Not Over In California

I think the general consensus on the economy from the grand poohbahs of the establishment is that we're contracting less slowly, that we're easing toward the bottom and will be able to improve as the year goes on. This optimism depends on no further "unforeseen" downturns in key economic sectors. But that just doesn't seem plausible. Zillow.com's estimates show that over 20% of all homeowners owe more on their mortgages than their homes are worth, as prices continue to decline. Considering that 24,000 homes and apartments are vacant in Sacramento, for example, up 40% year over year, the glut of supply suggests that those prices have further to fall. And thus we will not see much of a rebound in equity in the short term. Keep in mind that many of these homeowners who are underwater will experience recasts to their mortgage rates in the coming year, further straining their ability to make payments.

Now we have compelling evidence that a second foreclousre wave is starting to rumble through California once again, which could trigger the very same spiral that brought the nation's economy to its knees last year.

Here’s another sign that California’s foreclosures could jump in 2009: Delinquencies on dues owed to homeowner associations have risen sharply.

The homeowner association delinquency rate can serve as a leading indicator of sorts because homeowners usually stop paying dues before they stop paying their mortgage. The 90-day delinquency rate on dues for the 260 homeowner associations in California managed by Merit Property Management jumped to 5.3% in March from 2.8% last June. Delinquencies first spiked to 2.6% in December 2007 from 0.8% in March 2007.

The Journal looked at how banks were beginning to ramp up foreclosures after holding off for several months. Pre-foreclosure notices in California spiked in March after a state law had suppressed foreclosures at the beginning of the year.

Pre-foreclosure notices are where this begins, and those notices rose by 80% in the first quarter of 2009 from the previous quarter. As the article notes, the moratorium on foreclosures has been lifted, which will put more pressure on homeowners. We all understand that bad loans caused this crisis in the first place, right? Well, a lot of bad loans are still out there. At particular risk are those mortgages purchased at the height of the bubble in 2005 and 2006. Loans made in 2006 have an 8.5% default rate statewide. These are the worst liar loans, NINJA loans, many of them due to recast to higher interest rates. And this includes jumbo loans.

The number of U.S. homes valued at more than $729,750, the jumbo-loan limit in the most affluent areas, entering the foreclosure process jumped 127 percent during the first 10 weeks of this year from the same period of 2008, data compiled by RealtyTrac Inc. of Irvine, Calif., show. The rate rose 72 percent for homes valued at less than $417,000 and 78 percent for all homes, RealtyTrac said.

If you think this is over, particularly in California, duck.

News of the Good

I think I need a little good news, so here goes:

• A Senate Judiciary Subcommittee heard debate yesterday on a bill to cap credit card fees for people in bankruptcy.

Under current law, people filing for chapters 7 and 13 bankruptcy protection are obligated to pay credit card balances along with secured debts, such as house and auto loans. The measure is aimed at punishing credit card companies that raise their interest rates to a high level and at giving consumers who may be on the verge of bankruptcy greater leverage to negotiate better deals with those lenders.

The bill, introduced in January by Sens. Sheldon Whitehouse (D-R.I.) and Richard J. Durbin (D-Ill.), is another weapon the government is wielding against exorbitant rates charged by credit card companies. New regulations issued by the Federal Reserve targeting predatory lending practices are scheduled to go into effect next year.

Tom Geoghegan has a great article on how unlimited interest rates destroyed the economy at Harper's; unfortunately it's not online and only in the magazine. He correctly labels what the credit card industry is doing as usury, which used to be a crime for, oh, 5,000 years, but which is now accepted. This money suck from debtors to creditors fattens the financial services industry and causes bubbles and speculation. It's high time we did something about it. This is good.

• The Obama Administration's Justice Department will release Bush-era torture memos, over CIA objection.

