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Santelli: Is the Obama White House Playing Him?
Tweet Share on Facebook February 21, 2009 Comment (9)Blogger Marc Ambinder speculates that the Obama White House is actually encouraging CNBC's Rick Sangelli and his Chicago Tea Party:
The early press reaction asks why the White House would give Santelli free publicity and elevate him to Official status? Easy: they'd rather the opposition be identified with Santelli and stock brokers than with, say, a Joe the Plumber type (but who actually is a plumber and who has serious real reservations about the mortgage plan). Let opponents of the plan get into a tizzy, and let them have Santelli -- whose regular guy creds have to be established -- as their spoxman. Because, as it stands, ordinary folks don't much trust Wall Street these days....
Me: Guys like Ambinder are funny. To them, anyone associated with the financial industry is either Mr. Potter or Gordon Gekko. Listening to him, you would think it was white-shoe John Thain getting up there and hammering Obamanomics. Does he really think Santelli doesn't come across as kind of a regular, white-collar guy? Hey, he went to the University of Illinois and started as a floor runner at the Chicago Merc. In Chicago, that is a
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Michael Bloomberg on Raising Taxes: What Would Santelli Think?
Tweet Share on Facebook February 20, 2009 Comment (7)Mayor Michael Bloomberg on the radio:
One percent of the people that live in the city, the households that file in the city pay something like 50% of the taxes. In a city that's about 40,000 people so, you know, a handful left, any raise would make it revenue neutral. The question is, "What's fair?" If one percent are paying 50% of the taxes, you want to make it even more? A little over half the people, half the households who file tax returns don't pay any taxes. And about 30% of the households that file get a credit from the government. The government sends them a check. That's the Earned Income Tax Credit.
Me: Here is how the folks in Washington would answer Bloomberg's rhetorical questions: a) that they pay more; b) because we need the money and we think there are no ill economic side effects. Calling Rick Santelli!
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Housing Bill Not a Game Changer
Tweet Share on Facebook February 20, 2009 CommentSo says economist Michael Darda of MKM Partners:
Lastly, we don’t believe the $275 billion mortgage rescue package unveiled yesterday will be a game changer. It may help those holding on by their fingernails, but many of these borrowers are going to be in trouble if home prices continue to adjust downward, which is highly likely until inventory-to-sales ratios get back to 7-8 months(from about 12 months now). The collapse in home building (bad for the economy in the near term) is a painful but necessary adjustment that will ultimately help to stabilize inventories and home prices.
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Nationalization Fears Kill Citigroup, Bank of America and other Bank Stocks
Tweet Share on Facebook February 20, 2009 Comment (9)JPMorgan Chase is down 7 percent, Bank of America 14 percent and Citigroup 20 percent. Fear of nationalization are running wild on Wall Street. If these rumors are offbase, the White House needs to clearly say so. Now. But the one clear message that came out of Treasury Secretary Geithner's big speech, as investors see it, was that the "stress test" could lead to a full government takeover. And don't forget about the insureres. David Goldman hasn't:
But the more interesting story remains the big insurers. Citigroup is trading ugly at +450 basis points, but Swiss Life (BBB-) is at +863 (mid market), Lincoln Nation is at +818, Prudential Financial is at _742, Hartford Financial is at +666 (didn’t make that one up), and so forth. If the banks go down, the insurers who own their Tier 1 and subordinate debt and preferred shares get whacked as well.
Me: Goldman also notes that the odds of default by smaller nations such as Greece, Austria and Belgium are rising.
