Tuesday, December 18, 2012

Thank God for the fiscal cliff. With the election over, the media needed something upon which they could incessantly fixate, and our daily updates on the fate of the cliff-hanger negotiations are plenty of fodder to hold us until we have the final Christmas sales figures to talk about.

DECEMBER 17, 2012

Ignore the Wailing

Feigning Panic at the Cliff Edge


Thank God for the fiscal cliff. With the election over, the media needed something upon which they could incessantly fixate, and our daily updates on the fate of the cliff-hanger negotiations are plenty of fodder to hold us until we have the final Christmas sales figures to talk about.

But let’s take a quick stroll down memory lane to a little over a year ago. At the time, Republicans were using the threat of not raising the debt ceiling limit as a bludgeon to beat the Democrats into submission on the subject of tax breaks for the very rich. Contrary to his earlier vows, Obama caved, the Bush tax cuts were saved, other Republican demands were met, and all that the Democrats got out of the deal was raising the debt limit and a further extension of unemployment benefits. But the Dems were quick to protest that they did get something else; the Republicans promised to negotiate in the future to resolve their differences and come to a budget agreement. Most importantly, we were told, if the negotiations did not succeed, the Democrats had engineered a result that would cut spending across the board (including defense cuts) but which would spare important social programs like Medicare and Social Security. Liberals like Vermont’s Peter Welch touted the tough terms of the deal, bragging about how it was about time that defense is not to be exempted from the common fiscal sacrifice that we all should be prepared to make. He also was pleased that they had saved Social security and other programs from further cuts.

Fast forward a year and the same Peter Welch was lamenting about what a mistake it would be if we went over the “fiscal cliff” that his once admired bargain was threatening to bring about. In fact, congressional lobbyist largess recipients (CLLR, formerly known as congress members and senators) from both parties were crying out about the dangers of defense cuts of this magnitude, (especially ones that would affect jobs in their districts) and warning that barreling over this cliff would plunge us back into recession or worse. To be fair, some of them, including Welch have recently acknowledged that we could probably survive the economic fallout and indeed use the cliff dive to finally cut the Bush tax breaks for the wealthiest (since the Republicans seem not to have realized that they lost the presidency as well as losing seats in both houses of Congress). But almost without exception, our pols want to avoid this “drastic” measure and instead engage in negotiations to find a compromise agreement.

The Democrats seem to have forgotten that they already forged a compromise agreement, and that the fiscal cliff is the result of already giving in repeatedly to Republican demands that have unnecessarily slowed our economic recovery. During the 2011 negotiations, the Republicans knew that a bird in hand is worth more than any number in the bush, and bragged that they got everything that they wanted at the time. They knew that if/when the sequestration failed and the fiscal cliff was looming into view, they would be able to start negotiations all over again and today they are still issuing the same shrill and wrong-headed demands while the Democrats still wring their hands and search their souls for more compromise victims that they might find in the budget. Already we’re seeing trial balloons including cuts and changes to the very programs that we were told were saved by the negotiations that set up the dreaded cliff.

The saddest aspect of all of this play-acting is that the entire concept of the dangers of deficit spending is one that hasn’t made sense ever since we went off of gold or silver standards and chose instead to base our currency on the “full faith and credit” of the U.S. government. The world monetary system operates by taking a leap of faith approach in valuing world currencies. Our currency is sound as long as we say it is and as long as our economy is functioning at a level which continues to generate commerce and wealth and investor confidence. So when CLLRs gnash their teeth and rend their hair while crying about raising the debt ceiling, the rest of the world looks on in dumbfounded amazement. We have long established that we have no treasury that actually backs U.S. debts. If the government decides to raise the debt ceiling, it simply does so, and as long as the world still has “faith” all is good.

The U.S., like the banks and corporations that control it, is too big to fail, at least for now.

