>The Non-Debate Debate: Palin Twinkles and Winks

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Backwater, NV and the Biden – Palin “Debate:” What debate? Roll Call (sub req) said Governor Palin “held her own.” The Washington Post’s Tom Shales (the Style Columnist) opined “Palin Outdoes Herself, You Betcha,” because she “twinkled and winked…” The New York Times reporter said Palin “made it through the debate without doing any obvious damage to the Republican presidential ticket. This would be all well and good were we stilling living at the time when John Adams referred to the incumbent as “His Superfluous Excellency,” or when Senator Daniel Webster declined to be General Zachary Taylor’s running mate, saying, “I do not choose to be buried until I am really dead.” [CWRUedu]

Sadly, the media narrative is still about “How’d Sarah Do?” rather than what presidential candidate will best address the very serious issues facing this nation. We have a financial sector in full meltdown mode, two shooting wars, a terrorist organization in the wind undefeated by our military adventures, pirates operating off the Horn of Africa, and global climate change issues threatening our existence (the planet will keep spinning until we look like Mars thank you – we’re the ones with the problem). We have blundered through a budget surplus into unimaginable deficits. We have depleted our manufacturing capacity, shipped our well paying jobs overseas, and are looking at more home foreclosures than we’ve had since the Great Depression. We are dependent on foreign oil and will be until we figure out alternative ways to power all the gadgets we’ve purchased using entirely too much borrowing. And, should we dare mention any of these concerns we are “whiners,” and “economic illiterates,” who “look to the past.”

Most corporate media has chosen to narrow the focus to the level of ‘human interest’ reportage, substituting style for substance, and punditry for analysis. The two questions (How did she do? What’s the effect on the campaign?) are perfectly useless, which renders the pixels and print expended equally extraneous. One article in the New York Times did incorporate what should have been the hook for any analysis of the political theater on display this evening: “The issue is how different is John McCain’s policy going to be than George Bush’s,” Mr. Biden said. “I haven’t heard how his policy is going to be different on Iran than George Bush’s. I haven’t heard how his policy is going to be different with Israel than George Bush’s. I haven’t heard how his policy in Afghanistan is going to be different than George Bush’s. I haven’t heard how his policy in Pakistan is going to be different than George Bush’s. “It may be, but so far it is the same as George Bush’s.” Governor Palin stuck to her rehearsed talking points and buzz words.

Perhaps the most telling feature of Governor Palin’s presentation wasn’t the folksy shtick, it was her fervent attempt to distance the Republican ticket from the Bush Administration while avoiding any direct response to Senator Biden’s central question: How would a McCain administration be different? The McCain campaign, it appears, will settle for Huxley’s Formula – repeat “Maverick” often enough and people will begin to accept it as truth? “One hundred repetitions three nights a week for four years, thought Bernard Marx, who was a specialist on hypnopaedia. Sixty two thousand four hundred repetitions make one truth. Idiots!” (Brave New World)

Thus we were treated to one veteran Senator and one media creation. One candidate with significant legislative and foreign policy experience, and one who is packaged like a new product to be rolled out in a carefully orchestrated Madison Avenue campaign. We can have substance or we can have style. Do we really need a vice president who “twinkles and winks?”

desertbeacon.blogspot.com

>Bush to American Public: All We Ask Is The Impossible

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“A Matter of Trust” nails the essence of the current mortgage meltdown/credit crunch, and suggests that the application of one more “trickle down” patch over the intrinsic problems is nowhere near a solution for either Nevada’s or the nation’s economic problems. True. Anyone who remotely believes that increasing FDIC insured deposit levels, creating a TARP plan for lending institutions, or tinkering with mark to market accounting rules, is going to “solve” the issues underlying our economic problems is a prime candidate for an interest only ARM on any number of bridges. There are deeper, more intractable, issues at the base of our economic condition.

Push Pull Economic Growth:

The Push – If we accept that 2/3rds of this country’s economy is predicated on consumer spending, then it stands to reason that governmental economic policies should enhance the ability of individuals to increase their discretionary spending. A government that wants to report a growing consumer based economy would arguably want to increase wages. However, increasing wages leads inexorably to the bug-bear of banking – inflation. Should the economy “heat up” too much, the Fed steps in to raise interest rates to “cool things down,” or to put a lid on the rate of inflation. The Bush Administration was once pleased to announce its hand in a growing consumer based economy, but that growth was illusory – based more on perception than reality.

