Sunday Reads

Posted: November 28, 2010 | Author: | Filed under: Breaking News, Democratic Politics, Diplomacy Nightmares, Elections, Global Financial Crisis, Gulf Oil Spill, morning reads, The Great Recession, The Media SUCKS, U.S. Economy | Tags: , , , , , , , , , , , | 59 Comments
good morning!!!

Here’s an interesting piece in the Christian Science Monitor about an attempt to knock Rahm Emanuel off the ballot for the Chicago Mayoral election.  Emanuel’s eligibility is in question because of his residency in the District as Obama’s Chief of Staff.  Does that duty deserve similar treatment to active duty soldiers?

Chicago area election lawyer Burt Odelson filed his challenge to the Chicago Board of Elections, saying that Emanuel does not meet a state law that requires all candidates to be residents of the municipality in which they seek office for at least one year. He filed on behalf of two Chicago residents; on Wednesday, five other challenges were filed separately. Tuesday is the last day objections can be filed to the election board.

Central to Mr. Odelson’s argument is that Emanuel was removed from voter rolls twice during his two-year tenure in Washington, when he served as White House chief of staff to President Obama. During that time, Emanuel rented out his home. His campaign says he maintained ties to the city by paying property taxes, maintaining a driver’s license, and voting in the February primary.

Economists Olivier Jeanne and Anton Korinek  at VOX are suggesting Pigou taxes  (i.e. sin taxes) on financial corporations that would vary with credit booms and busts.    Rules would change depending on the state of the economy.  Suggestions include requiring higher capital levels or placing some kind of penalty on an organization when they take on large amounts of credit during an asset price boom.  The purpose is to impose the social cost of bailing the organization out on them to prevent from doing so and causing havoc in the financial markets. The idea is that they’d be less able to profit from the leverage so they’d be less likely to  go for the risk.  Suggestions specifically target mortgages with balloons or “teaser rates” since they are more risky and more likely to blow up in the face of market troubles.  The tax would then be used to fund any required bailout.

The optimal tax should also be adapted to the maturity of debt. Long-term debt makes the economy less vulnerable to busts than short-term debt, because lenders cannot immediately recall their loans when the value of collateral assets declines. For example, 30-year mortgages make the economy less prone to busts than mortgages with teaser rates that are meant to be refinanced after a short period of time.

An important benefit of ex-ante prudential taxation during booms is that it avoids the moral hazard problems associated with bailouts. When borrowers expect to receive bailouts in the event of systemic crises, they have additional incentives to take on debt. If the financial regulators accumulate a bailout fund, borrowers may increase their indebtedness in equal measure, leading to a form of “bailout neutrality”

Real Time Economics over at the WSJ has some interesting numbers up on Mortgage defaults.  The ever increasing backlog of defaults is worrisome.

492: The number of days since the average borrower in foreclosure last made a mortgage payment.

Banks can’t foreclose fast enough to keep up with all the people defaulting on their mortgage loans. That’s a problem, because it could make stiffing the bank even more attractive to struggling borrowers.

In recent months, the number of borrowers entering severe delinquency — meaning they missed their third monthly mortgage payment — has been on the decline, falling to about 700,000 in October, according to mortgage-data provider LPS Applied Analytics. But it’s still more than double the number of foreclosure processes started.

I personally enjoyed reading this Michelle Goldberg take-down on the Daily Beast of certain right wing women politicians who are trying to campaign as the ‘real’ feminists while throwing out their rewrites of herstory.  The Right Wing always rewrites history with the worst revisions.  I’m calling what they adhere to feminotexactlyism.  Here’s a few tidbits.

The historical revisionism here recalls that of Christian conservatives who try to paint our deistic Founding Fathers as devout evangelicals. At one point, Palin refers to Elizabeth Cady Stanton’s “Declaration of Sentiments,” which came out of the historic 1848 women’s rights convention at Seneca Falls, New York. Stanton deliberately echoed the language of the Declaration of Independence, referring to the rights that women are entitled to “by the laws of nature and of nature’s God.” To Palin, this mention of God proves that Stanton shared her faith: “Can you imagine a contemporary feminist invoking ‘the laws of nature and of nature’s God?’ These courageous women spoke of our God-given rights because they believed they were given equally, by God, to men and women.”

