Stop the Mortgage Bailout!!!

Came across this via Angry Bear. I agree, whole heartedly. Especially with this:

A bailout is morally irresponsible because it encourages irresponsible and irrational behavior. Here is a short list of the many "moral hazards" that a bailout enables:

A bailout sends the a wrong message about personal responsibility. It tells Americans in no uncertain terms that their financial decision have no consequences; the government will pick up the tab.


A bailout tells responsible Americans that they are suckers. If responsible American had been smart, they would have overextended themselves, purchased homes they could not afford, and taken out home equity loans based on the paper value of their property. Then, when the bill came due, they could pass it to the government like the irresponsible want to do.


A bailout allows banks, mortgage brokers, speculators, and refinancers to benefit from their abuse of the system. By doing so, it encourages these people to act irresponsibly in the future.


A bailout will force Americans who acted responsibly to pay for those who did not. The average American -- who saved and scrimped for years to buy a house but could not because speculators and over-extenders boosted home prices beyond affordability -- will now be forced to pay for the homes of those who were less scrupulous.

Take the time to click through on the link. This is a huge issue and will have an enormous effect on YOU and generations to come. We can't allow politicians to bailout greedy bankers with taxpayer money. Act today!

Income Disparity - Then and Now

I've written several posts on income disparity using data provided by the CBO. In short, the US is a society of the haves and have-nots, and the haves have accumulated more and more of the income for themselves over the years.

I've heard it mentioned several times before that income disparity was especially bad right before the Great depression. Unfortunately the CBO data only goes back to 1979, and thus all of the analysis I've done on the CBO data is quite limited in scope.

Anyway, I happened upon a post the other day at Jesse's Café Américain on the Minsky moment. The post itself is definitely worth reading, since we may be living through a Minsky moment as I write this. At the bottom of the post, though, was a figure breaking down income by quintile in some of the years prior to the Great Depression. It's not year by year, but it will do:
I decided to reorganize the data so that it matched the format in which I've presented the CBO data before. Here it is:

Unfortunately, there are only three years, but you can see that there is a general trend that income distributed to the highest quintile has steadily increased at the expense of the bottom 80% of the population. This is strikingly similar to what has happened since 1979.

This is pretax income, which what was used in the figure for the preGreat Depression data. As you can see, it's the same trend leading up to the Great Depression: an increase in share of income for the top 20% and a decrease for everyone else.

What's especially striking is when you break down the top 20% into various categories: Top 1%, Top 5%-1%, Top 10%-5%, and Top 20%-10%.

The amazing thing is that the share of income has only increased for the wealthiest of the wealthy. In fact, the Top 1%, representing only 1% of the population, was earning less than 10% of total income in 1979. In 2005, the Top 1% was earning more than 18%.

It's clear that we live in a society made up of the ultra-wealthy and everyone else, and that the ultra-wealthy has only become even wealthier in recent years. It particularly interesting that incomes during the period of time leading up to the Great Depression reflected a similar pattern of income. I'm not suggesting that the current credit crunch will lead to a Second Great Depression. But I hope that one of the results of the current crisis is realignment of this disparity so that the wealth of the nation benefits the commonwealth and not just the moneyed few.

I'd love to find a full data set that includes income broken down by quintile that goes back all the way before the great depression. If anyone knows where to find these data, please let me know in comments.

Newport Beach Bubble

A woman living in Newport Beach, CA got her $168,000 HELOC from Citibank shrunk down to a paltry $10,000. She feels like she's been robbed; after all, it's her money!:

“Remember that credit is money.” – Benjamin Franklin

I’ve always considered my primary residence to be one of my most solid investments. So it came as a surprise yesterday when we got the letter from Citibank about our $168,000 line of credit:

We have determined that home values in your area, including your home value, have significantly declined. As a result of this decline, your home’s value no longer supports the current credit limit for your home equity line of credit. Therefore, we are reducing the credit limit for your home equity line of credit, effective March 18, 2008, to $10,000. Our reduction of your credit limit is authorized by your line of credit agreement, federal law and regulatory guidelines.

Reduced to $10,000!? Hello!? Please don’t f-ck with my house in Newport Beach…

Of course, I’m calling them today to dispute it. Why? Because unlike the Phoenix property, I believe I can prove our home has retained its value and hasn’t declined. We have a Newport Beach address but live in what I’d describe as the low rent district of the city. It’s on the cusp of Eastside Costa Mesa and I believe the lender is using comps from Costa Mesa for comparison.

One reason why we bought in Newport is because we believed that property values would retain their value over time. After all, how many of you have heard of Costa Mesa? But most people have heard of Newport Beach. It’s considered desirable. People want the Newport Beach address. As real estate declines, it will decline more quickly in Costa Mesa. And it is.

But Newport hasn’t declined with any significance and if we compare current comps in our zip code, we can prove to the lender that our home has retained its value. Or so that’s my plan. I’m going to fight this one and I’ll write a follow up post about my success or failure with regards to the dispute.

This is my response:

First of all, despite what Benjamin Franklin has to say, credit is NOT money! Money is money! Credit can be converted to money, but it's not money until it is converted.

Second, we are in the middle of a credit crisis. There was an enormous, world-wide credit bubble. The bubble has burst. This means that credit will dry up and includes precious, unused HELOCs.

Third, the credit bubble led to inflated prices. This was especially true in real estate. I don't know enough about Newport Beach, but after looking some listings on Redfin, I found a couple that are selling for LESS than they were purchased just a few years ago:

311 32nd ST
Newport Beach, CA 92663
Last Sale: $1,270,000 (06/23/2005)
Asking Price: $879,000

209 38th
Newport Beach, CA 92663
Last Sale: $999,000 (11/03/2006)
Asking Price: $959,000

2227 Cliff DR
Newport Beach, CA 92663
Last Sale: $4,996,000 (11/30/2007)
Asking Price: $4,695,000

Many others are asking for basically the same price they were purchased for just a few years ago. That equals basically 0% appreciation.

According to Yahoo foreclosures, there are 113 listings for Newport Beach. More evidence of a housing bubble gone bad.

It's insane to suggest Newport Beach is immune from the housing bubble. Citbank probably did the right thing by shrinking your HELOC. Your house is no doubt worth less than it was.

Sorry to burst your bubble, so to speak...

