A lot of important stuff is cooking here at the end of the year. The headline battles about the tax cut deal and the deficit commission are very big deals, with short and long term implications both policy-wise and politically. You have probably seen enough writing about these headline grabbers (including from me) to keep you awake -- or put you to sleep -- well through the holiday season. But what is going on behind the curtain, away from the headlines, in the fight over banking policy and foreclosure fraud is just as important, and in some ways even more so. The budget deal expires in two years, some of the provisions (including the best one, unemployment extension) even sooner. The deficit commission report was a big moment in an important debate, but between partisan warfare, unpopular policy proposals, and short attention spans, most of what's in there isn't likely to be acted any time soon. But what happens in terms of the foreclosure fraud issue and the fight over banking regulations over the next year will determine whether we have a chance at escaping a Japanese style lost decade. I believe it will have more to do with whether the economy starts to revive than whatever mostly inefficient stimulus this tax cut provides, and I think it will have a bigger impact on whether Obama is re-elected than the tax cut deal or any other big issue coming up any time soon.
What crashed our economy was the speculative, out of control concentration of market power on Wall Street. That is what caused the housing bubble and subsequent housing price collapse, and until the massive underlying damage to our entire economy caused by that collapse begin to get healed, this economy will not get a whole lot better. With 25% of mortgages underwater, and more mortgages and household financial situations than that threatened by a weakened and unstable housing market, working and middle class consumers are not going to be going on any spending sprees any time soon.
The stimulus in the Obama-McConnell-Boehner tax cut deal, in spite of being bigger than the last stimulus, won't stimulate much except the excitement of inside the beltway pundits. The millionaires getting an extra $80,000 plus will buy a few more expensive meals and bottles of wine in expensive restaurants and maybe splurge on some new luxury items, but mostly they will save that money, investing it in safe bond deals while they wait for the economy to recover -- because as corporations have shown the last two years, you can be awash in cash but still not invest it in making new products if you don't think there is anyone out there buying. Middle class folks will tend to spend any extra dollars they have more on lowering their debt and adding to their savings, because with their biggest financial asset -- their home -- worth nearly as much as they thought it would be a few years, they know they have to shore up their financial position. The only folks actually spending more as a result of this deal are the unemployed and poor, simply because they have no choice -- they will be using the money to buy groceries and pay utilities and rent.
There is one other problem with this stimulus, and this is one the macroeconomists aren't getting: the vast majority of this money is going to preserve the status quo. It is stimulus in the sense that it is a lot of government money, unpaid for by any other budget cuts or long term tax hikes, but in terms of how real people will feel it, it is the status quo. People currently getting unemployment comp and various tax credits -- EITC, etc -- will still be getting them. People's tax rates will stay the same, because this is simply an extension of the tax cuts that have been in existence now for 10 years. To the vast majority of Americans -- still hard pressed, still squeezed by higher costs in necessities, still with a lower value home, still worried about their or their family members' jobs- there will be no boost in their take home pay or earnings potential, no new jobs actually being directly created like in the last stimulus bill. I am sure that many folks are happy to hear their taxes won't be going up, but they will have no extra money to buy no new things and no extra confidence that the economy will suddenly get better.
Which brings me back to banking and housing policy. This kind of ineffective weak tea stimulus is the only kind Republicans will be giving Obama in the next two years. But there are ways to significantly boost the economy right now that, between the Obama administration and the state Attorneys General negotiations with the big banks, can actually be done: write tight regulations around the financial reform bill, especially when it comes to issues like the swipe fees that directly pit the Wall St. bankers against main street business; have the DOJ prosecute bankers for using their market power to distort and harm the economy; and especially right now, force the bankers to write down mortgages. If the banks wrote down the mortgages of 5,000,000 underwater homeowners to the level the house was now worth in the market, so that they could stay in their homes and stabilize their financial condition, two very important things would happen economically. The first is that the housing market would finally begin to stabilize and recover- neighborhoods would no longer be riddled with abandoned homes and unkempt properties. The second is that all those homeowners, their debt reduced and their long term finances stabilized, might actually start spending money again: the multiplier effect would be big. Wall St will go into high pitched whining mode, but according to numbers one economist showed me, the profits that doing this would cost the banks would only amount to half the bonus money they paid out the last couple of years. The banks will scream bloody murder, but they will be just fine if we force them to write down these mortgages.
