In this post I want to focus on some different issues related to each other only by the fact that they depend on some temporary, non-recurring factors. This is an invitation for discussion and I will gladly accept additional contributions.1. Apparently presidential elections make it impossible for the Federal Reserve to make additional tweaks in the monetary policy until November. Even a well established chairman couldn’t do that, and newcomer Ben has his wrists tied. We’ll have 2% Fed funds rates till the end of the year.
2. Calculated Risk reported that China is making huge stockpiles of oil before Olympics. It could be a huge embarrassment for them to have any disruptions in gasoline supplies during the games. Once the games are over the oil purchases by China will decline
3. Something else about oil and elections. Bush is still making purchases into the strategic petroleum reserve. He let his buddies to drill oil in Texas and Alaska, and then pumps that oil back into strategic caverns and make all of us pay $125 per barrel for that procedure. Nice to have a buddy like that. I’d love to move some marbles from my right pocket into left one and be paid for that the record price in history. This nonsense will end in January, unless voters will do their nonsense the third time in a row
4. The congress is proposing the Frank mortgage reform, details are here. Bush already expressed his veto plans, he’s playing the new Andrew Mellon creative destruction policy. We just entered the next Kondratieff Winter, last time we’ve being there in 1930s and we are getting the new Mellon again. It seems to me that the congress and prez are in grind lock. Congress is unlikely to compromise because they will have their own prez next year. And this prez will never miss the opportunity to show his middle finger to the Congress, foreclosures be damned. In general, it is very unlikely to see any help from those two until next year, the time of stimulus packages is over. I think the economy will be in tailspin when the new president will take office
5. Now about crop seasons and animal murdering. The jump in grain and corn prices is so painful that the new trend is developing. The meat producers are killing a lot of animals because feeding them is not economic anymore. The huge fridges are filling up fast. The result of that is that this fall we’ll have a huge amount of extra crop as dead animals are not eating. I expect the prices to go down and export grow, which should help the trade deficit
Mortgage stimulus package
Now let’s get back to the item #4 from above. In his post Mish is sharply against this bill and he’s even asking his readers to call White House and support the veto. Mish is a very sharp guy and I’m learning a lot from him, but this time I sharply disagree. My main arguments are:
- The taxpayer is on the hook one way or another anyway. It’s a very long discussion, but the direct costs of bailing out financial institutions (including possible troubles at GSEs) and indirect cost of declining fixed income returns because of the prolonged Kondratieff Winter far exceeds the $20 or $30 bln that this bill will cost. We can easily save a trillion
- The lenders are paying immediately and upfront. The taxpayer will pay far less and over long time
- The government will receive the upfront insurance payment
- Bernanke is saying for months that the only way to fight foreclosures is to create the incentive for lenders to write down the principal. That’s what the bill is doing
Maybe it’s good to delay this bill until the Democratic president is elected and make the bill right instead of making unnecessary compromises with Bush, but in its current form it’s the right medicine applied where it hurts
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Bernanke is saying for months that the only way to fight foreclosures is to create the incentive for lenders to write down the principal. That’s what the bill is doing
I don’t see an incentive other than that the loan will now have a federal guarantee. So for the lender the writedown is like a big upfront insurance premium (I guess the borrower pays that back over time) — the taxpayers are basically putting a floor under potential losses by (irresponsible and greedy) lenders. Which reeks of ‘moral hazard’.
I don’t at all like — or really understand (will have to think a bit more about that) — the part where the borrower is awarded “equity” in an amount equal to the amount the loan is written down.
And I don’t see why taxpayers must or will necessarily be on the hook — I would like to see it demonstrated that otherwise the consequences will be catastrophic for the economy. In those comical hearings about BSC before Congress, no one was ever asked to explain exactly how a BSC bankruptcy would have been so terrible. Not one single chart or power point slide.
No one has a right to own a home.
Personally, I find industrial scale homebuilding of the kind engaged in by the big public builders to be abhorrent. It ravages the land. So it want to see it good and dead, with a stake driven throught its heart.
Eah, very nice to see you here!
Let’s concentrate on 2 problems - moral hazard and taxpayers being on the hook.
For the borrower I’m not sure there is much moral hazard: his choice is quick default that will solve his immediate problems but will move him out of the middle class into poor class or hook him into very painful mortgage for another 30 years. He will remain in pain, so I’m not sure any prudent borrower will envy him.