Not really. Stanton was a famous freethinker, eventually shunned by more conservative elements of the women’s movement for her attacks on religion. In one 1885 speech, she declared, “You may go over the world and you will find that every form of religion which has breathed upon this earth has degraded women.” Ten years later, she published the first volume of The Woman’s Bible, her mammoth dissection of biblical misogyny. Stanton was particularly scathing on the notion of the virgin birth: “Out of this doctrine, and that which is akin to it, have sprung all the monasteries and nunneries of the world, which have disgraced and distorted and demoralized manhood and womanhood for a thousand years.”

For more debunking, including that silly one about Susan B Anthony being some how against abortion, go read the article.  Facts are  such tractable things to Republicans that I wonder why any sane person would quote one without fact checking them first.  I just can’t take any more presidential candidates needing basic re-education; let alone presidents that require it.

Speaking of another one in that category, the national spotlight isn’t doing much good for my governor either.  I’ve got two sources I’ll quote here.  The first one is The American Thinker which you may recall is conservative.  They’ve even got his number.  It seems that just writing books about yourself is not going to be the path to Presidency any more.

Louisiana Governor Bobby Jindal is busy promoting his new tome Leadership and Crisis with book tour stops all over the country. This latest tour comes on top of his previous speaking tours to raise campaign cash for himself and various Republican candidates around the country. The only place Governor Jindal has trouble visiting is his home state of Louisiana. The joke in Louisiana is that Bobby is known as a governor in 49 states.


Louisiana blogger Lamar White, Jr. takes it even farther.  Yup, Jindal’s our ROAD Scholar. We can’t keep professors on university payrolls but we can sure pay for him to promote his self-serving book.

The oil spill was a huge scare, but instead of being honest about it, Jindal used it as an opportunity to advance his own political celebrity and perpetuate ridiculously disconcerting and almost masochistic myths about the effects of a deepwater drilling moratorium, none of which turned out to be true. He spent more time posing for the cameras and tagging along with CNN than practically anyone else, yet, in his “memoir,” it’s the Obama Administration who cared about media perception, not him. As an example, he cites a letter he delivered requesting an increase for federally-subsidized food stamps, suggesting that the Obama Administration delayed on their response. According to White House officials, Jindal’s formal request was delivered on the same day that Jindal called a press conference decrying the delays. Pure political theater.

But most importantly, when Jindal says Congressmen should spend more time at home, he should probably listen to his own advice. During the last couple of years, Jindal’s become more known for the things he has done outside of Louisiana than for anything he has done here in Louisiana. Before the November elections, he spent weeks touring the country to support fellow Republican candidates, and only two weeks after the election, he embarked on yet another nationwide tour, this time promoting his memoir.

I have to admit that this next Republican presidential primary is going to have me chewing my finger nails off.  If this is the best they have to offer, we are SO sunk.

Both the Koreas are upping the stakes in the Yellow Sea.  North Korea is sending veiled threats to the U.S about sending its air carrier–USS George Washington–into the area for joint ‘war games’.  SOS Clinton is in talks with the Chinese.  This is from The Guardian.

The world’s diplomatic corps is working feverishly to contain the crisis and make sure there is no further conflict. China, which is widely seen as having influence over the North, has held talks with the US between its foreign minister, Yang Jiechi, and the secretary of state, Hillary Clinton. “The pressing task now is to put the situation under control,” the Chinese foreign ministry quoted Yang as telling Clinton.

Meanwhile the US stressed that its military operation with the South – which includes deployment of a nuclear-armed aircraft carrier – was not intended to provoke the North. Yet the North’s news agency addressed that issue: “If the US brings its carrier to the West Sea of Korea [Yellow Sea] at last, no one can predict the ensuing consequences.”

The the joint US-South Korea exercises started late last night.  Here’s the report on them from English Al Jazeera.

South Korea’s military later said that explosions – possibly the sound of artillery fire – were heard on Yeonpyeong Island.

South Korea’s Joint Chiefs of Staff said that what is believed to have been a round of artillery was heard on Sunday from a North Korean military base north of the sea border dividing the two Koreas. It was not immediately clear where the round landed.

Residents of the island were ordered to take shelter in underground bunkers, but that order was later withdrawn, according to Yonhap.

Dozens of reporters, along with soldiers and police and a few residents, headed for the bunkers, where they remained for 40 minutes.

I’ve been watching the euro crisis again as the problems with Ireland seem to be creating problems with Spain now.  My print copy of The Economist didn’t come this morning so I’ve been having to read the cyber ink here.  My Saturday night soak in a hot bath was just not the same without it.  So,here’s my idea of a chiller thriller.