This is also actually the right thing, the moral thing, to do. The big banks on Wall Street destroyed this economy, and made out like bandits in the process. It should now be up to them to have to sacrifice to make things right again. But -- with all other possibilities of big boosts to the economy walled off by Congress -- this is also the only policy option the administration and the state AGs have to help get us through the bad times from this damaged economy.
Here's the other thing this does: it changes the political dynamics completely. It would show more clearly than any other thing the President could do that the Obama administration is on the side of hard-pressed middle class homeowners. And because the bankers will be squealing to high heaven, and their Republican friends on the hill taking up their cause, it will be obvious who is on what side. Pushing the banks hard to write down these mortgages is the best thing the administration could possibly do economically, morally, and politically.
The administration as a whole, which includes a lot of different components, does not yet see this. I think Elizabeth Warren gets this, and from what I am told some of the lawyers at DOJ get it and are chomping at the bit to exert legal pressure on the banks. Some of the political staffers I talk with are starting to see this dynamic as well. However, Treasury certainly doesn't seem inclined in this direction, and certain agencies especially the Office of the Comptroller of the Currency are completely in the tank for the bankers. One state AG told me that the "OCC has the attitude that the banks are perfect", and are resisting the AG's investigations and negotiations in every way they can.
I don't know what will happen with the administration. I am hopeful that it will sink in soon that the economy isn't going to get better very quickly, and that the political team will realize that taking on the big banks on behalf of hard pressed homeowners is a political winner. But no matter what the administration does, I do hold some hope for the state AGs as they negotiate with the banks. They are led by Tom Miller, an old friend of mine from Iowa and one of the most honest and pro-consumer politicians I know. Tom is meeting today with community activists from around the country, and I know that his heart is with them. Whatever the Obama administration is doing, I have hopes the AGs can put enough pressure on the banks to move this in the right direction.
If we can finally start getting to the heart of the problem -- the bankers and irresponsible system they created -- we can finally start rebuilding this economy. That will be a fight, a big one because no politician likes taking on these banks. But that kind of fight might actually start moving our politics in a better direction as well.
Cross-posted at my home blog, OpenLeft, where you can find all of my writing on Wall Street, the economic crisis, and U.S. politics in general.
Theory has it that Canadian banks are in far better shape than their US counterparts. If so, it's primarily because the Canadian Central Bank (Bank of Canada) has assumed nearly all the default risk on Canada's massive property bubble.
Is that supposed to make everyone stand up and salute the Loonie?
One key point that has recently come into the spotlight is Canadian citizens are not in better shape than their US counterparts. All those going "rah rah" over the Loonie, might be advised to consider some of the following articles.
Canadians warned to rein in borrowing on cheap money before it's too late
Bank of Canada governor Mark Carney issued a staunch warning to Canadians about the perils of cheap borrowing Monday, just as fresh data suggested household debt-to-income ratios have jumped to record highs.
"Household debt levels are at unprecedented levels relative to income — the level of vulnerability of households remains high," Carney told a news conference after a speech in Toronto.
Statistics Canada said Monday the ratio of debt to disposable income rose to 148.1 per cent in Canada in the third quarter — a close to five point jump — slightly ahead of the U.S. ratio of 147.2 per cent.
TD Bank chief economist Craig Alexander said it was natural that the government would explore ways to constrain borrowing, but said he also does not believe the situation has reached a crisis.
Apparently TD Bank chief economist Craig Alexander thinks it's best to wait until there is a crisis to do anything about it.
No doubt Alexander is a big believer in the Greenspan methodology of dealing with bubbles after they burst even though we have already seen the disastrous results of such complaisance.
Here's another good one from up North: Consumers warned: 'brutal reckoning' ahead
Bank of Canada governor Mark Carney issued another stern warning Monday on Canadians' appetite to take on record levels of household debt, which some analysts took as a signal he is set to raise interest rates as soon as the economy improves.
"Cheap money is not a long-term growth strategy," Carney said. "Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning."
In Ottawa, Finance Minister Jim Flaherty said his government could tighten mortgage eligibility rules for a third time, if required, to keep credit growth in check.
Based on conversations he's had with banking executives, "there is no reason for extreme concern right now," Flaherty said. "But there is a reason for concern. So if it is necessary, we will toughen up the mortgage rules some more."