For the lender there is an immediate upfront charge of 15%. Is that moral hazard? Yes, because otherwise he would lose 30%-40% on foreclose. Will the prudent lender envy him? I don’t think so. Most imprudent lenders are already out of business. If there are any imprudent lenders still alive the 15% haircut on bad loans will probably kill him anyway. So we are bailing out prudent lenders. All prudent lenders have some non-performing mortgages and are likely to participate. So the moral hazard is very small.
Are taxpayers on the hook? The program size is $300 bln. They claim the loss will be about $2 bln. Baloney, let assume $30 bln. Let’s count. The budget deficit is projected to jump from $200 bln to $500 bln. The local budgets will lose another $300 bln. So the cost of the recession for taxpayers is $600 bln per year or $50 bln per month. If this bill will make the recession 1 month shorter it will produce $20 bln of savings for the taxpayers
Andy, the gov’t was pumping 70,000 barrels per day into the Strategic Petroleum Reserve–that’s roughly .08% of worldwide production. The rule of thumb is that a 1% increase in demand will cause roughly a 10-15% increase in price, all other things being equal. So the supply going into the SPR has raised oil prices roughly 1.2%, or roughly $1.50 a barrel assuming the price is $125. That means it’s raised gasoline prices roughly 4-4.5 cents a gallon.
China is actually experiencing shortages of gasoline and diesel: http://www.chinadaily.com.cn/china/2008-05/13/content_6681648.htm The “huge stockpiles” are actually due to a temporary “strike” by refiners in China, who either need increases in subsidies to keep making product, or an increase in product prices. We’ve seen this exact same situation three times in the past year. Soon the refiners will come to an agreement with the gov’t, and they’ll start making product and buying oil again.
Re: the dead animals, just watch meat prices this fall.
“The result of that is that this fall we’ll have a huge amount of extra crop as dead animals are not eating. I expect the prices to go down and export grow, which should help the trade deficit”
Perhaps….but with consumption falling off a cliff I expect China will have a huge food problem and a lot of dollars to recycle.
I like the new web page
“The result of that is that this fall we’ll have a huge amount of extra crop as dead animals are not eating.”
Uh that’s not very accurate and from what you said you don’t sound like you know what you are talking about when it comes to ag commodities.
You won’t have a huge amount of ‘extra crops’ people can eat. You might have a brief surplus of *animal feed* which when its price comes down means that ranchers and others who raise ag animals will get back in the game as their feeding costs will have come down some. But the prices of the animal feed won’t go back to their lowest points so down the line expect meat and poultry and milk prices to rise in the long term.
The only other thing the surplus of animal feed might be good for is diversion into biofuels. If that happens you’ll see pump prices go lower but it will still mean ag product prices go up long term once the glut of killed off ag animals works its way through the system.
Loyal Reader - thanks for the correction. Question - as farmers already knew that the demand for animal food will drop, was it too late for them to switch to something else back in April?
We also know that stretched consumers are downscaling in food habits, i.e. replacing meat with peanut butter, it may happen that meat prices will increase only marginally
“Maybe it’s good to delay this bill until the Democratic president is elected and make the bill right instead of making unnecessary compromises with Bush”
What if with the democrat in the White House the bill would be even worse? Now they need to compromise and not go all in with a bailout plan. With the democrats controlling everything there is not guarantee that it would be right.
I also do not agree with this statement:
“or the borrower I’m not sure there is much moral hazard: his choice is quick default that will solve his immediate problems but will move him out of the middle class into poor class or hook him into very painful mortgage for another 30 years.”
What kind of pain are you talking about? Moving to an apartment and paying half what you’d be paying otherwise? Not being able to live off of ATM anymore? Having their credit ruined and having to buy for cash? Living within your means?
PeterB, if one ruin his credit he can’t borrow to send kids into colledge. Also, many corporations check the credit. If you have a foreclosure you won’t be hired even if you pass the interview. It’s just a policy that every new employee must not have a credit score below certain point. And that was your profession to work in that kind of corporations? Become a burger flipper?
Downey stats just out today. Non-performing assets (in mortgages only) jumping from 11.9% to 13.24% in one month. If you don’t count restructuring then NPA jumped from 7.4% to 8.6%. I heard that any bank with NPA above 3% eventually (could take a while) BK.
