News What is wrong with the US economy? Part 2

[mheslep]

DIY EV-Porsche 914's, to my knowledge, are not allowed on the golf courses.

And they do better than 5 mph.

A DIY EV 914 probably has about the same range as a golf cart. And w/o regen braking a converted 914 will not get anywhere near 200 mpg equivalent unless it is downhill all the way.

 

[edward]

Where did that bill to regulate Fannie and Freddie go? $200,000,000 spent by lobbyists may have squelched it.

But the political tentacles of the mortgage giants extend far beyond their checkbooks.

The two government-chartered companies run a highly sophisticated lobbying operation, with deep-pocketed lobbyists in Washington and scores of local Fannie- and Freddie-sponsored homeowner groups ready to pressure lawmakers back home.

They’ve stacked their payrolls with top Washington power brokers of all political stripes, including Republican John McCain’s presidential campaign manager, Rick Davis; Democrat Barack Obama’s original vice presidential vetter, Jim Johnson; and scores of others now working for the two rivals for the White House.

http://news.yahoo.com/s/politico/20080716/pl_politico/11781

As of March 19- 08 Fan and Fred were supposedly looking good.

http://www.ofheo.gov/media/pdf/LockhartStatement31908.pdf

 

[mheslep]

...]

As of March 19- 08 Fan and Fred were supposedly looking good.

http://www.ofheo.gov/media/pdf/LockhartStatement31908.pdf

From Lockhart's statement:

...Effective immediately, OFHEO is reducing the OFHEO-directed capital requirement for Fannie Mae and Freddie Mac from 30 percent to 20 percent above the 2.5 percent minimum statutory capital requirement.

There it is right there, lifeboats being tossed off the Titantic before it sails. Better yet, the statement is so recent that it qualifies as a 'full ahead' with the iceberg in plain view and and ice falling on the deck.

 

[Jimmy Snyder]

There is no earthly need for these bailouts. The idea is to generate fear among the masses who will then call for measures to give money to these institutions. I say let them live or die on their own. Nothing bad will come of it. Bad ones will die off and good ones will take their place. We are fast becoming a socialist state with the socialists crying the loudest "don't throw me in yon briar patch!".

 

[OrbitalPower]

Bailing out corporations doesn't have anything to do with socialism.

 

[Astronuc]

From Lockhart's statement:
There it is right there, lifeboats being tossed off the Titantic before it sails. Better yet, the statement is so recent that it qualifies as a 'full ahead' with the iceberg in plain view and and ice falling on the deck.

That should have been a WT* moment, given that all the warnings over the past 5 years.


CAPITOL REPORT
Echoes of Iraq in Bush handling of mortgage crisis
News analysis: Another 'trust me' remedy is getting rushed before lawmakers

WASHINGTON (MarketWatch) -- Fairly or not, some critics say they can't help but see similarities between the Bush administration's hurried approach to the financial market crisis and its headlong plunge into the Iraq war.

"You can draw some valid parallels between the prosecution of the war under the Bush regime and the way the financial sector has operated in recent years," said Tom Schlesinger, head of the nonprofit research group Financial Markets Center in Howardsville, Va.

"It fails the most basic test of democratic accountability," Schlesinger said.

On Tuesday, Washington kicks off the first hearings in which top officials will defend their prescription before lawmakers, who also are compelled by circumstances to take speedy action.

Some policy observers point to a "trust us" mentality in the administration's call to obtain sweeping powers that are scant on checks and balances on the executive branch. In addition, the White House is faulted with a failure to raise alarm before the situation spiraled out of control, forcing the mobilization of more troops and untold financial resources.

Outlining the administration's remedy, Treasury Secretary Henry Paulson came up with a three-page plan to spend $700 billion on toxic mortgage debt that was very spare on key details.

It boils down to "give me the money and trust me," Schlesinger said.
. . . .

Economists said there was a central problem to the Paulson plan. Most of the toxic waste in question does have some price, but it has been too low for the financial institution holding them to accept. So the government buyout would only work if taxpayers overpay for the assets.

