Fin/Inv

Airtime: Mon. Mar. 15 2010

S&P affirmed Greece’s BBB+ credit rating and took them off credit watch with negative implications but the outlook is negative from stable (which reflects their view of the govt’s ability to sustain reform momentum in the medium term). S&P said “we view the Greek govt’s total package of deficit reduction measures as appropriate to achieve its 2010 fiscal target, given the deterioration in Greece’s growth prospects.” They see “real GDP contracting by 4% this year.” “Despite the new measures, we think it will be difficult for Greece to comply fully with its planned consolidation path…if it does not implement additional measures in teh coming years.”

S&P 500 – Weekly Chart

courtesy of Fusion Analytics Investment Partners

As seen in the chart above the S&P 500 is retesting its highs from last week near 1,150. Given this is the first attempt at overtaking 1,151 and the index has to come up over 10% just to get there we are expecting some sort of pullback at least in the short run.

As long as the index stays above its recent pivot lows and uptrend near 1,045 the long running recovery rally is still in place. Should the S&P 500 defy logic here and blow through the 1,151 area without any pause then the secondary upside target is the 1,200 region.

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Kevin Lane is one of the founding partners of Fusion Analytics, and is the firm’s director of Quantitative Research. He is the main architect for developing their proprietary stock selection models and trading algorithms. Mr. Lane is a member of the Market Technicians Association.

For more information about Fusion institutional research & trading, please contact us at

Trading/Institutional Contact

Last night I mentioned the astounding DTI (Debt-to-income) of HAMP modification borrowers who were converted to a permanent modification: 2010: REOs or Short Sales?

Click on chart for larger image in new window.

If we look at the HAMP program stats (see page 6), the median front end DTI (debt to income) before modification was 45%, and the back end DTI was an astounding 76.4%!

Just imagine the characteristics of the borrowers who can't be converted!

Here is a table putting the numbers in dollars:

Median Characteristics of HAMP Permanent Modification
	Before Modification	After Modification
Monthly Income	$2,702.77	$2,702.77
Front End (PITI & HOA)	$1,216.25	$837.86
Back End (total)	$2,064.92	$1,616.26
After Debt Income	$637.85	$1,086.52

Front end DTI includes Principal, Interest, Taxes and Insurance (PITI) plus any homeowners association fees.

The back end DTI includes PITI and HOA, plus installment debt, alimony, 2nd liens, and other fixed payments.

That left the median borrower before modification with only $637.85 not including payroll taxes ($206.76), income taxes, utilities, food, and other monthly expenses. No wonder the borrowers were delinquent.

Now these median borrowers have $1,086.52 to pay all those expenses after the to 59.8% DTI bank end ratio. Remember this is gross, and is before the $206,76 in payroll taxes and an income taxes). Although this is an improvement, I expect many of these borrowers to redefault.

Barron’s notes that the M1 money multiplier biweekly indicator is worth watching closely.

Why? Because the multiplier is declining “corresponds so exactly to the expansion of the Fed’s balance sheet It hits at the core of the problem in a credit crisis. Until [the multiplier] expands, we can’t get sustainable growth of credit, jobs, consumption, housing. When the multiplier starts to go back up toward 1.8, then we know the psychological logjam has begun to break.” (Constance Hunter, economist at hedge-fund firm Galtere).

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The M1 Money Multiplier (biweekly)

Source: St. Louis Federal Reserve

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Source:
Reserved Banking
Leslie P. Norton
Barrons MARCH 15, 2010

http://online.barrons.com/article/SB126843827248361291.html

Die Eurozonenpartner beklagen sich, daß Deutschland durch seine schlechte Binnenkonjunktur deren Exporte nach Deutschland ausbremst. Bundesregierung und Industrielobby sind auf diesem Ohr Taub und argumentieren nicht das Import- sondern statt dessen das Exportthema und die deutsche Wettbewerbsfähigkeit. Doch die eigentlichen Sündenfälle liegen auf der Seite des deutschen Imports aus der Eurozone.

I have a few good quotes about secular bear markets in The Bear: Dead or Just Sleeping?:

“And, in fact, many in the bear camp believe the market is destined to meet its maker as soon as the Fed starts to raise interest rates – which could happen late this year.

“When rates go up, it becomes more expensive to borrow, corporate profits slide – all the negative things that take place that make the market less appealing as an investment opportunity,” Mr. Ritholtz says.

In fact, Mr. Ritholtz is one of several commentators who believe this rally has merely been a temporary cyclical swing in the midst of a longer-term bear market – one that began roughly a decade ago and is far from over. These long-term, or “secular,” market trends tend to last 15 to 20 years.

“This does not have the characteristics of a secular bull market,” Mr. Ritholtz says. Not only would it be starting ahead of schedule, he argues, but even at the market lows of a year ago the stock valuations were never as low as they typically get at turning points in secular market trends.