Found this via Mish

Sleep-Deprived

recounts

Existing Home Sales BS

Inspired by two posts at The Big Picture, I decided to look a little more closely at the BS being flung around yesterday regarding the release of existing home sales data for Feb 2008. It was disgusting, to say the least. All the major media outlets were pushing hard on the fact that the seasonally adjusted annual rate (SAAR) was up a whopping 3% from January.

Now, there is some confusion about this increase. It's true that existing home sales increase every single February when compared to the month before. That's because fewer people buy homes in the dead of winter. Most people are up in arms because it sounds like the media is spinning that an increase in home sales occurs every year, and that this increase isn't any different from any other year. What people are missing, though, is that this an increase in the annual rate of sales. Basically, if sales stay at this pace, then 3% more homes will be sold this year than if home sales stayed at the rate at which they were selling in Jan 08. Here is a figure that illustrates the MOM changes in SAAR for existing home sales since Feb 2007:
You can see that, except for Feb 07, MOM change in existing home sales was basically very negative the whole year. This is because SAAR is essentially an estimate of how many homes will sell in a given year, and that estimate had to be downwardly revised as the market tanked. In addition, looking at MOM change in SAAR is essentially one way of assessing the instantaneous rate of change (if you consider a month to be instantaneous) of the estimate of how many homes will be sold in a year. Last year, the existing home market steadily declined. Thus, the MOM in SAAR was negative for basically the whole year. The fact that it's positive right now means that downward trend in the market has taken a breather. For now. You can see that here:

That little uptick is why the media was sooooooo excited yesterday. The market still sucks, and the SAAR is off -24% from where it was last year. But it sucks just a little less than it did yesterday. whoo F-ing hoo.

Barry asks about how they accounted for the leap year:

February 2009 was a leap year -- the month had an extra day, and without that I sincerely doubt we would have seen any gain (I wonder how they adjusted for that).

Me too. I'm going to look into it. Maybe they made a "mistake". One day of extra selling doesn't sound like a big deal, but one day is about 3% of a month. It would be some crazy shit if the whole media frenzy yesterday was all because there was one more day in Feb 2008 than Feb 2007.

Why the FDIC is hiring

About a month ago, it was widely reported in the media that the FDIC was going on a hiring spree. WSJ explains why:

Regulators are bracing for well over 100 bank failures in the next 12 to 24 months, with concentrations in Rust Belt states like Michigan and Ohio, and the states that are suffering severe housing-market problems like California, Florida, and Georgia

I was skimming through the FDIC website and came across some humbling figures. No wonder the FDIC is worried.

And the number of problem institutions is increasing:
Fasten your seatbelts people; 2008 is going to be an interesting year...

PZ Meyers Expelled from Expelled

HO-LEE CRAP! This one of the funniest things I have read in a long time. PZ Meyers, professor at the University of Minnesota, has one of the most read science blogs on the intertubes, Pharyngula. Meyers has a particular penchant for ridiculing creationism in all its forms, especially Intelligent Design. He has a very sharp tongue, which makes him such a pleasure to read.

Anyway, there is a new documentary coming out next month called Expelled. It's about how intelligent design has gotten a "bum rap" and evil secular humanists have unfairly forced it from public schools. And it stars Ben Stein. Yes, that Ben Stein.

PZ Meyers got duped into being "interviewed" for the movie under false pretenses. Earlier this evening, he went attend a screening of Expelled. While standing in line, well, I'll let him explain:

I was standing in line, hadn't even gotten to the point where I had to sign in and show ID, and a policeman pulled me out of line and told me I could not go in. I asked why, of course, and he said that a producer of the film had specifically instructed him that I was not to be allowed to attend. The officer also told me that if I tried to go in, I would be arrested. I assured him that I wasn't going to cause any trouble.

I went back to my family and talked with them for a while, and then the officer came back with a theater manager, and I was told that not only wasn't I allowed in, but I had to leave the premises immediately. Like right that instant.

I complied.

I'm still laughing though. You don't know how hilarious this is. Not only is it the extreme hypocrisy of being expelled from their Expelled movie, but there's another layer of amusement. Deep, belly laugh funny. Yeah, I'd be rolling around on the floor right now, if I weren't so dang dignified...

They singled me out and evicted me, but they didn't notice my guest. They let him go in escorted by my wife and daughter. I guess they didn't recognize him. My guest was …

Richard Dawkins.

He's in the theater right now, watching their movie.

Tell me, are you laughing as hard as I am?

Yeah, I'm laughing my ass off! Too F-ing funny!

How Wall St lost its Marbles

I've had a hard time trying to describe the current credit crisis to friends and family. They sense my panic, but they just don't get. Heck, I don't get it half the time!

But Steve Waldman at Interfluidity has written a primer for kindergarteners. Here's how it starts:

Alice, Bob, and Sue have ten marbles between them. Whenever one kid wants another kid to take over a chore, she promises a marble in exchange. Alice doesn't like setting the table, so she promises Bob a marble if he will do it for her. Bob hates mowing the lawn, but Sue will do it for a marble. Sue doesn't like broccoli, but if she says pretty please and promises a marble, Bob will eat it off her plate when Mom isn't looking.

One day, the kids get together to brag about all the marbles they soon will have. It turns out that, between them, they are promised 40 marbles! Now that is pretty exciting. They've each promised to give away some marbles too, but they don't think about that, they can keep their promises later, after they've had time to play with what's coming. For now, each is eager to hold all the marbles they've been promised in their own hands, and to show off their collections to friends.

But then Alice, who is smart and foolish all at the same time, points out a curious fact. There are only 10 marbles! Sue says, "That cannot be. I have earned 20 marbles, and I have only promised to give away three! There must be 17 just for me."

But there are still only 10 marbles...

This is where it gets interesting. As they say, read the whole thing.

Needless to say, writers as creative as Waldman are few and far between. I'll be checking Interfluidity daily from here on out.

S&P 500 and T-Bills

There's a lot of talk about crazy low interest rates on short-term T-bills. In fact, the 13 week T-bill hit a 50 year low. Basically what this means is that people have no confidence that they will make any return by parking their money anywhere except Federally-backed notes. Thus the low, low rates.

