Central Perk

duminică, 19 decembrie 2010

Mish's Global Economic Trend Analysis

60 Minutes: Day of Reckoning Arrives; Chris Christie "It's Not an Income Problem, It's a Benefits Problem"; Six Common Sense Solutions
Asininity from Paul Krugman Regarding Money Supply and Ron Paul
New Jersey Outsources Turnpike Toll Collection; Reflections on Privatization Efforts and Public Unions in General
Sunday Funnies - Why People Don't Buy Gold

60 Minutes: Day of Reckoning Arrives; Chris Christie "It's Not an Income Problem, It's a Benefits Problem"; Six Common Sense Solutions

Posted: 19 Dec 2010 10:55 PM PST

Please watch this 60 minute interview on the crisis that states face. I have been talking about this for several years while most bloggers and nearly all of mainstream media have ignored the story. It is no longer possible to ignore the story.

Unlike the fluff interview with Ben Bernanke, Dan Kroft at 60 Minutes conducts a very hard hitting interview with Meredith Whitney, Illinois state Comptroller Dan Hynes, and New Jersey Governor Chris Christie.

Of the governors, Christie Christie stands alone in facing the problem.

Partial Transcript

California, which faces a $19 billion budget deficit next year, has a credit rating approaching junk status. It now spends more money on public employee pensions than it does on the state university system, which had to increase its tuition by 32 percent.

Arizona is so desperate it sold off the state capitol, Supreme Court building and legislative chambers to a group of investors and now leases the buildings from their new owner. The state also eliminated Medicaid funding for most organ transplants.

Then there's New Jersey. It has the highest taxes in the country, a $10 billion deficit and a depressed economy when first-year Governor Chris Christie took office. But after looking at the books, he decided to walk away from a long-planned and much-needed project with New York and the federal government to build a rail tunnel into Manhattan. It would have helped the economy and given employment to 6,000 construction workers.

Gov. Christie acknowledged that's a lot of jobs. "I canceled it. I mean, listen, the bottom line is I don't have the money. And you know what? I can't pay people for those jobs if I don't have the money to pay them. Where am I getting the money? I don't have it. I literally don't have it."

Asked if this is going on all over the country, Christie told Kroft, "Yes. Of course it is. It's not like you can avoid it forever, 'cause it's here now. And we all know it's here. And the federal government doesn't have the money to paper over it anymore, either, for the states. The day of reckoning has arrived. That's it. And it's gonna arrive everywhere. Timing will vary a little bit, depending upon which state you're in, but it's comin'."

And nowhere has the reckoning been as bad as it is in Illinois, a state that spends twice much as it collects in taxes and is unable to pay its bills.

(CBS) "This is the state of affairs in Illinois. Is not pretty," Illinois state Comptroller Dan Hynes told Kroft.

Hynes is the state's paymaster. He currently has about $5 billion in outstanding bills in his office and not enough money in the state's coffers to pay them. He says they're six months behind.

"How many people do you have clamoring for money?" Kroft asked.

"It's fair to say that there are tens of thousands if not hundreds of thousands of people waiting to be paid by the state," Hynes said.

Asked how these people are getting by considering they're not getting paid by the state, Hynes said, "Well, that's the tragedy. People borrow money. They borrow in order to get by until the state pays them."

"They're subsidizing the state. They're giving the state a float," Kroft remarked.

"Exactly," Hynes agreed.

"And who do you owe that money to?" Kroft asked.

"Pretty much anybody who has any interaction with state government, we owe money to," Hynes said.

"The state's a deadbeat," Kroft remarked.

"Yeah. I mean, the state of Illinois is known as a deadbeat state. This is a reputation that has taken us years to earn and we've reached, you know, the heights of, I think, becoming the worst in the country," Hynes said.

(CBS) "This is different, isn't it?" Kroft asked New Jersey's governor, Chris Christie.

"It is very different," Christie said. "The reason it's different is because the only choices left are choices that people previously have said were politically impossible, that you couldn't do. You couldn't cut K to 12 education funding. You couldn't do those things. They were, you couldn't talk about pension and benefit reform for the public sector unions. That were third rails of politics. We are now left with no alternatives."

"Just the third rail?" Kroft asked.

"Yeah, that's it. I'm just gonna grab it and go, and let the chips fall where they may," Christie said.

"This is unsustainable, right?" Kroft asked.

"Totally unsustainable. We have a benefit problem," Christie said. "It's not an income problem from the state. It's a benefit problem. And so we gotta change those benefits."

When one teacher told him at a public hearing, "And you're not compensating me for my education and you're not compensating me for my experience. That's all," the governor replied, "Well you know what, then you don't have to do it!"