“In the past, at the start of these big secular bull markets, you have really cheap stocks … I’m not sure we ever got to that point,” he says. “Stocks became reasonable in March [2009] for a month. Now, there are plenty of stocks that are expensive and there are plenty of indexes that are pricey.”

There is a lot more in the article . . .

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Source:
The bear: Dead or just sleeping?
David Parkinson
From Thursday’s Globe and Mail
Published on Thursday, Mar. 11, 2010 XXX http://www.theglobeandmail.com/globe-investor/the-bear-market-dead-or-just-sleeping/article1497020/

Several readers have asked me my views about Paul Krugman's latest column concerning China's currency.  I addressed this topic in a column about a year ago.  My views have not changed.

Weather impacted Feb Housing Starts totaled 575k annualized, 5k above estimates but down from 611k in Jan which was revised up by 20k. Permits totaled 612k, 11k above expectations but down from 622k in Jan. With both starts and permits, single family and multi family categories fell. Single family construction fell in the Northeast and South but rose in the Midwest and West. Weather notwithstanding, builders have been getting ready for the spring selling season and the last hope, for now, for people to take advantage of the upcoming expiration of the home buying tax credit while mortgage rates remain historically low. So, from an inventory perspective on one hand we want lower starts but on the other, builders have boosted GDP in the hopes that the buyers come out for new homes rather than existing ones. The housing stimulus party is about to end so we’ll see what gets squeezed in while it still lasts and what kind of hangover we see after.

T.R. Reid hosts a Presentation of Money-Driven Medicine on Link TV (see reception information) As taken from Maggie Mahar’s Health Beat Blog. A special investigative TV program is being aired detailing healthcare costs and the healthcare system. The topic is timely and well worth the time watching in order to gain a greater understanding on what is wrong with healthcare in the US.

A post by Edward Harrison.

I was talking to a friend of mine who does emerging market investing for a living and I asked him what he made of recent China-bullish comments by Stephen Roach. 

The Morgan Stanley Asia head was in Germany speaking to German business daily Handelsblatt last week. The guys from Handelsblatt wrote up a piece called “In China bildet sich keine Blase an den Märkten” which translates “China is not creating a market bubble.” Unfortunately, the story is behind a pay wall (and it’s in German anyway). But Gwen Robinson of the FT got the inside scoop and posted “Roach: Pooh-pooh to Chinese bubbles” at FT Alphaville. She writes:

As Roach notes, the Shanghai A-share composite index soared 3.5 times in the year ending October 2007 before plunging more than 70 per cent in the ensuing 12 months.

And every China watcher knows about the surge in nonperforming bank loans that required a major recapitalization of a nascent Chinese banking system less than 10 years ago.

But these problems were mere bumps in the road, in retrospect. Roach explains (our emphasis):

That’s because Beijing was vigilant in preventing asset and credit bubbles from spilling over into the real side of the Chinese economy. This was very different from the Japan endgame of the late 1980s, where the confluence of equity and property bubbles led to a massive overhang of excess capacity.

What’s more, he adds, it stands in sharp contrast to the more recent US experience, where property and credit bubbles pushed up homebuilding and personal consumption to nearly 80 per cent of US GDP prior to the bursting of the subprime bubble.

Of course, China is “hardly the poster child of macro stability” – with exports and fixed investment surging to nearly 75 per cent of Chinese GDP and private consumption at 35 per cent and still falling, China’s macro imbalances are in a league of their own.

But in Roach’s view, these distortions are less of an outgrowth of asset and credit bubbles and more a by-product of a conscious strategy of externally-oriented economic development.

While China can hardly avoid bubbles, he notes, it has been successful in preventing them from destabilising the real economy.

Because of the spate of China currency manipulation/protectionism stories hitting the wires (see my links post), I had been thinking about 1931 a lot recently – more on that later. But when I asked my friend what he thought of Roach’s comments, he said: “I think China is indeed Japan in 89/90, but potentially magnified.”

Let me explain. Contrary to current folklore, the reign of Paul Volcker was not one of extreme inflation hawkishness and anti-bubble moral suasion. In fact, there were serious animal spirits building in the U.S. in part due to a September 1985 Plaza Accord, in which the major countries all agreed to depreciate the US dollar. The exchange rate plunged a fantastic 51% before the carnage was done. And as anyone will tell you, currency depreciation is inflationary – either for consumer prices or asset prices or both.

By February 1987, the U.S. Government was alarmed at the speed of the U.S. dollar’s depreciation and looked to reverse it at the Louvre Accord. The problem, however, was that the U.S. wanted Japan to continue a stimulative monetary policy. Here’s what the accord actually said:

The Government of Japan will follow monetary and fiscal policies which will help to expand domestic demand and thereby contribute to reducing the external surplus. The comprehensive tax reform, now before the Diet, will give additional stimulus to the vitality of the Japanese economy. Every effort will be made to get the 1987 budget approved by the Diet so that its early implementation be ensured. A comprehensive economic program will be prepared after the approval of the 1987 budget by the Diet, so as to stimulate domestic demand, with the prevailing economic situation duly taken into account. The Bank of Japan announced that it will reduce its discount rate by one half percent on February 23.

