Huge Plunge In Mortgage Cure Rates Portends Foreclosure Disaster

Mortgage cure rates have fallen off a cliff. For those unfamiliar with the term, a "cure rate" pertains to those who go delinquent on loans then catch up and become current. Late payments that don't "cure" have a tendency to get later and later over time, before they eventually default.

Fitch ratings notes Cure Rates Plunge Among Prime RMBS.

According to Fitch, cure rate on prime mortgages plunged to 6.6% from an average 45% during 2000-2006. Alt-A cure rates plunged to 4.3% from an average 30.2% and subprime cure rates fell to 5.% from an average 19.4%.

A couple of charts can help put this in context. Here is a chart from Hidden Backlog of Foreclosures.

Pent Up Foreclosures By State



click on chart for sharper image

In regards to the above chart I said.

The area in pink represents potential foreclosure demand. Not all of that area will be foreclosed, but some of it sure will. The "Hidden Backlog" mentioned above (and highlighted in red) is within that pink area.

One thing missing from the chart is pent-up demand from those who are not delinquent yet have a huge incentive to walk because of massive negative equity.

For a look at "negative equity", moratoriums, and other foreclosure issues please see Brace for a Wave of Foreclosures, the Dam is About to Break.

With the new data from Fitch let's take a second look using another chart from Calculated Risk's post MBA Forecasts Foreclosures to Peak at End of 2010.

Prime Delinquencies and Foreclosures



click on chart for sharper image

In 2006 less than 3% of prime loans were delinquent and nearly half of them cured. Currently close to 6.5% of prime mortgages are delinquent (another 3% are in foreclosure). Worse yet, the cure rate is miserable. Even reworked loans quickly sink back into delinquency.

A key reason for the falling cure rates pertains to underwater mortgages. In 2006, someone might easily have had positive equity in their home and sold it (curing the loan). Most in trouble now do not have positive equity and cannot sell.

Of the 6.5% delinquent, the current cure rate is a mere 6.6%. On this basis, prime foreclosures could spike to 9%. If that sounds preposterous, note that prime delinquencies were close to 3% in 2007 and by second quarter 2009 the foreclosure rate hit that same 3% rate. Foreclosures follow delinquencies over time and a sinking cure rate makes that prognosis even more likely.

What happens now depends on jobs and home prices, neither of which looks very promising. Even 5-6% prime foreclosures would be a disaster and that looks increasingly likely.

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

Some Issues In Joint Production

1.0 Introduction
Sraffa's work on single product systems is sufficient for demonstrating the incorrectness of neoclassical economics, at least in applications in which equilibrium prices supposedly are ultimately, in some sense, scarcity indices. Sraffa's work on joint production is important in justifying a claim that Sraffa has rediscovered the logic behind the Classical theory of value. An interesting question is whether Sraffa's treatment of joint production holds up to a rigorous theoretical analysis. Christian Bidard, Heinz Kurz & Neri Salvadori, and Bertram Schefold are some economists who have gone into this question in some detail.

An example developed by J. E. Woods (1990: pp. 281-285) illustrates some questions raised by joint production. Unfortunately, I am not sure Woods is correct in his analysis; he constrains all goods to have positive prices in his example. I do not impose this constraint in my treatment of his example.

2.0 Technology
Consider an economy in which two goods, iron and coal, are produced. The managers of firms each know of three Constant-Returns-to-Scale processes for producing these goods (Figure 1). In each process, the inputs need to be available at the start of the year. The inputs are totally used up in these production processes, and the outputs become available at the end of the year. Since each process produces both iron and corn, this is an example of a model of joint production.

TABLE 1: Processes Exhibiting Joint Production

INPUTS	Process I	Process IIa	Process IIb
Labor	5 Person-Yrs	10 Person-Yrs	10 Person-Yrs
Iron	18 Tons	12 Tons
Coal			10 Cwt
OUTPUTS
Iron	48 Tons	12 Tons	12 Tons
Coal	10 Cwt	30 Cwt	30 Cwt

3.0 Quantity Flows
Suppose the final demand in this economy is for a composite good consisting of an equal amount of iron and coal. Four techniques can be formed from the technology to produce such a commodity. Two processes are used in each of the first two techniques. The Alpha technique consists of Process I and Process IIa operated in the proportions shown in Table 2. Notice that after the outputs are used to replace the inputs, the net output consists of one ton iron and one Cwt. coal, as required.

TABLE 2: Quantity Flows in Alpha Technique

INPUTS	Process I	Process IIa
Labor	1/6 Person-Yr	2/9 Person-Yr
Iron	9/15 Ton	4/15 Ton
Coal
OUTPUTS
Iron	1 9/15 Tons	4/15 Ton
Coal	1/3 Cwt	2/3 Cwt

The Beta technique consists of Process I and Process IIb used in the proportions shown in Table 2. Here too the net output is one ton iron and one Cwt. coal.

TABLE 3: Quantity Flows in Beta Technique

INPUTS	Process I	Process IIb
Labor	1/360 Person-Yr	1/108 Person-Yr
Iron	3/10 Ton
Coal		5/12 Cwt
OUTPUTS
Iron	4/5 Ton	1/2 Ton
Coal	1/6 Cwt	1 1/4 Cwt

If Process I is operated alone at unit level, the net output of the economy is 30 tons iron and 10 cwt. coal. The requirements for use would be satisfied if 20 tons of iron were thrown away - free disposal is assumed. If this technique is adopted, iron is a free good.

The last technique to be considered is the operation of process IIb alone. In this case more coal would be produced net than is needed. If this technique is cost minimizing, coal is a free good. (Notice than the combination of Process IIa and Process IIb would just produce more of coal, a free good. This is not economical.)

4.0 Prices
Since I want to consider cases where either iron or coal is a free good, neither can be chosen as the numeraire in an analysis of prices. Accordingly, suppose a person-year - in other words, labor commanded - is the numeraire.

4.1 The Alpha Technique
The price equations for the Alpha technique show the same rate of profits being obtained in the processes comprising the technique:

18 p_I(1 + r) + 5 = 48 p_I + 10 p_C

12 p_I(1 + r) + 10 = 12 p_I + 30 p_C

where p_I is the price of iron in units of person-years per ton, p_C is the price of coal in units of person-years per Cwt., and r is the rate of profits. By assumption, workers are paid at the end of the year. If the rate of profits as taken as given, the above system consists of two equations in two unknowns. The solution is:

p_I = 5/[6 (15 - 7 r)]

p_C = (5 - 2 r)/(15 - 7 r)

An economic restriction is that both prices be non-negative. Thus, the solution only obtains in the following interval for the rate of profits:

0 ≤ r ≤ 15/7

4.2 The Beta Technique
The price system for the Beta technique is:

18 p_I(1 + r) + 5 = 48 p_I + 10 p_C

10 p_C(1 + r) + 10 = 12 p_I + 30 p_C

Its solution is:

p_I = -5 r/[6 (r - 1)(3 r - 8)]

p_C = (4 - 3 r)/[(r - 1)(3 r - 8)]

Both prices are nonnegative if:

(4/3) ≤ r ≤ (8/3)

4.3 Choice of Technique
First, suppose Process I were operated alone. Since iron would be in excess supply, its price would be zero person-years per ton. Revenues would be equated to costs in Process I if p_C were 1/2 person-years per Cwt. But revenues would exceed costs in Process IIa by five person-years when operated at the unit level. Thus, firms would want to adopt Process IIa. Thus, operating Process I alone could not be cost-minimizing. (Since Process IIa alone cannot satisfy final demand, Process IIa could also not be operated alone.)

