Fannie Mae Update

Home loans are becoming delinquent faster than they can be written off!

Why the Debt Super-Cycle Must End

[click on chart to enlarge]
courtesy economicedge.blogspot.com

This is a very simple chart [says blogger Nathan A. Martin].

It takes the change in GDP and divides it by the change in Debt. What it shows is how much productivity is gained by infusing $1 of debt into our debt-backed money system.

Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system, the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.

Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!

This is mathematical PROOF that debt saturation has occurred. Continuing to add debt into a saturated system, where all money is debt, leads only to future defaults and to higher unemployment...

Thus money creation at the saturation point stops adding to productive efforts and becomes a roll-over affair with only the financial services industry profiting via interest and fees. In other words, money goes out and circles right back around to the banks instead of rippling through a healthy non-saturated economy...

[The full article with additional charts can be found at Nathan's website.]

Monday Muse

Rosanne Cash

Blue Moon With Heartache

Weekly Wrap

The President's signature earlier this week on the healthcare reform bill passed (finally) by Congress showed that he is a leftie in more ways than one. The bill will have far-reaching consequences, becoming evident only with time. I have said all along that the Democratic initiative, without a public option, is the status quo on steroids. It guarantees more business for private insurers. It mandates more spending for health coverage and maybe for health care, which are two different things. It will almost certainly raise the portion of GDP devoted to health services.

But private insurers, at first enamored of the prospect of a captive clientele compelled to buy their product, have thought twice about it. They have decided that they don't want the extra business after all. Their margins, which currently run in the 15-to-20-percent range, will get crushed as they take on sicker clients. It is bad enough already that they have to petition state regulators every year for hefty premium increases to keep up with soaring costs. Do you think they enjoy asking for 20-, 30-, even 40-percent hikes? It makes them look bad. Greedy. Cold-hearted. Unlike Wall Street banksters, they actually care about public perception.

Unfortunately for them, Barack Obama needed someone to campaign against in order to save his floundering reform effort. His problem was solved when he picked up a copy of the L.A. Times in early February and read that WellPoint's Anthem Blue Cross subsidiary had filed for a 39% increase in premiums paid on individual policies in California. (That even trumped the 23% hike sought by Anthem for its 11,000 HealthChoice policyholders here in Maine.) Obama immediately went after the nefarious insurers. "If we don't act, this is just a preview of coming attractions," he warned. "Premiums will continue to rise for folks with insurance."

He failed to add that even if we do act, premiums will rise. "Health insurance companies don't determine the cost of health care," pointed out WellPoint spokesman Jerry Slowey, "they reflect it." But Obama has a solution for that. It's called price-fixing. Government panels will be set up to review best practices, ration benefits, and regulate payments to providers. Markets will not be allowed to work because it is assumed that they cannot work.

The new mix of incentives and penalties will insure that there is greater demand for health services. The question is, who will pay? The newly insured, to the extent that they are able (income thresholds to be set by the government), will be forced to pay some. To the extent that they are unable, taxpayers will be forced to pay some. Existing policyholders and their sponsors will pay some (higher premiums). Insurers, becoming little more than regulated utilities, will give up some (lower margins). Providers will be asked to give up some (lower reimbursements). The end result? I predict a crowding out of private carriers, fewer providers per capita, and setbacks in health outcomes, with higher costs besides.

But it will happen so slowly that we will hardly notice. Makes me think of the frog in a kettle of gradually heated water. Unable to detect the change in temperature, it will succumb before jumping out.


update, 04-23-10--same message, this time from David Stockman, OMB Director in the Reagan Administration:

ObamaCare...will give the public sector huge new leverage to control the flow of dollars within the nation’s $2.3 trillion health spending system. The rather predictable outcome is a significant de-monetization of the system in the form of reduced provider incomes, longer cues (i.e. pushing spending into the future), reduced levels of care (i.e. less in-patient care, fewer tests) , and lower quality and availability of care ( i.e. fewer elective hip replacements). All of these forces of rationing and de-monetization will reduce hiring budgets and staff-patient ratios within the system.