In October 2005, the White House announced its guidelines for economic growth [WHPR] wherein there would be growth and job creation if (1) real disposable income increased; (2) taxes were cut; (3) we decreased our dependence on foreign oil; (4) NCLB created a better trained work-force; (5) health care and insurance were privatized; (6) Social Security were privatized; and (7) the Administration continued its Free Trade policies. The Administration proudly announced that disposable personal income had increased by $1,900, “homeownership has reached an all time high,” and “productivity is growing at the fastest rate in nearly 40 years.” The entire pronouncement did little more than describe a mirage. We can drill down to see how the Bush Administration created Oz.

General vs. Specific Numbers: Real disposable income in the United States only showed a month over month increase of 5% or more in one month since 2006; that was May 2008 when the economic stimulus package kicked borrowed money back into the consumer/taxpayer’s pockets. From January 2006 to May 2008 the increase was never above 1%, and actually declined in April 2007, November 2007, and January 2008. RDI dropped about 2.5% in June 2008, dropped about 1.5% in July, and decreased about 1.0% in August 2008. [BEA]

That $1,900 increase touted by the Administration and the Heritage Foundation is based on the 2001 report from the Bureau of Economic Analysis showing per capita disposable personal income at $25,697 compared to a 2006 figure, $27,766. [Heritage] What’s missing from this glittering generality is Whose Income Increased? Aggregates are useful, up to a point. If more income is flowing toward the upper socio-economic brackets in which there are fewer people then the result is not likely to be an appreciable increase in overall consumer spending. Unfortunately for the average American that was exactly what was happening.

In June 2005 there were concerns expressed that the rich-poor gap was becoming so wide, and growing so fast that “it might eventually threaten the stability of democratic capitalism itself. [CSM] Former Fed chief Alan Greenspan noted, “The Fed chief then added that the 80 percent of the workforce represented by nonsupervisory workers has recently seen little, if any, income growth at all. The top 20 percent of supervisory, salaried, and other workers has.” [CSM] In less kindly terms, those who were reporting surges in bonuses and stock-option exercises were skewing the curve. The Bush Administration continued to chose thinking in the aggregate – by May 3, 2008 CBS news was reporting that “Rich/poor income gap widening to chasm; evidence shows impact on those at the lower end of wage scale continues to grow.” The situation boils down to an economy in which fewer people have sufficient increases in disposable personal income to put into an economy predicated on consumer spending, and the remaining 80% of the population is looking at stagnating or declining levels of disposable income.

The Pull: Money deposited in investment accounts, savings accounts, and other forms of savings is essential to the healthy operation of our financial services institutions. This sector is looking a little sick, and not just because the Wall Street Wizards found new and creative ways to generate commissions and fees with mortgage based securities packages. As much as some theorists may wish to manipulate the figures, and contest whether NIPA numbers (from the BEA) or Flow of Funds calculations from the Federal Reserve should be applied, the essential track of personal savings in this country is flat or negative. [FedStL] Since the first quarter of 2006 personal savings as a percentage of disposable personal income never rose above 1.1% except for the 2.7% level in the second quarter of 2008 – when presumably some people dumped the stimulus check into a savings account? [BEA]

The Push-Pull: What’s a consumer based economy supposed to do when income gaps are widening, and 80% of the consumer population isn’t seeing appreciable income increases; and, the personal savings rates are flat-lining without “stimulation?” Borrow. From 1990 to 2004 Americans moved from owing approximately 86.2% of their annual disposable income to owing about 105.1%. [CS] The Federal Reserve tables provide a numerical view of this situation.