Interest Rate Roundup compares recent 13-week interest rates to the S&P 500. He says it seems like a leading indicator. Sort of seems true, especially if you look at the fact that the 13-weeked topped before the S&P 500 recently.

Does this mean the S&P 500 has farther to go? I have no doubt. How much farther, though, is anyone's guess. It sure looks like it could be a lot, though....

UPDATE: See Mish for more. He's had a lot of good things to say on this issue for the past few days...

Perlstein and the Bush Legacy

Polls show George W Bush has had dismal approval ratings for years and years. A lot of this has to do with Iraq, a war of choice started on false pretenses. But with the economy going south, no amount of good news they can rake from the sands of Iraq can save the Bush presidency.

So what will conservatives do to save their movement? After all, conservatism can never fail; it can only be failed. Will they rescue Bush's reputation? Or will they throw him under the bus to save conservatism? Amputate the limb to save the body, so to speak.

Rick Perlstein looks a Reagan's legacy. At one point, he was on the ropes, during Iran-Contra. but he finished his tenure at 63% approval, solidifying his position as the saint of the modern conservative movement.

What will they do about Bush. Perstein speculates:

What if... there had been no Reagan Rebound? What if progressives had thought ahead and launched a concerted campaign to keep Reagan's negatives down, where they deserved to be, of course, in the first place?

No President George H.W. Bush, certainly.

But even better. No headlines, in 1994, like "Reagan Name a Great Tool for Election"—and no chance of Newt Gingrich drafting off the public's vague perception that being called a "Reaganite" was a desirable thing, all the way to the conservative takeover of Congress. No headlines, like the ones in 2000, reading, "Bush: I'm Ronald Reagan's Heir."

Because the pathetic fumes of vestigial Reagan worship are the only card they truly have to play. We cannot give them the opportunity to play that card with Bush. We also can't let them get away with claiming Bush was somehow a betrayer of conservatism. If they do, conservatism can live to fight another day. "Don't like Bush? Doesn't matter. He wasn't a conservative. Conservatism is still the greatest thing since oven-fresh baguettes. We got rid of Bush, so now we can move on to a true conservative."

I have a problem with one of the premises in this post, though. Lemme explain.

Not that conservatives haven't mastered the art of cognitive dissonance, I have a hard time believing that the GOP will simultaneously try to rescue the legacy of George W Bush and throw him under the bus in order to save conservativism. Here's how I see it playing out.

We all know that the GOP is a coalition but one that is exceptionally hierarchical. They have an amazing capacity to maintain a unified message. My guess is that they will, initially, try to burnish the Bush legacy. But they probably will, and probably have already decided that it's futile save Bush. His reputation is already too far down the toilet, and it's only going to get worse as the economy slips further into recession, especially as job losses increase, as foreclosures skyrocket, as home prices crash, as gas prices soar, as the dollar weakens, etc, etc. He's toast, and they know it.

I think they've already started to cut him loose from the conservative movement. They know the tides are running against the GOP this year, and that McCain will probably lose by a lot. If McCain goes down in flames, expect them to hitch Bush to him as an anchor. "They" will have betrayed conservatism, and that's why "they" lost.

I'm going to keep my eyes peeled for examples of the GOP playing the "Bush betrayed us" card. My guess is that it's their only hope. There's no way Bush is going to end up with approval ratings higher that 50%, and I'd be shocked if they end up anywhere close to 40%. There's just no way they're turning the economy around in time, and that is the one issue that truly affects everybody. Look for updates on my blog.

Still, any effort to hitch Bush to the conservative movement is absolutely worthwhile. He's their albatross, and they will do their best to hide him from the public. It's our job to make sure the facts of the last eight years aren't erased from the national record. And the fact is that Bush is perfect exemplar of modern American conservatism.

Mideast and the Dollar

A great post from last week from Interest Rate Roundup on the dollar's recent woes and the reaction by Mideats financial institutions:

a key source of weakness appears to be rumblings in the Middle East about dollar pegs. Many regional currencies, including the UAE dirham and the Qatari riyal, are pegged to the U.S. dollar at fixed exchange rates. The problem is, having a dollar peg in your country essentially links your monetary policy to the U.S.'s monetary policy. If the U.S. Fed cuts rates to stimulate the U.S. economy, your economy will be stimulated as well -- even if the LAST thing you need is an extra boost. And believe me, most economies in the Middle East don't need it -- after all, they're raking in billions and billions of dollars from oil sales.

The result of the Fed-provided stimulation ... on top of strong regional economic growth ... is a gigantic inflation problem in many Gulf countries. UAE inflation surged to a record high 9.8% last year, according to estimates, up from 9.3% a year earlier. The government is planning to cap certain food prices and considering building up a "strategic food reserve" in response. In Qatar, inflation is exploding higher at a 13.7% rate, prompting countermeasures such as rent caps.

Two days ago, Bloomberg did a story that UAE was keeping its dollar peg, but it came with considerable pressure. From the article:

U.S. Embassy officials last week told central bank Governor Sultan Bin Nasser al-Suwaidi of their concern about reports that the sheikhdom may drop the peg, the official said yesterday, speaking on condition of anonymity. Political leaders have stopped the bank from developing any plans to move toward another currency regime, the official said. U.S. Embassy spokesman Atalah Hoshan in Abu Dhabi wasn't immediately available for comment.

Abandoning the link would risk further weakening the dollar as the U.S. economy falters and the Federal Reserve battles a crisis of confidence in financial markets. The oil-rich Gulf states, including Saudi Arabia and the U.A.E., depend on the U.S. for political and military backing and are unlikely to abandon their closest ally at a time of financial turmoil, said Anoushka Marashlian, senior Middle East analyst at Global Insight in London.

``The U.S. has always been the guarantor of U.A.E. military security,'' Marashlian said. ``The U.A.E. wouldn't do anything to compromise that relationship.''

If a few more banks go under, things could change quickly. Stay tuned...

Bank Run Metaphor

Paul Krugman put together a great post explaining what happens during a bank run. He describes it as what's happens when someone yells "Fire!" in a crowded theater:

Bank runs come in two kinds.

In some cases, the bank run is a pure self-fulfilling prophecy: the bank is “fundamentally sound,” but a panic by depositors forces a too-hasty liquidation of its assets, and it goes bust. It’s as if someone calls “fire!” in a crowded theater, provoking a stampede that kills many people, even though there wasn’t actually a fire.

