The Big Picture | Taxes and Policy

Feds Expand Mortage Fraud Investigation

Monday, May 05, 2008 | 06:43 AM

in Legal | Real Estate | Taxes and Policy

You mean not following Federal banking laws is a crime? Who knew?!

"Federal agencies are intensifying a criminal investigation of the mortgage industry and focusing on whether some lenders turned a blind eye to inflated income figures provided by borrowers.

The Federal Bureau of Investigation and the criminal division of the Internal Revenue Service have formed a task force to examine mortgages that were made with little or no proof of the earnings or assets of borrowers, a government official who had been briefed on the matter said Sunday . . .
The task force, which was established in January, stepped up its investigation in recent weeks as the financial industry disclosed billions of dollars in additional write-downs from bad mortgage investments. The latest inquiry is broader and deeper than a separate F.B.I. investigation of mortgage lenders that is also under way . . .

In January, the F.B.I. began a wide-ranging investigation of 14 unnamed mortgage companies over their lending and business practices. Those smaller inquiries have tended to focus on local foreclosure schemes. That F.B.I.-led inquiry has since expanded to include several more firms. In March, the Justice Department and the F.B.I. began investigating whether the Countrywide Financial Corporation, the troubled mortgage giant, misrepresented its financial condition and loans in filings with the Securities and Exchange Commission."

No word about any investigations into Predatory Borrowing . . .

Previously:
Tyler Cowen: "Predatory Borrowing The Bigger Problem"
http://bigpicture.typepad.com/comments/2008/01/apologist-for-f.html

Source:
Government Intensifies Mortgage Investigation
LYNNLEY BROWNING
NYT, May 5, 2008
http://www.nytimes.com/2008/05/05/business/05lend.html

Stimulus Check

Friday, May 02, 2008 | 03:30 PM

in Economy | Taxes and Policy

Many States Are "In Recession"

Monday, April 28, 2008 | 10:58 AM

in Economy | Taxes and Policy

Last week, we looked at Trimtab's erroneous read of Federal Withholding Taxes.

This week, let's take a look at how the States and Local governments are doing with their tax base. Let's start with a chart of non-Federal deficits, as highlighted this April 15th in The Gartman Letter:

>
STATE AND LOCAL BUDGET DEFICITS
Billions, 1965 - Present

Chart courtesy of Stephanie Pomboy, MacroMavens.

The chart above shows a steady deterioration in the balance sheets of the states and cities of the US since the late '90's. Dennis Gartman notes that "Cities and states cannot run budget deficits without issuing revenue anticipation notes and the like to try to balance their budgets, and for a time those stop-gap measures will work... with the operative words here being "for a time."

As consumers spend less, the decrease in economic activity is leading many individual states to have their own recessions:

"The finances of many states have deteriorated so badly that they appear to be in a recession, regardless of whether that's true for the nation as a whole, a survey of all 50 state fiscal directors concludes.

The situation looks even worse for the fiscal year that begins July 1 in most states.

"Whether or not the national economy is in recession — a subject of ongoing debate — is almost beside the point for some states," said the report to be released Friday by the National Conference of State Legislatures.

The weakening economy is hitting tax revenue in a number of ways: People's discretionary income is being gobbled up by higher food and fuel costs, while the tanking housing market means people are spending less on furniture and appliances associated with buying a house."

One last note: Preliminary Q1 GDP data gets released on Wednesday . . .

Graphic courtesy of AP

Previously:
Trimtabs Continues to Abuse Withholding Data http://bigpicture.typepad.com/comments/2008/04/trimtabs-contin.html

Sources:
U.S. States `Deteriorating' Amid Slump, Lawmakers Say
William Selway
Bloomberg, April 25 2008
http://www.bloomberg.com/apps/news?pid=20601103&sid=aynsFLOt6jWE&

Many states appear to be in recession as deficits grow
ANDREW WELSH-HUGGINS
Associated Press Apr 25, 8:17 AM EDT
http://tinyurl.com/69wjfv

Trimtabs Continues to Abuse Withholding Data

Wednesday, April 23, 2008 | 07:07 AM

in Data Analysis | Economy | Taxes and Policy

Yesterday's Gartman Letter (TGL) featured a discussion about withholding tax data (via Trimtabs); I received several questions about it from various quarters. In short, the Trimtabs' analysis was simply wrong. The data below reveals the how and why.

TGL quoted Charles Biderman of Trimtabs, who stated:

"The US economy is improving rather than deteriorating. The income and employment taxes withheld from the paychecks of all U.S. workers on payrolls rose 3.1% year-over-year in the past two weeks and one day (Friday, April 4 through Friday, April 18). Withholdings on the latest Friday this year were 13.2% higher than withholdings on the same Friday last year, and the growth rate will probably rise further once withholdings for Monday are available. The growth rates we have been measuring are definitely not indicative of an economy sliding into a deep recession. (emphasis added)

Trimtabs seems to have a fundamental misunderstanding about the withholding data series. Their conclusions are not merely unsubstantiated by the data -- they are directly contradicted by it. To be blunt, this was one of the weakest, most poorly reasoned and mathematically challenged analyses I have read in two decades on Wall Street. A brief review of the charts of the withholding data shows what an absurdity the Trimtabs commentary is.