Monday Muse

Stevie Nicks

Fleetwood Mac

Landslide

Weekly Wrap

[click to enlarge]

Take a quick look at these two graphs from CalculatedRiskBlog. Above, we see that the Mortgage Bankers Association's Purchase Index, updated every Wednesday, shows that mortgage applications for new homes have slipped to a twelve-year low, despite the soon-to-expire First Time Homebuyer's Tax Credit. Below, notice that initial unemployment claims, updated every Thursday, are stubbornly sticky at 450+ K. Look back to the double-dip recession of 1980-82 and ask yourself whether we should be girding ourselves for a similar chart pattern this time around:

Testifying on Capitol Hill Wednesday, the dean of two-handed economists used both hands to fend off congressional critics. Fed Chair Ben Bernanke delicately dodged questions about shady accounting at Lehman Brothers in the months leading up to the financial-sector meltdown in September 2008. The questions were sparked by last week's revelation that Lehman, prior to its bankruptcy, had used an accounting gimmick known as Repo 105 to overstate the health of its balance sheet. Recall that Lehman was raising capital like crazy during the winter and spring of 2008. Falling for the Repo 105 lipstick, investors in those secondaries eventually got gaffed.

Where were the regulators? Treasury Secretary Timothy Geithner, then heading up the New York Federal Reserve Bank, has used the DNR Defense--"do not recall." Likewise, Bernanke insisted on Wednesday that the accounting tricks were "hidden," even as two Fed officials were on the premises at the time, protecting the Fed's interests in discount-window loans to Lehman. They were there to Follow the Money, but did not follow far enough.

Now today comes the news that Merrill Lynch ratted to both the SEC and the Fed two years ago about Lehman's "aggressive" accounting. Caught, like Lehman, in the vise of the growing credit crunch, Merrill found itself at a competitive disadvantage to a firm cooking its books. Advised then of the tilted playing field, the Fed now claims no knowledge. Huh? As Tyler Durden at ZeroHedge tartly observes, the Fed is simply a tool of the industry and should not be part of any regulatory solution to the current financial crisis:

And this is the Fed that lame duck and financially supremely challenged Chris Dodd wants to put in charge of regulating everything in this country? If that really ends up happening, we are so #&$*ed... but not before Goldman funnels all of Americas' money into its Middle-Class Irredeemable Negative Interest Rate All-market Fund SIV.

How much confidence should we have in Big Ben?

THIS much.

.

Out of Balance, Out of Control

The Economist, in a chilling article on gender imbalances in some countries, observes:

Throughout human history, young men have been responsible for the vast preponderance of crime and violence—especially single men in countries where status and social acceptance depend on being married and having children, as it does in China and India. A rising population of frustrated single men spells trouble.

Not a problem in the U.S., but according to The Atlantic, this is:

[T]his era of high joblessness will likely change the life course and character of a generation of young adults—and quite possibly those of the children behind them as well. It will leave an indelible imprint on many blue-collar white men—and on white culture. It could change the nature of modern marriage, and also cripple marriage as an institution in many communities. It may already be plunging many inner cities into a kind of despair and dysfunction not seen for decades. Ultimately, it is likely to warp our politics, our culture, and the character of our society for years.

Either way, you have unchecked male hormones ready to wreak havoc. Alienation...

at home, on the streets...

...even in academia.

.

Monday Muse

Carrie Underwood

Quitter

Weekly Wrap

Personal consumption: up 3% since Christmas 2008

The American consumer is back, or so the data would suggest. As the graph above shows, personal consumption expenditures fell back in the fall of 2008 and winter of 2009, but have recovered since then. Rallying for the past year, the stock market believes the recovery is real. But is it sustainable?

Intuitively, it would seem that consumption should be held hostage by persistently high unemployment. So where is the money coming from?

Not here:

Disposable Income: flat for the past year

No new income? No problem. The banks will lend it to us, right?

Nope:

Consumer credit: down sharply in the past year

How about under the mattress?

Bingo:

Personal savings: dwindling again

The takeaways from this little slide show:

(1) as layoffs mounted in 2008, consumers rationally cut spending

(2) and started saving;

(3) with jobs still scarce, consumers must now draw on savings.

Today's headline: retail sales in February rose 0.3% from the month before, according to the Commerce Department. January's figures, however, were revised downward, so we are doing little better than running in place. Less than half of the retail-sales volume lost since the cycle peak has been recovered. Further progress will require a significant infusion of new jobs, and soon.

The Golden Bird Flies Over Rumford

Latin rhythms at the Muskie Auditorium

March 10, 2010

Music player here

Monday Muse

"Mama" Cass Elliot

Dream a Little Dream of Me

Weekly Wrap

It was a race against time, as Christopher Columbus knew all too well. After more than a month at sea, his crew was getting cantankerous, and he was not sure how much longer they would follow him through uncharted waters. He knew the earth was round. What he didn't know was how big around. What if he had miscalculated? Perhaps this voyage to the Orient would take longer, a lot longer, than what he had figured.