It's a scene that is starting to play out all over the country.

"Some union leaders have suggested that you're running the state like Tony Soprano," Kroft told Christie.

"Well, as an Italian American, I take great offense to that," he replied, laughing. "Listen, you know what it is? I'm the first person to expose them for what they've been doin' to the public."

Asked if he wants the public employee unions to share the pain, Christie told Kroft, "You bet. I want them to share in the sacrifice. And this is what I say to public sector unions: 'Listen you can boo me now, but I'm the first governor who has walked into this room in ten years and told you the truth. And here is the truth. If you don't partner with me to get this done in ten years you won't have a pension.' And that's the truth."

Inquiring minds will want to play complete transcript State Budgets: The Day of Reckoning

The last paragraph in my snip above however says everything anyone needs to know.

"This what I say to public sector unions: 'Listen you can boo me now, but I'm the first governor who has walked into this room in ten years and told you the truth. And here is the truth. If you don't partner with me to get this done in ten years you won't have a pension.' And that's the truth."

Public Union Problem in a Nutshell

Here is the public union problem in a nutshell: Union members lobby vociferously for untenable wages and benefit packages. Greedy politicians willing to accept bribes to get reelected, go along. On any threat of reduction in benefits, union organizers get out the vote with massive fear-mongering campaigns promising ruin if they do not get what they want. At election time unions donate massively to candidates willing to back union sponsored agenda. Over time, school boards, city halls, and legislative bodies in general get packed with politicians accepting bribes (campaign contributions) from the unions.

If you want to see just how aggressive public unions can be, please see 15,000 Illinois Protesters Chant "Raise My Taxes"; Unions Getting More Aggressive and Obnoxious; Record Turnout in N.J. Tells Unions to Go to Hell

As a result of coercion, bribery, and thug tactics, cities go broke, counties go broke, states go broke.

What Should the Goal of Elected Officials Be?

The goal of public officials should be to provide the most amount of services for the least cost.

Unions typically offer the least services for the most cost. Unions will argue with that statement but it is very easy to prove. Put all contracts out to bid, then accept the best offer from the most qualified bidder. Let's see how many unions win the bid.

Six Common Sense Solutions

Scrap Davis-Bacon and all prevailing wage laws.
Scrap collective bargaining for public union workers entirely.
Implement national right-to-work laws.
Outsource every public sector job possible including police and fire departments to the lowest cost private sector provider.
Kill defined benefit pension plans for all new hires and for all public employees that do remain in the system.
Tax public union retiree benefits over a certain amount.

The key to solving the 3 trillion pension deficit (see Interactive Map of Public Pension Plans; How Badly Underfunded are the Plans in Your State?) are the last two points above.

1. Kill defined benefit pension plans for all new hires and for all public employees that do remain in the system.
2. Tax public union retiree benefits over a certain amount.

As a starting point I previously suggested a plan to tax 90% of public union pension retiree income over $120,000 but that is likely far too generous. $80,000 or even lower might be a better starting point.

Whatever, the number is, the beauty of my proposal is that tax proceeds collected can be fed back into pension plans to help make them solvent. In addition, my proposal would win the support of many union employees at the low end of the benefit scale. Those pensioners would then see an likelihood their retirement benefits would be guaranteed. Finally, everyone would benefit via lower property taxes.

Hard Part Is Implementation

The solution is straight forward and easy to understand. Implementation is the hard part. Union sympathizers permeate every major city in the country via the bribery, coercion, and fear-mongering tactics described above.

Please remember that public employees are supposed be "public servants". Instead their one and only mission is to raise your taxes so they can feed at the trough with pension benefits the likes of which the average person can only dream about.

That Chris Christie could get elected in spite of public union tactics tells you just how fed up with tax-and-spend policies people are. Huge pickups by Republicans, especially Republican governors, in the last election is a very encouraging sign.

However, the battle has barely begun. Please show up at school board meetings, show up at town hall meetings, and work for candidates who will stand up for taxpayers, not public union workers.

It is imperative to take on and oust from office every public union supporter in the country, town by town, county by county, and state by state, one by one. If you don't help, you have only yourself to blame for rising sales taxes, rising property taxes, and rising income taxes that most cannot afford, and unless you are a public union worker, tax hikes across the board that you probably do not support.

Please get out the message.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Asininity from Paul Krugman Regarding Money Supply and Ron Paul

Posted: 19 Dec 2010 04:08 PM PST

In an absurd series of posts, Paul Krugman struggles to define money, then criticizes Ron Paul based on a myriad of incorrect assumptions "guessing" what Paul thinks, using as proof a Fan Site, not anything that Ron Paul said.

Let's start from the beginning. Please consider Paul Krugman's post What Is Money?