It’s interesting that it was the Democrats who wailed about deficit spending under Ronald Reagan, but the Republicans and the rest of the country ignored them. Now the Republicans are doing the same thing, but they have done a better job of ginning up worries among the general public and are using that leverage to create the sense that this is a much bigger problem than it is. Certainly, we need to balance spending and revenue, but the current debate is all about politics and not about economics. There is a bevy of economists who hold this view, Nobel prize winners Paul Krugman and Joseph Stieglitz among them, but the political caterwauling has drowned out their more measured words.

What to do? Ignore the news for the next few weeks, and if you find yourself wandering in the vicinity of the fiscal cliff, grab a stuffed lemming and toss it over the edge. Maybe we’ll get lucky and some members of Congress will follow it over.

Dan DeWalt is an activist and journalist
based in New Fane, VT.

This article originally appeared on
This Can’t be Happening!

With the repeal of Glass-Steagall these (formerly) honest commercial banks became gambling casinos, like the investment bank, Goldman Sachs, betting not only their own money but also depositors money on uncovered bets on interest rates, currency exchange rates, mortgages, and prices of commodities and equities.

DECEMBER 18, 2012

The Derivatives Tsunami and the Dollar Bubble

The Fiscal Cliff is a Diversion


The “fiscal cliff” is another hoax designed to shift the attention of policymakers, the media, and the attentive public, if any, from huge problems to small ones.

The fiscal cliff is automatic spending cuts and tax increases in order to reduce the deficit by an insignificant amount over ten years if Congress takes no action itself to cut spending and to raise taxes. In other words, the “fiscal cliff” is going to happen either way.

The problem from the standpoint of conventional economics with the fiscal cliff is that it amounts to a double-barrel dose of austerity delivered to a faltering and recessionary economy. Ever since John Maynard Keynes, most economists have understood that austerity is not the answer to recession or depression.

Regardless, the fiscal cliff is about small numbers compared to the Derivatives Tsunami or to bond market and dollar market bubbles.

The fiscal cliff requires that the federal government cut spending by $1.3 trillion over ten years. The Guardian reports that means the federal deficit has to be reduced about $109 billion per year or 3 percent of the current budget. More simply, just divide $1.3 trillion by ten and it comes to $130 billion per year. This can be done by simply taking a three month vacation each year from Washington’s wars.

The Derivatives Tsunami and the bond and dollar bubbles are of a different magnitude.

Last June 5 I pointed out that according to the Office of the Comptroller of the Currency’s fourth quarter report for 2011, about 95% of the $230 trillion in US derivative exposure was held by four US financial institutions: JP Morgan Chase Bank, Bank of America, Citibank, and Goldman Sachs.

Prior to financial deregulation, essentially the repeal of the Glass-Steagall Act and the non-regulation of derivatives–a joint achievement of the Clinton administration and the Republican Party–Chase, Bank of America, and Citibank were commercial banks that took depositors’ deposits and made loans to businesses and consumers and purchased Treasury bonds with any extra reserves.

With the repeal of Glass-Steagall these honest commercial banks became gambling casinos, like the investment bank, Goldman Sachs, betting not only their own money but also depositors money on uncovered bets on interest rates, currency exchange rates, mortgages, and prices of commodities and equities.

These bets soon exceeded many times not only US GDP but world GDP. Indeed, the gambling bets of JP Morgan Chase Bank alone are equal to world Gross Domestic Product.

According to the first quarter 2012 report from the Comptroller of the Currency, total derivative exposure of US banks has fallen insignificantly from the previous quarter to $227 trillion. The exposure of the 4 US banks accounts for almost of all of the exposure and is many multiples of their assets or of their risk capital.

The Derivatives Tsunami is the result of the handful of fools and corrupt public officials who deregulated the US financial system. Today merely four US banks have derivative exposure equal to 3.3 times world Gross Domestic Product. When I was a US Treasury official, such a possibility would have been considered beyond science fiction.

Hopefully, much of the derivative exposure somehow nets out so that the net exposure, while still larger than many countries’ GDPs, is not in the hundreds of trillions of dollars. Still, the situation is so worrying to the Federal Reserve that after announcing a third round of quantitative easing, that is, printing money to buy bonds–both US Treasuries and the banks’ bad assets–the Fed has just announced that it is doubling its QE 3 purchases.