In other cases, the bank is fundamentally unsound — but the bank run magnifies its losses. It’s as if someone calls “Fire!” in a crowded theater, and there really is a fire — but the stampede kills people who would have survived an orderly evacuation.

We’re in the second case. The Fed has spent the last 7 months trying to assure people that there isn’t any fire. But there is.

Worse yet, thanks to decades of deregulation, the theater doesn’t have a sprinkler system - and the town the theater is in doesn’t have a fire department.

And now we have to put together an emergency response.

OK, so I thought of a third scenario. What if there really is a fire, but that manager of the theater (Bernanke, Paulson, et al.) convinces basically everyone that there is no fire. How many people die in that scenario? Better to die fighting like hell to get out of the theater than sit compliantly while the flames lick around your ankles...

McCain Campaign Tries to Clean Up Mess

McCain's campaign has released a statement trying to spin hard out McCain's insane claim that Iran is supporting Al Qaeda militants in Iraq. Think Progress has an excerpt:

In a press conference today, John McCain misspoke and immediately corrected himself by stating that Iran is in fact supporting radical Islamic extremists in Iraq, not Al Qaeda — as the transcript shows. Democrats have launched political attacks today because they know the American people have deep concerns about their candidates’ judgment and readiness to lead as commander in chief.

The problem is that McCain did not just misspeak. He repeated this claim TWICE in the same press conference. And then he said the same crazy thing on Hugh Hewitt's show (you can listen to it here).

This is no slip up. McCain really believed that Iran has been assisting Al Qaeda. What would make him claim something so obviously insane multiple times? How could we possibly trust McCain with CIC powers over the largest military in the history of mankind when he doesn't even know the basic details of our adversaries in the Mideast?

McCain: Not Just a Slip-up

So it looks like McCain didn't just misspeak. He apparently has said the Shia Iran is training Al Qaeda extremists, Sunni radicals who hate Shia Islam, multiple times. This wasn't just the wires getting temporarily crossed in his 71 year-old mind. One might forgive the ramblings of a confused, old man, though it's hard to imagine giving a confused, old man absolute power of the greatest military on Earth.

No, McCain instead seems to have repeated this nonsense multiple times. MSNBC notes:

Mr. McCain said several times in his visit to Jordan — in a news conference and in a radio interview — that he was concerned that Iran was training Al Qaeda in Iraq...

Mr. McCain said at a news conference in Amman that he continued to be concerned about Iranians “taking Al Qaeda into Iran, training them and sending them back.” Asked about that statement, Mr. McCain said: “Well, it’s common knowledge and has been reported in the media that Al Qaeda is going back into Iran and receiving training and are coming back into Iraq from Iran. That’s well known. And it’s unfortunate.”

It was not until he got a quiet word of correction in his ear from Senator Joseph I. Lieberman of Connecticut, who was traveling with Mr. McCain as part of a Congressional delegation on a nearly weeklong trip, that Mr. McCain corrected himself.

“I’m sorry,” Mr. McCain said, “the Iranians are training extremists, not Al Qaeda.”

and

The Democrats noted that Mr. McCain, Republican of Arizona, had made similar comments about Iran training Al Qaeda in an interview with “The Hugh Hewitt Show,” a radio program he called from Amman. “As you know, there are Al Qaeda operatives that are taken back into Iran, given training as leaders, and they’re moving back into Iraq,” Mr. McCain said, according to a transcript posted on the show’s Web site.

You can listen to McCain on Hewitt's show here, and watch a clip of McCain saying Iran is assisting Al Qaeda here.

So what's McCain's deal here? We know he's wrong on this, and he quickly flip-flopped after Lieberman corrected him. So I think that means that we can rule out that he was deliberately lying. But he repeated it multiple times, so it obviously wasn't just some slip of the tongue. So what's going on here? Speculate in comments.

McCain: USSR not in Poland

Ford's loss to Carter in 1976 was largely thought to be based on one major gaffe in debate #2. He claimed that the USSR did not dominate Eastern Europe. Reality said other wise. This from CNN's website:

Ford also made what most observers considered to be an important blunder. In response to a question asked by Max Frankel of the New York Times concerning the Soviet influence in Eastern Europe, Ford said, "There is no Soviet domination of Eastern Europe, and there never will be under a Ford administration." Frankel responded, "I'm sorry ... did I understand you to say, sir, that the Soviets are not using Eastern Europe as their own sphere of influence in occupying most of the countries there?" Ford responded, "I don't believe ... that the Yugoslavians consider themselves dominated by the Soviet Union. I don't believe that the Romanians consider themselves dominated by the Soviet Union. I don't believe that the Poles consider themselves dominated by the Soviet Union. Each of these countries is independent, autonomous, it has its own territorial integrity, and the United States does not concede that those countries are under the domination of the Soviet Union."

In response Carter said he'd like to see Ford "convince the Polish-Americans and the Czech-Americans and the Hungarian-Americans in this country that those countries don't live under the domination and supervision of the Soviet Union behind the Iron Curtain."

News reports about the debate were dominated by Ford's statement and its potential effect on the race. Most observers felt the debate proved to be a turning point and the key to Carter's narrow electoral victory.

Fast-forward to today. McCain is touring the Mideast, bucking up his foreign policy cred. But in a press conference yesterday, McCain made a HUGE gaffe:

Sen. John McCain, traveling in the Middle East to promote his foreign policy expertise, misidentified in remarks Tuesday which broad category of Iraqi extremists are allegedly receiving support from Iran.

He said several times that Iran, a predominately Shiite country, was supplying the mostly Sunni militant group, al-Qaeda. In fact, officials have said they believe Iran is helping Shiite extremists in Iraq.

Speaking to reporters in Amman, the Jordanian capital, McCain said he and two Senate colleagues traveling with him continue to be concerned about Iranian operatives "taking al-Qaeda into Iran, training them and sending them back."

Pressed to elaborate, McCain said it was "common knowledge and has been reported in the media that al-Qaeda is going back into Iran and receiving training and are coming back into Iraq from Iran, that's well known. And it's unfortunate." A few moments later, Sen. Joseph Lieberman, standing just behind McCain, stepped forward and whispered in the presidential candidate's ear. McCain then said: "I'm sorry, the Iranians are training extremists, not al-Qaeda."