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What Rick Santelli Means for Obamanomics
Tweet Share on Facebook February 20, 2009 Comment (153)Has the American economy become a "fear economy"? You bet. But there has been a shift. For the financial markets at least, fear of the recession has morphed into terror about what the government is doing to deal with the reason. This is what CNBC's Rick Santelli was talking about yesterday with his call for a Chicago Tea Party. Stocks have lost more than fifth of their value since President Obama was elected. But the fear is more widespread than just that. As a new paper from the Tax Policy Center notes, the price of purchasing insurance against default on 5-year senior U.S. Treasury debt rose from around 10 basis points before September 2008 to above 70 basis points in early 2009. What are bond investors so worried about? Maybe they see the same fiscal future, trillion dollar deficits as far as the eye can see, as do report authors Alan Auerbach and William Gale:
In 2009, the federal deficit will be larger as a share of the economy than at any time since World War II. The current deficit is due in part to economic weakness and the stimulus, and in part to policy choices made in the past. What is more troubling is that, under what we view as optimistic assumptions, the deficit is projected to average at least $1 trillion per year for the 10 years after 2009, even if the economy returns to full employment and the stimulus package is allowed to expire in two years. The longer-run picture is even bleaker. We estimate a fiscal gap – the immediate and permanent increase in taxes or reduction in spending that would keep the long-term debt/GDP ratio at its current level –about 7-9 percent of GDP, or between $1 trillion and $1.3 trillion per year in current dollars.
And to close that gap, Auerbach and Gale says, we would have to cut all government spending by 23 percent or hike taxes by 52 percent. And, of course, deficits are just part of the problem. There is also the issue of a "share the wealth" rejiggering of what American capitalism is all about. Reward the losers and punish the winners. But the bottom line is this: Obama's economic plans cannot work with the cooperation of the markets. Falling stock prices mean people and business will continue to cut back on spending, and eventually higher interest rates will slow borrowing due fear of monstrous deficits.
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Obama's Savior-Based Housing Plan
Tweet Share on Facebook February 18, 2009 Comment (98)In the span of just over a week, America has witnessed the debunking of "savior-based" economics. That, you might have heard, is the theory that posits all you need for smart economic policy is to assemble a bunch of indispensable brainiacs in Washington and let them work their magic. (Hollywood has its own version of this theory, which is why we end up with the "great cast, bad movie" phenomenon. See "Ocean's Twelve" or "Ocean's Thirteen." Rather, don't see them.)
First came Treasury Secretary Timothy Geithner's tightly-wound presentation of a banking bailout plan that left Wall Street both somewhat confused about its details and somewhat terrified that the fuzzy thing wouldn't work. Next, came President Obama's signing of a $787 billion "stimulus" plan where most of the stimulus may actually kick in after the economy starts to recover. (Too little boli, too many Tic-Tacs in that one.) And now comes the third leg of the chair, a $75 billion housing bailout plan (though it could surge to $300 billion or more). It will attempt to help some homeowners refinance, assist others in lowering their monthly payments, and reduce mortgage rates.
The Obama plan is certainly more ambitious and costlier than many expected, especially in its use of Fannie Mae and Freddie Mac to influence the mortgage market. But will it all work? An analysis by IHS Global Insight concludes that it will help prevent some number of "preventable" foreclosures. So that's something. But between 10 million and 15 million homeowners are underwater and that number is growing. Who knows how many will walk away from their homes and to what extent the Obama plan will help? IHS Global just shrugs. Me, too, especially since the plan, while potentially lowering mortgage interest rates, doesn't make a clear provision for reduction in the principal. That's the real killer.
But it is certainly debatable whether we should even be trying a savior-based plan to prevent foreclosures. Do we need Uncle Sam to "save" homeowners who have sinned against the gods of financial prudence? Here's how the folks at Weiss Research see things after examining the Obama plan: "Foreclosures are actually resulting in overpriced homes burdened with too much debt being moved into the hands of new buyers, who are paying drastically reduced prices. They can therefore purchase using a traditional mortgage. ... Delaying and dragging out the downturn by artificially propping up home prices will arguably work against the market healing."