What is money, anyway? It's not a new question, but I think it has become even more pressing in recent years.

The truth is that these days — with credit cards, electronic money, repo, and more all serving the purpose of medium of exchange — it's not clear that any single number deserves to be called "the" money supply.

But if you're determined to view economic affairs through a sort of paleo-monetarist lens, focused on the evils of "printing money", you're going to have a hard time in the modern world, where the definition of money is increasingly vague.

I purposely picked out sentences from Krugman's article that reasonable people might agree with. Given that Austrian economists and Austrian-minded people cannot agree on how to measure money, it's hard to quibble too loudly with the above.

Those interested in a philosophical debate might be interested in reading

This post is not about the debate as to what money is. This post is about Paul Krugman's attempt to "guess" at what Paul thinks money is, then attack that strawman.

Paleomonetarism

Krugman dives into fantasyland with his followup post Paleomonetarism

I used that term — it's probably not original, but who knows? — in a recent post about the increasingly obscure meaning of the money supply. The best example would surely be Ron Paul, who's now going to have oversight over the Fed. If you read his stuff, it's very clear: money is a well-defined quantity that the Fed controls, and inflation comes from — indeed is defined as — increases in that quantity.

What he means, I guess, is monetary base. Here's the actual relationship between monetary base and inflation:

It's also worth nothing that in normal times (not now), monetary base consists overwhelmingly of currency (bank reserves are normally very small), and the majority of US currency isn't even being held in the United States.

It's kind of terrifying, in a way, to realize that the politically dominant faction in America right now has a view of money, what it is, and how it works that hasn't been true since the early 19th century, if it ever was.

The first thing of note is Krugman's line "If you read his stuff"

Follow that link and it takes you to a Ron Paul Fan site, not anything written by Ron Paul himself. It is NOT "his stuff" as Krugman states.

Krugman goes on to say (emphasis mine) "What he means, I guess, is monetary base. Here's the actual relationship between monetary base and inflation"

Excuse me but if you are going to attack someone, should you be guessing about what they mean? Krugman then follows up with a strawman attack based on a guess, based on a something Paul did not even say.

Believe it or not, it gets worse. The article Krugman pointed to did not use the term "monetary base". In fact, the article did not even use the word "base".

Is Krugman drunk?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

New Jersey Outsources Turnpike Toll Collection; Reflections on Privatization Efforts and Public Unions in General

Posted: 19 Dec 2010 03:15 PM PST

Public unions add no benefits to taxpayers ever, only expenses. It is best not to deal with public unions, bargain with public unions, or do anything with public unions but get rid of them where they exist.

In what I expect to be a growing trend going forward, the NJ Turnpike Authority Privatizes Toll Collection.

More than 200 union members and leaders packed the New Jersey Turnpike Authority's meeting Wednesday to oppose a plan to outsource toll collectors' jobs on the Garden State Parkway and Turnpike to private contractors next spring.

"Over the years, the union has worked together to help the Turnpike solve its problems," said Franceline Ehret, president of Local 194 of the International Federation of Professional and Technical Engineers, which represents 1,200 authority employees. "We urge you to hold off putting out the request for proposal and allow us to work it out."

Ehret and other speakers said outsourcing will take what are now middle-class jobs and reduce them to minimum-wage jobs, which would negatively affect the state and local tax bases and the economy.

Authority officials said the union will have a chance to submit a proposal as a private contractor.

"The RFP (request for proposal) will go out after the new year, and we will work with the incumbent unions," said James Simpson, the state transportation commissioner and authority board chairman. "The goal is to strike a balance and get agreements that are in line with the fiscal realities."

"If privatization occurs, there will be more savings," he said. "That goes back to the taxpayers in another way, even if we're talking about cross-subsidizations. The state is in dire straights, and one of the few assets of the state is the Turnpike and Parkway."

Flawed Union Response

The statements by James Simpson, the state transportation commissioner, were short, easy to understand, easy to justify, and precise.

In contrast, the logic of Franceline Ehret was fatally flawed. The idea that outsourcing would "would negatively affect the state and local tax bases and the economy" is preposterous.

Outsourcing will put money in the hands of taxpayers where it belongs, instead of the hands of union workers with excessively high wage-benefit packages for doing nothing more than sitting in a toll both.

Thousands of people would line up for those jobs even at minimum wage. If the union wants those jobs it can bid for them.

The goal of public officials should be to provide the most amount of services for the least cost. Unions typically offer the least services for the most cost. The unions will argue with that statement but it is very easy to prove. Put all contracts out to bid, then accept the best offer from the most qualified bidder.

The same applies to garbage collection, bus drivers, all public transportation, even police and fire contracts.

