Category: Economy

Nobel Prize Winner Stiglitz Fingers War as Cause of Slowdown

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It’s an interesting theory. Basically, he believes that in order to cope with the financial drain from the war, the Fed was forced to slash interest rates, leading to a speculative bubble, higher energy prices, and reckless lending.

While I agree as to the consequences of the the Fed’s (really Alan “Bubbles” Greenspan’s) policies, I do not think that the ultra low interest rates were from the war.

They were a function of Greenspan wanting to remain Fed chair when dealing with a president who had publicly stated his dislike of him during the campaign in 2000.

Bush blamed Greenspan for his dad loosing in 2002, you may recall McCain joking about doing the “Weekend at Bernies” thing if “Bubbles” died, and so when Bush came in, he whored himself to Bush and His Evil Minions™.

The Fed was slashing rates before 911, and even more between 911 and the Iraq invasion.

Foreigners Own Us

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Representatives of Treasury Department, SEC and Fed told Congress that it was crucial to the economic health of the United States to all sovereign wealth funds to have free reign to purchase US companies.

Congress is concerned after Abu Dhabi bought a significant portion of Citi, and other sovereign wealth funds have done so with other financial institutions, as a result of fall out from the credit implosion.

The regulators basically said, without foreigners buying this stuff, we’d be flat broke.

What they neglected to say is that we are flat broke anyway, from years of budget and trade deficits.

Economics Update

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Yawn, another day, another all time low for the Dollar vs. the Euro, breaking the $1.53:€1.00 barrier.

The expectation of a major fall in the dollar is one of the major causes of oil prices rising again today, though the fact that OPEC his telegraphing that there will be no production increase, contributes to this.

The job market is looking increasingly grim, with
nonfarm employment declining by 23,000, and, in a good indication of an incoming recession, productivity growth is declining.

We do have some good news, the appraisal standards for Fannie Mae and Freddie Mac are not officially implemented.

It would have been better news a year, or 5 years, ago.

I have this rule of thumb when looking at the economy, which is when something happens in high finance that is truly bizarre, start by assuming that it is bad news.

That’s the case with yields falling below 0% on Treasury Inflation-Protected Securities (TIPS).

TIPS are government bonds in which the principal appreciates along with the consumer price index. They are sort of inflation proofed as a result.

They are less riskier, because if inflation shoots up, you will get that back in the end, so the interest rate, which are set by auction, is lower.

Only for the past three days, the interest rate has been bid to less than zero, meaning that the bidders expect significant increases in inflation.

Paulson Sees New Capital Markets Proposals in ‘Weeks’

Bush’s Treasury Secretary is, after months of prodding by Democrats, coming up with a plan to close the barn door after the cow is gone, saying that, “We’re looking at the mortgage-origination process, we’re looking at the securitization process, we’re looking at rating agencies, we’re looking at disclosure issues, we’re looking at capital issues and regulatory issues in the weeks ahead.”

If it were done by honest decent and competent people, it would still be too late, but in this case it’s being done by Bush and His Evil Minions™, which means that it’s primary goal will be two fold, preventing meaningful regulation, and benefitting Bush, His Evil Minions™, and his campaign contributors.

The auction bond failure rate is nearly 70%, and appears to be getting worse, which means that at this critical time, with revenues falling, cities and states will find raising money for projects much more difficult.

In real estate, we now have mainstream press using phrases like, “Housing in ‘deepest, most rapid’ decline since Great Depression“, the alt-A crash is well and truly starter (Alt-A are not quite prime, typically credit scores over 700), and we have Ben Bernanke saying that housing woes could persist for years.

Additionally, we are about to see the revenge of the 2005 bankruptcy law, with filings up 18% from January, and 28% from the year before.

We are about to see the negative effects of the law, which were predicted when it was initially proposed.

BTW, all is not quiet in the ever entertaining world of the monoliner bond insurers. Ambac has announced a reorganization, where it will exit the mortgage securities market and raise $1.5 billion in new capital.

What About Ayn Rand’s Buddy Alan Greenspan?

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Members of the Senate Banking committee just grilled regulators and accused them of being, “Asleep at the switch” on the housing debacle.

One wonders why it appears that Alan Greenspan’s name never came up. He was aggressively working towards dismantling financial protections and ignoring basic regulations during his tenure at the Fed, pausing only to bail out fat cat investors when they got into trouble.