Second, suppose Process IIb were operated alone. In this case, coal would be a free good, and the price of iron would be 5/6 person-years per ton. For any non-negative rate of profits, revenues would never cover costs in Process IIa. On the other hand, for any rate of profits below approximately 133%, Process I would earn pure economic profits (Figure 1). That is, for rates of profits below this level, Process IIb would never be operated alone.

Figure 1: Profitability of Process I (Process IIb Prices)

Third, suppose prices corresponding to the Alpha technique were ruling. Figure 2 shows the difference in revenues and costs for Process IIb, the one process not in the Alpha technique. As usual in this analysis, costs include interest charges on the value of advanced capital. The Alpha technique is cost-minimizing only for rates of profits between zero and 200%, inclusive.

Figure 2: Profitability of Process IIb (Prices for Alpha Technique)

Last, suppose prices solved the price system for the Beta technique. Figure 3 shows the resulting difference in revenues and costs for process IIa, which lies outside the Beta technique. The Beta technique is cost-minimizing for rates of profits between 133 1/3 percent and 200%.

Figure 3: Profitability of Process IIa (Prices for Beta Technique)

5.0 Conclusions
The above analysis demonstrates that, for rates of profits between 0% and approximately 133%, the Alpha technique is cost-minimizing. For rates of profits above approximately 133%, Process IIb is operated alone and coal is free.

In a comparison of the Alpha and Beta techniques alone (without considering the possibility of operating a single process alone):

• The Alpha technique would be cost minimizing if the rate of profits were between 0% and 200% and the prices associated with the Alpha technique were ruling.
• The Beta technique would also be cost minimizing if the rate of profits were between approximately 133% and 200% and the prices associated with the Beta technique were ruling.
• The Beta technique would be cost minimizing if the rate of profits were between 200% and approximately 214% and the prices associated with the Alpha technique were ruling.
• The Alpha technique would be cost minimizing if the rate of profits were between 200% and approximately 267% and the prices associated with the Beta technique were ruling.

In short, the cost-minimizing technique would not be unique between the rate of profits of approximately 133% and 200%, if it were not for the possibility of operating Process IIb alone. The cost-minimizing technique would not exist between the rate of profits of 200% and approximately 267%, once again if it were not for the possibility of operating process IIb alone.

This example raises a question: Can examples arise with these sorts of non-uniqueness and non-existence problems, even allowing for the possibility of free goods? This is a theme in some of Christian Bidard's and Bertram Schefold's work. (Bidard amusingly names one of his articles "Is von Neumann Square?") I do not recall their conclusions. I think Bidard comes down negatively on Sraffa, based, I guess, partly on his analysis of joint production.

References

• Christian Bidard (2004) Prices, Reproduction, Scarcity, Cambridge University Press
• Heinz D. Kurz and Neri Salvadori (1995) Theory of Production: A Long-Period Analysis, Cambridge University Press
• Bertram Schefold (1989) Mr. Sraffa on Joint Production and Other Essays, Unwin-Hyman
• Bertram Schefold (1997) Normal Prices, Technical Change and Accumulation, Macmillan
• J. E. Woods (1990) The Production of Commodities: An Introduction to Sraffa, Humanities Press International

Critically Under-Capitalized Banks Direct Result of "Wonderful Chain of Stupidity"

Last week the Wall Street Journal ran an article about how trust securities sank Guaranty Financial Group and six family-controlled Illinois banks in early July.

Please consider In New Phase of Crisis, Securities Sink Banks.

Federal officials on Thursday were poised to seize Guaranty Financial Group Inc., in what would be the 10th-largest bank failure in U.S. history. Guaranty's woes were caused by its investment portfolio, stuffed with deteriorating securities created from pools of mortgages originated by some of the nation's worst lenders.

Delinquency rates on the holdings have soared as high as 40%, forcing write-downs last month that consumed all of the bank's capital.

Guaranty is one of thousands of banks that invested in such securities, which were often highly rated but ultimately hinged on the health of the mortgage industry and financial institutions.

Many analysts and bankers are increasingly worried that the boomerang effect that killed Guaranty will cripple many small and regional banks already weakened by losses on home mortgages, credit cards, commercial real-estate and other assets imperiled by the recession.

Thousands of banks and thrifts scooped up securities tied to the housing market or other financial institutions in the past decade. Such investments were alluring because they seemed certain to outperform Treasury bonds, municipal bonds and other humdrum holdings that dominated the securities portfolios at most banks for generations.

As of March 31, the 8,246 financial institutions backed by the FDIC held $2.21 trillion in securities -- or 16% of their total assets of $13.54 trillion.

The problems also underscore how the boom in securitization of loans instilled a belief that risks could be controlled, an idea embraced first by financial giants like Citigroup Inc. and Merrill Lynch & Co. and then smaller institutions reaching for higher profits.

"We saw them as a safe investment, and now we wish we didn't have them," says Robert R. Hill Jr., chief executive of SCBT Financial Corp, a Columbia, S.C., bank with 49 branches. The bank has less exposure than some other small institutions, with the crippled securities representing about 10% of its investment portfolio.

The overall impact on the U.S. banking industry's second-quarter results isn't clear, because disclosure of losses and even the types of securities owned vary widely from bank to bank. Some obscure their troubled holdings in a vague line item titled "other" in financial statements.

"The very depth of the problem is very difficult for us to get our hands on," says Jim Reber, president of the ICBA Securities, the brokerage unit of the Independent Community Bankers of America, a trade group of 5,000 small banks and thrifts. "These securities have declined in value, and it is not clear when they are going to come back in value, if at all."

The sickened securities fall into two categories. Guaranty is among nearly 1,400 banks that own mortgage-backed securities that aren't backed by government-related entities such as Fannie Mae and Freddie Mac. Such "private issuer" and "private label" securities are carved out of loans originated by mortgage companies, packaged by Wall Street firms and then sold to investors.

Small and regional financial institutions own about $37.2 billion of private-issuer and private-label securities, Red Pine estimates. But regulators are pressuring banks to write down the value of their mortgage-backed securities, now being downgraded as more borrowers fall behind on payments for the underlying loans.

Banks also are being battered by more than $50 billion of trust preferred securities, financial instruments that are a hybrid between debt and equity. From 2000 to 2008, more than 1,500 small and regional banks issued trust preferred securities, according to Red Pine data.

Many of the buyers were small and regional banks, which were confident they could evaluate other banks and attracted to the interest promised by the issuing financial institution.

But as banks struggle with rising loan losses, some issuers of trust-preferred securities no longer can afford their obligations. In the first half of 2009, 119 U.S. banks deferred dividend payments on their trust-preferred securities, while 26 defaulted on the securities.

The consequences are cascading down to banks that bought the securities. One banking lawyer who asked not to be identified describes the result as a "wonderful chain of stupidity."

Under-Capitalized Banks And FDIC

On August 19, in Emails from a Bank Owner regarding FDIC and Under-Capitalized Banks I posted some interesting comments from a bank owner on capitalization.

I have a few more emails to share, one of them written on July 4th after the six Illinois bank failures.

On July 4, 2009 ABO (A Bank Owner) wrote:

Mish,

As you may have noticed the FDIC closed seven banks on Thursday. Six of the banks were in Illinois and one was in Texas. The Texas bank appears to have been closed by the FDIC after loan losses depleted capital. However, the six bank's in Illinois were all closed after SECURITY LOSSES depleted their capital. Each of the banks had massive losses on their March 31, 2009 call report in the category securities gain(losses). Security losses are a non-operating item and are listed after pre-tax operating income on the call report. This is very unusual and possibly reveals another cancer hiding on many banks balance sheets. The cancer appears to be OTHER DOMESTIC DEBT SECURITIES. If you go the call reports available on the FDIC web site and go to schedule RC-B- Securities you will find these assets listed as other domestic debt securities. By definition other domestic debt securities are either;

1) Bonds, notes, debentures, equipment trust certificates and commercial paper issued by US-chartered corporations and other U.S. issuers.