There is nothing to negotiate here. Negotiation with unions is a complete waste of time and taxpayer money. The only reasonable place for negotiation is AFTER contracts are put out for bid, and always with the goal of providing the most amount of services for the least cost.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Sunday Funnies - Why People Don't Buy Gold

Posted: 19 Dec 2010 11:16 AM PST

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Seth's Blog : Who's on your list?

[You're getting this note because you subscribed to Seth Godin's blog.]

Who's on your list?

Years before he filmed the Godfather, Francis Ford Coppola met Al Pacino and they almost made a movie together.

Later, when it was time to cast his greatest film, Pacino was an obvious choice for Coppola.

Ask any successful director for a list of actors or cinematographers or screenwriters they'd like to work with and they can answer you, instantly. They're always keeping lists.

Do you have one? If your firm has an opening for a hire or a freelancer, do you have the name ready, instantly, the one you've been waiting for a chance to work with?

The worst time to go looking is when you need one, badly.

• Email to a friend •

•

sâmbătă, 18 decembrie 2010

Mish's Global Economic Trend Analysis

Cincinnati Threatens to Outsource Entire Police Department
Canadian Borrowing Gone Mad: A Look at BMO's Misguided Balance Sheet Theory and the Keep on Dancin' Market Share Theory of Toronto-Dominion
Spanish "Ghost Towns", Shadow Inventory, Cooked Books; Spain's 2011 Real Estate Funding Crisis

Cincinnati Threatens to Outsource Entire Police Department

Posted: 18 Dec 2010 08:55 PM PST

Cincinnati, like every union-plagued city in the country is having huge budget problems over untenable union wages and pension benefits. Big problems call for big actions. I am pleased to report that several thinking members on the Cincinnati City Council proposed to outsource the entire police department to the local sheriff's association. Unfortunately, the mayor nixed the idea.

The Cincinnati Enquirer reports City-county police merger proposed

Three Cincinnati City Council members floated a proposal Wednesday to shift city police patrols to the Hamilton County Sheriff's Office as a way to help plug a $60 million deficit in the city budget and avoid 275 police and firefighters layoffs.

But just as quickly as council members Roxanne Qualls, Wendell Young and Jeff Berding pitched the plan – which Hamilton County Sheriff Simon Leis supports – it seemingly died.

Council currently does not have enough votes to override a threatened veto by Mayor Mark Mallory, who in a letter to Leis said he sees the proposal as "a brazen and shameless attempt at union-busting" that he will never support.

Council members Cecil Thomas, Charlie Winburn and Leslie Ghiz are definite no votes.

Ghiz, who practices labor law, said the plan sounds to her like union-busting since council members just this week asked the police and fire unions for $20 million in concessions.

Cincinnati City Councilman Chris Bortz, who joined Leis, Qualls, Young and Berding at the Enquirer to talk about the idea, said merging services is worth exploring, but he wasn't willing to commit.

The proposed plan calls for the city to lay off its 790 patrol officers. The city would then pay the sheriff's department for patrols, who would hire many of the city officers to do those patrols. The rest of the police department would remain under the chief's supervision.

By doing the switch through layoffs and re-hiring, Qualls said the process does not violate the union contract.

Brazen and Shameless

What's brazen and shameless is the arrogance of the police union and Mayor Mark Mallory's willingness to hold citizens of Cincinnati hostage to untenable union demands. Clearly Mallory is beholden to the unions, not to the taxpayers of Cincinnati whom he is supposed to represent.

Here is the Proposal from Simon Leis Jr. Sheriff Hamilton County, Ohio. Check yourself to see if appears to be a "brazen, shameless" proposal.

Mallory has his priorities wrong and is unfit for office. The same can be said for Cecil Thomas, Charlie Winburn and Leslie Ghiz.

Your priority, should you live in Cincinnati, should be to get rid of Mayor Mark Mallory, and all of his pro-union cronies. They have destroyed your city and will continue to do so.

I commend Roxanne Qualls, Wendell Young and Jeff Berding for having the courage to make a proposal of outstanding merit.

What You Can Do

Please contact Mark Mallory, Leslie Ghiz, Cecil Thomas, and Charlie Winburn and let them know how disgusted you are that they would not even consider the merits of the proposal.

You can reach Mark Mallory at 513.352.3250.
Please email mayor.mallory@cincinnati-oh.gov to comment on police department outsourcing.

You can reach Leslie Ghiz at 513-352-3344
Please email leslie.ghiz@cincinnati-oh.gov to comment on police department outsourcing.

You can reach Cecil Thomas at 513-352-3499
Please email cecil.thomas@cincinnati-oh.gov to comment on police department outsourcing.