The Plaza Accord may have helped correct imbalances, but it also put the Japanese economy into a blow off bubble top that sent the Nikkei into the stratosphere above 38,000. The result was a spectacular bust from which Japan has still not recovered.

So, now that we see the Chinese, with their $600 billion stimulus package and massive increase in credit, causing serious malinvestment, one wonders whether we are seeing a repeat of the 1989/90 excess in Japan.

I have repeatedly pointed to enormous levels of malinvestment in China. Here are a few posts of that ilk.

• Hugh Hendry: China – The Emperor has no clothes Jul 2009
• China’s empty city: the emperor really has no clothes Nov 2009
• The Chinese bubble economy Jan 2010
• Construction in China’s Ghost Towns Jan 2010
• Jim Chanos still bearish on China, talks malinvestment Feb 2010

Yet, we see Stephen Roach’s cogent defence of what is going on in China. He is not known as a perma-bull – - quite the contrary.

So what gives? Is China experiencing a massive bubble or not? If so, will the bubble’s inevitable pop spill over into the real economy in a nasty way as it has done in the U.S. and elsewhere?

These are important questions given the central role China plays in the world economy. My own point of reference has been the 1920s and the 1930s more than the 1980s and 1990s. In the 1920s, Great Britain played the role now played by the United States: military power, declining economic power, anchor global currency, and largest debtor nation. The United States played the role now played by China: rising economic and military power and ‘alpha creditor,’ a phrase our Yves Smith coined. (The key difference is that the U.S. was more advanced relative to Great Britain than China relative to the U.S.)

The section in Charles Kindelberger’s seminal book, “The World in Depression 1929-1939″ on French accumulation of sterling also bears noting. Sterling was weak and the French had been accumulating huge amounts of British pound foreign reserves in 1926. This created a problem for the British because the French could threaten to redeem those pounds for gold under the gold standard then in operation. Kindelberger says:

this accumulation put [French central banker] Moreau in a strong position and [British central banker] Norman in a weak one. As an opening gambit, the bank of France began to convert sterling into gold…

There were threats of further conversions of sterling into gold.

Eventually, the French and British reached a compromise which involved the Federal Reserve Bank of New York lowering interest rates to help the British (and the Germans who had just had their travails with hyperinflation).  The result of this easy money was a blow-off top to the U.S. stock market and credit bubble that had almost collapsed after the Florida real estate boom went off the rails.

When I first posted this yesterday at Credit Writedowns, I failed to mention how I see China [and Japan] as the modern-day reserves accumulator. China is effectively doing what France did by accumulating reserves despite fears of currency depreciation. I think this reserve policy is significant because this is what is behind all of the talk of protectionism and currency pegging. The Chinese are afraid that the U.S. are actively looking to devalue the currency while the U.S. are fed up with the peg and the resultant imbalances.

How this gets resolved, I don’t know. Roach, at a minimum, usually points to increasing Chinese domestic demand (especially via increasing income security by expanding the social safety net). This parallels the situation in Europe where the Germans could increase spending to reduce intra-Eurozone imbalances, something France’s finance minister is on to. As for the Chinese, if they don’t do this, we are headed for some serious protectionist escalation in my view. And, as Ambrose Evans-Pritchard points out, the surplus countries take it on the chin in such a scenario, something we saw in Japan and Germany in 2008.

Clearly, the U.S. role of easy money global saviour in the late 1920’s was played by Japan in the late 1980’s and by China in the late 2000’s. Each time, the speculative mania which the easy money fuelled ended in disaster. 

Eventually, the whole system broke down in the 1930s, with the U.S. playing the protectionist card and precipitating collapse.

I have trouble believing this time is any different. If any of you have a different take on these events -especially in regards to protectionism, please respond in the comments.

Sources

Statement of the G6 Finance Ministers and Central Bank Governors (Louvre Accord) – University of Toronto G8 Information Centre

Charles Kindelberger – The World in Depression

Click on graph for larger image in new window.

Total housing starts were at 575 thousand (SAAR) in February, down 5.9% from the revised January rate, and up 20% from the all time record low in April 2009 of 479 thousand (the lowest level since the Census Bureau began tracking housing starts in 1959). Starts had rebounded to 590 thousand in June, and have moved mostly sideways for nine months.

Single-family starts were at 499 thousand (SAAR) in February, down 0.6% from the revised January rate, and 40% above the record low in January and February 2009 (357 thousand). Just like for total starts, single-family starts have been at about this level for nine months.