2) Preferred stock of U.S.- chartered corporations and business trusts that by its terms either must be redeemed by the issuing corporation or trust or is redeemable at the option of the investor, including trust preferred securities subject to mandatory redemption.

It is quite possible that what caused the failure of these six banks in Illinois were investments in trust preferred securities. Trust preferred securities are basically an unsecured loan to a bank holding company using a creative structure. Trust preferred came out of nowhere about 10 years ago and took the place of banks stock loans. A banker could borrow money on a LIBOR basis and only be required to pay interest for up to 30 years. Because of the unique structure the Federal Reserve blessed it and allowed banks to count a portion of the debt as equity. In other words the debt was not really debt by definition. Originating investment banks would take a large fee and originate the loan or trust preferred and sell the security into the market. If a bank bought the security as an investment it would be shown as an asset on the call report under the name of other domestic debt securities.

My point here is that I have not seen seven banks closed in one day in a long time. Most disturbing is that six of the seven were from one state, were small and apparently closed as the result of investments made in other banks via trust preferred. If this is the case how many other banks are exposed to the same risk and how much is their exposure? No decent banker would have invested in these assets unless the potential loss was somehow limited. A bank is limited by law as to how much it can loan one borrower. The law is called the legal lending limit. The amount varies by state but is usually no more than 15% of capital. Additionally, most banks have an in house limit that is much less. Why did the regulators allow this scheme in the first place and why did they not impose any restrictions on exposure? If I am correct 6 banks were just wiped out in one day as a result of this investment.

I did not have permission to share that email at the time, but as you can see, ABO was correct.

Hiding The Losses

A few days ago ABO had a few more comments about how FDIC was handling these situations.

ABO Writes:

Take a look at how the FDIC is selling failed banks. It is a little different than in the past. The FDIC is using a loss sharing agreement that is usually around 80-20 and has certain guidelines on timing of the losses. I would guess that the losses on the failed banks are dragged into the future somewhat rather than being recognized at the time the bank is closed. This method would be less of an immediate hit to the fund and would probably create a contingent liability rather than a direct one. The banks that agree to this loss sharing plan are relying on the promise of the FDIC to make good on future guarantees for losses. The losses are not backed by the full faith of the government.

The Fed and FDIC always want to delay addressing the problems, hoping they will go away. Such structural problems seldom do.

Amazingly Financial Group was considered "well capitalized" right up to the brink of failure. When the bank did fail, the hit to FDIC was not immediately taken but stretched into the future.

The WSJ article notes 'There are 1,400 banks that own mortgage-backed securities that aren't backed by government-related entities such as Fannie Mae and Freddie Mac." What we don't know is how many of those banks are levered up enough in garbage mortgages to fail.

Note too that those garbage trust-preferred securities problems are on top of the widely expected fallout from commercial real estate problems affecting small to medium-sized regional banks. Thus, banking woes are much deeper in many areas than either the FDIC or Fed is admitting.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Risk taking and the menstrual cycle

We tend take preferences as given and constant, but there is mounting evidence that preferences change over the life cycle and over external circumstances, as I reported before. There may now even evidence that preferences that preferences follow a predictable cycle, at least for women.Matthew Pearson and Burkhard Schipper asked an unusual question to the female participants in an otherwise

Global Debt Bubble, Causes and Solutions

Australian economist Steve Keen is one of the very few who have called this economic crisis correctly. What distinguishes Keen is that his economic forecasts are based on levels of debt and changes in levels of debt as opposed to money supply, output capacity and other things that led most economists astray.

The following video is about 19 minutes long but very much worth listening to in entirety, improving as it goes along. The video may take a while to load but it's well worth it. Everything below in quotes, until the next bold title is a partial transcript from the video.



Steve Keen:

"If you have a sane economy, and by sane economy I mean one which is not addicted to debt, not a Ponzi economy, then the change in debt each year should contribute a minor amount to demand. Therefore, if you tried to correlate debt to the level of unemployment you would not find much of a correlation. Unfortunately that is not the economy we live in."




"The red line shows the percent contribution that debt contributes to demand and the blue line which is inverted is the unemployment rate."

"There should be no correlation if the economy is operating sensibly. Correlation is now at the level of 83%. Because we have a debt driven economy, the change in debt levels each year is the major determinant in the change in economic performance."

"Neoclassical economic theory is dangerous. Neoclassical economists completely missed this crisis. My favorite statement comes from the OECD in its June 2007 report"



" A recent survey trying to find economists who predicted this found 12. And there are 10,000-15,000 economists in the US alone which is why I don't particularly accept their assurances that everything is OK from now on."

"Now why are economists so ignorant? Two major reasons. First of all the type of modeling they do is static where you ignore time, or if you have dynamics you assume they are converging to some nice stable situation in the future. And they ignore almost completely the role of credit and debt."

"I probably win the Dr. Doom award around the planet these days now that Nouriel Roubini is expecting the recession will end in about 6 months time. I think it's got a lot longer to go than that."

"What we are going through is a deleveraging crisis and we haven't experienced one of those since 1930. Last time it took 10 years and a world war to get rid of it, and this time we are staring up with 1.7 times the level of debt in America, not even mentioning the derivatives catastrophe that is also there."

"And deleveraging which is the attempt by the private sector to reduce its debt level can overwhelm the government's stimulus. The whole problem was caused by irresponsible lending and the only way out of this ultimately is to eliminate that debt. The debt has to be written off"

Powerpoint Presentation

The above text is a partial transcript from his presentation and the slides are two of many slides from the accompanying Powerpoint presentation. You can download the presentation on Steve Keen’s Debtwatch Blog. You will need to listen to the video to understand some of the slides.

Australian readers will want to pay particular attention as Australia is certainly not out of the woods.

Keen's Proposed Solutions

Steve Keen has some interesting proposals for solutions. He spoke of nationalizing banks which I have sided against. However, Keen also wanted to wipe out the shareholders and repudiate the bondholders by turning the assets over to the bondholders in a bankruptcy process. That is something I certainly do agree with. The problem here is probably the word "nationalization"

One thing is certain, US taxpayers got the worst of all worlds by nationalizing Fannie Mae and Freddie Mac, and taking over the liabilities (at taxpayer expense) while making the bondholders whole. To top off the madness, Fannie and Freddie increased lending limits, putting taxpayers at further risk. This is exactly the wrong "nationalization" approach and I am sure Keen would agree.

Keen has an interesting idea that mortgages on houses ought to be based on what rent they could fetch. Clearly the credit bubble never would have escalated to the point it did if lenders had the common sense to lend based on how much rent a house could fetch.

As it was, debt upon debt upon debt piled up until we had the Collapse Of The "Ownership Society".

Supposedly no one saw this coming. A chart in the preceding link proves otherwise.

Fed and Fractional Reserve Lending at Heart of the Issue

In regards to Keen's solutions, I believe the free market should make these decisions, not government bureaucrats. And in that regard, Keen never touched on what I think are the two root causes of this mess:

1) Micro-mismanagement of interest rates by central bankers in general and the Fed in particular.
2) Fractional reserve lending gone mad.

Free Market Forces Should Decide

It was not lack of regulation that got us into this mess, but rather regulation, going back to 1913 and the creation of the Fed. Making matters worse, Congress authorized Fannie Mae and Freddie Mac and hundreds of "affordable housing" programs all designed to pressure people into buying houses.

