Daily Digest

Daily Digest - August 19

Wednesday, August 19, 2009, 10:04 AM
  • Why is US Government Subsidizing Chinese PPIP ?
  • The Drawing Board - Three Tier Proposal (Video on page)
  • $3 Trillion in U.S. Mortgages Underwater and Risking Foreclosure.
  • Frank Veneroso on Mortgage Armageddon
  • Why Budget Deficits Matter: Government at a $1.26 Trillion Budget Deficit for the 2009 Fiscal Year
  • Is This the Start of the Big One?
  • American's are Saving. Really? (Chart)
  • Mortgage delinquency rate hits all time high in 2Q
  • Denial ain't just a river in Egypt.--Mark Twain
  • Barney Frank Chairman of the House Financial Services Committee (Video, Repost)
  • Episode 17 (2 Beers With Steve) - Unsustainable Trends Eventually End with Nathan Martin (Repost)

Economy

Why is US Government Subsidizing Chinese PPIP ?

Dick Bove points out this is insane:

It is being reported that China Investment Corp (CIC) intends to purchase $2 billion of AAA rated, distressed mortgages in the United States. The press reports are suggesting that CIC is presently interviewing 9 American money managers.

These managers have been approved by the Treasury to participate in the PPIP program as servicers. CIC will pick one or perhaps two to manage its investment program.

Note that the PPIP program:

Has the Treasury matches whatever a private investor puts up, then credits 6X as much capital. So if the Chinese are buying $2 billion, the US puts up $2 billion, and then the PPIP allows the purchase of $24 billion of distressed assets in the open market.

All for $2 billion dollars. Oh, and the FDIC would guarantee the debt being issued by the PPIP.

Hence, taxpayer dollars are subsidizing Chinese purchases of U.S. assets at a discount.

This is insanity . . . [emphasis mine]

The Drawing Board - Three Tier Proposal (Video on page)

$3 Trillion in U.S. Mortgages Underwater and Risking Foreclosure

$3 trillion in U.S. mortgages are in a negative equity position. What this means is borrowers owe more than their home is worth. A few research papers have shown that the number one factor in determining potential foreclosure is being upside down on a mortgage (job loss is up there as well). You can rest assured that all those Alt-A and option ARM mortgages in California are underwater to the point of touching sea bottom. How bad can it get? One area in Southern California, the Inland Empire has an estimate total housing property value of $222 billion. Only problem is there are $238 billion in mortgages attached to these properties. Two enormous counties with negative equity.

us real estate values

Frank Veneroso on Mortgage Armageddon

The U. S. A. is noteworthy in having the most skewed wealth distribution among the more advanced nations of the world....To accommodate for this I considered two scenarios: one where one third of all homes had no mortgage and one where 40% had no mortgage.

To establish the denominator (residential property value) in the nation’s aggregate mortgage loan-to-value ratio I took two thirds of the residential property value in the flow of funds accounts at the 2006 peak in home prices. I then reduced this value by 41% which is my estimate of the overall home price decline that will take the Case Shiller index back to its mean in real terms assuming no inflation over the next two years. Against this I put the total household mortgage debt of all kinds -- firsts, seconds, thirds, HELOCs -- at the end of Q1 for which we have the latest flow of funds data. That figure on mortgage debt is down from the peak of 2006, but not by much. I should add that, owing to negative amortizations and securitizations, I believe that, if there is an error in the flow of funds data on outstanding mortgage debt, it is one of underestimation.

Now all one has to do is simple division: take the ratio of outstanding mortgage debt to the projected value of all mortgaged owner-occupied residential real estate when home prices fall by 41%. That ratio exceeds 120%.

I made the same calculation, but using the assumption that 40% and not one third of all homes have no mortgage. The resulting aggregate loan-to-value ratio for all indebted homes is 134%.

Why Budget Deficits Matter: Government at a $1.26 Trillion Budget Deficit for the 2009 Fiscal Year

The notion that deficits do not matter is a widely held and deeply ingrained economic philosophy. This line of thought took a stronghold in the 1980s and has seemed to stick to our ever-growing dismay. Yet budget deficits do matter if we are looking at an economic horizon that is longer than one fiscal year. You need to put this into context of your own household. If you as an average American spend more than you make, it will eventually catch up to you. In a more distant past, the American consumer did not have access to debt as they do now. So they in effect had the ability to run localized deficits. Americans took this notion of spending more than you earn to heart. Many bought homes, cars, entertainment systems, and other consumer goods that simply did not jive with their income. This can last for a few years but eventually it will catch up. Now we are seeing the housing bubble burst and bankruptcies soaring.