Europe’s rescue plan is based on the idea that Ireland and the rest just need to borrow a bit of cash to tide them over while they sort out their difficulties. But investors increasingly worry that such places cannot, in fact, afford to service their debts—each in a slightly different way. In Ireland the problem is dodgy banks and the government’s hasty decision in September 2008 to guarantee all their liabilities. Some investors think this may end up costing even more than the promised EU/IMF loans of some €85 billion ($115 billion)—especially if bank deposits continue to flee the country (see Buttonwood). Ireland’s failing government adds to the doubt, because it could find it hard to push through an austerity budget before a new election (see article). In Greece the fear is that the government cannot raise enough in taxes or grow fast enough to finance its vast borrowing. Likewise in Portugal, which though less severely troubled than Greece nevertheless seems likely to follow Ireland to the bail-out window.

If the panic were confined to these three, the euro zone could cope. But Europe’s bail-out fund is not big enough to handle the country next in line: Spain, the euro’s fourth-biggest economy, with a GDP bigger than Greece, Ireland and Portugal combined.

One has to ask how much the Germans are going to pony up the cross country fiscal policy this will take.   I’m still not ready to call the eminent demise of the EURO since every study that I’ve read–and I’ve read lots over the last three years–points to how much trade and foreign direct investment has come from integration.  This will test a lot of wills; good an otherwise. Meanwhile, the Irish are rebelling over their deal. They don’t want austerity measures any more than the Greeks do or we do for that matter.

The Economist also weighed in on  the “Republican Backlash” to the QE2 calling it perplexing which I believe is equal to me being baffled by the whole thing.  It’s still either they don’t know a damn thing (e.g. Republican presidential wannabe candidate number 1 on the link up top) or they just want the power so they don’t really care (e.g Republican presidential wannabe candidate number 2 on the link up top there).  Has to be.  What is still the weirdest thing to me is how many of them seem to hate Bernanke who is–afterall–a fellow Republican and a Dubya appointee.  What a strange, strange world this has turn out to be.  I mean Ron Paul is going to be in charge of the House subcommittee on Monetary Policy next year.  That’s like putting a representative of Astronauts for a flat earth society in charge of NASA.

Yet the fight is not ultimately over numbers, but ideology. To be sure, the Fed’s reputation has suffered among Americans of all political stripes over its failure to prevent the crisis and its bail-outs of banks. But the tea-party movement holds it in particularly low regard, seeing it as the monetary bedfellow of the hated stimulus and bail-outs. Some 60% of tea-party activists want the Fed abolished or overhauled, according to a Bloomberg poll. One of the movement’s heroes is Ron Paul, a congressman from Texas who wants to scrap the Fed outright and bring back the gold standard. His son Rand, newly elected as a senator from Kentucky, has also been stridently critical. QE can be made to seem sinister: an animated video on YouTube that portrays it as a conspiracy between Goldman Sachs and the Fed to fleece the taxpayer has been viewed over 2m times.

The ideological content of the backlash should not be overestimated. In 1892 William Jennings Bryan, later the Democratic presidential candidate, declared: “The people of Nebraska are for free silver and I am for free silver. I will look up the arguments later.” Liberals accuse the Republican leadership of likewise concocting an excuse to rally their base against Barack Obama. Indeed, the letter to Mr Bernanke criticises QE2 in much the same language used to oppose fiscal stimulus: as a dampener of business confidence and stability.

Well, I’ve just about had it with the print news today.  Do you suppose the Sunday News Programs will have anything on more meaningful?

Ah, probably not.

What’s on your reading and blogging list today?

Less to be thankful about …

Posted: November 24, 2010 | Author: | Filed under: Global Financial Crisis, The Bonus Class, The Great Recession, U.S. Economy | Tags: , | 15 Comments

The Fed  has lowered its economic expectations despite the news that corporate profits during the third quarter have rallied like it’s 1984. What does this say for our economy?  More importantly, what does it say about our policy makers who steadfastly refuse to see the significance in these conflicting figures?

Top Federal Reserve officials project that the unemployment rate, now 9.6 percent, will fall only to about 9 percent at the end of 2011 and about 8 percent when the next presidential election arrives, in late 2012. The central bankers had envisioned a more rapid decline in joblessness in their previous forecasts, prepared in June.

The sober economic forecast comes despite signs that the recovery is picking up slightly. The Commerce Department said Tuesday that gross domestic product rose at a 2.5 percent annual rate in the three months ending in September, not 2 percent as earlier estimated. And there have been solid readings in recent weeks on job creation, manufacturing and retail.