Let's not forget the misguided regulation that created FDIC.

Inquiring mind will want to consider As of Friday August 14, 2009, FDIC is Bankrupt and followup Emails from a Bank Owner regarding FDIC and Under-Capitalized Banks.

If we eliminate FDIC, Fannie Mae, Freddie Mac, and all the housing subsidies authorized by Congress and the states, then the free market may very well decide that Keen's model of pricing houses is the correct one.

As it sits, there are too many factors other than rent that affect home prices, such as federal income tax deductions, affordable housing programs, proposition 13 in California, Fannie and Freddie, etc . Attempting to control those forces with more regulation is the wrong way to go. However, there is no reason why banks could not and should not (on their own accord) start making lending decisions based on rental values.

When it comes to the writeoff of debt and the need to prevent another debt bubble, I certainly side with Keen vs. Krugman, Mankiw, and even Roubini who all prescribe variations of "Neoclassical Nonsense" hoping to spur more bank lending and consumer borrowing by throwing money at the problem.

My own theory on credit and debt is contained in Fiat World Mathematical Model. Thanks go to Steve Keen for helping me finalize that model.

I have some emails from Steve Keen regarding my model, Keynesian clowns, and other things. I will share some of those emails later this week.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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New Bubble Threatens Global Rebound

Although Belief In Wizards Runs Deep there are a few free thinkers who don't see it that way. Andy Xie is one of them. Please consider New Bubble Threatens a V-Shaped Rebound.

In a normal economic cycle, an inventory-led recovery would be followed by corporate capital expenditure, leading to employment expansion. Rising employment leads to consumption growth, which expands profitability and more capex. Why won't it work this time? The reason, as I have argued before, is that a big bubble distorted the global economic structure. Re-matching supply and demand will take a long time.

The process is called Schumpeterian creative destruction. Keynesian thinking ignores structural imbalance and focuses only on aggregate demand. In normal situations, Keynesian thinking is fine. However, when a recession is caused by the bursting of a big bubble, Keynesian thinking no longer works.

The lifespan of a bubble depends on how it affects demand. The longest-lasting are property and technology bubbles. The multiplier effect of a property bubble is multifaceted, stimulating investment and consumption in the short term. The supply chain it impacts is very long. From commodity producers to real estate agents, it could stimulate more than one-fifth of an economy on the supply side. On the demand side, it stimulates credit growth and financial sector earnings, and often boosts consumption through the wealth effect. Because a property bubble is so powerful, the negative effects of a bursting are great. Excess supply created during a bubble's lifespan takes time to consume. And a bust destroys the credit system.

A technology bubble occurs when investors exaggerate a new technology's impact on corporate earnings. A breakthrough such as the Internet improves productivity enormously. However, consumers receive most of the benefits. Competition eventually shifts temporarily high corporate profitability toward lower consumer prices. Because the emergence of an important technology brings down consumer prices, central banks often release too much money, which flows into asset markets and creates bubbles. While an underlying technology leads to an economic boom, the bubble feels real. More capital pours into the technology. That leads to overcapacity and destruction of profitability. The bubble bursts when speculators finally realize that corporate earnings won't rise after all.

The cost of a technology bubble is essentially equal to the amount of over-investment involved. Because a technological breakthrough expands the economic pie, the costs of a technology bubble are easy to absorb. An economy can recover relatively quickly.

Some argue that, if low interest rates revive the property market, American households may be willing to borrow and spend again. This scenario is possible but not likely. The United States has not experienced serious property bubbles in the past because land is privately owned and plentiful. A supply overhang from one bubble takes a long time to digest. And American culture tends to swing to frugality after a bubble. One's outlook either for a normal recovery or a bubble-inspired boom depends on the outlook for the U.S. household savings rate. Unless the U.S. household sector is willing to borrow and spend again, emerging economies will not be able to revive the export-led growth model.

Instead of a V-shaped recovery, we may instead get a W curve. A dip next year, although perhaps not statistically deep, could deliver a profound psychological shock. Financial markets are buoyant now because they believe in the government. The second dip would demonstrate the limits of government power. The second dip could send asset prices down -- and keep them down for a long time.

Andie Xie's conclusion (in red) is correct. He got there by focusing on the debt bubble, which is also correct.

However, Xie's statements "In normal situations, Keynesian thinking is fine. However, when a recession is caused by the bursting of a big bubble, Keynesian thinking no longer works" are silly.

Keynesian stimulus never works. Such stimulus may at times appear to work but all it does in the short run (at best) is temporarily shift demand forward.

Consider the popular "Cash For Clunkers" program, widely touted as a huge success. It was anything but a success.

For a rebuttal please see Cash for Clunkers: Dumbest Program Ever? on the Cato@Liberty site or my posts: Government Bailouts and the Stock Market - The Seen and the Unseen with a followup: Cash For Clunkers For Housing Market Is 'No Brainer'

When Greenspan primed the pump (as Keynesian clowns like to call it), he brought 10 years worth of housing demand forward into a few short years, pushing up prices sky high. Once that demand was exhausted, we crashed.

The moral of the story is that in the long run, Keynesian stimulus leads to perpetual bubble blowing activity with bigger and bigger debt bubbles until the whole mess blows up.

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

Mish Mailbag: Reader Seeks Career Change to Escape "Retail Hell"

Kitty, a 40 year old woman is tired of "retail hell". She is considering going back to school and getting an associate's degree in HVAC (Heating, Ventilating, Air Conditioning) repair.

From Kitty:

Hi Mish,

I've been reading your blog for about a year now, and like your outlook and analysis. Keep up the good work! If you could spare a moment to give me some feedback, I'd be much in your debt.

I'm a 40 year old single woman with no children. I'm currently in my second year with a nation autoparts chain store, after being out of the workforce for many years dealing with my elderly parent's medical problems. They're stable now, and I'm looking ahead.

I don't care to stay in retail hell ($8.63/hr, 25-30 hrs/wk), and would like to be able to live through the next 20 years without having to depend on family for support.

I've been looking into fields that are necessary and would be very difficult to outsource. That kind of narrows options, eh?

I've settled on a field that involves repairing and maintaining large immobile machinery that's necessary for life in the Southwest: HVAC facility repair. I can get an Associates' degree in 2 years in the field (to complement my useless BA Comm.) while continuing in retail hell to pay for it all. I would finish school with no debt.

Does this sound like a good way to keep a steady income through bad times? It has to be better than retail and there's always a good chance of doing cash side work. Most people think A/C is magic, so it might just be good to be a magician for once!

I'd like to get a thumbs up/down, just to have an opinion from outside the friends and family echo chamber.

Keep on rocking the truth, thanks.

Kitty

Dear Kitty,

That is an extremely difficult question. Bear in mind I am not a career counselor, nor do I have any in depth knowledge of HVAC other than to know what it stands for . However, I will take a shot at answering your question.

As I see it, HVAC work is tied to commercial and residential real estate. The first question that comes to my mind is: How many skilled (5-15 yrs+ experience) HVAC specialists are out of work now?

I am not trying to be sexist with the next question, but many hiring will be.

Although early 40's is a lot better than mid-50's, will someone hire you, 42 years old (after you get your degree), on the basis of an associate's degree only, with no prior HVAC work experience, when you may be competing against younger men with lots more experience?

I do not know the answer to that question, but it's a crucial one.

Let's approach this in a generic way with a few more questions to ponder, leaving the issue of sex completely out of the question.

Will a welder out of work, retrained as a Java programmer find work as a Java programmer when there are tens of thousands of skilled programmers out of work?

Will a Java programmer retrained as a welder find work as a welder when there are tens of thousands of skilled welders out of work?