In other words, the entire economic policy of the United States is dedicated to saving four banks that are too large to fail. The banks are too large to fail only because deregulation permitted financial concentration, as if the Anti-Trust Act did not exist.

The purpose of QE is to keep the prices of debt, which supports the banks’ bets, high. The Federal Reserve claims that the purpose of its massive monetization of debt is to help the economy with low interest rates and increased home sales. But the Fed’s policy is hurting the economy by depriving savers, especially the retired, of interest income, forcing them to draw down their savings. Real interest rates paid on CDs, money market funds, and bonds are lower than the rate of inflation.

Moreover, the money that the Fed is creating in order to bail out the four banks is making holders of dollars, both at home and abroad, nervous. If investors desert the dollar and its exchange value falls, the price of the financial instruments that the Fed’s purchases are supporting will also fall, and interest rates will rise. The only way the Fed could support the dollar would be to raise interest rates. In that event, bond holders would be wiped out, and the interest charges on the government’s debt would explode.

With such a catastrophe following the previous stock and real estate collapses, the remains of people’s wealth would be wiped out. Investors have been deserting equities for “safe” US Treasuries. This is why the Fed can keep bond prices so high that the real interest rate is negative.

The hyped threat of the fiscal cliff is immaterial compared to the threat of the derivatives overhang and the threat to the US dollar and bond market of the Federal Reserve’s commitment to save four US banks.

Once again, the media and its master, the US government, hide the real issues behind a fake one. The fiscal cliff has become the way for the Republicans to save the country from bankruptcy by destroying the social safety net put in place during the 1930s, supplemented by Lyndon Johnson’s “Great Society” in the mid-1960s.

Now that there are no jobs, now that real family incomes have been stagnant or declining for decades, and now that wealth and income have been concentrated in few hands is the time, Republicans say, to destroy the social safety net so that we don’t fall over the fiscal cliff.

In human history, such a policy usually produces revolt and revolution, which is what the US so desperately needs.

Perhaps our stupid and corrupt policymakers are doing us a favor after all.

Paul Craig Roberts is a former Assistant Secretary of the US Treasury and Associate Editor of the Wall Street Journal. His latest book, Wirtschaft am Abgrund (Economies In Collapse) has just been published.

What to make of this? Housing Up, Home Ownership Down

December 18, 2012

Housing Up, Home Ownership Down

The Mysterious New Housing Bubble


The rebound in housing is now in full swing. Housing starts are up, existing home sales are gaining pace, inventory is down, and prices are on the rise. According to a recent report by Corelogic “House prices are up 6.3% year-over-year in October, the largest increase since 2006 and the eighth consecutive increase in home prices nationally on a year-over-year basis.” Many experts are now predicting that 2013 will be even better, in fact, J.P. Morgan thinks that prices could gain another 10 percent in the next 12 months. Here’s the story from the Wall Street Journal:

“J.P. Morgan Chase Co. expects U.S. home prices to rise 3.4% in its base-case estimate and up to 9.7% in its most bullish scenario of economic growth. Standard and Poor’s, which rates private-issue mortgage bonds, on Friday said it expects a 5% rise in 2013.” (“Home Prices Could Jump 9.7% in 2013, J.P. Morgan Says”, Wall Street Journal)

And the housing boom is having an impact on Wall Street, too, where prescient investors who loaded up on mortgage-backed securities (MBS) are cashing in bigtime via the Fed’s new MBS-buying program dubbed QE3. Fed chairman Ben Bernanke is paying top-dollar for financial derivatives that, in real terms, are probably worth just pennies on the dollar.