Here is the Census Bureau report on housing Permits, Starts and Completions.

Housing Starts:
Privately-owned housing starts in February were at a seasonally adjusted annual rate of 575,000. This is 5.9 percent (±10.0%)* below the revised January estimate of 611,000, but is 0.2 percent (±9.8%)* above the February 2009 rate of 574,000.

Single-family housing starts in February were at a rate of 499,000; this is 0.6 percent (±10.6%)* below the revised January figure of 502,000. The February rate for units in buildings with five units or more was 58,000.

Housing Completions:
Privately-owned housing completions in February were at a seasonally adjusted annual rate of 700,000. This is 5.4 percent (±20.2%)* above the revised January estimate of 664,000, but is 15.5 percent (±13.6%) below the February 2009 rate of 828,000.

Single-family housing completions in February were at a rate of 458,000; this is 4.3 percent (±13.7%)* above the revised January rate of 439,000. The February rate for units in buildings with five units or more was 236,000.

This level of starts is both good news and bad news. The good news is the excess housing inventory is being absorbed - a necessary step for housing (and the economy) to recover.

The bad news is economic growth will probably be sluggish - and unemployment elevated - until residential investment picks up.

Note: on the February snow storms, starts were up in the West and Midwest, and down in the Northeast and South (includes D.C. and Virginia), so the snow probably did impact starts. Of course some builders started spec homes to beat the tax credit expiration - and that boosted starts temporarily.

One Day at a Time, no not the sitcom staring Valerie Bertinelli that many of us grew up watching but the new drama that is now the FOMC where the flip side of their extraordinary accommodation, that of exit, becomes the main focus where they will be literally analyzing the process one day at a time. There is big focus today on whether the Fed will alter the wording on keeping the fed funds rate “substantially low” for an “extended period” but I think the Fed will keep that unchanged as they want to first wait to see the markets reaction to the end of QE by months end. If all signs are then clear, the Apr meeting will see a change in the wording I believe. German investor confidence fell but was 1 pt above estimates and EU officials made progress on Greek bailout plans. China stocks rose off its 4 1/2 week low and commodity prices are following. Their action is the missing link in the run to Jan highs.

Posting will be light this morn, as I am presenting at the NYHFRT today.

The topic: The housing boom and bust, the credit bubble, as well as the stock market crash — where do we go from here and how to repair the financial markets.

Looks like a good crowd of fund managers — I’ll be back before noon.

Financial analyst Meredith Whitney forecasts a second fall in the housing market:

The US housing market will face another retreat while mortgage-backed securities and Treasurys are likely to go through a "material" correction, Meredith Whitney, CEO of Meredith Whitney Advisory Group, told CNBC Tuesday.

"The housing market surely will double dip," Whitney told "Worldwide Exchange."

Government programs to support housing have been "murky" and when the modifications caused by them come to an end, a lot of supply may come to the market and that's when the real-estate market is likely to go down, she explained.

Here's a brief summary of the financial reform bill proposed by Senator Dodd:

• Consumers: A consumer-protection division would be created within the Federal Reserve, with the ability to write new rules governing the way companies offer financial products such as mortgages and credit cards. It would have authority over any bank with more than $10 billion of assets, and certain nonbank lenders.
• Banks: The Fed would oversee bank holding companies with more than $50 billion of assets. Regulators would have the discretion to force banks to reduce their risk or halt certain speculative trading practices.
• Failing companies: The government would be able to seize and break up large failing financial companies. Big companies would have to pay into a $50 billion fund to finance the dissolution of a failing firm.
• Systemic risk: A new council of regulators would be created to monitor broader risks to the economy. The council could strongly urge individual agencies to take specific actions to curb risk.
• Corporate governance: The Securities and Exchange Commission would have authority to write rules giving proxy access to shareholders who own a certain amount of stock. Shareholders would have a nonbinding vote on compensation packages for top executives.
• Hedge funds: Large funds would have to register with the government.

On the surface I don't think it's bad. I don't know much about the details.

I really like the consumer protection part, because a lot of credit card and consumer lending has gotten completely out of control. Will the new regulation result in 20% down payments for houses again? I doubt it. Why would the new regulation result in 20% down payments when the government, via the FHA, is encouraging 3.5% down payments?

I think having a systemic risk regulator is a good idea. I am skeptical about its ability to prevent future financial crises, though. After all, didn't the Fed completely look the other way during the buildup of the housing bubble? When everybody's getting rich, nobody wants to step in and stop the party. I don't see how this changes that innate human tendency.

Inquiring minds are interested in velocity and money. John Mauldin discusses both in The Implications of Velocity. Unfortunately, Mauldin perpetuates three widely believed myths in his article.

Misconception #1: Money Supply Needs To Grow

"Now, there is no exact way to determine the right size of the money supply. It definitely needs to grow each year by at least the growth in the size of the economy, the population, and productivity, or deflation will appear. But if money supply grows too much then you have inflation."