In 1980 the Debt Service Ratio ranged between 10.58 to 11.13; the range in 2008 is 14.35 for the first quarter, and 13.85 for the second. [Fed] If we add in payments for mortgage debt, homeowners insurance, and automobile leases to get the Financial Obligation Ratio (FOR) the consumer ratio was 5.65 in the first quarter of 1980 and is reported as 6.12 for the second quarter of 2008. The mortgage FOR was 8.12 in the first quarter of 1980, and now sits at 11.38. [Fed] When President Bush took office the mortgage FOR was 9.35, and it’s increased by 21.7% since. The Administration might have been crowing that “homeownership is at an all time high” in October 2005, but the price was a mortgage FOR of 10.37, up from 9.31 at the end of the Clinton Administration, an increase of 11.39%. [Fed]

What were citizens supposed to do? Save more, thereby increasing the deposits on the books of investment houses and commercial banks making them more stable? Save to purchase private retirement and health insurance accounts? Buy a house and join the Ownership Society, creating construction sector employment but increasing their level of mortgage obligation debt in comparison to their annual incomes? Purchase more goods and services to cause the consumer based economy to grow, thereby increasing their levels of personal indebtedness? In the Bush Administration scheme of things in which wages ‘should’ be low to make American goods competitive in the global marketplace and to prevent inflation, the American worker/consumer has little room to move. Americans have been asked to both save and spend – without a corresponding increase in their capacity to do so. It’s about time for an administration that stops asking the American public to do the impossible.

desertbeacon.blogspot.com

>A Matter of Trust … and Solving the Real Problem

>A training developer by profession, I can see parallels in the current economic crisis to what frequently happens in industry when something isn’t working quite right. In industry, managers are quick to blame the problem on poor performance of workers and prescribe a magic bandaid of “training” to fix the problem. They never take the time to discover that there’s a roadblock or a policy that get’s in the way of workers being able to deliver expected performance. Instead of investigating and analyzing the problem and removing the roadblock or faulty policy, managers frequently apply that magic ‘training’ bandaid to a symptom. And all too frequently, that magic bandaid doesn’t deliver the expected performance improvement.

Legislators appear to be doing the same thing. Instead of investigating and analyzing what’s really wrong with the economy and credit markets, they’ve leapt to a conclusion that they just need to throw more money after bad at the top of the food chain believing that somehow, it will immediately trickle down and all will be well and good. Hello?!?! The economy is in this condition because people can no longer pay for their mortgages. To-date, 600,000 759,000 taxpayers have lost their jobs this year, and even more are expected to lose their jobs before the end of the year. And … that 600,000 759,000 jobs number doesn’t include the number of people who’ve lost their jobs, but who’ve dropped off the unemployment rolls because they’re no longer eligible for unemployment assistance.

As I see it, the current problem we’re facing as a nation is a liquidity crisis (a credit crunch). We’ve become a nation of credit-card junkies with very little in savings and far too much debt on credit cards. People who had no business buying homes (because they’d have problems financing bubble gum), financed 100% of their home purchase using multiple loans and in many cases with ‘interest-only’ loans, expecting that they’d just stay in that home long enough for it to rise in value and then they’d sell it making a lot of money. Now add an economic downswing with massive job losses and not only do you get minimum payments against all those credit cards, but you also get homeowner failures-to-pay or inabilities-to-pay for their mortgages. That then leads to declining home values preventing many folks from being able to refinance their home mortgage because their home is no longer worth what they purchased it for.

So getting back to my analogy, throwing money at the financial institutions and shoring up the banks with more money to lend is like throwing money at a symptom of the problem. The locus of the problem is too many homeowners’ inabilities to pay. Thus, the ‘banks’ aren’t the problem, but only a symptom affected by the ‘real’ problem. So, you can shore up the banks all you want, but those liquidity/credit ‘symptoms’ will continually recur until folks in Washington finally begin to understand and deal with the real problem driving the economy.

Instead of continually trying to make ‘trickle down’ economics work, why not turn that around and try a ‘trickle-up’ approach? If they’re going to spend money on anything, why not buy mortgages directly from the taxpayers who’re slated for foreclosure. The government would then be in the position of being able to renegotiate the terms of those (predatory?) mortgages, adjusting the interest rates and length of those loans and then collecting monthly payments on those renegotiated mortgages. Buying these mortgages instantly puts money back in the banks, stablizes the housing market and has a positive impact on the economy as a whole.

Personally, I don’t trust the judgement of President Bush nor do I trust the cronies he placed in key governmental offices to stabilize this economy. Similarly, I don’t trust Mr. McCain, who was directly involved in creating the Savings & Loan crisis as a member of the Keating Five, to come to the rescue of our failing economy. The last thing we need is a maverick who’s being advised by Phil Gramm (i.e., “nation of whiners” comment and deregulation that led to the Enron debacle) and who shoots from the hip, shouts ‘fire him’ without thinking about the consequences that that would leave no one in a position to take needed action until a replacement could be confirmed by Congress, and who clearly doesn’t understand economics (let alone the difference between tactics and strategies).