SAS Saying Old Fuel Guzzler Auircraft are Cheaper to Operate

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The Scandinavian airline SAS: is saying that its MD-80s would still be cheaper to operate, even if the cost of fuel doubled.

It doesn’t make a whole bunch of sense, given that the cost of oil is at an all time high, until you look at this quote:

n its newly-released annual report SAS Group says the effect of capital costs means the MD-80 is SKr5-10 million ($0.8-1.6 million) more profitable to the carrier than newer aircraft.

Capital costs for the type are SKr20 million lower, more than offsetting the SKr10-15 million in higher fuel and maintenance costs.

…

n its newly-released annual report SAS Group says the effect of capital costs means the MD-80 is SKr5-10 million ($0.8-1.6 million) more profitable to the carrier than newer aircraft.

Capital costs for the type are SKr20 million lower, more than offsetting the SKr10-15 million in higher fuel and maintenance costs.

(emphasis mine)

This is interesting not from an aviation perspective, but from a larger economic one.

It implies one of two things:

  1. That airlines going for the latest and greatest hardware are slitting their own throats, and that capital costs completely blow away operating costs.
  2. That the cost of capital today is high enough that upgradeing even with the historically high fuel prices, simply does not make economic sense.
  3. That they expect these planes to be used for surges in demand for seasonal and other reasons, and won’t the full utilization, and capital costs dominate.

The first reason is simply not credible. If it were, we’d all still be flying DC-3s, or at least upgrades 707s and DC-8s, since they take people to the same places just as fast.

That leaves reasons two or three, or reasons two and three.

From a macroeconomic standpoint, however, it’s reason 2, the cost of capital, that is most interesting.

This may very well be a major capital purchase that is being delayed because the capital markets have frozen up. That the increased risk premium that has resulted from the credit crunch simply make it too expensive to upgrade to better equipment.

That is how a credit crunch creates a recession, which makes the credit crunch worse.

Economics Update

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first, let’s start off by saying that Tom Toles is a bloody genius:

We have Citi on a path to cutting 30,000 jobs, and we have Dubai International Capital LLC, a sovereign wealth fund saying that losses will get worse, and they will need another infusion of capital.

FWIW, it was Abu Dhabi investors who just bailed them out a month or so ago, not Dubai.

In real estate, they’ve just discovered that
the real estate collapse is making first-time buyers less likely to buy.

In related news, water is wet, and the sky is blue.

In truth this is hardly surprising when even people like Ben Bernanke, who has done his best to avoid panicking the markets is saying that foreclosures will increase, and house prices will fall for a while yet.

Ratio of home ownership to rental costs are near a historic high, so why would someone want to buy into a depreciating asset?

Meanwhile, we are finding that the, “extra yields investors demand on bonds backed by assets from commercial mortgages to credit cards rose to records”, recently, despite the fed rate cuts, leading a senior managing director at an investment firm to quip, “People are calling it financial Ebola“.

Translated into language for ordinary people, this means that people are requiring a much higher markup on either the prime rate, or the Fed funds rate, before they make loans.

Yields on three-year, AAA rated credit-card bonds with floating rates rose to 75 basis points over the London interbank offered rate, up from 40 basis points at the start of the year, according to Deutsche Bank AG data. Spreads over three-year swap rates for three-year, AAA rated fixed-rate auto-loan securities rose to 140 basis points, up from 75 basis points. The average spread over U.S. Treasuries on AAA rated commercial-mortgage securities climbed to 364 basis points, from 167 basis points on Dec. 31, according to Lehman Brothers Holdings Inc.

A basis point is 0.01 percentage point.

People are increasingly unwilling to lend money, and demanding higher returns, because they have no faith that it will be paid back.

Speaking of being paid back, Fremont General just defaulted on $3.15 billion in subprime mortgage loans that it sold a year ago.

The creditors are demanding immediate repayment, because Fremont’s “tangible net worth” (assets minus liabilities) have dropped below $250 million, meaning that they have violated the terms of the original sale.

Finally, we have Jon Moulton, the head of private equity firm Alchemy Partners, pretty much guaranteeing that, “There will be large private equity failures this year“. From the context he means both deals and firms.

Another Twist in Goolsbee/Canada Saga

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It appears that the sequence of events was rather different from what I had originally thought. Spefically, it appears that the Canadian consulate contacted Goolsbee and asked him questions, to which he responded.