You can reach Charlie Winburn at 513-352-5354
Please email charlie.winburn@cincinnati-oh.gov to comment on police department outsourcing.

Please let the mayor know you are tired of seeing your taxes raised to support public unions who get far more benefits and wages than taxpayers can afford and that it is high time for mayors and council members to be beholden to taxpayers, not unions.

Thanks to "Machiavellian" at the Virtuous Republic for his email that led to this post.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Canadian Borrowing Gone Mad: A Look at BMO's Misguided Balance Sheet Theory and the Keep on Dancin' Market Share Theory of Toronto-Dominion

Posted: 18 Dec 2010 09:55 AM PST

Theory has it that Canadian banks are in far better shape than their US counterparts. If so, it's primarily because the Canadian Central Bank (Bank of Canada) has assumed nearly all the default risk on Canada's massive property bubble.

Is that supposed to make everyone stand up and salute the Loonie?

One key point that has recently come into the spotlight is Canadian citizens are not in better shape than their US counterparts. All those going "rah rah" over the Loonie, might be advised to consider some of the following articles.

Canadians warned to rein in borrowing on cheap money before it's too late

Bank of Canada governor Mark Carney issued a staunch warning to Canadians about the perils of cheap borrowing Monday, just as fresh data suggested household debt-to-income ratios have jumped to record highs.

"Household debt levels are at unprecedented levels relative to income — the level of vulnerability of households remains high," Carney told a news conference after a speech in Toronto.

Statistics Canada said Monday the ratio of debt to disposable income rose to 148.1 per cent in Canada in the third quarter — a close to five point jump — slightly ahead of the U.S. ratio of 147.2 per cent.

TD Bank chief economist Craig Alexander said it was natural that the government would explore ways to constrain borrowing, but said he also does not believe the situation has reached a crisis.

Apparently TD Bank chief economist Craig Alexander thinks it's best to wait until there is a crisis to do anything about it.

No doubt Alexander is a big believer in the Greenspan methodology of dealing with bubbles after they burst even though we have already seen the disastrous results of such complaisance.

Here's another good one from up North: Consumers warned: 'brutal reckoning' ahead

Bank of Canada governor Mark Carney issued another stern warning Monday on Canadians' appetite to take on record levels of household debt, which some analysts took as a signal he is set to raise interest rates as soon as the economy improves.

"Cheap money is not a long-term growth strategy," Carney said. "Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning."

In Ottawa, Finance Minister Jim Flaherty said his government could tighten mortgage eligibility rules for a third time, if required, to keep credit growth in check.

Based on conversations he's had with banking executives, "there is no reason for extreme concern right now," Flaherty said. "But there is a reason for concern. So if it is necessary, we will toughen up the mortgage rules some more."

What's with this "no reason for extreme concern right now" nonsense? The Canadian property bubble is of epic proportion.

Flaherty too, appears to be a proponent of the Greenspan theory that bubbles can only be recognized in hindsight.

Blue Ribbon Complacency Awards

The blue ribbon for complacency goes to the Bank of Montreal for Debt picture not so bleak

Statistics Canada released data Monday showing that Canadian household debt has risen to 148 per cent of disposable income. The eye-popping figure is all the more alarming considering it's the first time since the 1990s that Canada's ratio has been higher than that of the U.S.

Alarm bells rang everywhere from the Bank of Canada to the Finance Department on Monday, and Canadians were urged to tighten their belts and prepare for a time of austerity.

But a closer look at the numbers indicates the picture might not be so bleak.

"The continued laser-like focus on debt overshadows the other half of the balance sheet," BMO chief economist Doug Porter said Monday.

Namely, Canadians are borrowing. But they're also saving, and they're worth more than they used to be.

Balance Sheet Theory Madness

Porter's statements are exactly the same kind of silliness we heard in the US regarding the central belief "massive debt is OK because it's supported by rising asset prices".

It was bad enough that anyone believed such nonsense a few years ago before the US property bubble blew sky high. That such beliefs still have proponents at the highest level of Canadian banks now seems rather amazing.

It just goes to show just how firm the belief "It's different here" is in Canada.

When housing prices crash, and especially if the stock market goes with it, what's left of Porter's "Balance Sheet Theory" will look something like a moldy slice of 3-year-old Swiss cheese.

Banks Won' Lead The Way

Toronto-Dominion Bank chief executive officer Ed Clark says Banks won't lead way on fixing debt problem.

If policy makers want Canadians to stop borrowing too much, it's up to Ottawa, not financial institutions, to force a change in behaviour, says one of Bay Street's longest-serving senior bankers.

Toronto-Dominion Bank chief executive officer Ed Clark acknowledged Canadians' alarming debt levels, but said the issue is a matter of public policy and would be best resolved by a tighter government rules on residential mortgages.