The apparent contradiction reflects the brutal math that faces a nation trying claw out of a deep recession: Moderate growth, which would be fine in normal times, will do little to bring down sky-high joblessness, a reality reflected in the Fed’s forecasts.

The uneven impact of recovery is amazing and well, downright unAmerican.  While corporations are now feeling the benefits of the stimulus, people are not.  Tax cuts made by stimulus nearly two years ago are not reaching the jobs markets or households.  The NYT analysis shows that corporate spending on payrolls are way down, while their write-offs of foolish investments is no longer the problem it once was.  Additionally, U.S. firms doing business over seas are doing remarkably well.  So, where are these profits going?  Certainly, they are not ‘trickling down’ via job creation or anything else that would be a boon to Main Street.

The moderate growth of GDP will not be enough to curb unemployment which is why it is vital the government do something.  The news today impacted the stock market so even Wall Street is aware that this is bad news.

The Fed’s top policymakers project that gross domestic product will rise 3 to 3.6 percent next year – which would represent a solid acceleration from the past two quarters but still would only be enough to bring the unemployment rate to the 8.9 to 9.1 percent range in the final months of 2011 and 7.7 to 8.2 percent at the end of 2012.

The officials also increased their estimate of how low the nation’s unemployment rate could ultimately go without stoking inflation. Several estimated that level is 6 percent or higher, not the 5 to 5.3 percent earlier thought.

Businesses cannot expand and grow without customers.  The current improvement is mostly due to bookkeeping past errors.  This is not the solid underpinning of a strong recovery.  It is easy to see why Bernanke is considering the QE2 given these GDP forecasts and the ongoing reality revision of Okun’s rule of thumb on the relationship between GDP growth and the unemployment rate.  The Fed’s statement shows that the BOG is doing QE2 because it’s necessary.  There is a tone of reluctance in their accompanying statements.  There is also the underlying feeling that policy at the zero-bound is not all that effective.

But most Fed officials expected the results of bond purchases “to help promote a somewhat stronger recovery in output and employment while also helping return inflation, over time, to levels consistent with the Committee’s mandate.” Some also thought the action would offer insurance against a further drop in inflation or against the “small probability” of persistent deflation.

But the document also leaves little doubt that several Fed officials remain uneasy with the action. Some anticipated that they would have only a “limited” effect on the pace of recovery, arguing the action should only be taken if the odds of deflation “increased materially.”

And several “noted concern” that the action “could put unwanted downward pressure on the dollar’s value in foreign exchange markets” or “an undesirably large increase inflation.”

I’ve said this before, but I continue to be baffled by the reluctance to aggressively pursue the fiscal policy means to buoy up the economy for the every day American.  Certainly, the last two elections were the result of frustration by the voter about the continual emphasis within the Beltway of the interests of the power that be.  War machines and paper profits get subsidies.  Suffering people are left to their devices.  Even, if they’ve been productive and paid for themselves up until now.

It is undoubtedly beyond time to move policy attention away from banks, auto manufacturers, and rich people seeking continued tax breaks.  It is not time to listen to the groups that don’t read data that reflect the danger of deflation.  If only Milton Friedman were alive to cut them off at the knees!  I can’t imagine these self-styled ‘conservatives’ could stand up to him.

I picked this item up at Economist’s View. It’s just discouraging that no policy maker seems to read these things and feel like they’ve been making huge mistakes. I have to get on the University library website to get the paper free, but so far, just what Thoma has quoted is horrifying.  It includes this.

According to our measures almost 40% of households have been affected either by unemployment, negative home equity, arrears on their mortgage payments, or foreclosure. Additionally economic preparation for retirement, which is hard to measure, has undoubtedly been affected. Many people approaching retirement suffered substantial losses in their retirement accounts: indeed in the November 2008 survey, 25% of respondents aged 50-59 reported they had lost more than 35% of their retirement savings, and some of them locked in their losses prior to the partial recovery in the stock market by selling out. Some persons retired unexpectedly early because of unemployment, leading to a reduction of economic resources in retirement which will be felt throughout their retirement years. Some younger workers who have suffered unemployment will not reach their expected level of lifetime earnings and will have reduced resources in retirement as well as during their working years.

Prudent fiscal policy requires running deficits when the economy is faltering.  Not only that, there are laws–like the Humphrey Hawkins Act of 1978–that demand it!!!  Long term fiscal restraint should be examined when the U.S. economy is on a secure footing.  Now isn’t the time for austerity.  Now is the time to conquer the real problems of people and not those imagined in the minds of Washington DC bloviates who just want more power and more money. Most Americans are worried about keeping their homes, feeding themselves, and holding on to jobs if they have one right now.  How is that less important than the tax cuts of the very few or the other special interest bills that they are working on the current lame duck session?