While both are possible is either likely?

To a great degree, success will depend on your attitude (you seem to have the right one), luck (an unknown factor), a rebound in demand for HVAC (unknown), local conditions (known but varying and subject to change).

In aggregate, taking everything into consideration, those seem like tough odds, not impossible but very tough.

Do I think you should try?

That is a harder question yet. If it would bankrupt you to try and fail, then no. However, your email indicates that you can weather the storm.

Still there is one last point for you to consider. Doing something for money is seldom the road to success. If possible, find something you want to do and pursue that. If HVAC maintenance and repair is what you really want to do, then go for it. If you selected that line of work simply because it pays more money, then don't.

You may also consider auto repair, nursing or other health care professions. I suspect that nursing or health care professions would have the highest odds of success, but I can easily be wrong.

Here is the key that only you can answer: Whatever you pursue, make sure it is something you really want to do. Otherwise it may take you years to land a job only to find yourself in "another hell" shortly after you are hired.

Don't trade one hell on earth for another. Life's too short to be doing something you hate doing.

Good luck to you.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Obama's Backroom Healthcare Deals Need Explaining

With $900 billion to a $trillion dollars or more at stake, and everyone wanting three shares of the health care pie (while giving up nothing), it should not come as a surprise that 'Special interests' play both sides in health fight

"We have the American Nurses Association, we have the American Medical Association on board," Obama told the weekend crowd in Grand Junction, Colo. "We have an agreement from drug companies to make prescription drugs more affordable for seniors. ... The AARP supports this policy."

The drug makers went first in making a deal with the White House, agreeing to pick up $80 billion in additional costs over the next decade to help defray the expenses of the legislation. The American Hospital Association agreed to shoulder an additional $155 billion.

In exchange, both won assurances the White House would protect them against attempts in Congress to seek additional cuts in their projected Medicare and Medicaid payments.

The American Medical Association's key issue was different. Doctors hope the legislation will allow them to avoid a looming 21 percent cut in payments under Medicare. The cost to the government for that would be about $230 billion over a decade.

Obama also agreed to require individuals to purchase insurance, reversing a position he held during his campaign. "My thinking on the issue of mandates has evolved. And I think that that is typical of most people who study this problem deeper," he said.

Health Care Sweeteners

It's easy to get buy-ins when you give away the farm. Obama brags about the buy-ins but does not state the costs. Pharmaceutical manufacturers certainly smell the gravy train as noted in Drugmakers Ramp Advertising Campaign For Health Care Reform.

The more promotion there is for this package the more leery of it you should be. The reason the AMA, AARP, and now PhRMA are all lining up behind healthcare reform is because everyone of them has been bought out by sweeteners.

While everyone is concerned about rationing, I am concerned about lack of rationing. What incentives does anyone have to hold down costs?

Certainly big PhRMA has to be thinking more drugs will be prescribed or they would not have a huge ad campaign going while pledging $80 billion in lower drug costs. Here are two key questions: Is it really $80 billion? And what did the Administration give up in return?

Huge Giveaways In White House Deal With Big Pharma

In case you missed it, please read the Huffington Post article Internal Memo Confirms Big Giveaways In White House Deal With Big Pharma.

A memo obtained by the Huffington Post confirms that the White House and the pharmaceutical lobby secretly agreed to precisely the sort of wide-ranging deal that both parties have been denying over the past week.

The memo, which according to a knowledgeable health care lobbyist was prepared by a person directly involved in the negotiations, lists exactly what the White House gave up, and what it got in return.

It says the White House agreed to oppose any congressional efforts to use the government's leverage to bargain for lower drug prices or import drugs from Canada -- and also agreed not to pursue Medicare rebates or shift some drugs from Medicare Part B to Medicare Part D, which would cost Big Pharma billions in reduced reimbursements.

In exchange, the Pharmaceutical Researchers and Manufacturers Association (PhRMA) agreed to cut $80 billion in projected costs to taxpayers and senior citizens over ten years. Or, as the memo says: "Commitment of up to $80 billion, but not more than $80 billion."



click on image for sharper view

...

Obama is walking a tightrope here. He wants to keep PhRMA from opposing the bill, and benefits by having its support, which now includes a $150 million advertising campaign. That's a fortune in politics -- more than Republican presidential candidate John McCain spent on advertising during his entire campaign -- but it's loose change in the pharmaceutical business.

What's The Real Deal?

"This memo isn't accurate and does not reflect the agreement with the drug companies," said White House spokesman Reid Cherlin.

If the health care deal as portrayed by the Huffington Post is inaccurate, then why doesn't the administration tell us what the real deal is? This is a big credibility issue. Obama is involved in a mudfight and one of the reasons is he refuses to say what is in the health care bill or should be in the bill. Instead all he does is bitch about misconceptions while working out secret backroom deals that he will not disclose.

Citizens want to know "What's the real deal?' It's a good question, and one that deserves truthful answers. Instead, the administration responds by slinging more mud.

This was a very damning leak printed by the Huffington post.

Scope For Fraud Increases

The more money you throw at a problem, the bigger the scope for fraud. $900 billion is a lot of scope for fraud. Consider Medicaid. The New York Times reports New York Medicaid Fraud May Reach Into Billions.

It was created 40 years ago to provide health care for the poorest New Yorkers, offering a lifeline to those who could not afford to have a baby or a heart attack. But in the decades since, New York State's Medicaid program has also become a $44.5 billion target for the unscrupulous and the opportunistic.

School officials around the state have enrolled tens of thousands of low-income students in speech therapy without the required evaluation, garnering more than $1 billion in questionable Medicaid payments for their districts. One Buffalo school official sent 4,434 students into speech therapy in a single day without talking to them or reviewing their records, according to federal investigators.

New York's Medicaid program, once a beacon of the Great Society era, has become so huge, so complex and so lightly policed that it is easily exploited. A computer analysis of several million records obtained under the state Freedom of Information Law revealed numerous indications of fraud and abuse that the state had never looked into.

"It's like a honey pot," said John M. Meekins, a former senior Medicaid fraud prosecutor in Albany who said he grew increasingly disillusioned before he retired in 2003. "It truly is. That is what they use it for."

New York's Medicaid program is by far the most expensive and most generous in the nation. It spends far more - now $44.5 billion annually - than that of any other state, even California, whose Medicaid program covers about 55 percent more people. New York's Medicaid budget is larger than most states' entire budgets, and it spends nearly twice the national average - roughly $10,600, more than any other state - on each of its 4.2 million recipients, one in every five New Yorkers.

That generosity was born of good intentions when Gov. Nelson A. Rockefeller signed the program into law in 1966, following the state's tradition of creating big antipoverty programs. But Medicaid has become far more than the child of that altruism, having morphed into an economic engine that fuels one of the state's biggest industries, leaving fraud and unnecessary spending to grow in its wake.

The New York Times article is a stunning 8 pages long filled with example after example of fraud.

Did it occur to anyone that we need to cleanup existing fraud before working out secret backroom deals and throwing another $900 billion into the honey pot? I guess not.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Shoppers Walk Away Leaving Orphan Items Behind

In increasing numbers, cash strapped consumers are abandoning items at the checkout counter or dumping items from their virtual shopping baskets online. The former creates orphan items that have to be restocked.

Last second abandonment is a new twist in the "Do I really need that?" shopping psychology that has set in. Now more than ever, shoppers are thinking twice in the checkout line.

Penny-pinching Americans are getting cold feet at the checkout -- thinking twice about spending and ditching items before they're rung up.