Now I want to bring this to a more micro level because similar rules apply to larger systems. Many Americans have had their access to credit cutoff. The U.S. Government for many years has been relying on cheap money fuel from foreigners to keep our deficit engines going. This will only work if we can eventually get the revenue side of the equation up. Otherwise, foreigners will do what many credit card companies are doing to consumers and that is pulling away that easy debt. It probably helps to see the actual cash flow sheet of the United States:

Is This the Start of the Big One?

The fall in the markets overnight, particularly the 5.8% drop in Shanghai, seems significant in combination with other factors:

American's are Saving. Really? (Chart)

Mortgage delinquency rate hits all time high in 2Q

That's up 65 percent, from 3.53 percent, in the 2008 second quarter.

Delinquency of 60 days is considered a precursor to foreclosure, because of the difficulty homeowners would have coming up with two back payments to bring themselves current.

Denial ain't just a river in Egypt.--Mark Twain (Repost)

House Financial Services Committee hearing, Sept. 10, 2003:

Rep. Barney Frank (D., Mass.): I worry, frankly, that there's a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .

Rep. Maxine Waters (D., Calif.), speaking to Housing and Urban Development Secretary Mel Martinez:

Secretary Martinez, if it ain't broke, why do you want to fix it? Have the GSEs [government-sponsored enterprises] ever missed their housing goals?

* * *

Barney Frank Chairman of the House Financial Services Committee (Video, Repost)

Episode 17 (2 Beers With Steve) - Unsustainable Trends Eventually End with Nathan Martin (Repost)

We titled this episode we talk with Nathan Martin of the website 'Nathans Economic Edge', one of the many excellent blogs on the internet trumpeting the problems in our financial system and how the problems still persist despite all the government intervention.

During our one hour talk we try to look back on the events that led us down the road to our national insolvency. We also explored many of the problems that still exist and will exist unless something... 'happens'. It was an excellent conversation with Nathan and we look forward to talking with again in the future.

We will be releasing an 'Afterhours' portion of this podcast whenever i get around to editing it. Also, I am looking for listeners to submit 3-5 minute audio MP3 files in which they talk about an issue that would be of interest to our listeners. Thank you,Steve

xgswh

9 Comments

hughacland's picture
hughacland
Status: Bronze Member (Offline)
Joined: Oct 7 2008
Posts: 25
Re: Daily Digest - August 19

Now call me old fashioned but that real estate chart looks a tad frightening. If, as the Crash Course explains, the historical evidence is that bubbles always retrace to the start then there is still a LOT more pain to come in the US housing market. Yikes! The US banks are in solvent at the moment once the Mark-to-Fantasy is removed.

In the words of von Mises:

"Depression is the aftermath of credit expansion"

Amen.

Davos's picture
Davos
Status: Diamond Member (Offline)
Joined: Sep 17 2008
Posts: 3620
Re: Daily Digest - August 19
hughacland wrote:

Now call me old fashioned but that real estate chart looks a tad frightening. If, as the Crash Course explains, the historical evidence is that bubbles always retrace to the start then there is still a LOT more pain to come in the US housing market. Yikes! The US banks are in solvent at the moment once the Mark-to-Fantasy is removed.

In the words of von Mises:

"Depression is the aftermath of credit expansion"

Amen.

Not to be doom and gloom here but I think it will be considerably worse. Think about all the loans that were offered that allowed "banks" to loan money to those who really couldn't afford it. Inventory will be like never before. 

hucklejohn's picture
hucklejohn
Status: Gold Member (Offline)
Joined: Dec 13 2008
Posts: 281
Re: Daily Digest - August 19

Regarding "American's are Saving. Really? (Chart)"   Can someone explain all the data, including each vertical bar on the chart?  Thanks. 

capesurvivor's picture
capesurvivor
Status: Platinum Member (Offline)
Joined: Sep 12 2008
Posts: 963
Re: Daily Digest - August 19-Barney Frank

Barney held a meeting  a day ago at a senior center in Dartmouth, Ma. A few snippets of this pretty loud and active meeting were aired on local news. There was great exchange (I couldn't believe) where an elderly man asked Barney "how can we trust the government" about some issue and Barney replied "this is a democracy, don't trust the government."

 

SG

Stan Robertson's picture
Stan Robertson
Status: Platinum Member (Offline)
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Posts: 651
Re: Daily Digest - August 19

Assuming that the horizontal scale was in years, a lot of the apparent bubble simply represents the considerable inflation that has occurred since 1955. You need to unfold the housing bubble from the currency bubble underneath it and then it doesn't look as though housing alone needs to collapse back to 1955 levels.  The big housing bubble occurred primarily in the last decade. The question is how the lenders survive if there is default on a large fraction of the submerged mortgages.

cwotom's picture
cwotom
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Joined: Jul 7 2009
Posts: 1
Re: Daily Digest - August 19

I think this Real Estate is gonna get real bad.  I live in the California Inland Empire.  I have a house I bought in 2006 for $650,000.  It's value rose to around $800,000.  I recently looked on Zillow.com (which I think averages higher than reality) and the house is now worth $279,500.  My personal opinion is this house will be $60 - 100,000 after the Alt-A crisis goes in full swing.  Personally, we haven't seen anything yet!

fujisan's picture
fujisan
Status: Gold Member (Offline)
Joined: Nov 5 2008
Posts: 296
Re: Daily Digest - August 19

Cameron dare not copy Obama's disastrous economic policies | Nassim Nicholas Taleb | Comment is free | The Observer

Should he come to power, the Conservative leader must avoid the calamitous mistakes of the American president.