Let's start at the 2001 recession. In the beginning of that contraction, withholding taxes fell slightly. Further into the recession, W/H actually rose. Then much deeper into the recession, W/H plummeted. This is consistent with what you would expect from an employment related data series, as employment is a lagging indicator.
>

Withholding Taxes, Quarter over Quarter Growth Rate

Withholding Taxes, Yearly Growth Rate

(Data through April 21, 2008)
charts courtesy of Matt Trivisonno

Based on the above, one is forced to wonder how a conclusion could be reached that the recession -- which has yet to produce negative year-over-year WH -- is already over, and now in recovery. If anything, based on this one single metric, it is still in the very early stages when compared to the recession of 2001. And, if this recession turns out to "only" be as bad as the last, mild contraction, the W/H data still has a long away to go. If it is appreciably worse than '01 (as I fear it might), then W/H data has yet to even begin to approach its worst levels.

Indeed, earlier this month -- based on what appears to be a similarly erroneous misinterpretation of the W/H data -- Trimtabs announced that "The recession was over" (see this Marketwatch article).

Why? The 4.1% year-over-year W/H. That sounds like a good number -- until you actually look at the full data series:>

>
Does this Weekly Chart look encouraging to you?

That chart is hardly impressive; once you put the year-over-year gains of 4.1% into historical context, it makes you wonder what the hell Trimtabs is looking at.

Lastly, note that the witholding data series is quite volatile, and fluctuates dramatically from day to day. Looking at the data as a series - rather than any single day or week -- provides a much less random basis for drawing any conclusions about what the general trend in tax withholding is, and what it might mean.

I cannot reproduce Trimtabs 13.2% single day data. However, looking back over the past 12 months "one day at time " series, we are left with the conclusion that at best, a huge change in a single day's data is most likely an enormous outlier to the rest of the W/H data series.

Here is the most recent data through April 18, 2008 showing both the volatility and the overall trend:

>
Withholding Taxes -- Y/Y Daily Growth

(Data through April 21, 2008)
charts courtesy of Matt Trivisonno

Under most circumstances, the normal state of W/H is for it to nominally increase. Except for the most severe slowdowns (i.e., recessions), it reflects both an increasing population and ordinary inflation. This natural expansion is not reflective of any fundamental improvements in the US economy.

This most recent analysis by Charles Biderman is more reflective of psychology: There is still too much bullish sentiment. We have not seen any of the deep despair that typically accompanies lasting bottoms. Instead, there seems to be a desperate attempt to grasp at bullish straws -- regardless of the data. This is symptomatic of early, not latter stages of a bear market.

Previously:
Changes in US Withholding Taxes (March 24, 2008)
http://bigpicture.typepad.com/comments/2008/03/changes-in-us-w.html

TrimTabs: Its a Recession, and Its Already Over (Wrong) (April 02, 2008) http://bigpicture.typepad.com/comments/2008/04/trimtabs-its-a.html

Disappearing Economic Indicators

Friday, April 18, 2008 | 06:47 AM

in Data Analysis | Employment | Psychology/Sentiment | Taxes and Policy | Wages & Income

First M3, now . . .

Sometimes, when the data is (how shall we say this) less than delightful, politicians pressure bureaucracies to modify their models. This attempt to misrepresent reality goes back at least to JFK, and probably much further. It is not party specific, but is a characteristic of the all too common creature, Politico Disinguousi.

Yesterday, we discussed the unprecedented seasonal changes to CPI (Pre-Revision CPI: 9%) that managed to all but eliminate inflation reporting. And the absurdity that is the birth death adjustment has all but completely bastardized the Non-Farm Payroll (NFP) data series. Of course, the cowardly scam that was the Boskin Commission was the most outrageous change in modeling over recent decades.

More brazen politicos don't even bother gunking up the models -- they simply press to stop reporting the data. The most egregious example of this in the recent past was M3 reporting. We noted as it happened that once the Fed decided to save a few pennies stopping M3 reporting, you knew that M3 was going to skyrocket.

And so it has.

Recently, there was an attempt to close Economicindicators.gov; That was a warning the economy was about to worsen. Thanks to readers and NY Senator Schumer, it was successfully beat back.

The latest such attempt at reducing economic information is brought to our attention by the WSJ's Real Time Economics. They note that:

"A statement from the chair of the NABE’s statistics committee, Haver Analytics President Maurine Haver, asserted that “just when reliable and timely indicators are needed most, resources devoted to their production at our federal statistical agencies have been cut, requiring the termination of data series or a reduction in sample sizes used to produce the data.”