All attention is being focussed on the Paulson Plan and modifications to that plan. Excuse me, but less than a month ago, President Bush and Mr. Paulson were repeatedly saying the economy was fundamentally sound. If they didn’t understand the nature of the problem then, why should we trust that either of them clearly understands the problem now?

There are a few in congress who are promoting a plan that minimizes the impact on taxpayers and that doesn’t cause the national debt to balloon to twice its outrageous size over the next few months. That plan is being promoted by Rep. Marcy Kaptur (D-OH) and Rep. Peter DeFazio (D-OR). Here’s a C-SPAN video with Rep. DeFazio, Rep. Kaptur and others talking about their ‘no-bailout’ bill approach.

Related Articles:

• A Nation of Village Idiots, by James Moore
• Why the Media Silence over John McCain’s involvement in The Keating 5?

Cross-posted from Rockspot

>Technical Difficulties

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Back Soon !
desertbeacon.blogspot.com

>Tanked

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Granted DB is a rural Nevada blogger, with precious little in the way of an academic background in economics – but, I am perfectly capable of recognizing a train wreck when I see one. Previous posts – probably too many – have been devoted to how and why we got into the financial services fiasco we’re seeing today. Previous posts – probably too many – argued that we, as a nation, need to do something about this, and soon. Additionally, we need to get past some of the emotional roadblocks that are preventing solutions.

Why do we need to do something? First, in spite of what the stock market did today, this is not a stock market problem. The tanking market was a symptom, and not the cause of the disease. The problem is a freeze up in the financial services sector. This sector handles everything from commercial lines of credit to major corporations to credit lines for small businesses. It deals with student loans, credit card interest rates, and (yes) mortgages. Yes, the financial services industry behaved badly. However, given the de-regulation binge we’ve been on coupled with the focus on short term (quarterly) earnings, we shouldn’t be surprised this has happened. Industries attract investment because they are profitable, not necessarily because they are good corporate citizens.

High leverage (debt) usually means high profits, and we allowed major investment firms to leverage up to 40:1. Now, the banks and other elements of the financial services sector are “de-leveraging” and that means less money in the pipeline – everyone’s pipeline. If we expect small businesses to get a 7 day loan to cover payroll, then the pipeline has to be open. If we expect automobile dealers to sell vehicles, then the pipeline has to be open. If we expect a family to secure a student loan at anything like an affordable interest rate, then the pipe line has to be open. If we expect that mortgage holders should be able to renegotiate an ARM into something more affordable, then the pipe line has to be open. Right now it’s shut. What prevented the House from passing a financial services sector rescue bill today to open the pipe line? (Hint: It wasn’t Speaker Pelosi’s comments on the floor. Rep. Barney Frank (D-MA) made that clear.)

Ideological Barriers: There was an interesting exchange on CNN today between Donna Brazile and ultra-conservative Terry Jeffreys that illustrated this issue. Jeffreys charged that homeowners who are paying their mortgages shouldn’t have to subsidize those who are not. Brazile responded that if homes in her neighborhood decline in value, then so does her house, all while she’s paying a heavier share of the local property taxes and feeling the effects of the credit crunch in her attempts to secure her own credit. Jeffreys then changed the playing field – from the local to the theoretical – asking, “But, what kind of economic system do we want?”

His preference, of course, was free market capitalism. This is the point at which pragmatism runs straight into purity. Do we want a pure version of free market capitalism in which homes in neighborhoods across the nation are allowed to “bottom out” to divest the country of “over-valuations?” Do we not want to see a situation in which some homeowners bear the major brunt of the crisis in foreclosure, others watch as their property values decline while the mortgage remains the same, while still others are free to sneer at the silly little people who bought more than they could afford from the comfort of their stable communities? Or, are we willing to allow government to prod the financial services industry into renegotiating the mortgage paper that’s clogging up the system? A person’s perspective on purity will likely depend on whether one is in foreclosure, looking at an “upside down” mortgage, or comfortably sitting in a home long since paid off, and empty of children who have long since graduated from college.