In an interview with The Globe and Mail, Mr. Clark said that no bank wants to be the first to impose stricter requirements on borrowers out of fear that it will suffer a major loss of customers to rivals. Personal banking "is a highly competitive industry," Mr. Clark said. "If we said 'Look, we're going to be heroes and save Canada from itself, and we'll impose a whole new [mortgage] regime on everyone else,' the other four [large] banks would say 'Let's carve them up.' "

Mr. Clark said it is impossible to expect any bank to crack the whip on borrowers because "market share loss is perceived as a strategic loss, not just a numerical or dollar loss."

Dance Until The Music Stops

Clark sounds like he's a big believer in the Chuck Price Music Theory best described in retrospect as "Keep dancing until you dance out the door".

Flashback July 10, 2007: Quotes of the Day / Top Call

Chuck Prince - Citigroup CEO

No End Soon to Buyout Boom: "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing".

Mish reply.

If ever there was market arrogance, the statements by Chuck Prince says it all.
In an interview with the newspaper, Prince said the boom will eventually end, but will continue for now because markets have plenty of liquidity, despite turmoil in the U.S. subprime mortgage market. He denied Citigroup was pulling back, the newspaper said. "When the music stops, in terms of liquidity, things will be complicated," he said. "But as long as the music is playing, you've got to get up and dance. We're still dancing.

Prince added: "The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be. At some point, the disruptive event will be so significant that, instead of liquidity filling in, the liquidity will go the other way. I don't think we're at that point.

My comment at the time was "I leave it to you to decide whether or not this is the 'last dance'".

Flashback November 02, 2007: Music Stops for Chuck Prince

The party is over and the music has stopped for Chuck Prince. His last dance is a two-step out the door. Citi's Prince Plans to Resign.

Moral-Hazard Position of Bank of Canada

Toronto-Dominion's CEO does not give a damn about fundamentals, about acting on their clients' interests, or for that matter acting on shareholder interests. Clark's only concern is in not losing market share to the other Canadian banks until the whole mess blows sky high.

Canada's banks clearly don't care what happens as long as they can pass the trash to the Bank of Canada, the Canadian equivalent of Fannie Mae.

Clark's statements, as well as statements made by the chief economists of BMO and Toronto-Dominion, put a spotlight on the decidedly stupid moral-hazard mess the Bank of Canada has gotten itself into by backstopping mortgages of Canadian borrowers.

But hey, look on the bright side. The music is still playing. In memory of Chuck Prince, Keep on Dancin'

Addendum:

I said Bank of Canada in a couple of places where I should have said CMHC.

Here are a couple of corrections from Canadian readers.

"RP" Writes ....

Quick corrections here Mish. Mortgages in Canada are guaranteed by the CMHC, which is a crown corporation equivalent to Fannie Mae. Anything less than 20% down requires this insurance, so that's the source of the Canadian banks' "health". The loose lending standards were set by the current "Conservative" government, a few months after they came in office. We had 0 down, 40 year mortgages insured by the government for a couple of years. Now it's officially 5% down and 35 years, but every bank will lend you the downpayment. The government also insures mortgages for rental properties.

Similarly, "MS" writes ....

Hey Mish,

One inaccuracy that should be corrected. It's the CMHC (Canada Mortgage and Housing Corporation) that serves as the equivalent to Fannie and Freddie, not the BoC. The CMHC insures mortgages for below market rates, and the major banks pass along their loans to them.

The Conservative government ordered the CMHC (a crown corporation) to insure some $300 Billion in additional mortgages during the crisis - nearly double their previous holdings. It is this that has buoyed the Canadian R/E market since then. Banks don't worry about credit worthiness, because the CMHC will take it anyway in order to meet their quota.

"Moi" Writes ....

Mish you are one of the few Americans that seem to "Get It". So many of the other US financial writers talk glowingly about how sound Canada is financially and how the Canadian banks did not take part in the risky lending practices that the US banks have taken part in. This is complete and utter BS!! The Canadian banks are doing the same sort of zero down or variable rate mortgages it's just they have none of the risk to worry about. 600 Billion dollars worth of that mortgage risk is held by the government of Canada thanks to the Canada Mortgage and Housing Corporation (CMHC). There are cash back mortgages every where in this country. In other words come up with your measly 5% down payment and the bank will give you 5% back. So here in Canada we proudly brag about how we do not have zero down mortgages, we just call them by a different name. Also, if you do not have 5% to put down no problem. All of the banks will loan you money to by an RRSP (IRA), you can than cash that RRSP to be paid back later and use that as your 5% down payment. Voila, zero down mortgages.