Ms. Haver catalogs the casualties of budgetary tightening, writing that “the Bureau of Labor Statistics (BLS) has been forced to terminate all hours and earnings data reported for local areas as well as payroll employment for 65 small metro areas. The BLS International Price Program has also eliminated a number of series including prices of transportation services such as passenger air fares, air freight, and crude oil tanker freight. The Census Bureau will discontinue its Survey of Alterations and Repairs in May. The Bureau of Economic Analysis will reduce the level of industry detail in its county data and will eliminate the benchmark capital flow tables that provide baseline data on industry-by-industry investment by type of investment. This may only be the beginning.”

Let's draw the appropriate conclusion from this: First M3 reporting stopped, and shortly thereafter, M3 skyrocketed. Next was the attempt to stop aggregating general economic information, and then we learned that GDP fell off the cliff.

Now comes the attempt to reduce the reporting of hours and earnings data. Gee, can you guess what coincidence is about to happen?

Let me end your suspense: Workers Get Fewer Hours, Deepening the Downturn.

"Throughout the country, businesses grappling with declining fortunes are cutting hours for those on their payrolls. Self-employed people are suffering a drop in demand for their services, like music lessons, catering and management consulting. Growing numbers of people are settling for part-time work out of a failure to secure a full-time position.

The gradual erosion of the paycheck has become a stealth force driving the American economic downturn. Most of the attention has focused on the loss of jobs and the risk of layoffs. But the less-noticeable shrinking of hours and pay for millions of workers around the country appears to be a bigger contributor to the decline, which has already spread from housing and finance to other important areas of the economy.

While official unemployment has risen only modestly, to 5.1 percent, the reduction of wages and working hours for those still employed has become a primary cause of distress, pushing many more Americans into a downward spiral, economists say.

Moreover, this slippage is a critical indicator that the nation may well be on the verge of a recession, if not already in one.

Last month, the hours worked by those on American payrolls dropped, compared with six months earlier, according to an index maintained by the Labor Department. The last time the index moved into negative territory was February 2001, when the economy was on the doorstep of recession. A similar slide emerged in August 1990, one month into what proved an even more severe downturn."

Now what were the odds of that ?

Previously:
Can M3 be Saved?
http://bigpicture.typepad.com/comments/2006/03/can_m3_be_saved.html

WTF? Feds Shutting Down Economic Data Site http://bigpicture.typepad.com/comments/2008/02/wtf-feds-shutti.html

Sources:
A Slump in Economic Indicators
Matt Phillips
April 14, 2008, 12:02 pm
http://tinyurl.com/48urm5

Workers Get Fewer Hours, Deepening the Downturn
PETER S. GOODMAN
NYT, April 18, 2008
http://www.nytimes.com/2008/04/18/business/18hours.html

Some key statistics as prediction aids: M3
NowAndFutures.com, 2008
http://www.nowandfutures.com/key_stats.html

Alternate Data Series
John William's Shadow Stats
http://www.shadowstats.com/alternate_data

Quote of the Day: Uptick Rule

Thursday, April 03, 2008 | 02:15 PM

in Markets | Taxes and Policy | Trading

Straight dope:

"To suggest that the removal of this rule is causing the markets to go down is to loudly announce 'I don't understand the credit crisis, and I am incapable of ever understanding it.'"

-Jim Bianco, WSJ

The article specifically mentioned Mario Gabelli, Martin J. Whitman, and Jim Cramer as opposing the elimination of the Uptick rule.

Source:
Blame Game: The 'Uptick' Rule Debate
GREGORY ZUCKERMAN
WSJ, April 1, 2008
http://online.wsj.com/article/SB120701263355579045.html

Jubak on the Paulson Plan

Wednesday, April 02, 2008 | 03:00 AM

in Markets | Taxes and Policy

Jim Jubak calls the Reform plan rally proof that there is nothing to it, other than business as usual.

click for video

Reform plan rally, no fix

via MSN Money

Hank Paulson's Cognitive Dissonance

Tuesday, April 01, 2008 | 06:28 AM

in Credit | Derivatives | Psychology/Sentiment | Taxes and Policy

>
"The Paulson plan belongs in a fictional world where financial institutions do a good job in regulating and monitoring themselves. Unfortunately, that’s not the world we live in."

-Why the Paulson Plan is DOA

So says Michael Mandel of Businessweek. In addition to the quote above, he goes further, calling the Treasury Secretary to task:

"In the middle of perhaps the greatest financial upheaval since the Great Depression, Treasury Secretary Hank Paulson is proposing a change in financial regulations which basically amounts to a big wink to Wall Street. His plan will go nowhere, both for political and practical reasons. In fact, it does not even meet the minimum standard of improving transparency, which would reduce the possibility of a similar crisis in the future...