Lousy Framing: The bill was probably dying as soon as the phrase “bailout” was applied. Yes, most of the financial services firms were physically located on Wall Street, but this bill wasn’t about the equities market. It was about the financial services market, and frankly speaking Secretary Paulson didn’t make that clear. However, all most people perceived was that the golden parachuted CEOs and their lackeys were about to get bailed out of the mess they’d created – after Bear Stearns, Merrill Lynch, AIG, Fannie and Freddie. No wonder the protesters took to Wall Street. Pride does come before the fall. The profits were great while they lasted, but in an over-heated, over-leveraged sector of the economy they weren’t going to last any longer than the Dot.Com IPOs nearly a decade ago.

The field was ceded to the free market buccaneers to define the bill’s provisions as a “bail out” for miscreants, not a rescue for average Americans who depend on credit to get paid and get by.

Better luck next time.

desertbeacon.blogspot.com

>Monday Clips

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Evidently, the McCain campaign isn’t finished declaring victories before the debates take place. Gov. Mitt Romney will be stumping for the Palin-McCain Ticket in Elko, NV on Thursday at a “Pre-Debate Victory Rally.” [EDFP] Meanwhile, corporate media types admit that they’ve self censored their coverage of Palin out of fear of being perceived as “piling on.” [TP]

OK, now we know what reward Senator John Ensign (R-NV) wants for his service to the GOP as the National Republican Senatorial Committee Chairman. He wants to be chairman of the Senate Republican Policy Committee during the next session. [LVRJ]

Perhaps in five to ten years residents of the Maryland Square area in Las Vegas, NV will be free of the PCE contamination, and be living in an environment friendly to human beings? [LV Sun]

The Nevada Supreme Court favors giving judges more “discretion in providing alternative sentencing in specialty courts.” [NV Appeal] University of Nevada Chancellor Jim Rogers announced that he will step down next year when his contract expires. [RGJ]

Pro Publica summarizes an investigation into the collapse of AIG.

The Alliance Defense Fund, founded by Focus on the Family CEO James Dobson, has convinced 33 pastors to join in “Pulpit Freedom Day” during which they’ll be endorsing political candidates, in contravention of their IRS status requirements. [CoIndp] The Department of Justice says it will be monitoring the Michigan GOP about its proposed “Foreclosure List Caging Scheme” for vote suppression. [MI Messenger] The House Judiciary Committee asked the Attorney General to investigate the foreclosure list scheme. [MI Messenger] The Michigan GOP may have dropped the foreclosure list, but has some “other things in mind.” [MI Messenger]

desertbeacon.blogspot.com

>The Sunday Deck Bass: The GOP’s Stinky CRA-fish

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Our northern Nevada Sunday Deck Bass award is once again a small fish compared to the GOP attempts to explain its way out of its incumbency. That thrashing and splashing noise we’re hearing in the wake of the negotiations on the Wail Street Bailout bill give every appearance of coming from a Republican party that doesn’t wish to celebrate the fact that they’ve held the Presidency for the past eight years, and controlled Congress from ’94 to ’06. If the Chicken of De-Regulation hadn’t just laid an extra large egg, the clucking from Representative Dean Heller (R-NV2) and other House Republicans might not be so dissonant. At one point in time, not so very long ago, the GOP was pleased to be the Party of De-Regulation; “let’s get government out of people’s lives,” “you know better what to do with your money than some bureaucrat.”

When the compliant GOP controlled Congress passed the bill six years ago insuring that credit default swaps would not be regulated, Senator Phil Gramm (McCain economic adviser, now “informal” after calling us “a nation of whiners,” and “economic illiterates”) told the nation: “The work of this Congress will be seen as a watershed, where we turned away from the outmoded, Depression-era approach to financial regulation and adopted a framework that will position our financial services industries to be world leaders into the new century.” [LV Sun] Gramm also sponsored and secured passage of the 1999 bill that destroyed the “wall” between commercial banks and investment houses that was supposed to protect bank deposits from the vagaries of the stock market. [LV Sun]

The CRA Canard: Anxious to deflect the blame for the mess created by Republican de-regulation schemes the GOP has returned to an old target, the 1977 Community Reinvestment Act that conservatives have attacked as “compelling banks to make loans to unqualified people.” [TB] The GOP is simply playing the race card, [TP] the National Review claiming the legislation was the result of “racially inflammatory campaigns that forced banks to make mortgages available to people without much in the way of income, assets, or credit.” [AJC] The act did no such thing.