Reality #1:

Money supply most assuredly does not need to grow each year by the size of the economy, by increases in population, or anything else as is widely believed.

An increase in money supply confers no overall economic benefit whatsoever. Over time, money simply buys less and less.

Please consider a few re-ordered sentences of Rothbard's classic text: What Has Government Done to Our Money?

Money is a commodity used as a medium of exchange.

Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its “price” in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.

Money is not an abstract unit of account. It is not a useless token only good for exchanging. It is not a “claim on society”. It is not a guarantee of a fixed price level. It is simply a commodity.

What Is The Proper Supply Of Money?

Continuing from the book ...

Now we may ask: what is the supply of money in society and how is that supply used? In particular, we may raise the perennial question, how much money “do we need”?

Must the money supply be regulated by some sort of “criterion,” or can it be left alone to the free market?

All sorts of criteria have been put forward: that money should move in accordance with population, with the “volume of trade,” with the “amounts of goods produced,” so as to keep the “price level” constant, etc.

But money differs from other commodities in one essential fact. And grasping this difference furnishes a key to understanding monetary matters.

When the supply of any other good increases, this increase confers a social benefit; it is a matter for general rejoicing. More consumer goods mean a higher standard of living for the public; more capital goods mean sustained and increased living standards in the future.

[Yet] an increase in money supply, unlike other goods, [does not] confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices—i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value.

[Thus] we come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the [monetary-unit] gold-unit .

The online book is a great read and I highly recommend reading it in entirety.

Misconception #2: Falling Velocity Causes Economic Activity to Decrease, Requiring an Increase in Money Supply to Maintain the Status Quo

"If velocity does slow by another 10%, then money supply (M) would have to rise by 10% just to maintain a static economy."

Reality #2:

Falling velocity is a result of an increased demand to hold money as opposed to a desire to expand productive capacity or borrow to make purchases. In other words, banks do not want to lend and consumers and businesses do not want to borrow. The Fed can print, but it cannot determine where the money goes, or indeed if it goes anywhere at all.

If the Fed increased money supply by 10%, the most likely consequence would be for money to sit or perhaps make its way into non-GDP producing financial speculation. Thus, GDP would not rise by 10%, instead velocity would plunge.

Congress can get into the act by giving away money, as it does with various stimulus plans but that has encouraged little lasting economic activity. Unemployment checks maintain spending on food and essentials but those are low-velocity activities. And as boomers head into retirement, peak spending behind them, velocity is highly likely to continue its downward slide.

By the way, when figuring velocity is it correct to use M1, M2, MZM, Base Money Supply, Austrian Money Supply, or True Money Supply? Obviously the measure of velocity differs widely depending on what definition of money one uses. In general, the broader the measure of money, the lower the resultant velocity.

Misconception #3: In a normal scenario, banks take money and lend it out 9-10 times over.

"And now we come to the policy conundrum for the Fed. They have pumped a great deal of money (liquidity) into the economy. Normally, banks would take that money and multiply it by lending it out (through fractional reserve banking at a potential 9-times factor), increasing velocity and the overall money supply."

Reality #3: Lending Comes First, Reserves Come Second

Australian economist Steve Keen and I have emphasized reality number 3 on numerous occasions. Please consider Fictional Reserve Lending And The Myth Of Excess Reserves for a lengthy rebuttal to the idea that the Fed expands money supply then banks lend it 10 times over.

Those are three widely believed misconceptions. Unfortunately they continually make the rounds. By the way, John Mauldin is a friend of mine and his columns are usually worth a look.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

I mentioned the Elizabeth Warren presentation on consumer protection at the Make Markets Be Markets.

She was on Charlie Rose last week — here is a small excerpt of the appearance, with a related graphic:

“Credit cards, mortgages, car loans, check overdraft fees. This is all the stuff that you have to do in your daily life to survive economically.

And what’s happened is this is an industry where the business model itself has fundamentally changed. The way the game used to work — let’s start with credit cards. It’s the easiest way to see it. Back in 1980, the credit card agreement for Bank of America, 700 words, would have fit on that one sheet of paper that you’ve got in front of you.

Terms are clear. They kind of figure out well here’s your creditworthiness and here’s how much we have to charge, we’re a little worried about inflation, how much it will cost us to monitor it, we’ll make a little profit. It works. Mortgages are set up pretty much the same way, car loans set up pretty much the same way.

And what happened over time — we got rid of usury laws right at this same point in time — is that the credit card folks, they were the real innovators here. They said we could hold up one or two things in front of you — low, low financing, 7.9 percent. We could hold up free gifts. We could hold up a warm and fuzzy relationship. We’re just the people to do business with.

And then put what are called in the trade “revenue enhancers” back in the fine print, and we can make a lot of money because you won’t figure out what this product costs.