The most striking thing about the current problems is just how much money the banks and the investment banks have lost. They apparently had no idea of how risky their own exposure was. The supposedly smart guys were simply stupid."

I concur with Mandel: In order to avoid these issues in the future, depository banks and investment banks need full and transparent reporting of their holdings. No more side pockets, off-the-book SIVs, or buried derivatives exposures. In fact, they should also clearly report the potential losses they have on their books via exposure to leveraged and risky counter-parties as well.

How did this all come about? Over the past 25 years or so, we have migrated from a world that was excessively regulated to a new world that was excessively deregulated. The initial problems were too much complexity, high costs, and time consuming bureaucracy. That's been replaced with an equally problematic situation: No adult supervision in places where the children require adult supervision.

Less financial supervision? More self-regulation? What hallucinogenics were taken prior to making those recommendations?

Bankers are not the folks who should be garnering less transparency, and less onerous regulatory requirements. Only a clueless ideologue would even dare suggest as much. Unfortunately, we have a clueless idealogue running the Treasury department. When confronted with what can only be described as insurmountable evidence that self-regulation has failed miserably, our man at Treasury proposes more self-regulation.

Riddle me this, Batman: If these finance wizards were any good at the job of self-regulation, would we even be having discussions as to how to resolve a global credit crisis?

If you are wondering how certain people can fail to understand this, the simple answer is cognitive dissonance. If Paulson were to confront reality -- lack of supervision is how banks got themselves in this mess in the first place -- his entire world view would crumble. Thus, the problem is not one of lack of supervision, its an issue of efficiency! Hence, we get these absurd attempts to make the lack of regulatory supervision "more efficient."

The Paulson plan isn't about avoiding future meltdowns in the financial system -- its about allowing Hank Paulson (and others) to cling to their now disproven deregulatory fantasies . . .

Source:
Why the Paulson Plan is DOA
Michael Mandel
Economics Unbound, March 30 2008

Uh-Oh: Cars/Vacations/Flat Panels Not Tax Deductible

Monday, March 31, 2008 | 06:30 PM

in Economy | Employment | Real Estate | Taxes and Policy | Wages & Income

Here's some more bad news for John Q. Public:

We all know that the fun of the past few years Housing binge / ATM withdrawal / GDP Party is long since over. But it turns out that the hangover isn't nearly done.

Why is that? Well, one of the advantages of Home Equity financing is that if you use the proceeds for capital improvements to the home -- *new floors, walls or lighting, installing central A/C, removing trees, refurbishing bathrooms, new lawns or gardens -- then it has the same tax deductiblity as if it were a primary mortgage.

What abut if you use the proceeds for other, non-capital improvement purposes?

From Realty blog Patrick.Net:

"Word from the IRS is that they are auditing people based on refiances on their house. If you refied and pulled money out of the house and use for other purposes than home improvement you can not claim that as Mortgage Deduction, needs to be claimed as Interest expense. Guess what, they want proof of home improvements…"

Uh-Oh !

Why do I smell some big trouble coming down the road for some people?

Source:
Refi Interest Trap?
March 28th, 2008
http://patrick.net/wp/?p=594

_______________________
* What we did to our home

SFAS 157: Market Prices Too Low? Just Ignore Them!

Monday, March 31, 2008 | 06:47 AM

in Credit | Derivatives | Markets | Taxes and Policy

Here's a honey of an idea that almost slipped by unnoticed last week. Thankfully, the NYT's sharp eyed business columnist, Floyd Norris, caught it.

An SEC opinion letter advising companies how to deal with their Level 3 assets made a rather curious suggestion. They advised that if the prices of mark-to-model ~~crappy~~ paper are underwater, well then, declare it the result of forced liquidation -- and then you can simply ignore them.

It truly boggles the mind.

Would someone please explain to me how providing an official mechanism for allowing companies to ignore market values of the bad investments they made help investors? Instead of working towards transparency, the SEC is providing a mechanism to allow banks to hide losses from their shareholders. This is nothing short of an invitation to commit fraud.

Here's the offending passage:

“Under SFAS 157, it is appropriate for you to consider actual market prices, or observable inputs, even when the market is less liquid than historical market volumes, unless those prices are the result of a forced liquidation or distress sale. Only when actual market prices, or relevant observable inputs, are not available is it appropriate for you to use unobservable inputs which reflect your assumptions of what market participants would use in pricing the asset or liability.” (emphasis added)

Norris suggests this is an invitation for banks having two sets of books. One for Bank disclosures for shareholders: Ignore these paper losses, the prices are only due to a forced liquidation -- and another for Margin calls: Hey! You are underwater by XX% in this; send in more money! Apparently, the SEC believes prices are irrelevant, except when it comes to margin calls.

Stop and think about this for a moment: Every margin call is essentially a forced sale. Consider the alphabet soup of highly leveraged derivatives out there, where many of the most recent trades have occurred because some hedgie has blown up. What might the unintended consequences of this rule actually be?