"It is no wonder that the Bush administration is pressing to get the plan passed quickly before any real oversight can be brought to bear, because even the simplest due diligence suggests that it needs some work if the taxpayer's interests are to be even minimally protected and some real oversight brought to bear on the whole process," wrote Josh Shapiro, chief U.S. economist at MFR Inc. in a note to clients.

. . . .

It will be interesting to look back in 20, 30 years to see how this period is judged.

 

[Jimmy Snyder]

Bailing out corporations doesn't have anything to do with socialism.

The Federal gov't bailing out corporations IS socialism.

 

[OrbitalPower]

The Federal gov't bailing out corporations IS socialism.

Socialism is when you have worker run means of production. The workers did not run Fanny Mae and Freedy Mac or Bear Stearns or anybody else, and if they did, this whole thing never would have happened.

Witness public utilities versus privatizes ones.

Capitalism is when the government protects the corporate interests; theoretically, in pure capitalism there is no such thing as even human rights - the government only exists to protect property owners.

So this is a failure of capitalism and the government has stepped into solve it. When the government protects the corporations at the expense of the public, that is called fascism, the successor of capitalism.

 

[Jimmy Snyder]

Socialism is when you have worker run means of production. The workers did not run Fanny Mae and Freedy Mac or Bear Stearns or anybody else, and if they did, this whole thing never would have happened.

They do now.

 

[OrbitalPower]

The government does, and the government is influenced by the corporations - not workers. Corporations have far more influence on the government than workers.

We really have a "free-market" lobbying esystem in addtion to a free-market economy, so it's no surprise that both are in shambles. (Capitalism has collapsed the US economy before.)

 

[mheslep]

There is no earthly need for these bailouts. The idea is to generate fear among the masses who will then call for measures to give money to these institutions. I say let them live or die on their own. Nothing bad will come of it. Bad ones will die off and good ones will take their place. We are fast becoming a socialist state with the socialists crying the loudest "don't throw me in yon briar patch!".

I don't like it either. What do you expect will happen to the availability of credit absent some kind of action? Banks are sitting on bad assets and they're still depreciating. The Treasury proposes to buy up the bad assets. How does a GM, a Caterpillar, Joe's Pizza, what have do if the money dries up?

 

[Jimmy Snyder]

I don't like it either. What do you expect will happen to the availability of credit absent some kind of action? Banks are sitting on bad assets and they're still depreciating. The Treasury proposes to but up the bad assets. How does a GM, a Caterpillar, Joe's Pizza, what have do if the money dries up?

I expect interest rates would climb. Credit would shun risky investments, like subprime loans, gravitate toward solid ones, like 30 year fixed with 20% down for no more than 2 years' salary. All investments would have to prove their worth to creditors. The short term pain would be overcome by the long term gain in the overall improvement of the investment mix. The current round of interventions all have the same purpose: reward risky investment. Median house prices have been falling and they should continue to fall until the median income can buy the median house under the 30 - 20 - 2 rule that I mentioned above.

 

[mheslep]

I expect interest rates would climb. Credit would shun risky investments, like subprime loans, gravitate toward solid ones, like 30 year fixed with 20% down for no more than 2 years' salary. All investments would have to prove their worth to creditors. The short term pain would be overcome by the long term gain in the overall improvement of the investment mix. The current round of interventions all have the same purpose: reward risky investment. Median house prices have been falling and they should continue to fall until the median income can buy the median house under the 30 - 20 - 2 rule that I mentioned above.

A sound description of how things should have been and what they should become. 'Credit' in the 2nd sentence is used as if there is some unaffected credit source waiting to come forward when wiser lending conditions prevail. The question then: is there any unaffected credit that can step forward? I don't think so. Absent any action to buy bad assets I 'd like to see the evidence that it will not just totally stop, versus merely grow tight and cause some term pain.