What's with this "no reason for extreme concern right now" nonsense? The Canadian property bubble is of epic proportion.
Flaherty too, appears to be a proponent of the Greenspan theory that bubbles can only be recognized in hindsight.
Blue Ribbon Complacency Awards
The blue ribbon for complacency goes to the Bank of Montreal for Debt picture not so bleak
Statistics Canada released data Monday showing that Canadian household debt has risen to 148 per cent of disposable income. The eye-popping figure is all the more alarming considering it's the first time since the 1990s that Canada's ratio has been higher than that of the U.S.
Alarm bells rang everywhere from the Bank of Canada to the Finance Department on Monday, and Canadians were urged to tighten their belts and prepare for a time of austerity.
But a closer look at the numbers indicates the picture might not be so bleak.
"The continued laser-like focus on debt overshadows the other half of the balance sheet," BMO chief economist Doug Porter said Monday.
Namely, Canadians are borrowing. But they're also saving, and they're worth more than they used to be.
Balance Sheet Theory Madness
Porter's statements are exactly the same kind of silliness we heard in the US regarding the central belief "massive debt is OK because it's supported by rising asset prices".
It was bad enough that anyone believed such nonsense a few years ago before the US property bubble blew sky high. That such beliefs still have proponents at the highest level of Canadian banks now seems rather amazing.
It just goes to show just how firm the belief "It's different here" is in Canada.
When housing prices crash, and especially if the stock market goes with it, what's left of Porter's "Balance Sheet Theory" will look something like a moldy slice of 3-year-old Swiss cheese.
Banks Won' Lead The Way
Toronto-Dominion Bank chief executive officer Ed Clark says Banks won't lead way on fixing debt problem.
If policy makers want Canadians to stop borrowing too much, it’s up to Ottawa, not financial institutions, to force a change in behaviour, says one of Bay Street’s longest-serving senior bankers.
Toronto-Dominion Bank chief executive officer Ed Clark acknowledged Canadians’ alarming debt levels, but said the issue is a matter of public policy and would be best resolved by a tighter government rules on residential mortgages.
In an interview with The Globe and Mail, Mr. Clark said that no bank wants to be the first to impose stricter requirements on borrowers out of fear that it will suffer a major loss of customers to rivals. Personal banking “is a highly competitive industry,” Mr. Clark said. “If we said ‘Look, we’re going to be heroes and save Canada from itself, and we’ll impose a whole new regime on everyone else,’ the other four banks would say ‘Let’s carve them up.’ ”
Mr. Clark said it is impossible to expect any bank to crack the whip on borrowers because “market share loss is perceived as a strategic loss, not just a numerical or dollar loss.”
Dance Until The Music Stops
Clark sounds like he's a big believer in the Chuck Price Music Theory best described in retrospect as "Keep dancing until you dance out the door".
Flashback July 10, 2007: Quotes of the Day / Top Call
Chuck Prince - Citigroup CEO
No End Soon to Buyout Boom: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing".
Mish reply.
If ever there was market arrogance, the statements by Chuck Prince says it all.
In an interview with the newspaper, Prince said the boom will eventually end, but will continue for now because markets have plenty of liquidity, despite turmoil in the U.S. subprime mortgage market. He denied Citigroup was pulling back, the newspaper said. "When the music stops, in terms of liquidity, things will be complicated," he said. "But as long as the music is playing, you've got to get up and dance. We're still dancing.
Prince added: "The depth of the pools of liquidity is so much larger than it used to be that a disruptive event now needs to be much more disruptive than it used to be. At some point, the disruptive event will be so significant that, instead of liquidity filling in, the liquidity will go the other way. I don't think we're at that point.
My comment at the time was "I leave it to you to decide whether or not this is the 'last dance'".
Flashback November 02, 2007: Music Stops for Chuck Prince
The party is over and the music has stopped for Chuck Prince. His last dance is a two-step out the door. Citi's Prince Plans to Resign.
Moral-Hazard Position of Bank of Canada
Toronto-Dominion's CEO does not give a damn about fundamentals, about acting on their clients' interests, or for that matter acting on shareholder interests. Clark's only concern is in not losing market share to the other Canadian banks until the whole mess blows sky high.
Canada's banks clearly don't care what happens as long as they can pass the trash to the Bank of Canada, the Canadian equivalent of Fannie Mae.