Today is the last day of the quarter. There is often window dressing to the upside the last few days before a Q's end to make the fund's performance look better. Imagine if there was an incentive to make a huge category of derivatives' last trade appear to be the result of a margin call? We would have this enormous window dressing down -- so as to not have to come up with a legitimate value for tier 3 junk.

This is a directive to banks to make the situation much, much worse. They can clean up their own books by forcing liquidations elsewhere. Un-fricking-believable.

Holy shnikes, have any of these people at the SEC every worked on a trading desk?

Source:
If Market Prices Are Too Low, Ignore Them
Floyd Norris
NYT, High and Low Finance
March 28, 2008, 6:21 pm
http://norris.blogs.nytimes.com/2008/03/28/if-market-prices-are-too-low-ignore-them/

~~~

Grant Calls Fed's Balance Sheet an `Economist Nightmare'

Thursday, March 27, 2008 | 03:00 AM

in Credit | Derivatives | Federal Reserve | Taxes and Policy

00:00 Fed intervention in credit market crisis
07:16 Credit crisis a "scandal"; Freddie and Fannie
09:23 Impact of Fed action on inflation, dollar
14:29 Is there a silver lining in credit crisis?
Running time 15:42

Click for Video

James Grant, editor of Grant's Interest Rate Observer, talks with Bloomberg's Pimm Fox in New York about the Federal Reserve's intervention in the credit market crisis and its impact on the value of the U.S. dollar.

Thanks, Laura!

~~~

Bailout Nation

Monday, March 24, 2008 | 06:30 PM

in Corporate Management | Psychology/Sentiment | Taxes and Policy

I have this image in my mind of an American cowboy: Rugged, independent, self-reliant. I picture him on a cattle drive, depending upon only his own wits, his horse, and his trusty Winchester to get by.

This vision of the American past is fast becoming a myth, rendered moot by the present day cowboys. The difference between the two -- not the smell, which is surprisingly similar -- is that the current cowboys have a different cavalry in their back pockets: Uncle Sam.

Indeed, as time goes on, we have become less independent, and more reliant upon the Federal Government -- especially the Federal Reserve -- for Bailouts.

I've been pondering this for some time now, and the longer I think about, the longer the list grows.

Consider the following:

- Great Depression

- Chrysler (1979)

- Steel Industry (date ?)

- National Flood Insurance

- Savings and Loan Crisis - RTC (1980s)

- 1987 Crash

- GSEs: Fannie, Freddie & Sallie

- Legislative Bailouts (SLRA, TCRA, CFMA, Med Part D)

- Long-Term Capital Management (1998)

- Farm Subsidies (run amuck)

- Airlines (post 9/11)

- Post "Dot Com" crash (2001)

- FASB

- Hurricane Hugo, Andrew, Katrina, and other not-so natural disasters (1989, 1992, 2005)

- Housing (2007)

- Bear Stearns (2008)

- Sub Prime (continuing)

What other bailouts have I missed?

There must be dozens. I am particularly interested in those situations where the profits were private, but the assumption of risk is public.

~~~

What say ye?

Changes in US Withholding Taxes

Monday, March 24, 2008 | 07:12 AM

in Consumer Spending | Credit | Economy | Taxes and Policy | Wages & Income

Matt Trivisonno, a software developer in Miami Beach who follows the market, has come up with a neat way to track changes in the Federal Government's witholding tax receipts.

After being rangebound for the prior 4 years, the year-over-year growth in withholding began rolling over in Q4 of 2007 -- a possible date marking the beginning of the current recession:

click thru for larger graph
Source: Matt Trivisonno's Blog
>

Note that withholding comes directly from Wages and Income, and would likely precede major shifts in consumer spending or credit.

See also:
In Debt Crisis, Uncle Sam Is Piling It On
Mark Gongloff
WSJ, March 24, 2008; Page C1
http://online.wsj.com/article/SB120632203228958435.html

~~~

Housing Bust Blame Game

Wednesday, March 19, 2008 | 11:45 AM

in Credit | Economy | Politics | Real Estate | Taxes and Policy

Back in August of 2007, we looked at the The Ongoing Impact of the Housing Sector.

At the time, I had assigned blame for all of the problems in the credit market to a variety of institutions and people. The blame went as follows:

* Federal Reserve (FOMC)
* Borrowers
* Mortgage brokers
* Appraisers
* Federal Government
* Fannie Mae
* Lending banks
* Wall Street firms
* CDO Managers
* Credit agencies
* Hedge funds
* Institutional Investors (pensions, insurance firms, banks, etc.)
* And back to regulatory role of the Federal Reserve

Today's WSJ has a front page article looking at the same issue: Housing Bust Fuels Blame Game. However, they assess blame somewhat differently, with a bit of a political slant:

Democrats are quick to blame Republicans, who were in power during the housing bubble and subprime lending frenzy. For years, America's leaders failed to restrain the markets, companies, investors and consumers from the missteps that led to the most pervasive financial crisis in decades.