Over objections from the U.S. intelligence community, the White House is moving to declassify—and publicly release—three internal memos that will lay out, for the first time, details of the "enhanced" interrogation techniques approved by the Bush administration for use against "high value" Qaeda detainees. The memos, written by Justice Department lawyers in May 2005, provide the legal rationale for waterboarding, head slapping and other rough tactics used by the CIA. One senior Obama official, who like others interviewed for this story requested anonymity because of the issue's sensitivity, said the memos were "ugly" and could embarrass the CIA. Other officials predicted they would fuel demands for a "truth commission" on torture.

While Obama's record on civil liberties is mixed thus far, on transparency and disclosure he has done quite a good job. The argument between Obama and Dick Cheney over the weekend was not an argument about detention, necessarily; it was an argument about torture. And the truth will come out. This is good.

• The EPA will review mountaintop mining projects which do great harm to the environment.

Dozens of mountaintop coal-mining permits will be reviewed for their potential impacts on streams and wetlands, the Environmental Protection Agency said Tuesday in breaking with Bush administration policy.

Announced by EPA Administrator Lisa Jackson, the move targets a controversial practice by coal mining companies that blasts away whole peaks and sends mining waste into streams and wetlands. It does not apply to existing mines, but to requests for new permits, a number estimated to be as high as 200.

I wish it were retroactive, but I'll take it. Mountaintop mining is a horrific practice and steps should be taken to stop it. This is good.

• Sen. Dick Durbin is introducing his public financing bill once again.

After the most expensive campaign cycle in U.S. history, a bipartisan group of lawmakers will introduce legislation this week to create an ambitious voluntary public campaign financing system that would ban contributions from lobbyists and place strict limits on other sources of campaign cash.

Under the proposed overhaul of campaign finance law, candidates would be prohibited from accepting donations from registered federal lobbyists but would receive public matching money for contributions from people in their communities. Advocates of the "Fair Elections Now" measure said the system would weaken the predominance of special interests in politics.

A lot of times, politicians offer "reform" that would do little or nothing to reform anything. This is an exception. Public financing is a proven technique, in Arizona, in Maine, in various municipal elections, to reduce the influence of money in politics. This is good (though I'm not hopeful, despite it being sponsored by members of both parties, that it will be successful).

• A federal judge paved the way for the dispensation of the morning-after pill to girls younger than 18.

U.S. District Judge Edward R. Korman in New York instructed the agency to make Plan B available to 17-year-olds within 30 days and to review whether to make the emergency contraceptive available to all ages without a doctor's order.

In his 52-page decision, Korman repeatedly criticized the FDA's handling of the issue, agreeing with allegations in a lawsuit that the decision was "arbitrary and capricious" and influenced by "political and ideological" considerations imposed by the Bush administration.

"These political considerations, delays and implausible justifications for decision-making are not the only evidence of a lack of good faith and reasoned agency decision-making," he wrote. "Indeed, the record is clear that the FDA's course of conduct regarding Plan B departed in significant ways from the agency's normal procedures regarding similar applications to switch a drug from prescription to non-prescription use."

The common argument from the right is that the ability to obtain Plan B will cause promiscuity. Plan B causes nausea and temporary bodily harm, which nobody seek out, and besides nobody on earth thinks that way. What will happen is a decrease in the unwanted teenage pregnancy rate, which is desired by most, and an enhancement of free choice for women. This is good.

Now, some may say that none of this matters, and Obama's taxpayer giveaway to the banks will destroy the country, and overall he's a very bad person. But tell that to the 17 year-old who now can rectify her bad situation, or the residents who get sick from living next to the mountaintop removal mine, etc.

Welcome To The ZIRP

The Federal Reserve cut their key interest rate as low as they can go - virtually to zero, although the bank rate is more like .5%. The investors loved it! Well, today they did, anyway. But this is the final tool in the shed for the Fed, and a zero interest rate policy (or ZIRP!) hasn't shown much success elsewhere in the world:

There's a bit of room left to go, since the rate isn't actually zero, but essentially, the Fed has run out of ability to use standard monetary policy. It's broken and it doesn't work anymore. Deflationary expectations have set in, and folks figure that a dollar a year from now will be worth more than dollar now, so even borrowing at zero or .5% doesn't seem like that good a deal.

