Goldman Sachs, all of the banks got bailed out, and the architect of that bailout then becomes the Secretary of the Treasury. So it's another signal to the financial markets that nothing ever changes. The cronies of capitalism are in charge of policy.
....
The Congress is owned lock, stock and barrel by one after another, after another special interest. And they logically say how can we expect, you know, anything good to come out of this kind of process that seems to be getting worse. So how do we turn that around? I think it's going to take, unfortunately a real crisis before maybe the decks can be cleared.
BILL MOYERS: But on the basis of the record, the lessons of the past. The experience you have just recounted and are writing about. Do you see any early signs that we might turn the ship from the iceberg?
DAVID STOCKMAN: No. I think we've learned no lessons. We really have not restructured our financial system. The big banks that existed then that were too big to fail are even bigger now. The top six banks then had seven trillion of assets, now they have nine or ten trillion.
Rather than go to the fundamentals which have been totally neglected-- we've simply kind of papered over the current system and continued the game of having the Federal Reserve and the Treasury if necessary prop up all of this leverage and speculation, which isn't helping the economy.
And when we talk about zero interest rates. That's not helping Main Street. Our problem in this economy is not our interest rates are too high. The zero interest rates are just more fuel for leverage speculation for what's called the carry trade and that is causing windfall benefits to the few but it's leaving the fundamental problems of our economy in worse shape than they've ever been.
In 1985 Stockman wrote The Triumph of Politics: The Inside Story of the Reagan Revolution. 30 years later Stockman laments...
"I was in the middle of being very disgusted with what my own Republican Party had done and what Bush had done and the Paulson Treasury. And then when I saw this, I got the title for my book, "The Triumph of Crony Capitalism."
It's so disappointing to see that the Obama administration, which in theory should've had more perspective on this than a Republican administration under Bush, to see that one, they appointed in the key positions the same people who brought the problem in: Geithner and Summers and all of those, and secondly, that Obama did nothing about it."
Stockman's new book, The Triumph of Crony Capitalism, rates to be a good one.
Britain has sunk deeper into debt. Three years after bubble burst, the UK has barely begun to tackle the crushing burden left by Gordon Brown. The contrast with the United States is frankly shocking.
US debt is already lower than Spain (363pc), France (346pc), or Italy (314pc), and may undercut Germany (278pc) before long -- given the refusal of the European Central Bank to offset fiscal contraction with monetary stimulus.
One is tempted to ask what all the fuss was about in the US. The debt of financial institutions is just 40pc, compared to the UK (219pc), Japan (120pc), France (97pc), Germany (87pc) and Italy (76pc). Bank debt has dropped from $8 trillion to $6.1 trillion -- accelerated by the Lehman collapse -- as lenders rely more on old-fashioned deposits.
In hindsight, the US property boom was remarkably modest compared to what happened in Spain, or what is happening now in China now where the house price to income ratio in Beijing, Shanghai, and Shenzhen is near 18. America's ratio peaked at 5.1 and is already back to its modern era average of three. The excesses have been unwound.
Personally, I am coming to the conclusion that the US crisis in 2008-2009 was largely a case of botched monetary policy and could easily have been avoided. The growth of M3 money -- which the Fed stopped tracking thanks to a young Ben Bernanke -- was allowed to balloon in the bubble, then collapse in 2008.
US Did Not Overcome Debt Crisis
There is a big difference between alleged "light at the end of the tunnel" and "America Overcomes Debt Crisis" as Pritchard claims. US consumers may be one-third of the way through, but US debt-to-GDP ratios are low only because unsustainable government spending has taken up the slack.
The US has not started government debt deleveraging and until that is nearly finished there will not be light at the end of the tunnel, let alone the end of the crisis. Optimistically, the best one can possibly assert is one can possibly see light at the end of the "consumer tunnel". The government tunnel immediately follows.
Moreover, one should not be "tempted to ask what all the fuss was about in the US". Just because other nations are worse, does not mean the US had no problem.
Five-Pronged Solution
US monetary policy and ECB monetary policy is partially to blame for these crises as Pritchard says. Reckless fiscal policies by governments everywhere is another part of the problem. The five-pronged solution which Pritchard does not mention is ...
The European crisis now was foreseen in advance by many, including Pritchard.
Certainly the ECB's "one size fits Germany" interest rate policy fueled the property bubbles in Spain and Ireland, as well as imbalances in Italy, Greece, and Portugal.
Unlike the US, the eurozone has the structural additional problem of being a monetary union without a fiscal union. Not one such currency union in history has ever survived.
Bailing out Greece and Portugal and Ireland will not fix structural problems including the ECB's "one size fits all" interest rate dilemma.
Debt and Deleveraging
Here are some excerpts from the McKinsey Global Institute PDF. Click on any chart below for a sharper image.
Executive Summary
The deleveraging process that began in 2008 is proving to be long and painful, just as historical experience suggested it would be. Two years ago, the McKinsey Global Institute published a report that examined the global credit bubble and provided in-depth analysis of the 32 episodes of debt reduction following financial crises since the 1930s. The eurozone's debt crisis is just the latest reminder of how damaging the consequences are when countries have too much debt and too little growth.
In this report, we revisit the world's ten largest mature economies to see where they stand in the process of deleveraging. We pay particular attention to the experience and outlook for the United States, the United Kingdom, and Spain, a set of countries that covers a broad range of deleveraging and growth challenges.
Deleveraging Only Just Begun
1 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government. 2 Defined as an increase of 25 percentage points or more. 3 Or latest available.