Where is the real leadership of the Democratic Party?

SEC: Finally Functional?

Posted: November 20, 2010 | Author: | Filed under: Breaking News, Equity Markets, Global Financial Crisis | Tags: , , , , , | 8 Comments

The SEC seemed captured by insiders for so long and was so badly understaffed that it really was a pathetic excuse for a regulator.  All it seemed capable of doing was capturing media divas like Martha Stewart while the Bernie Madoffs were only caught when market down turns identified their PONZI Schemes.   Interestingly enough,  two Madoff employees were JUST arrested on Thursday as prosecutors are finally moving towards the Madoff family jewels. But, bigger things are afoot.

The SEC has finally gone after the bad guys with a little help from the FBI and the Manhattan District Attorney’s office in what what can only be characterized as a major investigation. It took around three years to complete.  That means it actually got stated under the Bush years which is a shocker unto itself.

Have the SEC finally traded their aging white horses for some real stallions? This can only mean good news for the small investor and those of us who are stuck in institutional funds because Congress wants to pay back their FIRE friends by giving them our money to take to their casino.

The criminal and civil probes, which authorities say could eclipse the impact on the financial industry of any previous such investigation, are examining whether multiple insider-trading rings reaped illegal profits totaling tens of millions of dollars, the people say. Some charges could be brought before year-end, they say.

The investigations, if they bear fruit, have the potential to expose a culture of pervasive insider trading in U.S. financial markets, including new ways non-public information is passed to traders through experts tied to specific industries or companies, federal authorities say.

One focus of the criminal investigation is examining whether nonpublic information was passed along by independent analysts and consultants who work for companies that provide “expert network” services to hedge funds and mutual funds. These companies set up meetings and calls with current and former managers from hundreds of companies for traders seeking an investing edge.

Finally, some one is going after these “expert networks” which are basically groups of people that sell inside information. Yves at Naked Capitalism--some one who worked in the market for years and has some way of knowing–has been on this for years. I’ve been buried in academia and at the FED for some time, but even I knew it was bad.

Yours truly has complained off and on over the years about “consulting” and “research” firms whose entire business model revolves around the procurement and sale of inside information. These companies solicit consultants, who in the vast majority of cases are employees of major corporations, to provide insight into what is going on at their employer’s operations. These vendors are generally smart enough to make their consultants sign various waivers, which have the effect of shifting liability on to the hapless chump paid a couple of hundred dollars an hour for an hour or two for information worth vastly more than than. They are effectively exploiting the contract worker’s lack of understanding of the finer points of SEC regulations and corporate policy.

We first wrote about this abuse with weeks of starting this blog, in January 2007, when a Wall Street Journal investigation of the biggest player in this space, Gerson Lerman, led to an investigation by the New York attorney general, Eliot Spitzer (the SEC reportedly had investigations underway, although it was not clear whether Gerson Lerman was a focus).

I have had my tinfoil hat theory on Spitzer’s fall from grace  for some time. My thought is that some one went after Client 9 deliberately to stop him from finding out more about these lucrative deals and other Wall Street nastiness.  He got taken down over a game of patty cake so these guys could continue their scam.  Traders can make boatloads of money with ex ante knowledge and enough money to make the trade. Also, remember even if you’re just doing the deal, your value as a trader and analyst goes up if your assets’ value goes up.  There’s a lot of money in this game and getting in on momentum at the ground floor is a beautiful thing.

Here’s one of the more egregious examples from the WSJ article.

Another aspect of the probe is an examination of whether traders at a number of hedge funds and trading firms, including First New York Securities LLC, improperly gained nonpublic information about pending health-care, technology and other merger deals, according to the people familiar with the matter.

Some traders at First New York, a 250-person trading firm, profited by anticipating health-care and other mergers unveiled in 2009, people familiar with the firm say.

A First New York spokesman said: “We are one of more than three dozen firms that have been asked by regulators to provide general information in a widespread inquiry; we have cooperated fully.” He added: “We stand behind our traders and our systems and policies in place that ensure full regulatory compliance.”

Right.  It was just very good analysis.  We’ll see how that stands up in court.