As Bloomberg pointed out, the Bank of Japan kept rates at zero for five years, and it did squat. So the Fed has announced that it will use non-standard measures like buying up government backed housing bonds, and is considering buying long term treasuries, whose rates simply aren't dropping, even as people accept negative returns to buy short term securities. (They are doing so because the Fed was paying 1% interest on reserves, and treasuries can be used as reserves, which is why the Fed dropped the amount they pay on reserves to .25%.) [...]

Deflation can always be fixed, in the worst case scenario, the government could just send everyone a gift card for $50,000 which expires in 3 months and tell them to use it or lose it. But it can't be fixed by giving money to banks who won't lend it to the real economy, and even pushing down long bond rates really isn't going to matter as long as there are deflationary expectations.

So, expect the Fed to spend a LOT of money and get very little in return until someone uses some of the money to buy a clue. In the meantime, remember, you're probably going to have to pay this money back, no matter how little it does, unless the government manages to make itself go bankrupt. In theory the US need never go bankrupt, but a lot more of this, and it may turn out to be the lesser evil.

Paul Krugman calls it the liquidity trap - the Federal Reserve can't create a short-term shock to get the economy going at all, and the banks can't be prodded to lend, and the quantity of money is meaningless because bonds are worth essentially just as much. The Fed is also planning quantitative easing, basically increasing the money supply. But when money is the same as bonds, what's the difference? As Ian says, we're exploding the deficit and getting little in return.

The other worry is deflation; consumer prices fell at a record rate last month, which means that retailers can't sell enough to make a profit, which means they cut jobs, which means less people have money, and prices have to drop to sell anything, etc. Nasty business. While Kevin Drum notes that the drop in prices is entirely due to cheaper oil, taking that out of the equation there was virtually no change in inflation, which is unsustainable.

The textbook tells us to engage massive fiscal spending, as nobody is equipped to spend at all right now except for government. But Robert Reich is absolutely correct, IMO, that spending won't be enough.

Keynesianism is based on two highly-questionable assumptions in today's world. The first is that American consumers will eventually regain the purchasing power needed to keep the economy going full tilt. That seems doubtful. Median incomes dropped during the last recovery, adjusted for inflation, and even at the start weren't much higher than they were in the 1970s. Consumers kept spending by borrowing against their homes. But that's over. The second assumption seems even more doubtful: that, even if middle-class Americans had the money to continue the old pattern of spending, they could do so forever. Yet the social and environmental costs would soon overwhelm us. Even if climate change were not an imminent threat to the planet, the rest of the world will not allow American consumers to continue to use up a quarter of the planet's natural resources and generate an even larger share of its toxic wastes and pollutants.

The current deep recession is a nightmare for people who have lost their jobs, homes, and savings; and it's part of a continuing nightmare for the very poor. That's why we have to do all we can to get the economy back on track. But many other Americans are discovering they can exist surprisingly well buying fewer of the things they never really needed to begin with. What we most lack, or are in danger of losing, are the things we use in common -- clean air, clean water, public parks, good schools, and public transportation, as well as social safety nets to catch those of us who fall.

That's why it's not enough to spend, spend, spend, until the housing market comes back or everyone gets excited about the latest iGadget again. Indeed we need to create a new economy that is not based so heavily on unsustainable consumer spending. President-elect Obama has the right idea in talking about a green economy - not only would the money spent go into something of value, like the commons, but the emphasis on green technologies could spur innovation and perhaps generate something we can export for a change. Right now America is the number one exporter of raw materials in the world - we make precious little, give away our material wealth and do nothing but consume. When you strip away the CDOs and the CDSes and the subprime lenders, THAT's the problem. We're a bubble-based economy out of necessity. Without re-industrializing America, without making products the rest of the world wants, that will never change.