 

[Astronuc]

Another roller coaster day on the stock markets as the Dow 30 surged about 120 points and then reversed direction drifting down to -150 points during the day.

AIG is almost $5/share, so if one bought at $2/share, one has done quite well.


Last week, the IRS gave Fannie Mae and Freddie Mac a special deal.

IRS break boosts Fannie, Freddie - by Marine Cole, September 14, 2008
http://www.financialweek.com/apps/pbcs.dll/article?AID=/20080914/REG/809129952
Tailor-made ruling helps agencies use tax losses to goose capital.

When Freddie Mac and Fannie Mae inflated their core capital in recent quarters through the questionable use of deferred-tax credits, they didn’t violate any accounting rules. But they certainly received preferential treatment from auditors, regulators and tax authorities even as they were being bailed out by the government.

While Treasury Secretary Henry Paulson placed the two companies in “conservatorship” early last week, the Internal Revenue Service, which Mr. Paulson oversees, rewrote certain tax rules that will allow the mortgage institutions to take advantage of those tax credits. And that will help keep them alive for the time being.

Other companies, especially commercial banks, could also boost their capital with deferred-tax assets and get away with it to a certain extent. But only the banks, or at least big ones, might be able to count on auditors and regulators being as lax on them as they were on Fannie and Freddie, because of the risk to the financial system their failure might pose.

 

[Jimmy Snyder]

'Credit' in the 2nd sentence is used as if there is some unaffected credit source waiting to come forward when wiser lending conditions prevail. The question then: is there any unaffected credit that can step forward? I don't think so. Absent any action to buy bad assets I 'd like to see the evidence that it will not just totally stop, versus merely grow tight and cause some term pain.

Credit is tight now, but it hasn't dried up. Home sales are down, but they are not zero. I don't know who's getting loans now, but I expect that a customer who meets the 30 - 20 - 2 rule can still get one. I think another 25% drop in home prices would go a long way to getting us out of this.

 

[mheslep]

Credit is tight now, but it hasn't dried up. Home sales are down, but they are not zero. I don't know who's getting loans now, but I expect that a customer who meets the 30 - 20 - 2 rule can still get one. I think another 25% drop in home prices would go a long way to getting us out of this.

No dried up yet. The prediction from Paulson in the recent 15 lawmakers meeting, according to B. Frank today, was that nobody would get a car loan. Banks have to maintain a minimum capital reserve in assets, below which they can not loan regardless of the risk.

 

[edward]

Credit is tight now, but it hasn't dried up. Home sales are down, but they are not zero. I don't know who's getting loans now, but I expect that a customer who meets the 30 - 20 - 2 rule can still get one. I think another 25% drop in home prices would go a long way to getting us out of this.

It's a mixed bag. If home values drop another 25% anyone who bought a home in the past 3 years will be upside down on their loan. That includes those with prime loans who paid the 20% down. That is really devastating for people who get job transfers.

On the other hand housing would once again become more affordable. Some people would still be out of luck because they would have to use an FHA loan and pay the MIP.

All in all we appear to be heading back to square one as far as home ownership goes.

 

[Jimmy Snyder]

All in all we appear to be heading back to square one as far as home ownership goes.

Square one was when there weren't any houses. We are not headed there.

 

[edward]

Dynamic Map Of Non Prime Mortgage Conditions In the United States.

http://www.newyorkfed.org/mortgagemaps/

We are in deep do do.

 

[Jimmy Snyder]

Banks have to maintain a minimum capital reserve in assets, below which they can not loan regardless of the risk.

The Fed routinely adjusts the percentage minimum in order to add or subtract liquidity. And Paulson is a snake-oil salesman.

 

[edward]

Square one was when there weren't any houses. We are not headed there.

When that was square one a person could build his own home. I think I was referring to the point where the federal government became involved in home loans.

 

[quadraphonics]

The Fed routinely adjusts the percentage minimum in order to add or subtract liquidity.

