Monday Reads

Good Morning!

Are you reading for the end of the world next Saturday?  Nope, it’s not 2012 yet and we’re not talking about the Mayan Prophecy. Harold Campaign has convinced  a group of evangelicals that the date is May 21, 2011.  I wonder if any of them would like me to take care of their left behind pets for all their money?  You can read more about the man and his end of days wishes at Salon.

The self-appointed harbingers are not tied to any particular church — they claim organized religion has been corrupted by the devil — but rather to Internet- and radio-based ministries. And their lone mission is to tell anyone and everyone that the end of days is May 21. That’s when, they insist, God’s true believers will be lifted into heaven and saved, during a biblical event widely referred to as the Rapture.

The finer points of Christian eschatology have long been the subject of dispute (not to mention the inspiration for movies and books, like the blockbuster “Left Behind” series). Though mainstream churches reject the the notion that doomsday can be predicted by any man, fringe scholars continue to work feverishly pinpointing the moment of the final, divine revelation. And one such man — 89-year-old radio host Harold Camping — has been at the game for decades.

In the early ’90s, Camping published a book titled “1994?,” which claimed judgment day would arrive in September of that year. When confronted with such a staggering anticlimax — the world, after all, kept on spinning — Camping chose not to be discouraged, but to learn from his mistakes. (He hadn’t considered the Book of Jeremiah, he says.) A civil engineer by trade, Camping went back to the drawing board and continued to crunch the numbers, before arriving at the adamant determination that Rapture would come on May 21, 2011. He began to spread the word through his broadcasting network, Family Radio, in 2009, and quickly built up a fervid following.

I guess it takes all kinds.  That’s what my mother used to tell me when she was alive, anyway. Speaking of that, MoJo has a great list of Newtisms that will take you a trip back in time with Gingrich’s greatest tongue trips.  Here’s some of his earliest hits.

1978 In an address to College Republicans before he was elected to the House, Gingrich says: “I think one of the great problems we have in the Republican party is that we don’t encourage you to be nasty. We encourage you to be neat, obedient, and loyal and faithful and all those Boy Scout words.” He added, “Richard Nixon…Gerald Ford…They have done a terrible job, a pathetic job. In my lifetime, in my lifetime—I was born in 1943—we have not had a competent national Republican leader. Not ever.”

1980 On the House floor, Gingrich states, “The reality is that this country is in greater danger than at any time since 1939.”

1980 Gingrich says: “We need a military four times the size of our present defense system.” (See 1984.)

1983 A major milestone: Gingrich cites former British Prime Minister Neville Chamberlain on the House floor: “If in fact we are to follow the Chamberlain liberal Democratic line of withdrawal from the planet,” he explains, “we would truly have tyranny everywhere, and we in America could experience the joys of Soviet-style brutality and murdering of women and children.”

What is it that Republicans put in their formula that turns out people like this?  Newt was on Meet the Press yesterday where he mouthed off on a number of subject’s including Paul Ryan’s Medicare pogrome.  This is the National Review’s take so read with caution.

Newt Gingrich’s appearance on “Meet the Press” today could leave some wondering which party’s nomination he is running for. The former speaker had some harsh words for Paul Ryan’s (and by extension, nearly every House Republican’s) plan to reform Medicare, calling it “radical.”

“I don’t think right-wing social engineering is any more desirable than left-wing social engineering,” he said when asked about Ryan’s plan to transition to a “premium support” model for Medicare. “I don’t think imposing radical change from the right or the left is a very good way for a free society to operate.”

As far as an alternative, Gingrich trotted out the same appeal employed by Obama/Reid/Pelosi — for a “national conversation” on how to “improve” Medicare, and promised to eliminate ‘waste, fraud and abuse,’ etc.

“I think what you want to have is a system where people voluntarily migrate to better outcomes, better solutions, better options,” Gingrich said. Ryan’s plan was simply “too big a jump.”

He even went so far as to compare it the Obama health-care plan.”I’m against Obamacare, which is imposing radical change, and I would be against a conservative imposing radical change.”

I have to say that having Trump, Gingrich, Santorum and Paul all debating each other on one stage would probably be highly entertaining.   They could have a contest for who would make the craziest old uncle.

The White House is out on the road trying to head off problems with the national debt ceiling.  Timothy Geithner says that the economy will double-dip if the Republicans don’t raise the ceiling.