James Boyce has more, and believe me, I gave you the GOOD news.

Today In Economic Armageddon

The Federal Reserve joined forces with central banks across the world for a coordinated interest rate cut of 50 basis points. They're obviously throwing concerns about inflation out the window and trying to kickstart the credit markets, but Paul Krugman explains why that is not likely to work.

A quick illustration: in early July 2007, before the crisis, the target Fed funds rate was 5.25% and the rate on 30-day A2/P2 commercial paper — that is, CP issued by less-than-sterling borrowers — was 5.4%. On Monday of this week, the target Fed funds rate was 2%, down 325 basis points from pre-crisis levels, but the CP rate was 5.61% — up from pre-crisis levels.

So will this latest rate cut make any difference to borrowers? Maybe — but only to a few of them. We’re way past the point at which conventional monetary policy has much traction.

On top of this you have the Fed jumping into the commercial paper market, perhaps illegally, to get the rates they can't touch through monetary policy lowered. And they're starting to lend to private companies, putting more taxpayer dollars at risk.

These look like desperate attempts to stave off the inevitable, and nobody's really certain whether or not they'll work. What I think we have here is the policymakers in the White House trying to rescue their failed ideology and not the market. They want to use everything in their power (and a few things that aren't) to halt a slide to recession, as long as it doesn't look socialist and icky. What's more, they'd rather reward their friends on Wall Street than punish them, even though they have the opportunity to do either with the authority granted in the Paulson plan. The wiser move would be to follow Britain and just nationalize the banks already.

Britain’s largest banks are to be part-nationalised after the government took the momentous decision to pump tens of billions of pounds of public money into the sector to avert a banking collapse [...]

Under the UK bank rescue, the government is to put up to £250bn into the banking system in an effort to keep banks lending. It will also offer a guarantee to banks issuing medium term debt, which could mean backing a further £250bn of bank borrowings. But it is likely to demand dividend cuts and the end of big bonuses at the banks in return.

This is clearly what we should be doing here; a Swedish-style temporary nationalization with large equity stakes. It's cheaper and is more likely to be effective. And it looks like Emperor Paulson is slowly resigning himself to that reality:

Did anybody else notice that when Hank Paulson was describing in his press conference today what the Emergency Economic Stabilization Act enables Treasury to do, the first thing he listed was “to inject capital into financial institutions”?

That wasn’t how Treasury initially advertised its Troubled Asset Relief Program. It was sold as a way to get the market for mortgage securities moving (or, to use the jargon, liquid). Lots of academic economists objected that liquidity wasn’t the problem, it was insolvency. What Treasury needed to do was recapitalize financial institutions and take equity stakes in return […]

None of the people asking questions at the press conference really seemed to pick up on this, of course (&%%$# Washington journalists!). Along with Paulson’s affirmation that the FDIC was going to use its “systemic risk” powers to protect depositors and unsecured creditors “as appropriate,” I take it as one more sign that we’re headed toward a Swedish solution of our banking crisis—recapitalization and temporary nationalization of much of the banking system.

The second half of this needs to be a real stimulus bill for ordinary Americans which includes aid to state and local governments as well as infrastructure investment. And that's exactly what Nancy Pelosi is calling for.

DENVER - House Speaker Nancy Pelosi said Wednesday that a $150 billion economic stimulus plan is needed now because of the faltering economy and she may call the House into session after the election to pass it [...]

The Senate is expected to be back at work after Election Day to complete a public lands bill and perhaps deal with other matters, such as a measure to extend unemployment benefits. The House also could return to consider a stimulus plan and additional issues in a lame-duck session before the newly elected Congress takes over in January.

"We may have to go back into session before the next Congress," Pelosi said.

Pelosi said a stimulus package would create jobs by investing in public works, increasing food stamps benefits and extending unemployment insurance for the long-term jobless. She said lawmakers need to "hunker down" and look closely at the federal budget for possible savings, and reconsider whether the U.S. can afford to fight "a war without end" in Iraq.