Which is to say, to adjust the level of risk banks are allowed to run. But such considerations are extremely premature when the Federal government is busy dumping billions into said banks just to keep them solvent, and the banks have no appetite for more risk. You could lower liquidity requirements all you wanted, and it wouldn't have any effect, as any bank that actually loaned out more money (for houses, no less) would immediately see its stock price tank. Moreover, why would anyone want to borrow money to buy a house in the first place, if they believed that prices were going to drop by another 25%? You might as well just burn your down payment for warmth.

Not that I'd mind getting a deal on my first house, but let's be realistic: 25% is huge, and would bankrupt millions of families who bought homes in the last few years. Not a recipe for any kind of swift, painless recovery.

 

[Jimmy Snyder]

Not a recipe for any kind of swift, painless recovery.

I offer no recipe for swift, painless recovery. Go to Congress for that. They sell kool-aid by the barrel.

 

[Astronuc]

When I bought a house 18 years ago, I put down 10%. I since passed the 20% mark (so not PMI), I've enlarged the house, and pretty much have replaced everything but the original frame.

If I was starting out today, I probably couldn't live in the area where I live now, because the housing prices have appreciated much faster than inflation and salaries. Many kids in our area are looking elsewhere to live because the area is expensive.

In the last 6 months, I've been getting bombarded by offers for commercial real estate at bargain prices, and that has surged in the last month. This area has recently seen a surge in small businesses closing, and more than the usual number of houses on the market, and they remain on the market a lot longer.

 

[mheslep]

Raines worked for Obama campaign per the WP. I hear the campaign denies this now. Whatever.

In the four years since he stepped down as Fannie Mae's chief executive under the shadow of a $6.3 billion accounting scandal, Franklin D. Raines has been quietly constructing a new life for himself. He has shaved eight points off his golf handicap, taken a corner office in Steve Case's D.C. conglomeration of finance, entertainment and health-care companies and more recently, taken calls from Barack Obama's presidential campaign seeking his advice on mortgage and housing policy matters...

.
http://www.washingtonpost.com/wp-dyn/content/article/2008/07/15/AR2008071502827.html

 

[Astronuc]

From the WP article

Raines settled charges brought by the Office of Federal Housing Enterprise Oversight by agreeing this spring to pay $2 million and forfeiting $22.7 million in stock and other benefits. And though none of it will come out of his pocket -- the payment was covered by insurance -- he has not emerged unscathed. He and his wife of more than 25 years, Wendy, are separated. Their house, a 1910 colonial in Northwest Washington, is for sale. An old friend, former Time Warner chairman Richard Parsons, describes him as being "in strong recovery mode."
. . . .
In October 2003, even as Raines was invited to the Bush White House to receive a leadership award on behalf of Fannie Mae, investigators were about to look into the company's accounting books. A year later, Congress held a hearing on accounting irregularities at the company. By the end of 2004, Raines was forced out by the board, accused by regulators of overseeing accounting manipulations to bolster his compensation.

It reamins to be seen how recently the Obama campaign was talking to Raines. On the other hand, he has a cloud hanging over him. I'm pretty sure I read that OFHEO was concerned about Fannie Mae well before Oct, 2003 - perhaps as early as Feb 2002.

 

[lisab]

Raines worked for Obama campaign per the WP. I hear the campaign denies this now. Whatever.
.
http://www.washingtonpost.com/wp-dyn/content/article/2008/07/15/AR2008071502827.html

Taking phone calls from the campaign <> working for the campaign. I bet (and actually, I hope) that both campaigns seek a wide range of opinions on important issues.

 

[turbo]

By the end of 2004, Raines was forced out by the board, accused by regulators of overseeing accounting manipulations to bolster his compensation.