In a heavily-anticipated response to Sen. Michael Bennet, D-Colo., who asked Geithner to document the economic and fiscal impacts of failing to lift the statutory debt limit, the Treasury secretary detailed a chain reaction that would cripple the economy, costing jobs and income.

“A default would inflict catastrophic far-reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment,” said Geithner in the letter to Bennet which was dated May 13. “Even a short-term default could cause irrevocable damage to the economy.”

Geithner has imposed an August deadline for Congress to lift the $14.3 trillion debt ceiling, but lawmakers are still negotiating over Republican demands to tie the move to spending cuts. And a portion of the GOP still remains skeptical about the need to act by the deadline at all, arguing that the consequences have been overstates.

Economist Mark Thoma has a better explanation of how the refusal to increase the debt ceiling would impact the economy on CBS Money Watch.  This explanation is much more precise.

If politicians fail to reach a deal to increase the debt ceiling, there would be a large fall in federal spending. The decline in federal purchases of private sector goods and services would reduce aggregate demand, and this could slow or even reverse the recovery (it could also threaten the delivery of critical services that some people depend upon). In addition, the failure to pay wages to federal workers would disrupt household finances and cause a further decline in demand, as would the failure of the government to pay its bills for the goods and services it has already purchased from the private sector (and it could even threaten some households and businesses with bankruptcy should the problem persist). There may be some room for the Treasury to use accounting tricks to avoid the worst problems, at least for a time, but it is not at all clear how well this would work to insulate the economy from problems and eventually this strategy will come to an end.

That’s potentially bad enough, but it’s far from the end of the problems that could occur. Failure to raise the debt ceiling could also undermine faith in the safety of US Treasury bills. If we default on bond payments, or appear willing to do so even if it doesn’t actually occur and investors lose faith in US Treasury Bills, they will begin demanding higher interest rates to cover the increased perception of risk. This could be very costly. We depend upon the rest of the world to finance our debt at extremely low interest rates. If the willingness of other countries to do this diminishes, then the cost of financing our debt would rise substantially. And that’s not all. In addition to increased debt servicing costs, an increase in interest rates would also choke off business investment potentially lowering economic growth, and the consumption of durable goods by households would fall as well. Rising interest rates would also be bad for the housing recovery (such as it is). Thus, failure to reach an agreement could be very costly.

The Economist‘s Blog on American Politics: Democracy in America has an interesting  post right now on ‘The Road to Plutocracy’.  It’s an interesting read with a lot of quotes from other pundits.

THE word “plutocracy” is in the air these days. Some say the era of the de facto rule of the mighty top 10%, or top 1%, or whatever insidious sliver of the income distribution is thought to constitute the moneyed power elite, is upon us, or nearly so. I’m not so sure. I am sold on the proposition that there’s something deeply whacked about the American financial system, and that whatever that’s whacked about it is significantly responsible for the top 1% pulling so far away from the rest of the income distribution. This needs to be fixed, whatever its other consequences. It’s not clear to me, however, what exactly is whacked. I don’t know whether to sign up for Tyler Cowen’s “going short on volatility” story, Daron Acemoglu’s “financial-sector lobbying and campaign contributions ‘bought’ an enriching (and destabilising) regulatory structure” story, or some other story. No doubt the truth is in some subtle combination of stories. In any case, accounts such as Mr Acemoglu’s, according to which big players in certain sectors over time manage to rig the regulatory climate to their advantage, are quite compelling for reasons both theoretical and empirical

Newsweek has an interesting article up on why the megarich manage to have such a sweet tax deal.  Even if we raise their income taxes, it really doesn’t hit them where it counts.  Here’s why.

It drives economist Bruce Bartlett crazy every time he hears another bazillionaire announce he’s in favor of paying higher taxes. Most recently it was Mark Zuckerberg who got Bartlett’s blood boiling when the Facebook founder declared himself “cool” with paying more in federal taxes, joining such tycoons as Bill Gates, Warren Buffett, Ted Turner, and even a stray hedge-fund manager or two.