Despite the increasingly positive signs of market strength, there are reasons to be skeptical, after all, this is the second time that prices and sales rallied since the bottom fell out in 2006. The first rebound took place in 2009, when President Barack Obama initiated his Firsttime Homebuyer program which provided lavish incentives for potential buyers to sign on the bottom line. The program sparked a frenzy of activity that reversed the direction of the market, but quickly petered out in a matter of months. Could today’s sudden surge in prices be another “false start” or is it the real deal? Only time will tell. But it’s worth noting that the market has never really cleared and that normal supply-demand dynamics have never been allowed to work as one would expect in a free market. In fact, housing is arguably the most maligned and manipulated market of all time. Mortgage rates are artificially low due to Fed intervention (QE3). Inventory is artificially low due to the banks withholding of distressed backlog. Down payments are so minuscule (FHA=3.5%) that homebuyers end up leveraged at a 30 to 1 ratio, the same as the big Wall Street investment banks prior to the Crash of ’08. And, finally, government-backed mortgage modifications (HAMP) provide generous refinancing to high-risk “underwater” applicants with LTV at 125%, a process that makes subprime mortgages look like a model of prudent lending. So much is fake about today’s housing market, that it’s a stretch to call it a market at all.

Even so, there are anomalies in the data that don’t support the media’s storyline that “Housing Is Back”. For example, did you know that the homeownership rate is still falling?

But how can that be, you ask? After all, if housing is recovering, then more people must be moving into homes, right?

Wrong. Check out this illuminating post from Sober Look:

“Some readers have been asking how one can reconcile positive signs in the housing market with declining rates of homeownership. Indeed, homeownership is falling at an even faster pace than during the 08-10 period….The explanation is that so far a great deal of net demand growth in housing has been in rental units. …This demand for rentals is in fact one of the factors supporting the housing market – for every renter there is a landlord who buys a home.

JPMorgan: – There is no contradiction between increased demand for housing and reduced homeownership rates. Demand for housing is mainly dependent on the increase in the number of households, whether these households choose to own or to rent the housing units they live in. Growth of household formation had been stifled during the expansion to date by high unemployment and subdued job growth.


The decline in homeownership rates implies that virtually all the increase in demand for housing units associated with increased household formation consists of increased demand for rental units. Indeed current estimates indicate that over the past year the number of occupied rental units increased 1.32 million and the number of owneroccupied housing units actually declined 175,000.” (“Falling homeownership rate and the housing market”, Sober Look)

Well, that changes things a bit, doesn’t it? So if the number of people who actually bought a home and moved in dropped by 175,000, then what we’re seeing is industrial-scale investment by Wall Street speculators who are getting lavish financing perks from the banks to buy distressed properties that, if they had been sold on the MLS or via bank auctions, would have driven prices down even further pushing bank balance sheets deeper into the red. In other words, the Obama administration, the banks, the Fed and the behemoth private equity firms are all in bed together to prevent firsttime homebuyers from getting a good deal on a foreclosure and to reward the people who blew up the financial system with another backdoor bailout.

Does that change your attitude about the so called housing rebound at all?

But there is an upside to all this speculative investment, that is, at least the banks are whittling down their gigantic stockpile of backlogged homes. That’s got to be a good thing, right?

Wrong, again. Because the people who are getting pushed out of the market, are the very people the who historically provide continuity and stability, that is, firsttime homebuyers. Here’s the scoop from CNBC:

“Current homeowners are finally moving up, and distressed sales are making up less of the overall market—all signs of much-needed improvement in housing….Unfortunately, first-time home buyers are seeing just the opposite, largely left out of this surge in sales and prices. Their share of the market, usually up in the 40 percent range historically, fell to 34.7 percent in October, the lowest in the Campbell/IMF survey’s three-year history.” (“Housing Recovery Is Leaving Behind First-Time Buyers”, CNBC)

So, more of the low-end homes are being bought up by the big private equity firms, which means fewer crumbs for the little guy at the bottom. Is that really a positive development?