The mistake threatened to undermine McCain's argument that his decades of foreign policy experience make him the natural choice to lead a country at war with terrorists. In recent days, McCain has repeatedly said his intimate knowledge of foreign policy make him the best equipped to answer a phone ringing in the White House late at night.

This is a blunder of huge proportions. How could we possibly trust McCain with CIC powers if he doesn't even know the basic details about our adversaries in the MidEast? How could we possibly let a man this clueless into a tour of the White house, let alone run the place? He doesn't even have the faintest idea of what he's talking about!

To be perfectly honest, I'm shocked. I know McCain is pretty clueless about most things, and really only cares about two things: 1) superficial politics related to his own stature and 2) War. I would expect him to say stupid stuff about all sorts of things, like the economy for instance. But he should get this war stuff down, right? To suggest Iran is training Al Qaeda is insane, to say the least.

Expect the media to take a pass on this, of course. They love McCain; they're his base. Just think if Obama or Clinton had said something like this. The media would be calling for them to quit the campaign immediately.

WOW

So much has happened over the weekend. I haven't had time to get a post up because we have family in from out of town and I have been very busy writing up my thesis. But here's the short skinny:

Bear Stearn (BSC) was "orderly liquidated" this weekend, sold to JP Morgan for $2 a share. Yes, $2 a share. No really, $2 a share. At the end of the day on Thurs., BSC was trading for $57. One year ago, they were trading at $147. Today they closed at $4.81, presumably because many happy investors had to cover their shorts.

JP Morgan made out like a bandit. More from the Big Picture:

2) JPM looks to have gotten a great deal – the Fed is actually taking on the first $30Billion in risk; Unless BSC’s losses exceed that, it’s a winner for JPM.

3) The Fed took this risk because JPM could not possibly have done the due diligence over the weekend....

5) JPM gets a terrific scapegoat for the next 4 (or 8 or 12) quarters to blame for all of their crappy paper, leveraged risk, and counter-party obligation.

Many are saying Lehman Bros (LEH) are next. Could be. They tanked hard today, down over 40% at one point. But they crawled back to only take a 20% hit by the end of the day. And that seems to holding more or less afterhours. But I decided to look at the longer picture of LEH versus some of their competitors. All are down big in the last 6 months:

LEH was holding up pretty well until late Feb, whereas MS, UBS, MER, and BSC have been in steady decline. especially since late Oct. Even with the beating LEH took today, they're doing about the same as the others. Even better than UBS (ignoring BSC, R.I.P.).

Of course the problems facing LEH are eerily similar to those that were facing BSC. So the rumors may be true. We'll see.

Interesting times, indeed.

Bears Eat Bear Stearns

The Big Picture is liveblogging the mauling Bear Stearns is getting this morning. Most of the damage has been done already; share price is currently off 47%. Earlier this week BS (nice acronym, eh?) Chief Executive Alan Schwartz said is well, that there isn't a liquidity problem at BS. Today, JP Morgan has gone to the Fed Discount Window to get money for BS. Lot's of money.

Spitzer vs Vitter; view from the right

Sadly, No! checks out the wingnuts so we don't have to. Here's a highlight:

I know what the liberals are asking: Why is [Spitzer] such a big deal, and Sen. David Vitter’s previous experience with call girls isn’t?

Shut up, that’s why.

Who could argue with that? More at the link...

Spitzer Gets Nailed

Some thoughts about the Spitzer situation:

First, he brought this upon himself. No one forced him to play with ladies of the night. He made his choice, and now he's paying for it. His career as an elected official is ruined.

Second, this is especially sad because Spitzer one of very few elected officials willing to take on monied interests. We live in a society run by very powerful, very wealthy, very few, very elite that accrue huge amounts of wealth for themselves. See this post that shows the long term trend of an increasingly wealthy elite

The wealthy elite game the system, paying off politicians so that our economy is structured to maximize profits for the few. Spitzer was working to counteract that trend. Now he is powerless to do anything, and there are very few politicians to replace him. Given that the current financial fallout is all because of scam built on scam built on scam, we are worse off with fewer elected officials willing to ferret out financial wrongdoing on Wall St.

Third, remember, this is a leak from a federal investigation. The wiretap happened less than one month ago. There's no way this case was ready to go forward, so someone wanted to see Spitzer crushed. He had lots of enemies, so that list is long. Obviously the "big" story is the prostitute, my guess is that there is an interesting narrative laying beneath the surface about how this investigation came to be. Of course, it's hard to imagine that anyone would use the justice system for political ends...

UPDATE: More on the reaction of the monied interests from the WSJ:

The news stunned traders on Wall Street, where Mr. Spitzer long has been viewed with fear and contempt. Some view the revelations as a huge hypocrisy for a man, who as New York's attorney general, had aggressively pushed for ethics and fair play on Wall Street earlier this decade. People who clashed hardest with Mr. Spitzer are among those crowing the loudest.

"He actually believes he's above the law," said Ken Langone, a former New York Stock Exchange director who now heads a small investment-banking firm. In his role as prosecutor, Mr. Spitzer sued Mr. Langone for his role in doling out the large pay package of former New York Stock Exchange CEO Dick Grasso. "I have never had any doubt about his lack of character and integrity -- and he's proven me correct."

His political rivals, too, jumped into the fray.

"This is not a victimless crime," said U.S. Rep. Peter King, Republican of Long Island. "I've never known anyone who was more self-righteous and unforgiving than Eliot Spitzer."

Read the whole thing for more on Spitzer's many spats with the jackals on Wall St.

Puget Sound Housing: What's the Sound a Bubble Popping?

I've been following housing in the Puget Sound area for about a year now. In fact, my recent obsession with economics and finance all started with digging into the itty gritty details of the real estate market in the area.

Last spring, Seattle denizens deluded themselves into thinking that our little neck of the woods was a real estate paradise. A magical land where every homeowner rides a pretty, pink pony on streets made of crystal. A land where gooey, gooey gumdrops fall from the sky. A land where housing appreciates 10%+ per year forever.

Seattle was the last holdout (except for the research triangle in NC), the last large metropolitan area that hadn't yet seen its housing bubble burst. Even though last spring markets in So CA, AZ, Las Vegas, and Miami were imploding, there were plenty of entrenched business interests in Seattle that were arguing that our market would be immune to the troubles spreading across the land. The enablers in the local media only made things worse, ignoring data that ran contrary to the interests of the real estate / industrial complex.