The Canadian Association of Accredited Mortgage Professionals came out last month with their "Good News" annual report last month. Just like the Real Estate Industry, all news is good news. Take a look at the numbers. At these absolutely rock bottom interest rates:

100,000 mortgage holders would be in trouble with any rate move.
350,000 mortgage holders would be in trouble if rates only go up less than 1 percent.
250,000 mortgage holders would be in trouble if rates went up between 1 and 1.5 percent.

So, if interest rates which are at Century lows went up a measly 1.5 percent, 700,000 mortgage holders in Canada would be in trouble. What if they went up 2 or 3%? It would be mortgage Armageddon in Canada. This is how precarious our housing market. The following link gives you just one tiny example of why Canadian housing is a house of cards that could topple at the slightest touch.
http://whispersfromtheedgeoftherainforest.blogspot.com/2010/05/pardon.html

http://www.theglobeandmail.com/report-on-business/canadian-mortgage-debt-tops-1-trillion-for-first-time/article1789172/

5% or more cash back mortgage:

http://www.tdcanadatrust.com/mortgages/5_cashback.jsp
http://www.rbcroyalbank.com/products/mortgages/cash-back-mortgage.html

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Spanish "Ghost Towns", Shadow Inventory, Cooked Books; Spain's 2011 Real Estate Funding Crisis

Posted: 18 Dec 2010 12:39 AM PST

In Spain, huge projects are completely empty and bad debts mounts as the Spanish banks play extend-and-pretend with developers. That game is about to end.

Developer loans are coming due. Yet, there is no way for developers to make interest payments let alone pay any principal. When developers collapse in 2011, banks will be stuck with a vast amount of undeveloped land at overvalued prices as well as ghost towns so far outside of major towns that no one will live in them.

A flood of inventory awaits a death of buyers. Moreover, a huge amount of shadow-inventory is waiting on deck, hoping for better prices so the owners can bail. Unfortunately there is no one to bail to. Spain's official unemployment rate is 20%, and it's quite likely the real unemployment rate is higher.

On top of that, Spain has to deal with various austerity measures. There is no way for it to grow out of its problems.

Many are starting to realize Spain is massively understating the problems its banks, and Spanish banks books are cooked. That has been my position all along. The New York Times offers evidence in Newly Built Ghost Towns Haunt Banks in Spain

It is a measure of Spain's giddy construction excesses that 250 row houses carpet a hill near this tiny rural village about an hour by car outside of Madrid.

Most of these units have never sold, and though they were finished just three years ago, they are already falling into disrepair, the concrete chipping off the sides of the buildings. Vandals have stolen piping, radiators, doors — anything they could get their hands on.

The Bank of Spain says the banks have about $240 billion in "problematic exposure" out of $580 billion invested in real estate and construction, a situation, they say, the banks are capable of handling.

The boom and bust of Spain's property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units — about 800,000 in 2007 alone. Developments sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.

"Most of the adjustment in housing prices has already taken place," José Manuel Campa, Spain's deputy finance minister, said recently, though he allowed that there was a lack of good information on real estate sales.

Still, skeptics abound. One is Jesús Encinar, the founder of Spain's most popular property Web site, Idealista.com. He says that the Spanish authorities are striving to engineer a soft landing of the housing market that would give more time to offload surplus housing at reasonable prices.

But he believes prices still have a long way to fall, by 30 or 40 percent, maybe more. "Some people who said there was no housing bubble are now saying we are at the bottom," Mr. Encinar said. "But I say we have several years to go."

Fernando Acuña, co-founder of Pisosembargados.com, a Web site that sells housing on behalf of the banks, said as many as 100,000 repossessed units were now for sale in Spain, a number that "could double or triple."

The biggest challenge for the banks is that they are likely to end up owners of vast amounts of undeveloped land. José Luis Suárez, an expert on real estate at the IESE business school, said 65 percent of bank lending to developers is tied up in land, enough to build 758,000 more housing units. "That gives you an idea of how long it could take for the market to digest all this," he said.

There is much more in the two-page article. Inquiring minds will want to take a closer look.

Revenue Drain to Hit Spain

Bloomberg reports Spain Banks Face 2011 Revenue Drain on Funding Costs.

Spain's banks, burdened this year by rising defaults and flagging credit demand, will face further pressure in 2011 as funding costs eat away at the returns on their stock of home loans.

The squeeze may be worst for lenders with the greatest proportion of mortgages because they have less scope to pass on the financing costs to customers, said Claire Kane, an analyst at MF Global in London. Ibercaja, a Zaragoza-based savings bank, has 53 percent of its loans in mortgages, while Bankinter SA, based in Madrid, has 46 percent, Bank of Spain data show.