Nassim Nicholas Taleb

The Observer, Sunday 16 August 2009

Dear David (if I may),

You and your party may be the only hope we have for a resilient society insulated from negative Black Swans and in which everyone has the opportunity to benefit from positive Black Swans. For I despair of the Obama administration's ability to fix this financial crisis and prevent future ones. I am appalled by the dangers it has been creating and its takeover by the same economic establishment responsible for this crisis.

What is a Black Swan? It is a low-probability, high-impact event that, because of its rarity and the instability of the environment, cannot be scientifically evaluated in terms of risk and return. Although Black Swans are rarely predicted, they are retrospectively seen as having been anticipated, which makes us overestimate our abilities to see them coming. Black Swans can emerge as a result of our intellectual arrogance and our ignorance of our limitations. Some elements of the future are simply beyond our grasp.

Much of history has been dominated by Black Swans, both positive and negative. These deviations are the main reason economic theories and forecasts do not work, since the exceptional and unforeseen high-impact event plays a large role in economic life.

...

Headless's picture
Headless
Status: Gold Member (Offline)
Joined: Oct 28 2008
Posts: 363
Re: The Essence of What This Site Represents

What CM and the community here are creating is of historic significance!

(John Pilger: Obama and Empire)

"The primary goal of great power is to limit our natural desire for social justice and equity and real democracy. Long ago Edward Bernay's invisible government of propoganda elevated big business from its unpopular status as a kind of mafia to that of a patriotic driving force. The American way of life began as an advertising slogan. The modern image of Santa Claus was an invention of Coca Cola. Today we are presented with an extraordinary opportunity. Thanks to the crash of Wall Street and the revelation, for many ordinary people, that the free  market has nothing to do with freedom, the opportunity within our grasp is to recognize that something is stirring in America that is unfamiliar, perhaps, to many of us within the left, but that is related a a great popular movement that is growing all over the world.

Look down at latin America: less than twenty years ago there was the usual dispair, the usual divisions of poverty and freedom, the usual thugs in uniforms running unspeakable regimes. Today, for perhaps the fist time in 500 years, there's a people's movement based on the revival of indigenous cultures and language, a genuine populism. The recent amazing acheivements in Bolivia, Ecuador, El Salvador, Venezuela, Argentina, Brazil and Paraguay represent a struggle for community and political rights that is truly historic, with implications  for all of us. The successes in Latin America are expressed perversely in the recent overthrow of the government of Honduras, because the smaller the country, the greater is the threat of a good example that the disease of imancipation will spread...

[Pilger later quotes Martha Gelhorn]

'I'll tell you what anti-American is. It's what governments and their vested interests call those who honor America by objecting to war and the theft of resources and by believing in all humanity. There are millions of these Americans in the United States. They are ordinary people. They are ordinary people who belong to no elite and who judge their government in moral terms though they would call it common decency. They are not vain. They are people with a wakeful conscience. The best of America's citizens. Sure, they disappear from view now and then, but they are like seeds beneath the snow. I would say they are truly exceptional. Truly exceptional.'

[Pilger continues]

"My own guess is that  a populism is once again growing in America, evoking a powerful force beneath the surface that has a powerful history...something is coming again....

What Obama and the bankers and the generals and the IMF and the CIA  and CNN and BBC fear is ordinary people coming together and acting together. It's a fear as old as democracy, a fear that suddenly people convert their anger to action, as they've done so often throughout history.

'At a time of universal deceit,' wrote George Orwell, 'telling the truth is a revolutionary act.'"

More on the origins and manifestations of this deception we now call  our government:

The Century of the Self

Mein Kampf, Part I

Harold Pinter on Charlie Rose

Seymour Hersh: Mario Savio Memorial Lecture (safely skip to 8:00, where the historic speech begins)

Conversations with History: Daniel Ellsberg

Conversations with History: Noam Chomsky

Conversations with History: Howard Zinn 

Jeff Borsuk's picture
Jeff Borsuk
Status: Silver Member (Offline)
Joined: Jul 25 2008
Posts: 150
Re: Daily Digest - August 19

In the best markets, lenders would fail. That would be the best thing to happen.

In our markets, the government steps in and bails out the big ones...leaving the little ones to fail. It seems the big ones have the ear of the government.

Jeff

 

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