A possible mutiny was not his only worry. Embedded in the wooden hulls of his three vessels were shipworms, steadily munching away on the cellulose keeping the crew afloat. Known as "termites of the sea," shipworms are not actually worms, but bivalve mollusks. In their larval stage, they invade submerged wood and, fitted with shell "bits" at their front ends, start drilling. After a while they grow to 2-3 feet long, and the infested wood takes on the appearance of Swiss cheese (above). Not a comfortable thought when you're a thousand miles or more from your home port.

Columbus's fleet was now due for some scheduled maintenance. As often as you might change the oil in your car's engine, sailors back then had to haul their vessel out of the water and refresh the pitch applied to the hull to deter the teredos. Any damage would have to be caulked before setting sail once more. Columbus was in dire need of a pit stop, but there was no beach around. That's when he was approached by a government economist.

"What are you doing here?" Columbus demanded.

"I was appointed by His and Her Majesties to count the gold that you said you would find, remember? Besides, I have some good news. The teredos have stopped eating our ships. What do you say we break out a cask of vino?"

Known for his ill temper, Columbus exploded.

"Have you got rocks in your cabeza? So what if the worms have stopped! We're still taking on water through the holes they already made!"

Columbus needed dry land, not a dimwitted sycophant. He was of half a mind to heave the economist overboard to feed the sharks, but sent him off to clean the heads instead.

Over 500 years later, optimistic economists still find favor in royal courts. They make six figures and primp for CNBC. They stand behind presidents and prime ministers at important press conferences and fly to places like Davos, Switzerland, to hang with their buds. They find jobs for their girlfriends at the World Bank. They rock and they roll.

Here in the U.S. they blithely announce that the recession is over. Any month now, they say, we will stop losing jobs. That's when things will be all better. But stopping the infestation is not the same as fixing the problem. Holding at zero net new jobs means that we are still taking on water. We need to repair the damage by adding 12 million jobs.

Today's news from the Bureau of Labor Statistics: the teredos are still chewing. According to the Establishment Survey, 36,000 jobs were lost in February. And what do all those unemployed whose benefits are running out think? That maybe it's time to turn the ship around.

Pushing on a String

Trough? Or cliff-drop?

Still believe this is a typical recession? John Mauldin, in his weekly newsletter Thoughts from the Frontline, would like to draw your attention to the graph above. He has this to say:

The money multiplier, as measured by the ratio of M0 to M1 growth, is at its lowest level ever...the normal, accustomed relationships about money supply and inflation are proving to be wrong. We live in extraordinary times. We are coming to the End Game of the debt supercycle that has lasted for 70 years. Everything is changing in front of our eyes.

Here is what he is talking about. M0 (M-zero) is a measure of the monetary base, consisting of all currency plus central-bank credit. This is the supply controlled by the Federal Reserve Bank. M1 refers to the money available to all us poor folks for our day-to-day transactions. It is the sum of currency outside the vaults of depository institutions plus demand and other checkable deposits issued by such financial institutions as your friendly neighborhood bank (or your predatory Wall Street bankster).

In our system of fractional-reserve banking, M1 is some multiple of M0, as commercial banks extending lines of credit to their customers are required to retain in reserve only a fraction of the total dollar amount of their loans. In this way, money created by the Fed gets multiplied by the institutions doing business with the public. If the Fed wants to rev up business activity, it expands M0, intending thereby to lever up M1.

This is what the Fed is (frantically) trying to do now. Problem is, a dollar of M0 does not go as far as it used to. Twenty-five years ago it grew three dollars of M1; now it buys a measly 81 cents. This begs the Morning After question, what happened? Simply put, banks are reluctant to lend, and consumers and businesses are reluctant to borrow. As Mauldin explains:

Bank lending has fallen percentage-wise the most in 67 years. The actual amount of bank loans is falling each and every quarter, with no signs of a bottom. Consumers are reducing their debt and leverage. Bank loans are being written off at staggering rates. Over 700 banks are officially on watch by the FDIC, with more banks being closed each week.

There is at least $300-400 billion in losses on commercial real estate waiting to be written down. Housing foreclosures are rising and hundreds of billions have yet to be written off. As more families fall into unemployment or underemployment, there will be more writedowns. Is it any wonder that banks are having to shore up their balance sheets and make fewer loans?

Essentially the multiplier graphed above measures confidence. The low level of confidence permeating our economy makes the Fed helpless. Getting out of this mess is up to you and me.

Monday Muse

Nina Gordon

Tonight and the Rest of My Life