Bartlett, a former member of the Reagan White House, isn’t against the wealthy paying higher taxes. He’s that rare conservative who thinks higher taxes need to be part of the deficit debate. His beef? It’s a hollow gesture to say the federal government should raise the tax rate on the country’s top wage earners when the likes of Zuckerberg have most of their wealth tied up in stock. Many of the super-rich see virtually all their income as capital gains, and capital gains are taxed at a much lower rate—15 percent—than ordinary income. When Warren Buffett talks about paying a lower tax rate than his secretary, that’s because she sees most of her pay through a paycheck, while the bulk of his compensation comes in the form of capital gains and dividends. In 2006, for instance, Buffett paid 17.7 percent in taxes on the $46 million he booked that year, while his secretary lost 30 percent of her $60,000 salary to the government.

“It’s easy to say ‘Raise taxes’ when you know you’re not going to have to pay those taxes,” Bartlett says. “What I don’t hear is ‘Let’s raise the capital-gains tax.’” Instead the focus has been on the federal tax rate paid by those with an annual income of $250,000 or more—the top 3 percent of earners. Bartlett argues that while raising taxes on the country’s richest individuals would go a long way in easing the debt crisis, it makes no sense to treat the professional making a few hundred thousand dollars a year the same as the Richie Rich set. Maybe it’s hard to muster sympathy for an executive pulling down $1 million a year. But ours is a tax system where a person in the top tax bracket (those earning more than $374,000 in 2010) pays a tax rate of 35 percent on the upper portions of his or her income (37.9 percent if you include Medicare), whereas a hedge-fund manager or mogul earning 10 or 100 times that amount pays less than half that tax rate.

Well, now I’m thinking we’re all just so f’ked that I might as well stop while I’m ahead.  What’s on your reading and blogging list today?


How to Kill Home Ownership

Levittown House and family circa 1948

Your house is about to become even harder to sell, even more unlikely to appreciate, and even more unaffordable to more people.  Be prepared to go back to the past.   All those young Obama Democrats better love their landlords.  They’re likely to be stuck with them for some time.  Every think you’d see a headline like this for a Democratic President? Here’s one from NPR Today: Obama Administration: Not Everybody Should Own A Home,

For decades, U.S. housing policy seemed to assume that more home ownership was always better.

At one point in the early ’90s, the government launched the “National Homeownership Strategy,” whose stated goal was to “attempt to help all American households become homeowners.”

So perhaps the most striking thing in today’s housing finance report from the Obama administration is the simple idea that not everybody should own a home (emphasis added):

The Administration believes that we must continue to take the necessary steps to ensure that Americans have access to an adequate range of affordable housing options. This does not mean all Americans should become homeowners. Instead, we should make sure that all Americans who have the credit history, financial capacity, and desire to own a home have the opportunity to take that step. At the same time, we should ensure that there are a range of affordable options for the 100 million Americans who rent, whether they do so by choice or necessity.

This is idea, in turn, leads to the Obama administration’s main conclusion: Fannie Mae and Freddie Mac should cease to exist.

I’ve been a critic of the way Fannie Mae and Freddie Mac were managed for about 15 years.  They were packaging up loans and paying bonuses like the worst of the Wall Street set.  This had nothing to do with their basic government franchise agreement which is to provide long term funds to back up home loans.  The packaging and wheeling and dealing were part and parcel of Fannie and Freddie trying to mimic Wall Street and privatization.  However, they both provided products with implied government guarantees.  This implies a higher level of due diligence in underwriting and packaging that they basically ignored.  It’s similar to USDA grade beef.  There was a guarantee that these loans would hold mortgage insurance and be underwritten carefully.   The root cause of the problems were not the attempts to get more qualified people into affordable mortgages, it was to feed Wall Street greed and shovel money to their executives who were frequently just political hacks. They simply did the worst of the Wall Street practices at a much higher volume with a more damaging result because of the US stamp of approval; the implicit guarantee.

Now, we have a back to the gilded age future ahead of us.  What has made these loans work as loans and the securities that back the loans work is the implied low risk with a decent rate of return.  Many, many pension funds and institutional investors  hold huge numbers of Fannie and Freddie Securities because they’ve always had high ratings.  Most of these pension funds and institutional investors are sources of long term funds.  There’s not a lot of a lenders that will lend long these days and that’s going to be a problem for most people looking for a home now more than ever.  My guess is that most home loans will now go down to terms of about 15-20 years or they’ll be completely variable rate.  That means the homeowner will have to bet on the rate to get an affordable mortgage and gamble their incomes will go up to secure the lowest rates and longest terms.   Both of these are highly risky bets.  Past data has shown that most people loose with these kinds of mortgages.