They apparently did the same with Clinton’s and McCain’s economics gurus, and then they wrote up the responses and forwarded them upstairs, but once they reached the political levels of government *cough* right winger Canadian PM Steven Harper *cough*, they were leaked to do damage, because Harper Bush’s other poodle.

Goolsbee is largely blameless in this, though I’m not sure how much that means in presidential politics in the US. He still needs to stay away from the media for a few weeks.

Economics Update

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Let’s lead off with the dollar on it’s way down, it’s at a 3-year low vs. the Yen, and a new record low vs. the Euro, which is one of the things that has oil breaking another all time record, $104/bbl.

The value of the dollar is dropping, so the price of oil, which is sold in dollars, is increasing. One wonders how many countries are considering a Euro oil bourse other than Iran.

In real estate, we have the largest drop in residential and commercial construction in 14 years.

So much for commercial real estate being “immune” from this contagion.

The poster child for the real estate meltdown, Countrywide, is still hemorrhaging on its mortgages, with 90 day delinquencies at 5.6% (up 900% from a year ago), and this is threatening to torpedo the deal with Bank of America to buy them out.

FWIW, there are more foreclosures than sales in a number of the states in the West, and Florida.

On the macro level, we have Warren Buffett saying that the recession is pretty much all ready here, and the president of the Philadelphia Federal Reserve saying that inflation is not important, and that the first priority is keeping the economy on track.

When a central banker says, “Inflation, no big deal”, you know that you are up a certain creek sans paddle.

Further evidence of a slowdown is the fact that Ford and Toyota sales declined in February. Ford having declines is not a shocker, but when Toyota is not selling cars, no one is selling cars.

The happy news is that the FDIC doesn’t see there being a surge in bank failures, though it does make one wonder why they are calling back retirees and generally staffing up.

They expect to be as busy as a one legged man in an ass-kicking contest.

In the world of municipal bonds, which should be safe-havens in a time like this, it appears that the costs are increasing, and the ratings falling, for municipal bonds, because of the collapse of the auction security markets.

In bond insurance, we have a new, or at least new to me, bond insurer bleeding, Security Capital’s to the tune of $1.5 billion on various complex investments.

It’s already been downgraded.

Finally, Buffet is now saying that his offer to buy the muni business of bond insurers is no longer operative.

Berkshire Hathaway is aggressively bidding on municipal bond portfolios, and as other insurers are downgraded, their position can only get stronger.

How to Fix the Economy

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You know the drill. Credit Crises, housing crash, dollar at all time low.

Then we have Sam Zell, media mogul and drooling moron, saying that the reason that the exonomy is tanking is because Obama and Clinton are talking it down in their campaigns (H/t Will Bunch of Attytood).

Zell has it wrong. The savior of our economy is politics. With Clinton raising $35 million in February, and Obama having raised even more money, campaign spending is the only stimulus package out there.

If we have a contested convention, between the money spent on pundits, feting super-delegates, and advertisements, we should have full employment.

(please note snark tag)

Economics Update: Housing Edition

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There is a lot of news, so this one is just housing.

Mortgage rates are climbing, despite the Fed rate cuts. As I’ve said before, with the expectation of inflation and greater risk of defaults, there is nothing that the Fed can do to keep the rates down.

It does not help that Standard & Poors is looking at cutting ratings on new tranches of mortgage backed securities, this time Alt-A, to the tune of 1,887 classes, which are supposed to be higher quality than subprime.

In the San Diego area home prices are in free fall, having fallen 3% last month, and 9.14% in the last three months.

Finally, we are beginning to see foreclosure self help websites. The link is “You Walk Away” dot com.

Austan Goolsbee Fingered as NAFTA Contact In Obama Campaign

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So reprots CTV News.

There are three possibilities.

The first is that these discussions never happened, in which case both Obama and Goolsbee deserve an apology.

The second is that Goolsbee did talk to the ambassador with the approval of the campaign, in which case everyone in the campaign deserves a dope slap and a severance notice.

This would be unnecessary and stupid, and I do not think that the members of Obama campaign are that stupid. (If they are, then they deserve to lose)

The third possibility is that Goolsbee decided to do this unofficially on his own.

If that’s the case, he needs to be dropped in an ostentatiously public manner, because you can’t afford to have someone freelancing like this on policy or diplomacy.

I do know that Mr. Goolsbee has occasionally read my blog, so if he wants to make a statement, I will post it unedited.

Economics Update

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We have bad news on income and spending. If you go to the link it says that they are both up slightly, 0.3% and 0.4% respectively, but this is less than inflation, which means that it is a real drop.