Clark's statements, as well as statements made by the chief economists of BMO and Toronto-Dominion, put a spotlight on the decidedly stupid moral-hazard mess the Bank of Canada has gotten itself into by backstopping mortgages of Canadian borrowers.
But hey, look on the bright side. The music is still playing. In memory of Chuck Prince, Keep on Dancin'
Addendum:
I said Bank of Canada in a couple of places where I should have said CMHC.
Here are a couple of corrections from Canadian readers.
"RP" Writes ....
Quick corrections here Mish. Mortgages in Canada are guaranteed by the CMHC, which is a crown corporation equivalent to Fannie Mae. Anything less than 20% down requires this insurance, so that's the source of the Canadian banks' "health". The loose lending standards were set by the current "Conservative" government, a few months after they came in office. We had 0 down, 40 year mortgages insured by the government for a couple of years. Now it's officially 5% down and 35 years, but every bank will lend you the downpayment. The government also insures mortgages for rental properties.
Similarly, "MS" writes ....
Hey Mish,
One inaccuracy that should be corrected. It's the CMHC (Canada Mortgage and Housing Corporation) that serves as the equivalent to Fannie and Freddie, not the BoC. The CMHC insures mortgages for below market rates, and the major banks pass along their loans to them.
The Conservative government ordered the CMHC (a crown corporation) to insure some $300 Billion in additional mortgages during the crisis - nearly double their previous holdings. It is this that has buoyed the Canadian R/E market since then. Banks don't worry about credit worthiness, because the CMHC will take it anyway in order to meet their quota.
"Moi" Writes ....
Mish you are one of the few Americans that seem to "Get It". So many of the other US financial writers talk glowingly about how sound Canada is financially and how the Canadian banks did not take part in the risky lending practices that the US banks have taken part in. This is complete and utter BS!! The Canadian banks are doing the same sort of zero down or variable rate mortgages it's just they have none of the risk to worry about. 600 Billion dollars worth of that mortgage risk is held by the government of Canada thanks to the Canada Mortgage and Housing Corporation (CMHC). There are cash back mortgages every where in this country. In other words come up with your measly 5% down payment and the bank will give you 5% back. So here in Canada we proudly brag about how we do not have zero down mortgages, we just call them by a different name. Also, if you do not have 5% to put down no problem. All of the banks will loan you money to by an RRSP (IRA), you can than cash that RRSP to be paid back later and use that as your 5% down payment. Voila, zero down mortgages.
The Canadian Association of Accredited Mortgage Professionals came out last month with their "Good News" annual report last month. Just like the Real Estate Industry, all news is good news. Take a look at the numbers. At these absolutely rock bottom interest rates:
100,000 mortgage holders would be in trouble with any rate move.
350,000 mortgage holders would be in trouble if rates only go up less than 1 percent.
250,000 mortgage holders would be in trouble if rates went up between 1 and 1.5 percent.
So, if interest rates which are at Century lows went up a measly 1.5 percent, 700,000 mortgage holders in Canada would be in trouble. What if they went up 2 or 3%? It would be mortgage Armageddon in Canada. This is how precarious our housing market. The following link gives you just one tiny example of why Canadian housing is a house of cards that could topple at the slightest touch.
http://whispersfromtheedgeoftherainforest.blogspot.com/2010/05/pardon.html
http://www.theglobeandmail.com/report-on-business/canadian-mortgage-debt-tops-1-trillion-for-first-time/article1789172/
5% or more cash back mortgage:
http://www.tdcanadatrust.com/mortgages/5_cashback.jsp
http://www.rbcroyalbank.com/products/mortgages/cash-back-mortgage.html
Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
Obama <b>news</b> conference: liveblog – CNN Political Ticker - CNN.com Blogs
Washington (CNN) -- President Barack Obama held a news conference Wednesday to discuss the lame duck session of Congress and plans for the upcoming year.
Bad <b>news</b> from freed detainee: The Jews used witchcraft on me at <b>...</b>
Bad news from freed detainee: The Jews used witchcraft on me at Gitmo.
WikiLeaks documents leaked again : Views and <b>News</b> from Norway
“I have no comment on how we secured access to the documents,” Aftenposten's news editor Ole Erik Almlid told DN. “We never reveal our sources, not in this case either.” DN also reported that WikiLeaks spokesman Kristinn Hrafnsson had ...
bench craft company scam
No comments:
Post a Comment