Plus, that’s if they can get the funding at all. Without something similar, I doubt that the major sources of these funds which are usually forced into safe investments will be available.  Either that, or you’re going to lock in to a fixed rate but for an intermediate term loan.  Think about your own house loan and what that would mean for you.   You either double your house payment or take the bet that the rate won’t go up enough to force you to default in the future.  Most people don’t have sophisticated enough knowledge of economics to even make an educated guess.   My guess is that if they take the loan at all, they’ll go for the short term fixed rate loan on a much cheaper house.  This is going to change the complexion of the housing market for ever if it goes through as planned.

This is a President used the gipper metaphor for himself. This is the White House that wants less Government in the Mortgage system.

The Obama administration wants to shrink the government’s role in the mortgage system — a proposal that would remake decades of federal policy aimed at getting Americans to buy homes and would probably make home loans more expensive across the board.

The Treasury Department rolled out a plan Friday to slowly dissolve Fannie Mae and Freddie Mac, the government-sponsored programs that bought up mortgages to encourage more lending and required bailouts during the 2008 financial crisis.

Exactly how far the government’s role in mortgages would be reduced was left to Congress to decide, but all three options the administration presented would create a housing finance system that relies far more on private money.

“It’s clear the administration wants the private sector to take a more prominent role in the mortgage rates, and in order for that to happen, mortgage rates have to go up,” said Thomas Lawler, a housing economist in Virginia.

Abolishing Fannie and Freddie would rewrite 70 years of federal housing policy, from Fannie’s creation as part of the New Deal to President George W. Bush’s drive for an “ownership society” in the 2000s. It would transform how homes are bought and redefine who can afford them.

Treasury Secretary Timothy Geithner said the plan would probably not happen for at least five years and would proceed “very carefully.” In the meantime, he said the companies would have the cash they need to meet their existing obligations.

There are other ways to do this.  Most would have to do with tighter governance of Fannie and Freddie and elimination of private sector practices of bonuses for volume when government guarantees are involved.  Also, a cap for the mortgages to prices more standard through out the country rather than Washington DC would help.  Fannie and Freddie should have no place in the jumbo market.  Here’s a few of the proposals that are in the White House program.

The Obama administration proposals include raising the rates Fannie and Freddie charge to banks for loan guarantees to the same levels as private banks. Private mortgages for so-called jumbo loans, which are not covered by government guarantees, currently cost between 0.5% and 0.75% more than government-backed mortgages. So, if Fannie and Freddie’s fees were to rise to the market level, mortgage rates across the U.S. might rise substantially.

The administration also proposed lowering the maximum value of a mortgage that can qualify to be federally backed from the current $729,750 to $625,500. That’s a widely suggested move that would attract the private sector to make more loans in the upper range of the market. The proposal also called for Fannie, Freddie and the FHA to set a minimum down payment requirement of 10%. Currently, the agencies are authorized to make loans with no down payments at all.

The big issue is what to do about the government guarantee that assures investors who buy Fannie and Freddie mortgage bonds that the U.S. government will pay back the bonds in the event the underlying mortgages default. Because of that guarantee, Fannie and Freddie can offer lower interest rates than the private sector. Investors, especially foreign investors, were burned by subprime bonds during the financial crisis, and now they won’t touch private mortgage bonds without a government guarantee.

There’s obvious problems with Fannie and Freddie but they mostly lie with how it was managed and how it morphed as more up income and high price assets were put into play.  Helping upper income people or expensive real estate markets weren’t originally part of the charter.  Making it more like a bank isn’t going to remove the abuses but add to them.  Bonuses for production quotas lead to reduced quality.

It would be more prudent to take Fannie and Freddie back to their roots rather than to them strip them of their ability to provide affordable mortgages to entry level home owners.  The management got caught up in production over quality of loans because they got bonuses.  That was a huge problem.  The connection to affordable housing initiatives was never the problem.  Churning out crap to feed the investment frenzy of Wall Street and peeling off bonuses for their executives led to their sloppy loan processing.  They caught the same disease that plagued the private sector at a larger volume.  Congress also did a poor job of oversight.

This move will leave a huge gap in two places.  First, it will impact investment portfolios that rely on long term, relatively safe but decent yield-bearing assets.  It will also remove one more route to the American dream for ordinary Americans.  Let’s just say we’re all taking one for the Gipper.