The United States: A light at the end of the tunnel
Since the end of 2008, all categories of US private-sector debt have fallen relative to GDP. Financial-sector debt has declined from $8 trillion to $6.1 trillion and stands at 40 percent of GDP, the same as in 2000. Nonfinancial corporations have also reduced their debt relative to GDP, and US household debt has fallen by $584 billion, or a 15 percentage-point reduction relative to disposable income. Two-thirds of household debt reduction is due to defaults on home loans and consumer debt. With $254 billion of mortgages still in the foreclosure pipeline, the United States could see several more percentage points of household deleveraging in the months and years ahead as the foreclosure process continues.
[Mish Note: notice the key phrase "months and years ahead"]
Even when US consumers finish deleveraging, however, they probably won't be as powerful an engine of global growth as they were before the crisis. One reason is that they will no longer have easy access to the equity in their homes to use for consumption. From 2003 to 2007, US households took out $2.2 trillion in home equity loans and cash-out refinancing, about one-fifth of which went to fund consumption.
Without the extra purchasing that this home equity extraction enabled, we calculate that consumer spending would have grown about 2 percent annually during the boom, rather than the roughly 3 percent recorded. This "steady state" consumption growth of 2 percent a year is similar to the annualized rate in the third quarter of 2011.
US government debt has continued to grow because of the costs of the crisis and the recession. Furthermore, because the United States entered the financial crisis with large deficits, public debt has reached its highest level—80 percent of GDP in the second quarter of 2011—since World War II.
The next phase of deleveraging, in which the government begins reducing debt, will require difficult political choices that policy makers have thus far been unable to make.
That last sentence, coupled with the fact that consumer deleveraging is only 1/3 finished is precisely why the headline title by Pritchard that "America Overcomes the Debt Crisis ..." is quite inaccurate.
Not only that, but growth assumptions remain absurdly high as do earnings forecasts.
1 Includes all loans and fixed-income securities of households, corporations, financial institutions, and government. 2 Q1 2011 data.
UK household debt, in absolute terms, has increased slightly since 2008. Unlike in the United States, where defaults and foreclosures account for the majority of household debt reduction, UK banks have been active in granting forbearance to troubled borrowers, and this may have prevented or deferred many foreclosures. This may obscure the extent of the mortgage debt problem. The Bank of England estimates that up to 12 percent of home loans are in a forbearance process. Another 2 percent are delinquent.
Overall, this may mean that the UK has a similar level of mortgages in some degree of difficulty as in the United States. Moreover, around two-thirds of UK mortgages have floating interest rates, which may create distress if interest rates rise—particularly since UK household debt service payments are already one-third higher than in the United States.
Spain: The long road ahead
The global credit boom accelerated growth in Spain, a country that was already among the fastest-growing economies in Europe. With the launch of the euro in 1999, Spain's interest rates fell by 40 percent as they converged with rates of other eurozone countries. That helped spark a real estate boom that ultimately created 5 million new housing units over a period when the number of households expanded by 2.5 million. Corporations dramatically increased borrowing as well.
As in the United Kingdom, deleveraging is proceeding slowly. Spain's total debt rose from 337 percent of GDP in 2008 to 363 percent in mid-2011, due to rapidly growing government debt. Outstanding household debt relative to disposable income has declined just 6 percentage points. Spain also has unusually high levels of corporate debt: the ratio of debt to national output of Spanish nonfinancial firms is 20 percent higher than that of French and UK nonfinancial firms, twice that of US firms, and three times that of German companies. Part of the reason for Spain's high corporate debt is its large commercial real estate sector, but we find that corporate debt across other industries is higher in Spain than in other countries. Spain's financial sector faces continuing troubles as well: the Bank of Spain estimates that as many as half of loans for real estate development could be in trouble.
Spain has fewer policy options to revive growth than the United Kingdom and the United States. As a member of the eurozone, it cannot take on more public debt to stimulate growth, nor can it depreciate its currency to bolster its exports. That leaves restoring business confidence and undertaking structural reforms to improve competitiveness and productivity as the most important steps Spain can take. Its new government, elected in late 2011, is putting forth policy proposals to stabilize the banking sector and spur growth in the private sector.
Note how Spain was massively skewered by the ECB's "one size fits Germany" interest rate policy. That structural problem remains in spite of all the can kicking by the US and ECB with lending schemes and the LTRO.
Let's return to the report for one more chart from the report.
US Household Debt Ratios
There are a lot of optimistic assumptions in that report. The above chart highlights one of the biggest assumptions.
Certainly one can make a case that the change from single-household worker families to dual-household worker families (both husband and wife working), accounts for the rise is sustainable debt loads from 1955 to 1985.
How much of the rest is sustainable? I suggest little to none of it is. The stock market boom of the 90's followed by housing bubble in the 2000's is what made families "feel" wealthy.
Negative Stock Market Returns for another Decade?
With global growth slowing, coupled with an enormous change in boomer demographics, combined with massive amounts of deleveraging still to come in the top 10 economies, the likelihood the stock market puts in another sustainable boom as it did in the 90's is highly unlikely. When households feel wealthy they are apt to take on more debt.
In a debt deleveraging cycle, not only does feeling wealthy go away, so does the likelihood of strong returns in the stock market. Indeed, I have made the case for Negative Returns for Another Decade
For the sake of argument let's assume an optimistic case of 4-5% annualized returns for another decade. Is that enough to keep that household debt trend intact?
Of course not. The idea the trendline itself should go up over time is complete silliness unless there is a structural change as there was in the 60's and 70's when women went to work en masse.
Nonetheless, the McKinsey Global Institute report is well worth a look in entirety. Click on the first link at the top for an opportunity to download the full 64-page report.
Obvious flaws aside, the report is a great read containing a wealth of information on debt levels of countries and what has been done to address the issues so far.
Postări
Niciun comentariu:
Trimiteți un comentariu