But in hindsight, the failure stretches across government and across party lines. At bottom are two strong currents. From the Republican president to urban Democratic congressmen, homeownership was pushed as an overriding and unquestioned goal. And many significant attempts at regulation were obstructed by the prevailing belief that the economy did best when financial markets operated as freely as possible.

While the headline writer tries to call this a "Bipartisan Failure," the bulk of the actual article is find less kind to the GOP. The Journal blamed:

* The Bush administration for cheerleading homeownership and pressuring government-sponsored mortgage lenders Fannie Mae and Freddie Mac to provide funding for riskier mortgages.

* Congress for allowing Fannie and Freddie to invest heavily in securities backed by subprime loans.

* While Democratic congressmen pushed federal law to restrain sub-prime lending practices Republicans (with some Democratic allies) blocked or countered with weaker versions;

* Federal Reserve, Chairman Alan Greenspan, revered for not using the Fed's authority to more aggressively regulate lender behavior.

* California -- where the country's subprime lenders where -- saw Democratic state lawmakers refusing to impose tougher regulations on a prized local industry.

Perhaps its bias on my part, but that list looks a little one sided to me . . .

graphic courtesy of the WSJ

Source:
Housing Bust Fuels Blame Game
Democrats Seize On Opponents' Role;
Bipartisan Failures
GREG IP, JAMES R. HAGERTY and JONATHAN KARP
WSJ, February 27, 2008; Page A1
http://online.wsj.com/article/SB120406115972594515.html

Free version
http://online.wsj.com/public/article/SB120406115972594515.html?mod=blog

Continue reading "Housing Bust Blame Game"

Here Comes the Economic Stimulus!

Friday, March 14, 2008 | 04:00 PM

in Commodities | Economy | Energy | Taxes and Policy

Fantasy-based Economics

Tuesday, March 11, 2008 | 06:47 AM

in Currency | Markets | Psychology/Sentiment | Taxes and Policy

Here's the latest work of David Malpass, chief economist at Bear Stearns. You can find it in the romance & fantasy section of your local ~~bookstore~~ WSJ Oped page:

"When President George W. Bush addresses the Economic Club of New York on Friday, his comments on the dollar crisis will be the crucial issue for markets and the economy. The best thing he could do would be to state clearly that he wants a stronger dollar. That would draw liquidity back to the U.S., lower inflation risks, and head off the growing calls for government bailouts and support programs.

Absent administration support for the dollar, recent Fed rate cuts have simply sped up the flood of capital away from the U.S. without providing enough domestic stimulus. The rest of the world is already full of cheap dollars, pushing gold and oil to new highs, European tourists onto Madison Avenue, and petro-dollar sovereign wealth funds into building islands to use up their excess.

A clear presidential preference for a stronger dollar could cause an immediate leap in financial markets. U.S. stocks and corporate bonds are attractively priced -- except for the dollar risk. No matter how high a bond yield or how strong the track record of a U.S. private-equity manager, the threat of continued dollar weakness holds global liquidity at bay. The prospect of a stronger dollar would reverse that." (emphasis added)

Um, no.

The folks who believe this sort of drivel would do well to recall Ralph Waldo Emerson: "Your actions speak so loudly that I can't hear what you're saying."

The President's words about the dollar, in the waning lame duck months of his presidency, are irrelevant. His actions over the past 7+ years, in concert with those of the Federal Reserve, are what matters. Can anyone honestly believe that mere speechifying is going to overcome the impact of enormous deficits, excessive government spending, reckless growth in M3, historically ultra-low rates, and an ongoing intervention in credit, currency, capital and fixed income markets ?

I've noticed this wingnut fantasy sequence repeatedly over the past 8 years: ignore reality, jawbone the way you hope things should be, ignore the results of your words and actions, declare victory. Mission accomplished.

It is an absurdly infantile way to manage any sort of enterprise. You will note that none of this crowd truly runs anything -- much less manages assets. The returns would overwhelmingly disprove the theory; this group is long on blahblahblah and short on accountability.

Here is a simple truism: Capital goes to where its treated best. All the bully pulpit speeches and wishful thinking cannot change that reality. The Fed's mad dash towards zero interest rate policy (ZIRP) has debased the dollar in pursuit of an even more absurd policy aim: ending the ups and downs of the business cycle.

Who is more culpable: The emperor, or those who comment on his finely woven garb?