They're leaving sweaters in the dress department, dumping cookies near the grocery cashier and waiting until the last minute to weigh wants versus needs. Online, shoppers are abandoning their virtual carts as they search for better deals.

People "want to be in the act of shopping, but they don't want to be in the act of buying," said Joel Bines, a director at AlixPartners, a turnaround consultant.

Besides abandoning goods while standing in line, they're paying close attention once checkout begins. They ask cashiers to provide a total while they're still scanning items to see where they stand, or to have necessities like health care basics scanned first, said Dan Fishback, chief executive of DemandTec Inc., a retail technology company. When they hit their limit, they forgo what's left in the basket.

Internet research company Forrester Research estimates as much as 59 percent of online purchases are being dumped during checkout. Those rates had ranged from 47 percent to 53 percent in the past six years, according to industry surveys.

The Container Store, which sells storage items, has seen its online abandonment rate rise to 68 percent. The company has launched an e-mail campaign to remind shoppers of their abandoned purchases and a service that lets shoppers pick up online purchases at the store to avoid shipping costs.

Eric Younan, 35, of Farmington Hills, Mich., who said he had never quit during the checkout process, has abandoned online shopping carts four times in recent weeks because he discovered extra charges late in the game.

"Two years ago, a $10 handling charge wouldn't have fazed me, but now I would just drop it," said Younan, a publicist. "Back then, I had more disposable income, and my time was worth money."

The massive 68 percent abandonment rate at the Container Store is quite telling.

Have you looked at some of their stuff? Here's a sample.




click on image for sharper view

Does one really need a Kingsford charcoal caddy dispenser? Heck, I never knew such a thing existed. Who wants that bright orange folding crate for $19.99? I do not want that for free. A modular hauling system on sale for $49? You've got to be kidding me.

Note that the container store not only sells containers but household products and all kinds of stuff that just begs to be contained. Take a look at this $49.00 designer dustpan.


"Designed by noted style-maker Karim Rashid, this broom is as much a work of art as it is a functional cleaning tool. The broom and dustpan feature an integrated, ergonomic design for comfortable use, effective cleaning and simple, compact storage."

A quick look at their prices is all it takes to figure out what's happening. It's a triple whammy:

1) Containers as well as stuff to be contained are cheaper at places like Target (TGT), Walmart (WMT), and Home Depot (HD).

2) Works of art are out. Practicality and frugality are in.

3) Instead of buying more junk and/or containers to store junk in, consumers are deciding to throw stuff away.

Lifestyle Liquidations

For more on throwing stuff away, please see Lifestyle Liquidation - Estates of the Fabulously Rich and Downsizing of America - Thoughts on a Vanishing Lifestyle.

Lifestyle liquidation has only just begun.

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

Orwellian Madness "Bernanke Saved The World"

The MarketWatch Headline Bernanke: We Saved The World is the height of Orwellian madness.



Please consider the "full story" We saved the world from disaster, Fed's Bernanke says.

In a speech at the Kansas City Fed's annual retreat in Jackson Hole, Wyo., Bernanke summarized a hellish year and explained modestly how he and his central bank colleagues saved the world from a bigger disaster.

"The world has been through the most severe financial crisis since the Great Depression," he said. "As severe as the economic impact has been, however, the outcome could have been decidedly worse."

If the Fed, other central banks and other government leaders hadn't acted in a coordinated and aggressive way in September and October of 2008, "the resulting global downturn could have been extraordinarily deep and protracted," Bernanke said.

The policy response "averted the imminent collapse of the global financial system, an outcome that seemed all too possible to the finance ministers and central bankers."

Reflections on a Year of Crisis

To be fair to Bernanke, he never directly claimed to have "Saved The World". That is a trumped-up headline by MarketWatch.

Here is the key snip from his Jackson Hole speech Reflections on a Year of Crisis.

Since we last met here, the world has been through the most severe financial crisis since the Great Depression. The crisis in turn sparked a deep global recession, from which we are only now beginning to emerge.

As severe as the economic impact has been, however, the outcome could have been decidedly worse. Unlike in the 1930s, when policy was largely passive and political divisions made international economic and financial cooperation difficult, during the past year monetary, fiscal, and financial policies around the world have been aggressive and complementary. Without these speedy and forceful actions, last October's panic would likely have continued to intensify, more major financial firms would have failed, and the entire global financial system would have been at serious risk. We cannot know for sure what the economic effects of these events would have been, but what we know about the effects of financial crises suggests that the resulting global downturn could have been extraordinarily deep and protracted.

Although we have avoided the worst, difficult challenges still lie ahead. We must work together to build on the gains already made to secure a sustained economic recovery, as well as to build a new financial regulatory framework that will reflect the lessons of this crisis and prevent a recurrence of the events of the past two years. I hope and expect that, when we meet here a year from now, we will be able to claim substantial progress toward both those objectives.

Serious Risk vs. Saved the World

There is a difference between "Serious Risk" and "Saving the World". However, that is as far as I will go in defending Bernanke. It is important to understand that we are in this crisis because of the policies of Central Bankers in general and the Greenspan and Bernanke Fed in particular.

Both Greenspan and Bernanke have fostered an environment that threw money at every problem. The worldwide credit boom and housing bubbles were a direct result of Central Bank policies. Thus, giving credit to Bernanke is like giving credit to a doctor for amputating a cancerous limb after mistakenly cutting off three perfectly healthy limbs.

The difference between the Greenspan's alleged "success" and Bernanke's struggle to save the world is Greenspan had a wind of consumers' willingness to go deeper in debt blowing at his back. Bernanke has the wind of boomers fearing retirement in the midst of falling home prices and impaired bank balance sheets blowing stiffly in his face.

That difference is immense. For further discussion of the problems facing Bernanke and how little power the Fed really has when consumer attitudes have changed, please see Belief In Wizards Runs Deep.

Bernanke's Self-Promotion Self-Vindication Campaign

Bernanke's Jackson Hole speech is part of his campaign for re-appointment to the Fed. Previously, Bernanke had a cream-puff interview with 60 minutes as well as three fluff installments on "The NewsHour with Jim Lehrer" as discussed in Bernanke Goes On Self-Promotional Media Blitz.

Bernanke's media blitz is as galling as it is unprecedented. No Fed chairman in history has openly or brazenly campaigned for reappointment.

The most galling thing is that nowhere along the way did Bernanke ever mention his role, the Fed's role, or central banker's role in general for creating this crisis.

Did The Fed Really Save The World?

Even Bernanke admits that "We cannot know for sure what the economic effects of these events would have been ..." thus we still cannot be sure if his policy actions were correct. Indeed some highly respected individuals suggest they were the wrong thing to do.

Elizabeth Warren On The Policy Response

Visit msnbc.com for Breaking News, World News, and News about the Economy

Please listen to that sobering interview, in entirety. It is about 9 minutes long. Elizabeth Warren rips PPIP (the public-private investment plan) to shreds, and questions the policy responses that have still left toxic assets on the balance sheets of banks.

Warren: ".... In addition to what we've got with the toxic assets, we've got a real problem coming on commercial mortgages.... looking ahead to 2010, 2011, 2012 we are potentially looking at 50-60% default rates. This is a very significant problem concentrated with intermediate and smaller banks"

My favorite exchange starts just after the 7 minute mark.

MSNBC: In hindsight was Paulson right? If Congress did not write that $700 billion check would banks have collapsed?

Warren: I have to say I think there would have been some real pain. There are some businesses today that are alive that would have been wiped out. However, I am just not convinced at all that we would have gone into a death spiral"

MSNBC: With the facts he knew at the time, was it the right call?