My guess is that there will be a good deal of shaking and quaking going on shortly because the names have yet to be released.  We will undoubtedly see some Goldman Sachs names among them.  Goldman Sachs appears to be a central player in those health care company mergers.  NY magazine is being vague right now, but the network of traders and investment bankers could shake up the Street and it’s about time.  They’re poking around now which probably means their lining up their fallen angels who are most likely to turn state’s evidence to avoid having more than just a few weekends with Bernie.

The characterization of the degree of insider trading by both the FBI and SEC is that this is part of a “pervasive” culture. I smell a huge class action suit in the works against a lot of funds.   It also further puts to rest the idea that the U.S. equities markets represent anything near a rational market since prices in this instance represent two tiers of agents.  One set that only have public information.  One set that’s privy to the out of school tales of contract workers.  This should turn some of the literature  in the investment area on its heels. That’s a good thing too.  I do so want to see the death of that random walk down Wall Street hypothesis once and for all.

AND I just hate that look of a smug investment banker in the morning; especially when they try to give the impression that that it’s all about their brilliance and not about their luck or a little illegal information.   This should be more fun to watch than a James Bond movie when Sean Connery was in his prime.  It may also breathe some life into that CNN show Parker/Spitzer because Spitzer is bound to have his own little insider information on the probe and my guess is he’ll try to parlay that into higher ratings for his current enterprise of journalistic pattycake with Parker.  Eliot Spitzer could may well have the last laugh on this.

Home, Lost Home

Posted: November 16, 2010 | Author: | Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, U.S. Economy | Tags: , , , , , | 41 Comments

The Senate Banking Committee is looking into allegations today about Bank of America’s Foreclosure process.   As you may know, there have been problems with foreclosure documents that have led many to question the legality of many foreclosure actions by banks.  At least seven banking officers will appear before the committee to argue the case that robo-notorization and other means of speeding up the process of making people homeless are not illegitimate.  Retiring Senator Bank-Lobbyist-in-Training Chris Dodd is in charge of that committee.

Bloomberg has this to report about the hearings.

Democrats said they are concerned not only about foreclosures, but also about whether mortgage servicers are properly handling mortgage modifications intended to keep some homeowners from losing their properties.

“If many banks and servicers are not handling even basic foreclosure procedures correctly, it is likely that many are also not correctly evaluating homeowners for mortgage modifications,” Senator Robert Menendez, a New Jersey Democrat who is a member of the Banking Committee, said in a letter to Treasury Secretary Timothy F. Geithner that is scheduled to be sent today.

In the House, lawmakers will also call in overseers and regulators from government agencies, including the OCC and the Federal Housing Finance Agency.

Consumer advocates have been expressing concern about this process for years and aggressive lobbying is apparently paying off for the financial institutions.  This report on a flurry of FIRE lobbying is from WAPO.

The spotlight on the foreclosure process has anxious financial executives mobilizing on Capitol Hill. A financial lobbyist said senior executives have been meeting with lawmakers and their staffers, and industry groups are planning letter campaigns aimed at preventing aggressive new legislation.

“Everyone’s very nervous about what’s going to happen this week,” said another industry official, who spoke on condition of anonymity because his firm has a stake in the outcome. “We have all hands on deck.”

It’s unclear what new measure could pass in a politically divided Congress, but some ideas under consideration could broadly reshape the mortgage industry.

Some lawmakers want to resurrect legislation that would give bankruptcy judges the power to order lenders to reduce the principal that homeowners owe. Others are pushing for some big banks to spin off their mortgage-servicing arms to avoid conflicts of interest. There’s also discussion of replacing the industry’s current system for tracking mortgages with one that would be subject to federal regulation.

“The risk is small that a bill gets through,” the financial lobbyist said, but “we are taking it very seriously.”

Meanwhile, Americans for Financial Reform have requested the FED withdraw a Rescission Rule. In real estate transactions, these rules generally offer up a ‘cooling off period’  that give a buyer a chance to nullify a sales contract within a certain period. Most state rescission rules run from five to 15 days.  The FED’s considering tightening the process to favor the lenders.  Here’s some information on the request from AFR to the FED.

In the face of an unparalleled foreclosure crisis, now is the time to reinforce the fundamental importance of TILA rescission. Instead, the Board’s proposal would eviscerate the single most effective tool that homeowners have to stop foreclosures and avoid predatory loans: the extended right of rescission. The FRB Docket R-1390 contains a series of proposed changes to the TILA rules governing mortgage lending.