So that one page credit card agreement in 1980 has now grown to about 30 pages. And it’s not just 30 pages, it’s 30 pages of incomprehensible text. The fine print, the “whereas,” the heretofores.”

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Comparison between 1980 and 2010 Credit Card Applications

Let’s Sex Up this Economic Reporting Financial News Express

Final destination Iran? Herald Scotland (hat tip readers Crocodile Chuck and Scott). Seriously Not Good, and timing peculiar given the current official unhappiness with Israel intransigence (as in a move like this undermines US criticism, or simply shows it to be a sham).

CO2 at new highs despite economic slowdown Scientific American (hat tip reader John D)

Big Bailout Banks Slashed Lending In January Huffington Post

Wall Street Dominance of Swaps Clearing Must End, Brokers Say Bloomberg

Strategic default: In come the waves again Ed Harrison

Lawmakers press for action on China currency Reuters (hat tip reader Phil S)

Brazil to Break Patents on U.S. Films, Books, Drugs Reuters (hat tip reader John D)

Letter to the Editor: Stovepiping To Persia Chris Floyd

Memo to Moody’s: It’s Accounting 101, Not Economics Marshall Auerback, NewDeal 2.0

At Lehman, Watchdogs Saw It All Andrew Ross Sorkin, New York Times. In case you had any doubts….and this begs the further question: not only did they choose to ignore Lehman’s bogus accounting, how could they miss all the CDS exposures leading to AIG?

China’s Fragile Economy, Its Housing Bubble, and What It Means To Us: Part I The Daily Capitalist

We need explicit rules for bail-outs Lorenzo Bini Smaghi Financial Times. There was a wee blogosphere spat on this topic recently…

Our Next Economic Plague: Japan Disease Andy Xie, Cajing (hat tip Crocodile Chuck)

An important item from last week I managed to miss: The End of an Era in Finance Dani Rodrik, Project Syndicate

Survey: Readers don’t want to pay for news online Associated Press (hat tip reader John D)

The problems with the Schäuble proposal Wolfgang Munchau. He reads it as a road map for Eurozone exit. Will that ultimately prove to be a formula for breakup, or shrinkage to a more economically homogeneous membership?

Antidote du jour:

Die US-Industrieproduktion ist im Februar 2010 gemäß den gestrigen Daten der US-Notenbank (FED) um saisonbereinigte +0,1% zum Vormonat, den achten Monat in Folge gestiegen! Im Vergleich zum Vorjahresmonat stieg der Output der breitgefassten Industrie um +1,7%, nach +0,8% im Januar und -2,3% im Dezember 2009!Im Chart die monatliche prozentuale Entwicklung der gesamten Industrieproduktion seit 1976

In a bizarre, Soviet-style move, the White House has threatened to veto the intelligence budget unless everyone accepts the FBI frame up of Dr. Bruce Ivins.

As Bloomberg writes:

President Barack Obama probably would veto legislation authorizing the next budget for U.S. intelligence agencies if it calls for a new investigation into the 2001 anthrax attacks, an administration official said.

A proposed probe by the intelligence agencies’ inspector general “would undermine public confidence” in an FBI probe of the attacks “and unfairly cast doubt on its conclusions,” Peter Orszag, director of the Office of Management and Budget, wrote in a letter to leaders of the House and Senate Intelligence committees.

Given that an FBI investigation into a specific crime has nothing to do with the budget or any of OMB's other core responsibilities, it seems that Orszag simply drew the short straw for this little assignment.

As I wrote Thursday:

The FBI says that the anthrax case is closed, and that they have proved that Dr. Bruce Ivins did it.

But Congress is not convinced.

On March 3, 2010, Representative Holt called for a new investigation:

Last week, [Congressman Holt] succeeded in including language in the 2010 Intelligence Authorization Bill that would require the Inspector General of the Intelligence Community to examine the possibility of a foreign connection to the 2001 anthrax attacks.

“The American people need credible answers to all of these and many other questions. Only a comprehensive investigation—either by the Congress, or through the independent commission I’ve proposed in the Anthrax Attacks Investigation Act (H.R. 1248)—can give us those answers,” Holt said in a letter to the Chairmen of the House Committees on Homeland Security, Judiciary, Intelligence, and Oversight and Government Reform.

[Here's the letter.]

Dear Chairmen Thompson, Conyers, Reyes, and Towns,

I am writing to ask that your committees, either individually or jointly, conduct a probing investigation of our government’s handling of what has been known as the “Amerithrax” investigation.

As you are aware, last week the Federal Bureau of Investigation announced it was formally closing its investigation into the 2001 anthrax letter attacks, commonly known as the “Amerithrax” investigation. The Bureau has maintained since his suicide in 2008 that the late Dr. Bruce Ivins was their principal suspect in the attacks, a conclusion reaffirmed by the FBI when it closed the case last week—despite the fact that the FBI’s entire case against Ivins is circumstantial, and that the science used in the case is still being independently evaluated.