And, how about this: You probably read that existing home sales have been picking up, which is true. In October, sales on existing homes rose 2.1 percent to a seasonally adjusted annual rate of 4.79 million. But there’s more to this story than meets the eye. Check this out at CNBC:

“The October numbers were driven entirely by multifamily apartment starts, up 10 percent month-to-month and up 63 percent year over year…..Younger Americans are in fact moving out of their parents’ basements, but many are moving into rental units, and that is also a formed household.” (“Yes, Housing Starts Surge, but Rentals Are the Drivers”, CNBC)

So this is the great housing recovery that everyone’s been crowing about; little Johnny and Janie finally leave the nest to live in a rental unit owned by some fatcat PE pirate from Manhattan? That doesn’t exactly sound like the America Dream, now does it? And here’s something else to mull over (from the same article):

“Housing starts at 894,000 is near where they were at the depths of the 1981 and 1991 recessions and 60 percent below the peak in January 2006,” pointed out Peter Boockvar at Miller Tabak.”

So let’s keep things in perspective. Housing is still in the doldrums despite the hype, despite the low rates, despite the unprecedented meddling and intervention by the Fed, the banks and the USG. Just look at the data. Naturally, if the banks withhold distressed inventory, the government lends money to underwater homeowners, and the Fed slashes rates to record lows and buys whatever MBS the banks produce, then there’s going to be a surge in activity. But how long will it last?

No one knows. But one thing is certain, the Fed’s loosy goosy policies never seem to work as planned. Case in point: Bernanke’s zero rates and QE4 have not revived interest in housing as much as they have touched off a surge of speculation which could generate another destabilizing asset-price bubble. Get a load of this from the SF Gate:

“There is a tsunami of money coming into the market, billions of dollars to buy distressed single-family homes,” said Jeff Lerman, a San Rafael real estate lawyer, speaking about the national landscape. “The window of opportunity is rapidly closing (as prices rise). Over the next 18 months, profit margins in single-family opportunistic buying will be compressed quite a bit.”

A Chronicle analysis of sales data compiled by San Diego research firm DataQuick showed that absentee buyers, who once bought about 10 percent of homes sold in the nine Bay Area counties, account for about a quarter of all purchases this year, more than doubling their share…..

“Right now the dominating force driving the rental market in California is foreclosed-upon former homeowners transitioning to renters,” Burke said. “That demographic is an important market segment for us.” (“Investors rushing into real estate deals”, SF Gate)

Repeat: “A tsunami of money coming into the market” from deep-pocket speculators. That’s your “recovery” in a nutshell.

Of course the article focuses on the Bay Area, but the same thing is going on in the hotter markets across the country, particularly Los Vegas, Phoenix, Atlanta and Miami. Investors are buying up all the cheap homes they can get their hands on . The flurry of activity has pushed prices higher, but can it last? Housing expert Mark Hanson doesn’t think so. Here’s a clip from a recent post at The Big Picture:

“For years I have proclaimed that “no housing recovery will ever occur — or no dead-cat-bounce will reach “escape velocity” or become “durable” — unless the repeat buyer is leading the way. This is because investors and first-timers are thin, volatile cohorts who have been known over history to leave the market literally, overnight….

The problem is that the mortgaged homeowner has always been the primary demand cohort. It’s not investors, first-timers or those who own their homes free and clear. Rather, the mortgage-levered homeowner who tends to move every 6 to 8 years who provides most of the historic underlying support for macro housing.

This is a problem. Put simply, there are more houses today then there were five years ago but a full HALF of the primary demand cohort — repeat buyers — died due to negative equity….. and able buyers have been cut in half.

Bottom line, WHERE IS THE “DURABLE”, INCREMENTAL DEMAND GOING TO COME FROM(?) (“Shadow” & “Ghost” Inventory / Negative & “Effective” Negative Equity…The Real Challenges for US Housing”, Mark Hanson, The Big Picture)

Hanson makes a good point. Traditionally, repeat “move up” buyers have driven the market, but that’s not happening now because so many people are underwater and can’t afford to move. So, yes, housing prices can go higher for a while, but the higher they go, the less profit investors will make, which will lead to a drop-off in sales and greater price erosion. That will put us back at Square 1.

So, what’s going to happen next?