A few of the proposed changes, including new “material A much greater concern is the proposed decimation of TILA’s right of rescission. At the  depths of the worst foreclosure crisis since the Great Depression, we are surprised that the Federal Reserve Board has proposed rules that would eviscerate the primary protection homeowners currently have to escape abusive loans and avoid foreclosure: the extended right of rescission in 12 CFR § 226.15 and 226.23. disclosures” for home secured credit, would advance consumer protections.

Some changes are neither particularly damaging nor particularly beneficial to consumers. Other parts of the proposal, however, would seriously undermine the reliability of TILA disclosures on home secured credit.  Instead of informing consumers about the terms of their loans as Congress intended, these proposals  would allow broad misstatements of loan terms through new tolerances that are without statutory authority.

The Truth in Lending Act passed by Congress specifically provides consumers the right to unwind an illegal loan through “rescission” for up to three years after the loan was consummated.  The statute – and current Board regulations –both provide that if the proper disclosures were not  provided to the homeowner at the closing, the homeowner can rescind the loan by sending a notice to the creditor. The statute then requires the creditor to cancel the security interest. Only after the  creditor has complied with its obligation to cancel the security interest is the homeowner required to pay back the lender the amount still due on the loan. This order of obligations is the essence of the protection provided by TILA’s extended right of rescission. The cancelling of the security interest means that the homeowner has a defense to a foreclosure. It also means that the homeowner has the means to obtain refinancing so as to be able to tender the amount due. The extended right of rescission does not mean that the homeowner does not have to repay the loan. While the amount due is reduced by the finance charges, fees and amounts the homeowner has already paid, the balance is still due the creditor.

Current momentum to push the laws to protect mortgage loan originators and processors appears aimed at protecting them from the consequences of some really shoddy underwriting practices.  This seems mostly motivated to save them the billions of dollars of costs they–and in turn the Federal Government–would incur should there be zero tolerance of these egregious practices.  Not only are billions of dollars of investors money at risk–including pensions and institutional investment funds–but there’s also that little matter of the bankrupt Fannie and Freddie that sit on tons of the nasty stuff and are currently being propped up by tax payer money.

Oddly enough, there are calls again for the FED or Treasury to do more ‘stress tests’ to see exactly what the potential fall out from this massive stupidity might be.  Will we once again have to fork over our Treasury to pay for the greed of the housing and mortage debacle?  All of this undoubtedly has the markets shaky, I went in search of why so  much Big RED numbers in the major stock indexes today.  The uncertainty inherent in this problem is undoubtedly fueling the equities set back.  We continue to see fall out from the District’s inability to deal with the current systemic risk in our Financial System due to massive  and hasty deregulation.   Here’s some more analysis from WAPO.

At the same time, he said, panel members sympathize with the conundrum facing policymakers as they deal with the issue: On one hand, grinding foreclosures to a halt unnecessarily could harm the economy and slow its recovery. On the other, he said, distressed borrowers are entitled to due process, especially when banks are trying to take their homes.

Administration officials say they are keeping a close watch on the issue.

“We strongly believe that the reported behavior within the mortgage servicer industry is simply unacceptable, and servicers who have failed to follow the law must be held accountable,” said Treasury spokesman Mark Paustenbach. He added that the administration has led an interagency effort to “investigate misconduct, protect homeowners and mitigate any long-term effects on the housing market. The independent regulatory agencies, the Justice Department and [the Department of Housing and Urban Development] are examining servicers’ behavior, and we will continue to monitor the situation closely.”

This loosely means they’re  probably anticipating the need for more bailouts.  Good luck with that given the influx of hostile partisans coming in from the right wing of the Republican Party in January.   What’s a bunch of lame ducks to do?

Let’s Make a Deal (or not)

Posted: November 12, 2010 | Author: | Filed under: Bailout Blues, Economic Develpment, Global Financial Crisis, Team Obama, U.S. Economy | Tags: , , , | 6 Comments

The U.S. and South Korea have failed to reach an agreement in a trade deal that would have boosted U.S. agriculture exports.  The deal would’ve included concessions to South Korea on automobiles and that was not going over well with domestic automakers like FORD and their related labor unions.  As with all trade arrangements, there are usually winners and losers.  Ranchers and U.S. consumers would’ve been on the winning side of the deal.  The U.S. auto industry and related interests were the potential losers.

Arrangements probably failed due to the tough stance the U.S. is taking on the dollar and foreign exchange pegs these days. No one is happy with QE2 around the world.  We’ll get to that in a minute.  I’m going to quote from the WSJ on this so you need to realize that what’s written here is very pro-free trade.  What was being negotiated at the moment was removal of some trade barriers on both sides.  Political consensus here was that Obama is trying to look more “pro-business”.  Part of South Korea’s problems, oddly enough, is that they are ‘too green’ for America’s stuff. Can you imagine a Democratic president trying to get a country to be less environmental friendly?