To date, there has been no comprehensive examination of the FBI’s conduct in this investigation, and a number of important questions remain unanswered. We don’t know why the FBI jumped so quickly to the conclusion that the source of the material used in the attacks could only have come from a domestic lab, in this case, Ft. Dietrick. We don’t know why they focused for so long, so intently, and so mistakenly on Dr. Hatfill. We don’t know whether the FBI’s assertions about Dr. Ivins’ activities and behavior are accurate. We don’t know if the FBI’s explanation for the presence of silica in the anthrax spores is truly scientifically valid. We don’t know whether scientists at other government and private labs who assisted the FBI in the investigation actually concur with the FBI’s investigative findings and conclusions. We don’t know whether the FBI, the Department of Homeland Security, the Department of Health and Human Services, and the U.S. Postal Service have learned the right lessons from these attacks and have implemented measures to prevent or mitigate future such bioterror attacks.

The American people need credible answers to all of these and many other questions. Only a comprehensive investigation—either by the Congress, or through the independent commission I’ve proposed in the Anthrax Attacks Investigation Act (H.R. 1248)—can give us those answers.

As you may know, my interest in this matter is both professional and personal. The attacks originated from a postal box in my Central New Jersey congressional district and they disrupted the lives and livelihood of my constituents. For months, Central New Jersey residents lived in fear of a future attack and the possibility of receiving cross-contaminated mail. Mail service was delayed and businesses in my district lost millions. Further, my own Congressional office in Washington, D.C. was shut down after it was found to be contaminated with anthrax.

Given its track record in this investigation, I believe it is essential that the Congress not simply accept the FBI’s assertions about Dr. Ivins alleged guilt. Accordingly, I ask that your committees investigate our government’s handling of the attacks, the subsequent investigation, and any lessons learned and changes in policies and procedures implemented in the wake of the attacks.

The next day, Representative Jerrold Nadler - Chair of the House Judiciary Subcommittee on the Constitution, Civil Rights and Civil Liberties - joined in Holt's call for a new investigation:

Despite the FBI’s assertion that the case of the anthrax attacks is closed, there are still many troubling questions. For example, in a 2008 Judiciary Committee hearing, I asked FBI Director Robert Mueller whether Bruce Ivins was capable of producing the weaponized anthrax that was used in the attacks. To this day, it is still far from clear that Mr. Ivins had either the know-how or access to the equipment needed to produce the material. Because the FBI has not sufficiently answered such questions, I join Congressman Holt in urging an independent investigation of the case.

Maryland Republican Congressman Roscoe Bartlett and other congressmen have also joined in the call for a new investigation.

In fact, the only airtight case is against the FBI.

For more on the anthrax attacks, see this.

Paul Jackson has a great post at HousingWire: Housing Recovery is Spelled R-E-O

[U]sing LPS data, for all loans more than 90 days in arrears, the average days delinquent is now at 272 days—up from 204 days in early 2008. For loans in foreclosure, the aging numbers are even more staggering: loans in this bucket average 410 days delinquent, up from 260 days delinquent in early 2008.

Ponder those numbers for just a second. On average, severely delinquent borrowers have gone more than 9 months without making a mortgage payment—and yet foreclosure has not yet started for them. For those borrowers who are in the foreclosure process, it’s been an average of 13.6 months—more than one full year—since they last made any payment on their mortgage.

Ahhh ... the "Squatter Stimulus Plan" - live mortgage free (but not worry free).

But Paul thinks foreclosures (REOs) will be the answer, not short sales:

For some, short sales will be an important solution—but don’t kid yourself: the hype currently surrounding short sales and the HAFA program will prove to be short-lived ...

He gives two main reasons for foreclosures over short sales: 1) 2nd liens, and 2) that HAFA has the same qualifications as HAMP. I agree that 2nd liens pose a serious problem, but on the qualifications, Paul writes:

The HAFA program, going into effect on April 5, is getting plenty of attention—and the program’s heart is in the right place. But most are forgetting that it’s an extension of HAMP, the government’s loan modification program that has seen tepid success at best thus far. A loan must first be HAMP-eligible in order for anyone (borrower, servicer, or investor) to qualify for the program’s various incentive payments for short sale or deed-in-lieu.

Which means any of the guidelines applicable to the HAMP program—loan in default or default imminent, within UPB [CR: unpaid principal balance] guidelines, owner-occupied, and originated prior to 2009—still apply.

But lets review the qualifications for HAFA:

The property is the borrower’s principal residence;

The mortgage loan is a first lien mortgage originated on or before January 1, 2009;

The mortgage is delinquent or default is reasonably foreseeable;

The current unpaid principal balance is equal to or less than $729,7501; and

The borrower’s total monthly mortgage payment (as defined in Supplemental Directive
09-01) exceeds 31 percent of the borrower’s gross income.