Deposits dropped by $180 mln in one month
Ok, I was wrong - S&P closed at 1423, which is above May 2nd intraday 1422. Well, then we are in the rally yet.
VIX is 16.3, sounds like a concrete floor. Last time VIX was that low at October 11. But my main complain is that financials are well below levels of 2 weeks ago.
re: Mortgage stimulus package
Why should the taxpayers pay to give lenders an incentive to be honest? Why not enforce rules mandating honesty in corporate accounting. We could start by getting rid of the rule allowing “level 3 assets” marked to make believe. The rules should be simple: assets that serve as collateral for a loan must be marked to market. Assets that are owned 100% can be carried any way they want.
Obfuscation, about punishing the scamsters - count me in
Right here, with a big stick…
1. Now that OPEC exporters are awash in excess dollars expect them to cut back on exports, to reduce their surplus dollar collection. If an exporter is making a 4 Billion a month exporting oil but only spends 1 Billion a month, it doesn’t make sense to continue to export at the maximum rate trading a valuable commodity for declining dollars. Probably by the fall I expect selected OPEC nations to cut exports below their quotas. Nothing in the OPEC charter states that an member has to meet its quota, only that its quota can’t be exceeded.
Consider than Gulf Sovereign funds are holding off recycling dollars back into consuming nations because of fears over losses. Now cash is starting to pile up, and that cash they can’t put to work without taking on huge risks. The solution is to simply cut exports to reduce or eliminate accumulating dollars.
Its possible that the price of oil will reach near $150 by the end of year, despite demand destruction.
As long as production declines below demand, price will remain high or go even higher.
FWIW: People bitch at OPEC, but they forget that all thier petro-dollars have been recycled back into our economies. They could have simply choosen export only enough oil to match their consumption of western goods and services. Instead they reinvested surplus capital back into the West. The No-OPEC lawsuit bill is slap in the face.
2. Ben “Arthur” BURNanke’s plan to reduce mortgages by 15 to 20% is doomed to fail. Property values in regions facing mortgage problems (ie Florida, Nevada and California) have already dropped at least 15%. We know that prices will slide much lower. By the end of the year, national price declines will be more than 15%. A lot of borrowers are losing their jobs, becoming under-employeed or simply can’t afford to pay a reduce mortgage with increasing property taxes* and higher food and energy costs. Borrowers will continue to walk away from there homes unless their total housing costs (mortgage+taxes+insurance+energy…) are below what it costs to rent. When housing prices were appreicating, borrowers were willing to shell out more costs for housing, on the expectation they could sell at a higher price. That incentive is gone.
* Towns and Cities are raising property taxes as tax revenues fall and costs for energy, muni bond interest rates and other expenses soar. Property taxes in my town are rising about 7.5% this year.
3. Any gov’t bailout to “fix” the mortgage mess is going to cost far more than anyone expects. Its likely to exceed $3 Trillion over the next two years, which isn’t something the gov’t is sitting on. While I think its a bad move, I have no doubt that it will happen in 2009. When its all done, the US will still face a depression and the US dollar will lose more than half its value. At best the bailout will buy a failing US economy a few extra months and ease the pain. There is no “easy fix”, yet Congress will go on believing a bailout will fix everything. Just Look at Japan twenty-years of bailouts and still no end to deflation.
3. A break up of the EU is about to begin as southern Europe (France, Italy and Spain) are falling to pieces as the European housing bubble has popped and the Credit crunch sinks in. These countries are facing large job losses and face a near term hard recession. They need the ECB to cut rates, and its likely the ECB will stick to thier inflation target. I would expect that at least one of southern European nations to leave the EU by the early 2010, if not sooner.
Obfuscation wrote:
“Why not enforce rules mandating honesty in corporate accounting. We could start by getting rid of the rule allowing “level 3 assets” marked to make believe.”
Banks are already facing serious problems. Why add fuel to the fire? There is no point in pushing this issue, except if you want to live in a Mad Max society. If you mandate that that all the banks must mark down “level 3″ assets you’ll see many banks simulateously fail, as investors demand their money back, issue class action lawsuits, and refuse to loan any money to any bank. It would be far easier for the system to cope if they fail one at a time, rather than all at once. Congress and the Fed would fight any such measure to force banks to mark down level-3 assets. Sooner or later banks will start selling off level-3 assets to raise money, and they will be sold off at real market value. (ie Citi’s $400+ billion assett sale annouced earlier this week). Selling off assets into the market makes more sense than trying to guess at the real value anyway.