We also have oil at or near all time highs, and the dollar at or near all time lows.

We have a new estimate of total losses among financial firms from the meltdown, $600 billion. I think that they are off by at least one zero.

Insurance is continuing to unwind in a most unpleasant manner.

MBIA is not doing much in the way of business, because bond issuers don’t trust them to be solvent in the future.

Perhaps of more concern is that this is beginning to effect the reinsurance market, with Swiss Reinsurance Company posting an 87% drop in profits.

If this market goes south, it takes most of the insurance market with it.

Of course, we have the Fed shoveling out more money to the investors. It will auction off another $60 billion in March.

I don’t even want to think what the money supply is doing right now.

The credit crunch is also interfering with things like reorganizations, with Delphi unable to find the loans necessary for it to reorg under bankruptcy.

Finally, earnings fell across the market, with the S&P 500 companies’ earnings falling 4.2%, as opposed to the 10% increase forcast at the beginning of 2007.

Economics Update

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First and most importantly, GDP increased at an annual rate of 0.6% in q4. Seeing as how prices are increasing at an annual rate of greater than 4%, I would call this a contraction in real dollar terms.

Also, Initial jobless claims rise 19,000 to 373,000.

Moody’s is looking at downgrading Fannie Mae. Right now, it’s B+, which may be fine for a grade, but not so good for a financial institution.

Moody’s is probably thinking that they at risk of having problems if there is something like a margin call, as Thornburg Mortgage Inc. currently is. It looks like they will take a $300 million hit.

We also have a q4 loss of $2.5 billionfor Freddie Mac This goes along with Fannie’s $3.6 billion loss that I reported a few days back.

And just to show you that it isn’t limited to real estate, the credit crunch is forcing the Pennsylvania student loan program will stop making loans, at least for now, because the credit crunch is making money too expensive.

Another Day, Another Alphabet Soup Collapse

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A few days ago, I was wondering what a VIE (variable interest entity) was, and why they were collapsing.

Well, the Wall Street Journal now has the answer. VIEs are basically bonds where the interest rate is periodically refigured at auction.

Municipalities like them, because the interest rates are lower, both because they are more liquid, and because if interest rates rise, then they will follow.

They are basically the same as adjustable rate mortgages, only for bonds.

The problem is that no one is buying at auctions, and the banks have to cover the unpurchased bonds.

The difference between these and auction rate securities is that the banks have to purchase these from whoever wants to sell.

The interest spike is not as bad, these typically go up to prime, so it’s a jump from around 2% to around 6%, but the maturity date gets kicked up too, with 30 year bonds becoming 5 year bonds.

Expect to see more municipal bankruptcies as a result.

Obama Staffer: NAFTA Rhetoric “Not Serious”

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This could be bullsh&^, or it could be some staffer or economic adviser freelancing.

Or the report that a staffer told the Canadian ambassador that, “criticisms would only be campaign rhetoric, and should not be taken at face value“, could be true.

CTV is fairly reliable, and I think that Obama is way to savvy to knowingly let someone do this, even if that [b]WAS[/b] his real position (which it probably is, he voted for CAFTA).

It’s simply too politically stupid.

I think that it was one of his economic advisers freelancing, and whoever it was, they should be fired today.

Loan Portfolio Limits Eased on GSEs. Disaster to Follow

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As a result of their accounting scandals Fannie Mae and Freddy Mac had their portfolios capped about 725 billion dollars, but regulators have now removed the caps.

This is, to quote Nietzsche, “Like the bite of a dog into a stone, it is a stupidity”.

The head of OFHEO, James Lockhart, will be eliminating the caps this week, and it looks like he will be reducing their capital requirements below the current 30% too.

Mr. Lockhart is an ass. At a time when the 2nd and 3rd largest borrowers in the world, after the US government, are facing a collapsing market, allowing them to go further out on a limb that is being sawed through is insane.

Naomi Kline Nails It

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She has an article in the nation, Disowned by the Ownership Society, or as I like to refer to it, the Pwn3rsh1p society.

Go read it.

Here is a sample:

In November Nasdaq joined forces with several private banks, including Goldman Sachs, to form Portal Alliance, a private equity stock market open only to investors with assets upward of $100 million. In short order yesterday’s ownership society has morphed into today’s members-only society.

BTW, this private market will crash and burn, because there is no small investor left to hold the bag when the bubble bursts.