If we look at the HAMP program stats (see page 6), the median front end DTI (debt to income) for permanent mods was 45%, and the back end DTI was an astounding 76.4%! And these are the borrowers who made it to permanent status!

Many borrowers who meet the HAMP qualifications never even get a trial program because their DTI ratios are so high there is just no way they will make it to a permanent mod. The servicers turn them down on the spot. These are the borrowers eligible for the HAFA program right away - and looking at the HAMP DTI stats I suspect this is a much larger group of borrowers than will ever get a permanent mod. So, although I think REOs will play a key role, I think short sales will also be very important.

More on Short Sales at HousingWire:

from Jacob Gaffney: LPS Starts New Short Sale Service

As 2010 gears up to be the ‘Year of the Short Sale,’ Lenders Processing Service (LPS), the integrated technology provider, is jumping on opportunities such a situation offers by launching its own short sale service to clients.

from Jon Prior: Equator Oversees 125,000 Automated Short Sales in Four Months

In a report that may be considered numerical ammunition to the argument that short sales are heating up faster than modifications, Equator announced that it ushered along more than 125,000 short sale transactions, from November to February, since launching an automated short sale platform.

Note: Yes, I predicted that 2010 would be the year of the short sale, although I think economist Tom Lawler was first.

Robert Waldmann

Let me join Brad DeLong in Saying

Let Me Join Pete Davis in Saying: "Thank You Marjorie Margolies-Mezvinsky"
Pete Davis expresses the sentiment very well:

Thank You Marjorie Margolies-Mezvinsky: I've always wanted to thank Marjorie Margolies-Mezvinsky (D-PA) for her courageous deciding vote for President Clinton's 1993 deficit reduction bill. Her Republican colleagues jeered her as she walked down the aisle to cast her vote with shouts of "Bye, Bye Marjorie!" Her crime -- voting for the Omnibus Budget Reconciliation Act of 1993 that reduced the FY94-FY98 deficits by an estimated $496 b., with $241 b. of tax increases and $255 b. of spending cuts. The bill capped a 12-year deficit reduction effort, leading to the budget surpluses of FY98-FY01. She paid the political price, losing her seat in suburban Philadelphia after her first term in office, but she set the U.S. economy on course for its strongest decade since the 1960s.

Unhappy is the country which needs heroines.

So she lost her seat, but who else's service in Congress do I remember with such gratitude ? Answer, Senator George [ed] Mitchell*.

It is important that Marjorie Margolies-Mexvinsky's political heroism is not forgotten. The fact that it is remembered might help some current Representatives find some courage.

* He turned down a seat on The Supreme Court and didn't run for re-election so that he could concentrate on passing Clintoncare. No good deed goes unpunished. For his virtue he was sent to try to solve the damnable question of Northern Ireland. He succeeded. No great deed goes unpunished either and he is now in charge of mideast negotiations. In a just world, Newt Gingrich would be trying to get Israel and Hamas to make peace, and Mitchell would be cashing in** and appearing on TV to pontificate. But, in a just world we wouldn't need Marjorie Margolies-Mezvinsky or George Mitchell.

** Of course he has cashed in, but that was long ago, and in another country (the USA).

Disgusted minds are reading a Sacramento Bee article New speaker grants Assembly pay hikes.

New Assembly Speaker John A. Perez gave his top aide an annual pay increase of nearly $65,000 - about $5,400 per month - upon becoming leader of the lower house, records show.

Ramirez's annual salary is now $190,008 -- $80,424 higher than that of Perez or Senate President Pro Tem Darrell Steinberg, D-Sacramento, whose pay was dropped from $133,639 to $109,584 last year by the state's independent salary-setting commission. Legislators not in leadership positions are paid $95,291 a year.

There are more examples in the article.

Perez Swearing In Speech

Please consider Speaker John A. Pérez: California Must Unite Around Solutions

March 1, 2010
At his swearing-in as California’s 68th Assembly Speaker at the State Capitol today, Speaker John A. Pérez (D-Los Angeles) said his top priority is to get Californians back to work. In his speech, which was delivered before several hundred community and business leaders, working men and women and elected officials, Pérez said he would work to implement innovative ideas around job creation and government reform and he also pledged to work across both sides of the aisle to deliver results for Californians.

Top Priority Is Spending Money

It took a mere two weeks for California Democratic Speaker John A. Perez to prove his top priority is not jobs, but rather spending money and padding the pockets of his friends and associates.

California voters, I have a simple question: Why do you put up with the likes of John A. Perez and his ilk?

Seriously how can you vote for this fiscal lunatic?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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One year ago, on 60 Minutes, Ben Bernanke uttered that now famous phrase.

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