Citi’s selloff plan sounds reasonable and will fair better than other banks that delay selling off their level-3 assets. The first seller always gets the highest value. The second and third sellers sell into a saturated market and are forced to accept lower payments for the same type assets (assuming that they find buyers). Of course if all the banks attempt to sell off their level-3 assets it would be banking armageddon!
#1 Can’t agree more with last comment, I’ve seen the rural landscape I knew as a child turn into vast expanses of tract housing. It sickens me, all that good farmland we will need someday ruined for short term gain.
Ag issues relating to meat production are still in early stages but the overall problem is that meat producers need a breeder herd to create market production. With the large imput cost not only of feed but also land,fuel and related equipment have made it uneconomical to hold large breeder herds this holds for hogs, poultry and beef. So farmers have been sending breeder stock to slaughter which does create larger inventory but in time demand will outstrip production and prices will move up for America’s basic meat products.
The other trend in Ag of interest is the entire cost of production given the steep rise in basic imput cost of energy and pestcides. If we go back a few years to the 50’s & 60’s it was the introduction and large scale application of nitrogen and pestcides that created our Ag miracle which significantly pushed up production and .
We may be reaching another tipping point in AG production whereby the higher imput cost of energy negates the benefits of massive energy intensive farming. The 160 acre farm that has been replaced by the 5000 acre farm may see in life in the coming years but the cost for food would still be high
as the leverage gained from cheap energy is lost.
#13
It sickens me,…
Yes. I’m hoping karma shitcans those bastards. Unfortunately I’m mostly still waiting…
Volatility itself is very volatile lately. VIX is jumping 7%-9% up and down. Is there any way to plot the volatility of volatility, could be quite useful to have a chart like that.
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Thanks a lot!
Techguy:
Great insights on OPEC, mortgage bailout, and EU!
Question: Do you think it would make Euro stronger or weaker if Spain, for example, dropped out?
Re: banks and accounting.
You may very well be correct that banks will fail if they cannot stand on strict accounting principles. I’m also inclined to agree that it would be less harmful to the economy if banks failed one at a time and not all at once.
However, I would like to point out that Citigroup is not selling off level 3 assets: they are selling off prime, profitable, retail operations.
Maybe the banks shouldn’t fail all at once, but if they are insolvent, keeping them on life support, draining the life of teh living will also be a disaster.
Oh no, they ARE selling level-3 assets, just for from home:
http://www.businessspectator.com.au/bs.nsf/Article/Citibank-sells-A500-mln-RMBS-to-21-investors-EP879?OpenDocument
They hope we won’t notice?
“Question: Do you think it would make Euro stronger or weaker if Spain, for example, dropped out?”
I really don’t know. I think the Euro stability really depends on how good or how bad its export market holds up. If exports some how remain strong (ie Global decoupling), the Euro will probably strengthen whether Spain stays or leaves the EU.
Another important factor is how the credit crunch will affect them. One of the reasons why the Euro stopped\paused rising is because of credit concerns.
If EU members do leave its likely to result in the complete break up of the Union as one by one, countries separate. The point of the Euro was bring stability and make international trade easier.
“However, I would like to point out that Citigroup is not selling off level 3 assets: they are selling off prime, profitable, retail operations.”
Well I haven’t see any statment that specificially states the sale of “level 3″, but nor have I seen any statements that excludes them from “asset sales”. I have to assume that they would be selling them.
Re: If EU members do leave its likely to result in the complete break up of the Union as one by one, countries separate. The point of the Euro was bring stability and make international trade easier.
And, instability would make the dollar stronger again. Wouldn’t it be amazing if a housing loan bubble split-up the EU, causing the world-wide slime to buy protection dollars. HA! Almost too funny to think about. It would be fun to read the history of this era in 100 years if THAT happened. “… the American future preserved by the Herculean efforts of Ben Bernanke and the greatest president in history John McCain …”
John will win, btw. No way on earth the largest racial group in the US is going to vote for “one of THOSE people”. They’re STILL pissed off about the civil rights movement and “those liberal democrats!!” (and day hate da troops TOO!!!)
I think Spain problems will only bring some minor weakness to euro they don’t mind anyway. I think for Europe it will be just a regular mild recession, one of many.
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