In the same vein, former Bush economic adviser Lawrence Lindsey has suggested an immigration program that would give a provisional green card to anyone who invested at least $10 million in residential property and held it for five years. And bond guru David Goldman of the Inner Workings blog relates that he's been getting inquiries from Chinese investors interested in the U.S. housing market. He also highlights what is easily the worst aspect of the Obama plan, the "cramdown" provision which would allow judges to modify mortgages. "Allowing judges to show generosity to homeowners ... and keep them in their homes makes the core assets of the banking system uncertain. ... Cramdown probably is responsible for the deterioration of subprime AAA’s during the last few days." That's what happens when you toss 1,000 years of contract law out the window in the middle of a global financial crisis.
But the plan falls short of what some experts were pushing for, in both elegance and scope. For instance, Alan Blinder, the former Fed vice chairman, wanted a $400 billion, 21st-century version of the New Deal-era Home Owners' Loan Corp, which bought mortgages from banks and then issued more affordable new loans to struggling homeowners. Then there's Glenn Hubbard and Christopher Mayer of the Columbia Business School who advocated a $338 billion plan to allow all mortgages on primary residences to be refinanced into low, low, low 30-year, fixed-rate mortgages. And independent investment strategist Ed Yardeni and Carl Goldsmith of Delta Asset Management proposed fully nationalizing Fannie Mae and Freddie Mac and then offering a trillion bucks worth of 30-year, fixed-rate mortgages at 4 percent to all qualified borrowers to buy a new or existing home.
Maybe one of these pricey plans could have turned around the housing the market and the economy. Maybe not. But Obama's surely won't. And that's not really the intent, apparently. It's all about stabilization. As the president himself said, "If we act boldly and swiftly to arrest this downward spiral, then every American will benefit. It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. ... And by bringing down the foreclosure rate, it will help to shore up housing prices for everybody."
"Arresting downward spirals." "Preventing the worst." "Shoring up prices." Well, you can't exactly accuse Obama of overhyping the benefits of this proposal. Nor should he, given the pessimism found in current economic forecasts. The Fed now thinks that the unemployment rate could climb to over 9 percent this year and next, and still be above 8 percent in 2011 -- some four years after the recession began. And the Philadelphia Fed surveyed 43 forecasters who predicted that the unemployment rate will rise from 7.8 percent this quarter to 8.9 percent in the fourth quarter of 2009. Unemployment is expected to average 8.4 percent this year and 8.8 percent in 2010.
So there are no miracles in any of this. No quick turnarounds. No light at what appears to be a very long and treacherous tunnel. As Bill Murray's weatherman character put it in Groundhog Day,"I'll give you a winter prediction: It's gonna be cold, it's gonna be grey, and it's gonna last you for the rest of your life." At least, it kind of feels like that. (This is probably a good time to point out that just over a year after President Reagan signed his revolutionary economic plan, the economy shifted into high gear and never looked back. But no Morning in America around here anytime soon.)
This is Obama's multi-trillion dollar economic recovery plan, Obama's multi-trillion dollar choices for economic salvation. It has government spending taxpayer money like never before to boost the economy. Conservatives says it's too much (and wrongheaded), liberals too little (and weak-hearted.) But no more blaming former President Bush. It's Obama's housing crisis, his banking crisis, his economic crisis. -
Obama's $75 Billion Housing Bailout
Tweet Share on Facebook February 18, 2009 Comment (23)So Obama's plan to save the housing market is out. This sentence from the president's speech really struck me: "Sub-prime loans – loans with high rates and complex terms that often conceal their costs – make up only 12 percent of all mortgages, but account for roughly half of all foreclosures." Again, Washington refuses to point a finger at reckless homeowners. They were just confused, Obama says. But JP Morgan economist Jim Glassman points the finger at these folks (as well as Wall Street and Washington):
Home buyers? Yes all those folks who bought homes at inflated prices, particularly anyone who bought a home since 2003 … they bear some responsibility too. Rather, they contributed to the inflated conditions in some housingmarkets. But those who took personal responsibility and are living with their obligations—not walking away from the commitments that are the reason for the $1.1 trillion of writedowns of mortgage assets by the global financial industry—they aren’t the culprit. And there are many of them. Those who walked or who took on obligations thinking that rising real estate values would bail them out …they are as much to blame for the housing crisis as Wall Street. Where were the congressional hearings in those days grilling homeowners for gouging new home buyers.[Of course, who is so naïve to need an answer to that question.]