Yet, a harbor of rationality gleamed as a beacon through the real estate fog. I started reading SeattleBubble blog every single day. Then I started responding in comments and on the forum. It was fun, because there were a bunch of fools (Mashugana in particular) claiming that there was no bubble. People who could look at the data objectively knew the writing was on the wall, but the bubble hadn't blown yet. But by the time it all started to unwind and the Seattle bubble started to burst in the fall of 07, I found Calculated Risk and other finance blogs which showed that a bigger problem loomed than Seattle Real Estate, the potential collapse of the financial system in the US. Let's just say the gravity of that situation drew me in, and I spent less time at Seattle Bubble.

But I still pay attention to Puget Sound housing. Here's an update. The Tim has given a recap of the most recent data released by NWMLS for the month of Feb. He has been doing this for a long time and has very good stats and charts. I'll try to fill in a couple of gaps, especially Snohomish and Pierce Counties.

NWLS reports various data for counties in WA every month. There are two categories of data I've been following for some time: median price for a single-family home (SFH) and median price for a condo per month. I've been following three counties: 1) King, which includes Seattle and most of the urban density around Seattle. 2) Snohomish, which includes urban areas north of Seattle, of note is Everett. 3) Pierce, which includes urban areas south of Seattle, of note is Tacoma.

SFH

For Feb, median price for a SFH in King Co was $429,900, down -0.01% year-over-year (YOY). Essentially flat YOY. Here is a figure that shows YOY for median SFH in King Co since Jan 2003:

You can see that peak appreciation was in Oct 05, when the median price for a SFH increased nearly 20% in one year.

Median price for a SFH in Snohomish Co was $355,000, down -2.74% YOY. Here is the figure for YOY data since Jan 2003:

Peak appreciation in SnoCo was in Aug 05, when the median price for a SFH increased 23.6% in one year.

Median price for a SFH in Pierce Co was $265,750, down -7.40% YOY. Here is the figure for YOY data since Jan 2003:

Peak appreciation in Pierce Co was in Oct 05, when the median price for a SFH increased 25.4% in one year.
CONDOS

Median price for a condo in King Co was $189,000, up 1.31% YOY. Here is the figure for YOY data since Jan 2003:

In general, appreciation in the condo market has lagged the SFH market. I guess this isn't too much of a surprise, given that as people were priced out of SFHs, only condos were left in their price range. Peak appreciation in King Co was in Feb 07, cresting at 24.58% in one year.

Median price for condos in Snohomish Co was $245,000, up 9.87% YOY. It jumped significantly from last month, which came in at only $224,999. Here is the figure for YOY data since Jan 2003:

Peak appreciation in SnoCo was in Aug 05, when the median price for a condo increased 26.22% in one year.

Median price for a condo in Pierce Co was weak, only $198,950, down -14.15% YOY. Here is the figure for YOY data since Jan 2003:

Peak appreciation in Pierce Co was in Apr 06, when the median price for a SFH increased 25.12% in one year.

YOY has a number of drawbacks which I described in an earlier post. Most important is that it's retrospective in 12 month increments and will miss dynamics that are more recent. Another way to look at price changes is to normalize them to a particular date. Here is a figure that shows median price for a SFH in each of the three counties since Jan 2002.


You can see that if you look YOY, the data look basically flat. But if you look from the peak at ~ July 2007, things have tanked. Hard.

Here are the condo data:Pierce Co appreciated more quickly, which interesting because if you look at the normalized SFH data, all three counties look basically the same. I decided to look at how far off each category of home (SFH and Condo) for each county is off from the peak.


For King and Sno, SFH have fallen more than condos. For Pierce, SFH have fallen about the same as King Co, but condos in Pierce are WAY worse than Sno and King. Obviously this is because of what I mentioned earlier; that Pierce Co condos appreciated much faster than the other two counties.

Looking ahead, things are only going to get worse. SFH and condos for all three counties are much higher than they were last year, and the number of sales is about half. The mortgage crisis just gets worse and worse, with lenders tightening their standards. And with hints that many very large banks are, at the very least, teetering on the verge of insolvency, means that banks can't lend money they don't have. And with a significant recession looming, things will only get worse as people who don't have jobs won't be able to pay their mortgages. This will also make the foreclosure situation even worse, further deteriorating the market.

Things are ugly right now. Prospects do not look good.

Congress meets the Tan Man

I watched a little bit of the hearings. My favorite corporate criminal, Angilo "Tan Man" Mozilo was testifying. I didn't see much in the form of fireworks, but it was fun to watch him squirm when asked about selling $150 million in stock just before CountryWide plunged.

Also, I didn't know this: CountryWide started a share buyback program just as Mozilo was selling his shares off. They bought back $2.5 billion.

Here's the kicker; They borrowed $1.5 billion in order to buy back $2.5 billion. Captains of industry, indeed. Just like the captain of the Exxon Valdez.

UPDATE: I found an article in Forbes that provides some of the transcript for the share buyback issue I mentioned above:

In particular, lawmakers wanted to know how Mozilo justified selling $150 million of his Countrywide stock in 2006 and 2007, even while the company had to borrow money to buy back its own shares.

"That doesn't speak well of your faith in the company's stock," Waxman told him. Mozilo responded that that there was "no relationship between the buyback of stock and my sales," explaining that he was planning for retirement and that his net worth was tied up in Countrywide.

I wonder if the allow tanning booths in Club Fed?

Non-Borrowed Reserves

In the comments over at Angry Bear, Edward Charles Ponzi Jr. pointed to a major recent development in the Fed's reports on non-borrowed reserves at banks. I put together a figure that illustrates this "change":This is non-borrowed reserves held by banks per week since 1975. You can see it that it varies little over the long term. It looks like reserves increased in 1985 (maybe related to Plaza Accords or unwinding of the dollar?) and started to drop in about 1995. There is a VERY sharp peak right after 9/11 2001, which makes sense given the uncertainties following the attacks on the WTC, a major financial hub. Then it basically holds steady, except it appears to be much more variable from week to week.

But in Jan 08, a funny thing happens. Non-borrowed reserves go from about $40 billion to -$20 billion in about three weeks time. WTF? Seems bad, right?