That’s easy. The banks are going to try to reduce their stockpile of unwanted homes by increasing the number of foreclosures. The supply of distressed homes actually increased while the banks fiddled inventory to effect the fake rebound. ( No, the banks are not running out of distressed inventory as the dissembling media would have you believe.) So now the banks have to dump more homes on the market which will put pressure on prices. The banks don’t want prices to jump 6.5% per year. They want just enough upward movement in prices to lure people back into the market. This process is already underway, as this CNBC article reveals:

“The good news is that overall foreclosure activity continues to fall and a decline in new foreclosures are leading the drop. The bad news is that the huge backlog of homes already in the foreclosures process, but long delayed, are finally going back to the banks in big numbers.

Bank repossessions jumped 11% in November month-to-month and rose 5% from November of 2011, according to RealtyTrac. That marks the first annual jump in just over two years.” (“Housing’s Repo Man Is Back”, CNBC)

So tell me this, dear reader: Why did “bank repossessions (suddenly) jump 11% in November”? And why has foreclosure activity picked up for the first time “in over two years”?

Is it because the banks didn’t know that they were sitting on millions of distressed properties that they’d eventually have to sell or is it because the banks colluded with the Fed and Obama to control the flow of foreclosures in order to prop up prices and seduce more suckers back into the market?

That’s a no-brainer, right? It’s all manipulation.

So, how is this all going to play-out?

Well, we know that the Fed is going to continue to purchase mortgage-backed securities (MBS) to the tune of $45 billion per month “indefinitely”. But housing sales could still weaken as profit margins on investment properties shrink and more of the big players look for other places to put their money. That gives Bernanke about a 6-month window to settle on a strategy for inflating another housing bubble. He knows he cannot count on organic demand or move up buyers because unemployment is still too high and wages are not showing any sign of growth. So, his only hope is to change regulations so the banks can resume lending to mortgage applicants who’ll never be able to repay the debt. And that is precisely what the Fed chair is doing. Take a look at this in Bloomberg:

“Federal Reserve Chairman Ben S. Bernanke said the Fed will take action to speed growth and a rebound in a housing market facing obstacles ranging from too-tight lending rules to racial discrimination….Bernanke said while tighter credit standards after a collapse in the subprime mortgage market were appropriate, “it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.”…

Bernanke said housing-finance authorities have taken steps to “remove barriers to the flow of mortgage credit” and referred to efforts by the Federal Housing Finance Agency and by Fannie Mae and Freddie Mac to clarify rules surrounding mortgages that go into default.

These steps, the 58-year-old Fed chief said, should “increase the willingness of lenders to make new loans.” (“Bernanke Says Fed Will Do What It Can to Support Housing”, Bloomberg)

Did you catch that part about how “the Fed will take action (on) racial discrimination”?

In other words, African Americans are going to be in the crosshairs again like they were during the subprime fiasco. Take a look at this in Bloomberg:

“Lenders were 3½ times more likely to steer blacks to high-interest mortgages than whites with comparable credit scores, according to a Center for Responsible Lending study of 27 million loans originated from 2004 to 2008. In Memphis, where 63 percent of the 652,000 residents are black, officials say their city was targeted for such predatory lending — a practice that Marano says his company didn’t engage in….”(“Wall Street Kept Winning on Mortgages Upending Homeowners”, Bloomberg)

Does Bernanke really care if minorities get fleeced for a second time in less than a decade?

Don’t make me laugh. The Fed doesn’t give a rat’s ass who gets taken to the cleaners as long as his crooked Wall Street buddies get their pound of flesh.

So, here’s how it’s going to go down: Bernanke’s going to twist arms at the Consumer Financial Protection Bureau (CFPB) to define a “qualified mortgage” in a way that allows the banks to dump their garbage loans on Uncle Sam without any risk to themselves. Once the new regulations are in place and the banks get the “safe harbor” provision they want; they’ll start issuing mortgages to anyone who’s strong enough to sit upright and put a “X” on the dotted line, which is how we got into this mess to begin with.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.