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The Housing Great Depression
Tweet Share on Facebook February 18, 2009 Comment (2)Some housing perspective from IHS Global Insight on the 12 percent drop in single-family starts and the 8 percent drop in single-family permits:
Conditions in the market for new homes have not been this bad since the 1930s, and they continue to worsen. In recent months, several factors that will extend the downturn in housing starts have come into play. First, the household formation rate has slowed, as homeowners losing their jobs or homes to foreclosure have moved in with family. Second, rising foreclosure rates have driven down the prices of existing homes, pricing new homes out of the market. Third, the credit crunch has made it difficult for builders with viable projects to obtain financing. Finally, the severity of the downturn and the stock market crash has reduced demand for long-lasting goods such as automobiles and new first and second homes. These factors will continue to play a role in depressing starts during 2009.
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Fellow Americans, Stop Saving!
Tweet Share on Facebook February 18, 2009 Comment (3)Yes, yes, we all need to save more and spend less. So the scolds keep telling us. But this change of behavior will have consequences, as superstrategist Ed Yardeni notes:
We are told: Americans must save more. Maybe so but that won’t be good for our economy. I’ve heard some observers casually claim that the personal saving rate must go back to 8%. If it did that during the fourth quarter of last year, real GDP would have been down by 17.9% instead of 3.8%. Let's do the math: The personal savings rate was 2.9% during Q4-2008, up from 1.2% during the previous quarter. If it was 8% at the end of last year, real personal consumption would have dropped 23.0% instead of 3.5% and real GDP would have been down 17.9%. Obviously, no one is saying that the saving rate should rise so much in such a short period of time. However, if consumers really do decide to save more on a long-term basis, then the size of the economy would shrink since consumers account for so much economic activity.
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Should China Send Us Stimulus Checks?
Tweet Share on Facebook February 17, 2009 Comment (6)China has been a huge growth engine for the global economy in recent years. Exports to America are a big reason for this. America is now in recession. And China is slowing dramatically. So maybe China should send Americans stimulus checks that we can spend money on their stuff. Hey, they are dollar heavy, after all. Obama should get Geithner on that one right away. Or maybe, more seriously, China should buy U.S. stocks. At least, that is the idea of Jonathan Parker, a finance professor at Northwestern University:
So my proposal is that the Chinese start to sell Treasuries and buy a broad index of U.S. equities. For China, this has several advantages. First, this would raise the U.S. stock market, and help to cheer up the American consumer while increasing Chinese exports. Second, if this “stock market stimulus” starts a rally or spreads to the confidence of global investors, there may well be a multiplier effect to the global economy, helping Chinese exports to much of the world. Third, the yield on Treasury debt is very low, partly due to its convenience yield or liquidity. China does not need this liquidity, so why pay for it in terms of lower rates of return? Finally, the U.S. stock market is actually a pretty good buy right now – both Warren Buffet and myself have invested heavily based on the idea that returns will be strong just from the underlying dividends given such low prices.
Are there downsides or complications? Yes, I see two. First, the Chinese would increase their exposure to some U.S. risks. While holding Treasury debt exposes them to inflation risk, holding equities means their government wealth declines when the U.S. does poorly, which is exactly when China might need money to prop up its economy in the face of falling exports. Second, the U.S. could get nervous about the scale of foreign government control rights over its own corporations. This could probably be circumvented by buying index mutual funds, perhaps with special low fees, or worked out at high levels.