One stumbling block was Korea’s refusal to change a provision in the 2007 pact that provided an immediate end to a 2.5% tariff the U.S. levies on imports of Korean cars, said House Ways and Means Committee Chairman Sander Levin (D., Mich.). The U.S. wanted the tariff reduced gradually, while Korea eliminates safety and environmental rules that U.S. auto makers, led by Ford, said help keep Korea the world’s most closed car market. The effect of reducing the U.S. tariff more slowly likely wouldn’t be large because South Korea’s Hyundai Motor Co. already gets around it on more than half of the cars it sells in the U.S., by making them in Alabama and Georgia.

Compounding the stalemate, Mr. Levin said, were U.S. concerns that Korea’s proposed system for settling disputes wasn’t likely to work.

The U.S. also wants Korea gradually to drop its ban on imports of U.S. beef from older cattle, which began after the U.S. had a case of mad-cow disease seven years ago. Previously thought the easier of the two issues, it is a hot button politically for Korea and prompted a walkout by Korean negotiators.

In the end, the parties ran out of time. U.S. Trade Representative Ron Kirk said, “We won’t be driven by artificial deadlines,” though it was Mr. Obama who set the G-20 deadline.

The president alluded to the political pressures. “If we rush something that then can’t garner popular support, that’s going to be a problem,” said Mr. Obama, who had criticized the moribund 2007 Korea pact when he was a candidate. “We think we can make the case, but we want to make sure that that case is airtight.”

So, if you want the White House explanation, here’s Austan Goolsbee in a white house white board moment. I’m not sure what it says when the head of the President’s economic advice team has to give us all lectures, but any way, here’s the deal via Austan.

So, the G20 thing seems to be an exercise in every one going their own way.  No one likes the hot money issue or the weakening dollar.  So much for cooperation.  Guess the only thing we’re exporting  these days are financial bubbles.

The U.S. Federal Reserve decision last week to pump $600 billion into world’s biggest economy has stolen the spotlight away from China’s currency. Brazilian Finance Minister Guido Mantega said today that the Fed’s move may inflate commodities prices and proposed the world move away from using the dollar as the main reserve currency. Former Chinese central bank governor Dai Xianglong this week faulted the U.S. for adopting policies without regard for the dollar’s global role.

The policy fissures and concern countries may react with currency devaluations and capital controls underscore how the G-20 unity displayed during the financial crisis has given way to national divisions as members chart their own recovery path.

“The last thing a developing economy wants is for that liquidity to distort their asset markets and create a destabilizing bubble,” Stephen Roach, Morgan Stanley’s nonexecutive Asia chairman, told Bloomberg Television in an interview yesterday. “The process is not going to work if they don’t come up with a multilateral solution.”

If you want to read how the QE2 could possibly work and if it will be scaled up, I suggest going over to Tim Duy’s FedWatch for a wonky and some what long analysis. Oh, and there are plenty of those nifty graphs that I always love in the piece about the recovery.  He’s going with the blowing bubbles is good narrative.  Interesting.  Duy says the FED has no choice because the Federal Government is so out of it on Fiscal Policy.  Even more interesting and sadly true.

Flooding the market with money is dangerous business.  It risks distorting prices and capital allocations.  We simply don’t know where the money will wash up.  I know that is in vogue to believe there is a nice, obvious story that links an increase in the money supply to an increase in nominal GDP, but that only works on paper.  In the real world, the paths between money and output and prices are complicated.  The ultimate composition of aggregate demand matters.  It matters a lot – distortions have consequences.  Warsh’s risks amount to a laundry list of the possible distortions that might occur as the result of ongoing quantitative easing.  And he clearly takes those risks seriously.

It makes me think that I haven’t been taking those risks seriously enough.  But when monetary policy is the only game in town, what choice do you have?  You do what you can up to a point…but then you throw it back to Congress and say “you take responsibility for the mess you created by abdicating your role in crafting long run, stabilizing macroeconomic policies.”  Warsh has set the stage for doing exactly that.

Of course, seriously, if we really have to throw this back to Congress, we are absolutely done for.  Cooked.  Toast.  Somebody remember to tell the last guy to turn off the lights on his way out.  Better to take our chances with the next bubble.

Aiyee … I’m about reading to move my money into alligator belly futures.  At least that makes a good gumbo if you fail to get out in time.

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