This is a huge problem that needs to be addressed with regulations. The people running large companies are often rewarded for good short-term performance, and if they can cook the books or manipulate policies to make the profit/value of the company look good, they can get leveraged goodies, like stock options priced at very favorable rates, so that if they can increase the value of the stock temporarily (and they can, in most cases), they can cash in the options and do VERY well, at the expense of regular share-holders, mutual funds, etc. I don't know how to address this problem effectively, though I think it is quite fortuitous for Cheney that he refused to divest himself of Halliburton stock and options, and somehow Halliburton and subsidiaries managed to get many billions of dollars in no-bid contracts to support a war that we didn't need to fight... Our financial system seems designed to allow the powerful to divert public money into private pockets.

The current "bail-out" plan being pushed so feverishly by Bernanke and Paulson smells. It looks like a last-ditch attempt to create a huge windfall for speculators while there is a compliant/complicit administration in power. The inclusion of language making Paulson's actions off-limits for judicial or administrative review is a huge red flag.

 

[Astronuc]

CAPITOL REPORT
Bernanke rides to rescue of Paulson plan
Clear that plan may take more time to pass, but avoids derailing

Various senators are skeptical and/or concerned about Paulson's plan. I don't blame them, and I have to wonder if they even understand it or the current turmoil in the markets.

. . .
A key point of the critics was that under the plan Treasury must pay more than the market value for the mortgage assets.

But Bernanke explained that the mortgage securities have two prices - a "fire-sale price" if the mortgage asset was sold quickly today and a "hold-to-maturity" price if the mortgages were held to maturity.

Banks have been paralyzed by this fire-sale price because their precious capital would evaporate overnight.

The key to the plan, Bernanke said, was that if Treasury was able to buy the mortgages, it will be able to hold them to maturity. As a result, the fire-sale price could be avoided.
This would remove uncertainty, return liquidity, and credit markets should be able to unfreeze, Bernanke said.

"This is not an expenditure of $700 billion. This is a purchase of assets. If auctions are done properly...the American taxpayer will get a good value for his or her money and as the economy recovers, most, all, or perhaps more than all, of the value will be recovered over time," Bernanke said.

I'm still curious about the punitive measures involved, or at least some assurance that the people who are responsible for the current crisis are held accountable, and not rewarded for their irresponsible/reckless actions.

Rescue plan hits speed bump in Senate
http://www.marketwatch.com/News/Story/Story.aspx?guid=e1f27722623140078f49f33f2493c076
Financial rescue plan greeted with skepticism


Here are some of todays headlines from Marketwatch (while Bernanke and Paulson were discussing the plan with the Senate):

• Bernanke: Paulson plan would set 'hold-to-maturity' price
• Bernanke: U.S. can buy assets near hold-to-maturity prices
• Bernanke against suspension of mark-to-market accounting
• Dodd: Constitution put at risk by Paulson mortgage plan
• Sen Dodd:Confidence in U.S. financial future has been shaken

• Paulson: Slicing $700 bln into tranches 'a grave mistake'
• Paulson: Focused on helping small as well as large banks
• Paulson opposes proposal to get equity in return for help
• U.S. also plans to buy assets from foreign banks: Paulson
• Bernanke says U.S. plan 'precondition' for economic recovery
• U.S. will get money back from bad assets it buys: Bernanke

Congress really needs to get serious about regulation. Regulation isn't inherently unfair - but bad regulations can be. Can we trust Congress to do it right?


And here is a commentary by PAUL B. FARRELL
Reaganomics $3.9 trillion debt outrages taxpayers
Mad as hell? Try the Zen Millionaire's 12-step 'antirage' meditation
http://www.marketwatch.com/News/Story/Story.aspx?guid=69d374526f1742dda3da334864e446b3

 

[Jimmy Snyder]

Socialism is when you have worker run means of production.

If that's what Socialism is, then Socialism is a form of insanity. What maniac would take a good engineer like me and set me to running the company I work for? What lunatic would ask my boss, a successful businessman, to listen to my opinion on how to run the show? What nut would ask my boss to sit with me and help me write programs? Is Socialism a cure for the division of labor? Would society benefit if I spent a part of my day drilling for oil? Does Socialism mean I need to learn the intricacies of interest rate swaps, or should I just trade by the seat of my pants?