Well, it sounds like it might be that banks are making heavy use of the Term Auction Facility (TAF). This is a device created by the fed to ease the liquidity crunch and encourage lending between banks and others. They already have a method of doing that called the discount window. But there are some major differences between the discount window and TAF. Caroline Baum at Bloomberg explained this difference:

Q: What is the difference between the discount window and the TAF?

A: About 50 basis points, at least at the Feb. 25 TAF auction. The minimum bid at the auction is determined by the expected fed funds rate over the term of the loan, which is 28 days.

The Fed awarded $30 billion at 3.08 percent last week. The discount rate is 3.5 percent. (That rate doesn't include the implied cost of any stigma that accrues to the borrower for going to the window.)

Also:

The Fed had already taken steps in August to encourage banks to borrow directly from its discount window, compressing the spread of the discount rate over the federal funds rate to 50 basis points from 100 and expanding both the type of collateral it would accept and the terms of the loans to 30 days.

No matter how nicely the Fed asked, banks were unwilling to incur the stigma associated with discount window borrowing, especially at a time when financial institutions were reporting large losses and any intimation of trouble could cause depositors to take flight.

Fed Chairman Ben Bernanke decided to respond to the liquidity crisis with, appropriately, added liquidity. (See ``Federal Reserve'' and ``lender of last resort.'') That didn't stop the yammering about the assumption of credit risk by the central bank.

A blog at the WSJ made the same point last month, but less elegantly:

A number of people on Wall Street have noticed a recent plunge in non-borrowed reserves in the banking system and wondered it is a sign of distress in the banking system or of unusually stringent monetary policy. They dropped from $42 billion last November to negative $2 billion at the end of January.

It’s probably a false alarm, though. The drop is purely technical, a function of how the Fed has chosen to classify the money lent through its new Term Auction Facility.

Some background. All banks are required to hold some reserves in the form of either cash on deposit at the Fed or currency in their vaults. The Fed manages interest rates by increasing or decreasing these reserves. The Fed ordinarily does this through open market operations: It buys, usually temporarily, Treasury bonds and bills from dealers, and the funds get deposited in the dealers’ bank accounts at the Fed. That causes reserves to go up. Banks usually lend out anything in excess of their requirements, putting downward pressure on the federal-funds rate. Banks also obtain reserves by borrowing at the discount window, which often occurs if they fall short of their regulatory requirement.

According to economic theory, the Fed can target either the price (interest rate) or the quantity of reserves, but not both. Back when the Fed hated to admit it controlled interest rates, it targeted reserves. Since the amount banks borrowed from the discount window was somewhat beyond their control, they focused on reserves minus discount window borrowings, or “non-borrowed reserves.” In 1990, the Fed began to explicitly target the federal funds rate in one of its most important and least appreciated moves towards greater transparency. Since discount window loans were usually pretty small, total reserves and non-borrowed reserves were pretty close.

Last December, the Fed concluded that open market operations weren’t providing relief to some quarters of the interbank funding market and introduced the TAF. Like open market operations, the TAF enabled the Fed to lend a predetermined amount of funds to the banking system, with the interest rate at which they were lent determined through an auction process. But like the discount window, the money was lent directly to banks rather than primary dealers, and against a wide range of collateral rather than just Treasurys and agency securities. The TAF didn’t add to the money supply because for each dollar lent through the TAF the Fed was careful to liquidate a dollar of its holdings of Treasury bills and bonds to keep its overall balance sheet unchanged. But because the TAF is essentially discount window credit, the Fed decided to classify it as borrowed reserves.

OK, so it's all just a misunderstanding, right? Well, take a look at most of the comments at the WSJ blog post. They're not buying it. Some examples:

Carl:
So borrowing from the TAF is counted very much like borrowing from the discount window? What you are telling us then is that banks found it advantageous to borrow $50 Billion from the functional equivalent of the discount window (formerly used only by banks in trouble as there was a perceived stigma) and that this is business as usual?
The clear purpose of the TAF is to allow banks in difficulty to borrow from the Fed ANONYMOUSLY so as to avoid the stigma previously attached to the discount window (which was not anonymous). TAF borrowing allows banks to post as collateral assets that are not marketable and therefore to obtain cash that is needed for either reserves or lending without trying to sell assets into a nonfunctional market.
While the TAF is a clever and useful addition to the Fed’s toolkit, its heavy use last month indicates that a crisis did exist and was at least partially resolved. I suspect that the TAF will need to be used again soon as certain structural problems will cause further capital losses to the banks. False alarm, indeed.

tom a taxpayer:

Where is George Orwell when we need him for this blog “Non-Borrowed Reserves: False Alarm”.

How about this Orwellian beauty: “The drop is purely technical, a function of how the Fed has chosen to classify the money lent through its new Term Auction Facility.” Isn’t that a sweet way to deal with a drop from $42 billion to negative $2 billion.
Purely technical, my good man. Why it’s just a matter of how you classify things…how you view things. If you stand on your head and look at the world, up is down, and down is up.

The key quote: “But like the discount window, the money was lent directly to banks rather than primary dealers, and against a wide range of collateral rather than just Treasurys and agency securities.”

Yes, my good man, a wide range of collateral rather than just stodgy old low-yielding Treasurys and agency securities. The Fed can make great returns by taking these high-yielding, mortgage-backed CDOs as collateral.

So, the Fed is lowering lending standards…precisely the behavior that created the subprime fiasco. The Fed is supposed to set the standard for good behavior, for a sound and sober central bank. But don’t be alarmed. It’s just a technicality…just a matter of how you classify things.

There's a lot more on this. My impression was best summarized by yves in the comments at Angry Bear in a follow up post on this issue:

My concern is that the powers that be are all treating the Fed's Term Auction Facility, which was created to deal with money market stress, as no big deal. The operation of the TAF is what leads to the negative net non-borrowed reserves.

I am bothered that an emergency facility, which was initially presented as "let's try it a couple of times and see how it goes," has not only become pretty permanent, but has been enlarged with little fanfare (it went from $40 billion in outstandings to $60 billion). And per some recent sightings, such as a WSJ story just posted, the money markets are looking rocky again.