Source:
Bush and the Dollar
DAVID MALPASS
WSJ, March 11, 2008; Page A21
http://online.wsj.com/article/SB120519657936325885.html

Previously:
Quote of the Day: Malpass (WTF?) on the Dollar http://bigpicture.typepad.com/comments/2007/11/david-malpass-w.html

The "Chutzpah" of Bear Stearns
http://bigpicture.typepad.com/comments/2007/08/the-chutzpah-of.html

What's the U.S. Savings Rate Really? http://bigpicture.typepad.com/comments/2005/05/whats_the_us_sa.html

Bankruptcy & Countrywide

Wednesday, March 05, 2008 | 07:00 AM

in Consumer Spending | Legal | Real Estate | Taxes and Policy

A quick post before I head over to CNBC: Two NYT articles caught my eye this morning on the theme of consumer bankruptcy:

• Filings for Bankruptcy Up 18% in February http://www.nytimes.com/2008/03/05/business/05bankruptcy.html

Americans filed for bankruptcy in growing numbers in February, buckling under the combined weight of rising energy prices, a weakening housing market and sky-high personal debts.

An average of 3,960 bankruptcy petitions were filed per day nationwide last month, up 18 percent from January and up 28 percent from a year earlier, according to Automated Access to Court Electronic Records, a bankruptcy data and management company.

That piece must be combined with the following:

• Countrywide Is Sued Again by U.S. Overseer http://www.nytimes.com/2008/03/05/business/05lend.html

The United States Trustee has filed a second lawsuit against the mortgage lender Countrywide Financial, accusing the company of abusing the bankruptcy process.

In a complaint filed Saturday with the Federal Bankruptcy Court in Miami, the United States Trustee for the Southwest region, Donald Walton, accused Countrywide Home Loans, a unit of the mortgage lender, of wrongly asserting claims related to the property of two Miami borrowers, Jose and Fanny Sanchez, who reorganized their finances in bankruptcy.

The Miami suit comes on the heels of a separate lawsuit in the bankruptcy court in Atlanta also accusing Countrywide of abusing the bankruptcy process.

That new bankruptcy law turned out to be quite a clever stroke of social engineering in ways never envisioned by its drafters . . .

Sources:
Filings for Bankruptcy Up 18% in February
JENNY ANDERSON
NYT, March 5, 2008
http://www.nytimes.com/2008/03/05/business/05bankruptcy.html

Countrywide Is Sued Again by U.S. Overseer
REUTERS, March 5, 2008
http://www.nytimes.com/2008/03/05/business/05lend.html

Hackonomics, Part II

Thursday, February 21, 2008 | 12:30 PM

in Economy | Taxes and Policy | Wages & Income

A quick follow up to last week's Hackonomics discussion, where we looked at how little alleged wealth inequality there is in America.

Part of our critique was that dividing the US into quintiles was a variation of the median/average error, and only served to hide the exhorbitantly greater wealth, income and consumption of the top few percent. To that end, there are two peices of evidence I want to point you towards: One anecdotal, and one data driven.

The first one is THE ONE PERCENT, to be shown Thursday night on Cinemax, at 6:30pm Eastern (and throughout the month). The film is directed by Jamie Johnson (yes, Johnson as in the Johnson Johnson & Johnson). Its his follow up to his "Born Rich,” shown on HBO in 2003.

Here's the Cinemax description:

Four years after turning his camera on himself and other affluent youths in his documentary Born Rich, filmmaker Jamie Johnson presents this look at the "wealth gap": the growing divide between the rich and the poor in America. In this film, the 27-year-old heir to the Johnson & Johnson fortune explores the political, moral and emotional rationale that enables a tiny percentage of Americans--the one percent--to control nearly half of the wealth in the entire country. Along the way, Johnson collects the points of view from a wide variety of Americans, ranging from media mogul Steve Forbes and Kinko's founder Paul Orfalea to Florida taxi drivers and Chicago residents in danger of losing their low-income homes. (TVG) (NA)

Looks to be rather intriguing.

One last thing: In the original Hackonomics, I buried the detailed spending habits of the of the upper echelon of wealth in America. I suspect you will find this data a bit more unequal than the quintile nonsense we saw from Alm and Cox.

Here is how this group spent their money as follows:

Dollars Spent Category - 2007 Spending per Affluent Elite Household
                    Category           Category
                    Spending           Spending
Summer Spending        *       2007       *      2005    Change 2007/2005
Activity               %      $ Spent     %     $ Spent  $Change %Change
Yacht Rentals        10.60%  $384,000    9.50% $317,000  $67,000  21.14%
Redecorating         44.90%  $129,000   30.90%  137,000  ($8,000) -5.84%
Villa Rentals        15.70%  $106,000   13.80%  $79,000  $27,000  34.18%
Experiential
Excursions          25.80%  $103,000   22.70%  $79,000  $24,000  30.38%
Jewelry/watches      73.70%  $94,000    63.20%  $63,000  $31,000  49.21%
Luxury Cruises       47.50%  $92,000    43.10%  $71,000  $21,000  29.58%
Charitable Giving    97.50%  $82,000    98.40%  $52,000  $30,000  57.69%
Vacation Home
Rentals             12.10%  $82,000    11.80%  $64,000  $18,000  28.13%
Out-of-Home Spa
Services            67.70%  $61,000    48.70%  $49,000  $12,000  24.49%
Summer
Entertaining        93.90%  $56,000    92.40%  $39,000  $17,000  43.59%
Luxury Hotels        95.50%  $48,000    93.40%  $36,000  $12,000  33.33%
Luxury Resorts       84.80%  $41,000    82.60%  $23,000  $18,000  78.26%
At-Home Spa
Services            53.50%  $38,000    47.40%  $26,000  $12,000  46.15%
Apparel/accessories  92.40%  $34,000    86.80%  $16,000  $18,000 112.50%
Audio/visual         51.50%  $31,000    50.70%  $14,000  $17,000 121.43%
Wines and Spirits
for Social
Entertaining        86.90%  $24,000    77.00%  $19,000   $5,000  26.32%
Wines and Spirits
for Personal
Consumption         84.80%  $17,000    74.30%  $11,000   $6,000  54.55%