Warren: (struggling to be polite) "You know, let me say it this way. The question about whether or not the world as we know it has ended, depends on what you think the world is as we know it. If you think the world as we know it, are a handful of huge financial institutions, the dinosaurs that roamed the earth, then you're right. They are not going to exist without huge infusions of government money. On the other hand if what you really believe is that our economy and our world is 115 million American households you start to see it very differently. And you say, you know if the dinosaurs are gone there are still a lot of stuff to be done.

High Praise For Elizabeth Warren

I have high praise for Warren. It takes a lot of courage to say what she did on the record. Moreover, I am certain she is correct about what she hints the real world is: American households and a large consortium of small to mid-sized banks as opposed to a few dinosaurs that ought to be extinct.

Bernanke Saved The Dinosaurs

Bernanke did not "save the world". All Bernanke did was prolong the lives of a few ailing dinosaurs at great expense to US taxpayers.

Elizabeth Warren, not Bernanke should have given a speech at Jackson Hole.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Intellectual protection should be decreasing, not increasing

Have you noticed how the grip on intellectual property law keeps expanding: copyright periods lengthen, the scope of patentable "innovations" widens, and the enforcement of intellectual property become the topic of international trade negotiations. But should we expect this?Michele Boldrin and David Levine look at this using the age-old trade-off in intellectual property protection: long

Hidden Backlog of Foreclosures

When it comes to foreclosures, there is no such thing as a "safe state". Even states that did not engage in widespread use of liar loans and other silly mortgage lending practices are struggling with foreclosures. The issue is jobs, and unemployment is rising everywhere.

Please consider Foreclosure Woes Spread To Areas Once Thought Safe.

Amid record levels of home foreclosures nationwide, there are worrying signs that the foreclosure crisis could be spreading to parts of the country that had previously been relatively unscathed.

Last month, for example, RealtyTrac, a private firm that tracks foreclosure data, recorded sharp spikes in foreclosures in states like Idaho, Oregon, Utah, and Illinois, where the prolonged recession is cited as the culprit.

"It surprised us when we went from a state with a low level of subprime lending to a state with a high level of foreclosures," says Gerry Mildner, the director of the Center for Real Estate at Portland State University. "Most of our problems have to do with unemployment rather than with toxic loans.

RealtyTrac's Sharga points to several other states that have seen alarming jumps in unemployment, including Kentucky, Alabama and North and South Carolina.

"We won't know what the impact of these rises in unemployment will be until a year from now," says Sam Khater, a senior economist with First American CoreLogic, a private real estate data firm.

What worries Khater more are states where sharply rising unemployment is coupled with many homeowners who already owe more than their houses are worth. He points to states like Ohio, Georgia and Illinois. Home prices in Illinois, for example, fell 14.8 percent in June compared with a year earlier. "Their price decline has been accelerating," he says.

The actual foreclosure rates are hard to predict in part because a number of state governments, along with federal government-sponsored Fannie Mae and Freddie Mac, have instituted a range of delays and moratoriums on foreclosures.

"The government has a pretty big chokehold on the foreclosure process," says Madeline Schnapp, the director of macroeconomic research at TrimTabs Investment Research. But that also means that there is a hidden backlog of home loans in default that could end up in foreclosure.

Moody's Economy.com estimates that lenders will foreclose on 1.89 million homes in 2009, up from 1.43 million last year.

RealtyTrac's Sharga says "We don't see much improvement until 2011." With that, mainsteam thought is staring to approach the 2012 possible bottom I suggested two years ago. At the time, no one thought home prices would fall for this long. Perhaps I will turn out to be an optimist.

TransUnion: Mortgage Delinquencies Still Rising

Delinquencies are a leading indicator of foreclosures and Mortgage delinquency rates are still rising.

TransUnion released the results of its analysis of trends in the mortgage industry for the second quarter of 2009 and the associated impact on the U.S. consumer.

The report showed that mortgage loan delinquency (the ratio of borrowers 60 or more days past due) increased for the tenth straight quarter, hitting an all-time national average high of 5.81 percent for the second quarter of 2009, an 11.3 percent increase from the first quarter rate. This is an indication we still have a ways to go before we see the foreclosure rate return to something more normal.

TransUnion’s forecasts indicate the 2009 mortgage delinquency rates continuing to climb at a slower pace, reaching less than 7 percent by year end. However, due to a continued downward trend in housing prices throughout the year as well as high unemployment levels, TransUnion does not see national delinquency rates beginning to fall until the first half of 2010.

MBA Survey: Delinquencies Continue To Climb

The latest MBA National Delinquency Survey also shows Delinquencies Continue to Climb.

The delinquency rate for mortgage loans on one-to-four-unit residential properties rose to a seasonally adjusted rate of 9.24 percent of all loans outstanding as of the end of the second quarter of 2009, up 12 basis points from the first quarter of 2009, and up 283 basis points from one year ago, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

The delinquency rate includes loans that are at least one payment past due but does not include loans somewhere in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the second quarter was 4.30 percent, an increase of 45 basis points from the first quarter of 2009 and 155 basis points from one year ago. The combined percentage of loans in foreclosure and at least one payment past due was 13.16 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey.

The seasonally adjusted delinquency rate increased 35 basis points for prime loans (from 6.06 percent to 6.41 percent), 40 basis points for subprime loans (from 24.95 percent to 25.35 percent), and 58 basis points for FHA loans (from 13.84 percent to 14.42 percent), but decreased 15 basis points for VA loans (from 8.21 percent to 8.06 percent).

Florida Worst State In Nation

Florida wins the dubious honor of being the worst state in the nation. A massive Twenty-three percent of home loans in Florida are past due or in foreclosure in the second quarter of this year. For more details please see Florida foreclosures on rise.

As home prices fell and the job picture worsened, the percentage of Florida home loans either past due or in foreclosure hit 23 percent in the second quarter, outpacing any other state in the nation.

The figure represents 807,000 loans, a staggering sum of the roughly 3.5 million mortgages outstanding in Florida.

"Florida deserves special mention as the worst state in the country," said Jay Brinkmann, chief economist of the Mortgage Bankers Association that released the numbers Thursday. "Nevada is a close second, but everyone else is far behind."

Delinquencies and Foreclosures by State

Calculated Risk has an excellent chart showing state by state totals in his post MBA Forecasts Foreclosures to Peak at End of 2010.

Annotations in hot pink are mine.



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Pent-Up Foreclosure Demand

The area in pink represents potential foreclosure demand. Not all of that area will be foreclosed, but some of it sure will. The "Hidden Backlog" mentioned above (and highlighted in red) is within that pink area.

One thing missing from the chart is pent-up demand from those who are not delinquent yet have a huge incentive to walk because of massive negative equity.

For a look at "negative equity", moratoriums, and other foreclosure issues please see Brace for a Wave of Foreclosures, the Dam is About to Break.

TransUnion thinks national delinquency rates will begin to fall in the first half of 2010. I doubt it. Delinquencies and unemployment go hand in hand and unemployment rate is both high and rising discounting the ridiculous drop in the participation rate last month (See Jobs Contract 19th Straight Month; Unemployment Rate Inches Lower to 9.4% for details).

Moreover the unemployment rate is likely to keep rising for at least another year after the official end of the recession. Many hoping to hang on will get wiped out at the very bottom. That unfortunately is the way it has to be.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Belief In Wizards Runs Deep

In response to Misguided Worries About Inflation I received an email from "GR" telling me "The deflation metaphor is not playing out. Every month the things I consume go up in price."

He pointed numerous price increases, including gasoline, up a nickel in a week.

Excuse me but isn't the price of gasoline down $1.50 or more from a year ago?

More to the point, I clearly spelled out in the post that prices are symptoms, not the definition of deflation.