"The amount of mortgages a bank has gives an indication of who is going to face the most pressure on revenues," said Daragh Quinn, an analyst at Nomura International in Madrid. "The more retail mortgages you have, the more difficult it will be to re-price your loan book."

Cooked Books and Bad Loans

The Bank of Spain said "Bad loans as a proportion of total loans in Spain climbed to 5.67 percent in October, the highest level since January 1996, from 5.50 percent in September and 4.99 percent a year ago."

Does anyone believe that? I don't, but even if it is true, it will not stay that way long. Expect to see that rate rise as soon as developers default and banks get saddled with ghost towns.

Here's another paragraph from the article that strikes me as unbelievable.

"The quality of Spain's mortgages has proved resilient, even with unemployment higher than 20 percent. Moody's expects a loss ratio of 2.8 percent for home loans, compared with 12.9 percent for loans to developers and 50 percent for real estate assets."

Anyone agree with Moody's regarding that 2.8% loss ratio on home loans in the face of statements by Jesús Encinar, from the preceding article. Encinar, the founder of Spain's most popular property Web site, thinks home prices drop another 30% over the next few years.

PIGS Exposure Table

Inquiring minds may wish to take another peek at PIGS Exposure Table, Explaining the Panic by Numbers

click on chart for sharper image

Exposure to Spain

Germany - $216.6 billion
France - $201.3 billion
Great Britain - $136.5 billion
US - $172.8 billion

A Question of Philosophy

Here's an interesting quote from the above Bloomberg article by Arturo de Frias, an analyst at Evolution Securities Ltd. in London: "Mortgages can be a problem in a given year such as 2011 because of the prevailing liquidity or funding conditions. Over a longer period, they remain a very profitable business."

That sounds much like the philosophy espoused by Countrywide Financial and hundreds of U.S. subprime lenders that all suddenly died in 2007-2008. Ironically it's the reverse of an often repeated Keynesian phrase "In the long run, we're all dead."

In this case it's "In the short run we're dead, but never mind that. In the long run we'll do just fine". It sums up the PIGS situation quite nicely, but it's certainly no way to run a business or a country.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Your Weekly Address: National Security Over Politics on START

Your Daily Snapshot for
Saturday, Dec. 18, 2010

Your Weekly Address: National Security Over Politics on START

President Obama urges the Senate to heed the calls from Presidents George H.W. Bush and Bill Clinton, every living Republican Secretary of State, our NATO allies, and the leadership of the military: ratify the New START Treaty with Russia.

Watch the video.

Weekly Wrap-Up

A quick look at the week of December 13, 2010:

Quote: “We are here with some good news for the American people this holiday season,” said President Obama before signing the Middle-Class Tax Cuts Bill -- legislation that will prevent tax hikes on middle class families, keep the economy growing, and maintain lifelines for millions of those who are unemployed through no fault of their own. Watch the video.

Digg the White House: The White House is now on digg.com. Take a peek and start following us right now.

Holidays in Photos: Go behind-the-scenes as the White House celebrates the holidays in this photostream.

Healthy Kids: The President signs the Healthy, Hunger-Free Kids Act at a local DC school. The new law improves the nutritional value of school meals and increases the number of children eligible to receive them. Watch the President’s and the First Lady’s remarks.

The Night Before Christmas: The President reads to children at a local elementary school and the First Lady to patients, parents and staff at Children’s National Medical Center. Watch the video of the President here and the video of the First Lady here.

Elmo at the White House: Elmo joins Assistant White House Chef Sam Kass in the White House Kitchen to talk about healthy and tasty school meals -- and Elmo does the melon dance. Watch the video.

Lie of the Year: Politifact calls the claim that Health Reform is a "Government Takeover of Health Care" the lie of the year.

West Wing Week: “All these pens”

Across the Country: See how the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act will impact middle class families in every state.

"Significant Progress”: President Obama discusses the Afghanistan-Pakistan Annual Review released this week. Read the statement.

“We need it badly”: General James Cartwright, the Vice Chairman of the Joint Chiefs of Staff, takes questions on the START Treaty.

Cool Roofs: Changing the color of your roof from dark to light can lower your energy bill 10-15%. Find out more in this video.

DREAM: Top Administration Officials discuss the importance of the DREAM Act, read them all: Cabinet Secretary Chris Lu’s here, Education Secretary Arne Duncan’s here, Labor Secretary Hilda Solis's here, Commerce Secretary Gary Locke's here, Homeland Security Secretary Janet Napolitano's here, Dr. Clifford L. Stanley, Under Secretary of Defense for Personnel and Readiness, here, Secretary of Agriculture Tom Vilsack here, Attorney General Eric Holder's post here.

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