Reality is intruding on the fantasy scenario that we can continue to prop up the financial system with funny money. The reckoning is going to be painful but we should at least start to head in the right direction.

Somebody REALLY Doesn't Want That Recession

The Fed just lowered interest rates by 3/4 of a point. So the predicted market crash is now a half-crash (only down 130 points or so).

Larry Kudlow's solution to this crisis on CNBC is to cut all taxes on capital gains and corporations. Amusing.

Meanwhile, you can cut interest rates to 0 and it's not going to help consumers buy everyone's crappy goods, or help people get credit. The economy's still going to contract, companies will still shed jobs.

The banks are way up today, expecting a bailout. You can only bail them out so much.

Looming Recession Update: Wall Street Thinks They Know Something

I saw Jim "Mad Money" Cramer yesterday say that "if the Fed doesn't cut interest rates by a half-point, we're in for a major recession." They went a quarter-point, and the Dow is down 250 points.

Sometimes these things take on a kind of self-fulfilling prophecy. Cramer and his buddies want the financial industry to be bailed out for their own mistakes, and making credit easy to obtain is a key element of that. Really the banks want to avoid prosecution from the entities who they pushed the risky securities onto.

The sole goal of the freeze is to prevent owners of mortgage-backed securities, many of them foreigners, from suing U.S. banks and forcing them to buy back worthless mortgage securities at face value - right now almost 10 times their market worth.

The ticking time bomb in the U.S. banking system is not resetting subprime mortgage rates. The real problem is the contractual ability of investors in mortgage bonds to require banks to buy back the loans at face value if there was fraud in the origination process.

And, to be sure, fraud is everywhere. It's in the loan application documents, and it's in the appraisals. There are e-mails and memos floating around showing that many people in banks, investment banks and appraisal companies - all the way up to senior management - knew about it.

I can hear the hum of shredders working overtime, and maybe that is the new "hot" industry to invest in. There are lots of people who would like to muzzle subpoena-happy New York Attorney General Andrew Cuomo to buy time and make this all go away. Cuomo is just inches from getting what he needs to start putting a lot of people in prison. I bet some people are trying right now to make him an offer "he can't refuse."

The banks created this shady system, and eventually they're going to have to jump into the shitpile head-first. And the rest of us, in California and throughout the nation, are bracing for the fallout.

Becoming The Third-World Country We Seek

Apparently the fact that our money is worthless globally is now a plus:

The U.S. dollar's slump on world currency markets boosts sales prospects for U.S. exporters but could mean higher prices for American consumers already smarting from rising food and energy costs.

A weak dollar increases the chances of higher inflation. That could put the Federal Reserve in a tough position of having to choose between tolerating rising inflation or raising interest rates to curb it — even if that makes the emerging economic slowdown worse.

Cheap exports for the world, rising inflation, an enormous inequality gap - hey, when did we become Mexico?

Well, this is what you get when you have essentially unregulated capitalism driven by greed, and a systematic destruction of the federal agencies tasked with oversight. Massive deficits didn't help either; we've borrowed so much that our money has become worthless. The dollar has gone down because the Fed has been so concerned with keeping a lid on this mortgage crisis that interest rates have been cut. But when the dollar goes down, commodity prices go up, which means inflation as those rising prices are passed to the consumer.

There are, in short, a lot of pitfalls in this economy right now, and the options are simply poor.

UPDATE: This is funny.

So right after the Bear Stearns funds blew up, I had a thought: This is what happens when you lend money to poor people.

Don't get me wrong: I have nothing personally against the poor. To my knowledge, I have nothing personally to do with the poor at all. It's not personal when a guy cuts your grass: that's business. He does what you say, you pay him. But you don't pay him in advance: That would be finance. And finance is one thing you should never engage in with the poor. (By poor, I mean anyone who the SEC wouldn't allow to invest in my hedge fund.)