There's more on this issue, especially from the doom-and-gloom contingent. If I get enough done today, I'll look over what they have to say and post more later. I'll also keep an eye on this issue from here on out.

More on dollar index; Why YOY?

In my post below on Kudlow's latest column, I didn't provide a justification for illustrating the dollar index since 1974 in year-over-year (YOY) terms. It isn't necessarily intuitive, nor is necessarily the "correct" method, but I have some reasons.

The historical dollar index data is given per month since 1973. I could look at the percent change month-to-month (MOM), which would provide an instantaneous rate of change. I decided to use YOY instead of MOM for a couple of reasons.

YOY is often used to account for seasonal fluctuations in data. A classic example is number of houses for sale in a given market. Real estate is a seasonal industry; business usually is twice as brisk in the summer than it is in the winter. Every spring the number of houses for sale increases, and every fall that number decreases. If you want to assess the health of a market like that, the best comparison is to compare houses for sale this year vs the same month last year. This removes any seasonal bias.

The problem is that it doesn't account for any changes that occur since 12 months ago. I wrote a post about this last year about median price for SFH in King Co, WA.

OK, back to the dollar index. There isn't a seasonal pattern in changes within the dollar index. So why use YOY? I felt that I wanted to assess the effect that a presidential policy may have on the index. The force of a policy is somewhat limited, given all of the factors that influence currency rates. Thus, if an administration favors a particular "strong" dollar policy, you would expect to see pattern of positive YOY % changes over the long term.

My point was that during virtually Reagan's entire second term YOY % change in the dollar index was negative. Kudlow claimed Reagan favored a "strong" dollar policy. But the data suggest that either Reagan was impotent to implement a strong dollar policy, or he didn't favor such a policy. Given the Plaza Accords, the evidence suggests the latter.

Bomb Iran: McCain sings!

This video is really quite catchy:




Update: I'm posting this mostly to see if I can actually embed a YouTube video. Success!!!

Record Oil; been there, done that

Wow, just wow.

It's no secret that the price of oil has been skyrocketing. This week the price for a barrel of oil broke the all-time inflation adjusted record set back in 1980. But I haven't seen the price of oil, inflation adjusted over time.

Big Picture has snatched an image from the NYT. It's worth a look.

Kudlow: Reagan for strong dollar?

Two posts at Angry Bear tear into a recent Larry Kudlow column at the National Review about politics of the strength of the dollar relative to other currencies. Anyone that has been overseas the last few years, or anyone that lives near the Canadian border, knows that the dollar ain't what it used to be. In fact, the dollar is at historic lows against the Euro, and is really weak against a bunch other currencies, including the Canadian loonie and the Yen.

Anyway, Kudlow, who is a very prominent anchor at CNBC, could best be described as one of the nation's lead cheerleaders from which only happy-talk spills from his mouth. A column in which he admits anything negative about any facet of the economy might be seen as a very bad sign for the economy. But Kudlow makes one claim about Reagan and his policies on the dollar:

Right now the greenback is in virtual freefall. It’s a disorderly drop... Something must be done to reverse this trend, and McCain is in a good spot to do it. Remember, McCain was a foot soldier in the Reagan revolution. Borrowing a page from the Gipper — who always said a great nation has a strong currency — he should argue on the campaign trail for a dollar surge.

cactus at Angry Bear wrote a post about whether it really is true that Reagan favored a strong dollar. He noted that:

Case in point: The Federal Reserve's Major Currencies Dollar Index for January 1981 was: 96.023. In January of 1989, it was 90.5499. Sure, that wasn't the collapse we've enjoyed during the presidency of Bush the Incoherent (Jan 2001: 103.5074, Feb 2008: 72.5747) but it takes a full load of delusion to be simultaneously in favor of a strong dollar and Reagan's dollar policy.

In comments, cursed said this in response:

Please go and look at the strength of the US dollar in 1985 before the Plaza accord purposefully engineered weakening of the dollar in order for US manufactures to compete. Leave going off half cocked to me, and being a cooperate hack to Kudlow.

cursed suggested that looking at the end points of a data set may not be very informative. I have to agree. So I decided to look at the data myself. I plotted year-over-year changes in the dollar index starting from 1974. I changed the color of the bars to indicate which party controlled the white house:
If the value is positive, it means the dollar index increased from one year to the next. If it's negative, the dollar index decreased. The magnitude of the change is reflected in the size of the bar.

So cursed is right; in general, during Reagan's first term, the dollar increased in value relative to other currencies. But the bottom dropped out on the dollar in 1985 after the Plaza Accord (which I don't know much about).

In general, over the last 30 years, the dollar index has performed "better" under Democratic administrations than under Republican ones. It's also clear that, though maybe Reagan "favored" a strong dollar policy, at the very least, he was impotent to maintain a strong dollar. In addition, if the major drop in 1985 is due to the Plaza Accords, then Reagan changed his position (dare I say flip-flopped?) on the importance of a strong dollar policy.

Now, all of this is just to demonstrate that Kudlow is looking back on the Reagan administration with rose-colored glasses. He can be forgiven for this; it's a requirement to be a member of the GOP to believe in the infallibility of Saint Gipper. But he's just plain wrong in this case.

Now, I have to agree with pgl that this whole "strong dolor vs weak dollar" argument is a lot more complicated than it might appear. He says:

Prestige? Patriotism? I guess if one is as clueless about economics as Lawrence Kudlow appears to be, then maybe all one has is prestige and patriotism as excuses for a really bad policy prescription. Kudlow’s line about inflation being the cause of recessions is idiotic. Now it is a lack of aggregate demand.

Kudlow is advocating contractionary monetary policy, which will have two adverse effects on aggregate demand. One is to drive up real interest rates which will discourage both business and residential investment demand. But the main on point transmission channel is the appreciation of the dollar that Kudlow wants, which would lower net export demand.

A "weak" dollar can help during a recession. A president could make things worse by pursuing a "stronger" dollar, especially given the import/export imbalances we've experienced in recent years. A correction was necessary.

I believe that the recent collapse of the dollar is probably temporary, however. There are strong signs that currency markets are highly imbalanced, given that there are specialized US retailers accepting Euros in lieu of dollars. And the financial "ebola" in the US is very contagious and will spread to Asia and Europe, which will force the central banks there to lower interest rates.

Anyway, I have some more thoughts on this, but I've run out of time.