                                  2007             2005     $Change  %Change
    Total Luxury Summer
    Spending/Household       $622,202.02        $399,187.50 $223,015  55.87%

    *Percentage of those surveyed spending in this category
Survey of Households with Net Worth $10 Million +

Prince & Associates (2007)

Yeah, that consumption spending looks pretty egalitarian to me! I got your top quintile RIGHT HERE.

~~~

Source:
A Gaping Divide: Straddling Capitalism’s Fault Line
By GINIA BELLAFANTE
NYT, February 21, 2008
http://www.nytimes.com/2008/02/21/arts/television/21bell.html

The One Percent
Jamie Johnson
February 19, 2008 | 06:31 PM (EST)
http://www.huffingtonpost.com/jamie-johnson/the-one-percent_b_87459.html

see also

Borrow and Spend
Floyd Norris
NYT, February 11, 2008, 12:42 pm
http://norris.blogs.nytimes.com/2008/02/11/borrow-and-spend/

Consumption and Income Inequality
Economist's View February 10, 2008
http://economistsview.typepad.com/economistsview/2008/02/consumption-and.html

What is wealth?
Saturday, May 22, 2004 | 08:34 AM
http://bigpicture.typepad.com/comments/2004/05/what_is_wealth.html

The Bankers' Bailout

Thursday, February 21, 2008 | 07:00 AM

in Credit | Derivatives | Federal Reserve | Taxes and Policy

I mentioned this yesterday (Inflating Our Way Into Recession), but I thought it was an important enough piece to highlight on its own.

This is an all too vivid an account of what is likely to be an ongoing and expensive venture into irresponsible lending and speculation -- all that the taxpayer's expense.

"Since the onset of the subprime crisis last summer, the White House has repeatedly rejected the notion of a government bailout, either for homeowners facing foreclosure or for the banks and mortgage companies that made the now souring loans. "There's no bailout with government money, none whatsoever," Treasury Secretary Hank Paulson emphasized. But even as the administration has stuck to its laissez-faire stance in public, behind the scenes a covert bailout has been under way, with a number of public and quasi-public agencies quietly dispensing vast sums to financial institutions saddled with worthless or near worthless mortgage securities. All the while, homeowners at the heart of the problem have been left largely to their own woes. The rescue operation brings to mind John Kenneth Galbraith's dictum that in the United States, the only respectable form of socialism is socialism for the rich . . .

Then there is the Federal Home Loan Bank system, an obscure institution that President Herbert Hoover set up in 1932 to stimulate mortgage lending. The F.H.L.B., actually 12 government-chartered but privately owned regional banks, exploits its semiofficial status to raise money cheaply in the bond market and lends the proceeds to its membership, including most of the nation's big banks and investment firms. Since last summer, the F.H.L.B. has been extending low-cost credit at an unprecedented rate—$184 billion in the third quarter alone. Recipients include Citigroup, which owed the F.H.L.B. $98.7 billion at the end of September; Countrywide Financial, which owed $51.1 billion; and Washington Mutual, owing $43.7 billion . . .

As a result of all this government-sanctioned activity, total mortgage lending nationwide actually rose in the third quarter of 2007, according to Richard Iley, an economist at BNP Paribas. However, as he pointed out in a recent research note, simply increasing the volume of business was probably not the only goal. "It is no exaggeration to say that the mortgage market was effectively nationalized" in the third quarter, Iley wrote. "The F.H.L.B. acted as a forgiving lender of the last resort, providing the liquidity to sustain mortgage production while Fannie and Freddie acted as risk intermediaries of last resort with record purchases of mortgages."

Viva laissez faire Capitalism Socialism!

Source:
The Bankers' Bailout
John Cassidy
Portfolio, March 2008 Issue
http://www.portfolio.com/views/columns/economics/2008/02/19/Massive-Bailout-Planned-for-Banks

Thursday, February 21, 2008 | 07:00 AM | Permalink |