Confusion Over Inflation

Articles like these have people confused about what inflation is. Indeed every week I have someone email me that "We have inflation and deflation at the same time."

No we don't. It is not possible. The reason is falling prices are a symptom of deflation not a definition of it. Falling prices frequently accompany deflation, but they are not a necessary ingredient.

If you need a refresher course please read Inflation: What the heck is it?.

Better yet, read and understand Fiat World Mathematical Model.

Talking about the auto industry and Walmart, "GR" says "They will not sell below cost even if the demand graph drops to zero. They will somehow find a way to get government subsidy, or else they will find a consumer gimmick to increase the price."

Well GM sold cars at a loss for 5 years and that is why they eventually went bankrupt. If GM sold no cars insisting they break even they would have gone bankrupt sooner.

Currently, commercial real estate bankruptcies are growing at a massive rate. So too are bank failures, foreclosures, and credit card defaults. And bankruptcies, foreclosures, and credit card defaults result in the destruction of credit, the very essence of deflation.

Somehow "GR", like many others, has intense faith in the Fed to get prices up and consumers spending. This is in spite of the fact that prices are falling and demand is sinking in the face of the biggest stimulus package the world has ever seen!

Scorecard Shows How Little Power Bernanke Has

In a second email "GR" sent a long list of why what is happening can't happen even though it clearly is. He concluded with "Celente, Schiff, and Weber cannot be wrong, only their timing may be off."

Their timing is off indeed, perhaps by as much as Prechter's was in his deflation call: decades. Prechter was at least right, finally. Deflation is here. Hyperinflationists were wrong betting it would come before deflation. And they are still waiting for Godot.

The reality is Bernanke's Deflation Preventing Scorecard shows how little power the Fed actually has once consumer attitudes change.

Fed Controls Price Of Gold?

A second person told me "The gold market is totally controlled by the FED"

Bernanke is scrambling to prevent the second great depression, cannot get consumers to buy or banks to lend, did not see any of this coming, could not and did not prevent the housing crash, could not and did not prevent the crash in commercial real estate, and has a scorecard of zero in preventing deflation, yet somehow the Fed controls the piece of gold.

Really?

Deflation Denial In Spite Of Overwhelming Evidence

People have misguided faith in the Fed's ability to forever blow bubbles although the power of the Fed is all an illusion.

It's easy to blow bubbles and get consumers to spend when consumer attitudes are on your side. However, it's much more difficult now that consumer attitudes towards spending and banks attitudes towards lending have dramatically reversed.

The Wizard behind the curtain has now been exposed as a fraud. Yet, in spite of massive evidence the Wizard is powerless to change attitudes, most stubbornly believe in the Wizard.

The Winds Of Frugality Blow In Bernanke's Face

Please consider The Consumer Has Dug in His Heels by Bill Bonner.

Since 1945, the US economy – and much of the rest of the world economy – has been carried on the backs of American consumers. First, they spent money they earned during the war years. Then, they spent money they earned in the big boom of the ’50s and ’60s. And then they spent money they hadn’t earned at all. They borrowed from future earnings…increasing total US debt from just 120% of GDP in the ’70s…to 370% of GDP in 2007.

In the last 15 years of that period, especially, each time the consumer showed a reluctance to continue spending, the feds rushed to give him more credit. And during the final five years – the Bubble Epoque – debt doubled.

Now, the consumer has dug in his heels. He’s not going a step further until he unloads his excess baggage of debt.

Once again, the feds are trying to stimulate him. The Fed’s key interest rate is practically at zero. The feds are pumping money into the economy as fast as they can. And they’ll give a fellow up to $4,500 if he’ll agree to kill his old car.

Even with the stimulus spending…and the stimulating low interest rates…he’s still not willing to add debt. Of course, this is just what happened in Japan. The public sector spent; the private sector saved. Net result: an on-again, off-again recession that has lasted almost 20 years.

This morning’s news tells us that the federal deficit through July comes to $1.27 trillion. We didn’t think that was possible. And despite this inferno of new debt…the 10-year Treasury bond yields barely 3.6%. We never thought that was possible either.

So, anything could happen. But generally, government stimulus only works when it is not needed. That is, it only works when it goes in the same direction as the underlying trend…not against it.

But now, the underlying trend has reversed. It’s no longer a credit expansion; it’s a credit contraction. The consumer has had his fill of debt. He’s cutting back on his spending and paying off debt. That’s what the July figures show. That’s been the history of entire downturn. That’s why it’s a depression, not a recession. It’s a major change of direction that will take years to accomplish. Now, stimulus is not only useless – since it is against the major trend – its counterproductive. It delays and contradicts the adjustments that need to be made.

Encouraging people to buy too much was what caused the problem in the first place. Encouraging them to buy more now is not a solution; it’s just a continuation of the same flawed policy of stimulating consumer demand…a policy that has been in place for decades.

But now the wind is blowing in the other direction. The government may not like it, but they can’t stop it.

That article is a great read in entirety. I encourage you to read it. Without even mentioning the word "attitude" that's what Bonner is talking about.

Greenspan was able to reflate time and time again because consumers were trained "cash is trash" and to "buy the dip". Yet Greenspan's power was an illusion, his manipulations were all in the direction of the trend.

Japan failed to stimulate credit because of changed consumer attitudes towards debt.

Bernanke will fail as well. Indeed he already has. His deflation prevention scorecard is proof enough.

Crash Course For Bernanke

Flashback January 28, 2008: Inquiring minds are reviewing a Crash Course For Bernanke

Four Reasons Bernanke Will Fail

• Changing Social Attitudes About Debt (People willing to walk away from homes, save more and spend less)
  
• Commercial Real Estate Crash Underway
  
• Unemployment Soaring as Private Sector Jobs Contract
  
• Global wage arbitrage

Final analysis will show that Bernanke can change interest rates but not attitudes, and attitudes are far more important. Indeed, changes in attitudes will render all of Bernanke's academic theories about the Great Depression meaningless.

Greenspan had the wind of consumers' willingness and ability to go deeper in debt at his back. Bernanke has the wind of boomers fearing retirement in the midst of falling home prices and impaired bank balance sheets blowing stiffly in his face. There is no cure for what ails us other than time and price. And with the aforementioned attitude changes, the biggest, most reckless, global credit expansion experiment the world has ever seen is coming to an end. Central banks are powerless to do anything about it.

Fed Subject to Real and Practical Constraints

The "central banks are powerless argument" always leads to the inevitable response: Why can't the Fed print money and give it away to everyone. The answer is the Fed has no power to give away money to consumers, and even IF they had that power they would not do it. The reason is people would pay off their loans and banks do not want to be paid back with cheaper dollars.

The Fed will not act against its own best interests, and giving money to consumers would be doing just that. That is a practical constraint that nearly everyone misses! Indeed, look who was bailed out, it sure was not consumers, it was banks at consumer expense.

Zero-Bound interest rates is a real constraint. Recently fed Governor Janet Yellen stated the Fed wold lower interest rates if it could. Well it can't!

Thus there are practical as well as real constraints on what the Fed can and will do. Nearly everyone ignores those constraints in their analysis.

Congress in theory and practice can give away money. Indeed, Congress even does that to a certain extent. Extensions to unemployment insurance, increases in food stamps, and cash for clunkers are prime examples.

However, those are a drop in the bucket compared to the total amount of credit that is blowing up. Take a look at the charts in Fiat World Mathematical Model if you need proof.

The key point is it is the difference between Fed printing and the destruction of credit that matters! As long as credit marked to market blows up faster than handouts and monetary printing increase we will be in deflation. Deflation will not last forever, but it can last a lot longer than most think.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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