What the CRA did was to stop banks from “Red-Lining,” withholding loans from entire neighborhoods along racial or ethnic lines. The fact, which GOP members conveniently omit, is that “federal law requires that CRA lending activities must be done consistent with safe and sound banking practices. In reality, most high-cost loans were originated by lenders that did not have a CRA obligation and lacked federal oversight.” [MST] (emphasis added) The bottom line is that the Community Reinvestment Act does NOT require any bank to make any loan to any unqualified home buyer – just the opposite; and most of the problem loans were made by institutions not subject to federal oversight.

A September 26^th letter from the Congressional Black Caucus [link to document] to GOP Minority Leader John Boehner (R-OH) challenging comments made by Rep. Michele Bachman (R-MN) [TP] that the CRA caused the mortgage meltdown seems not to have stopped Republican efforts to maintain this canard in the face of facts to the contrary. Rep. Eric “Signature’s Sandwich” Cantor (R-VA) was on MSNBC this morning launching the self-same lie, and was in his turn challenged by Rep. Barney Frank (D-MA).

Just how far from the facts the racially tinged charge made by Bachman and Cantor are is illustrated by the testimony of Sandra F. Braunstein, Director of the Division of Consumer and Community Affairs of the Federal Reserve to the House Financial Services Committee on Feb. 13, 2008. Braunstein provided some important historical context for her report on the CRA:

“The debate surrounding the passage of the CRA was contentious, with critics charging that the law would distort credit markets, create unnecessary regulatory burden, lead to unsound lending, and cause the governmental agencies charged with implementing the law to allocate credit. Partly in response to these concerns, the act adopted by Congress included little prescriptive detail. Instead, the CRA simply requires the Federal Reserve and the other federal financial supervisory agencies:

• to encourage federally insured depository institutions to help meet the credit needs of their entire communities, including low- and moderate-income areas, consistent with safe and sound operations;

• to assess their records of performance under the CRA during examinations; and

• to take those CRA records into account when evaluating proposals for expansion.

The law gives the agencies considerable discretion and flexibility to fashion programs and procedures to carry out the purposes of the law, to issue implementing regulations that include measures of performance, and to modify those regulations in response to changing markets. This flexibility has contributed to CRA’s relevance and adaptability through times of rapid economic and financial change, and widely differing economic circumstances among neighborhoods.”

So, why would Republicans attempt to tie this act to the present mortgage meltdown? – simply because it was passed during a Democratic administration. The Republicans appear to be casting about for any finance bill passed during any Democratic administration to play the “they did it too” game, thus diminishing their culpability for the de-regulation fiasco that precipitated the current financial problems. It’s instructive to note that one of the major GOP objections to the CRA at the outset was that it would “create unnecessary regulatory burdens” on financial institutions.

No, requiring regulated banks to provide loans to qualified and credit worthy members of underserved racial and ethnic groups did not cause the systemic failure created by unregulated financial institutions who made predatory loans to unqualified and uncredit-worthy people in the interest of promoting the Bush administration’s Ownership Society.

The GOP “fishing expedition” to find some other excuse for the impact of their de-regulation binge, is peculiarly stinky.

desertbeacon.blogspot.com

>The Bail Out Plan: Where’s the Pain? Try your local car dealer?

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Representative Dean Heller (R-NV2) is among the House Republicans questioning the Administration’s bail out proposal for American financial institutions. “Heller questioned whether the proposed rescue will work or is even advisable. Paulson has told Congress the bailout will settle jittery markets. But, Heller said, “I am not convinced.” […] “A lot of us stepped up,” Heller said. “But it is just one after another. Every time we are told that we have controlled the problem, but then we hear two weeks later that this is getting bigger.” […] “And now you are asking me to bail out Wall Street?” the roofer told Heller. “I am feeling pain today. What pain is Wall Street going to feel?” [LVRJ] OK, Mr. Pure Free Market Capitalism – how about speaking to local and regional pain?

The lack of available credit hit home in Las Vegas this week when two car dealerships shut down. “The difficult sales environment was made worse by the banking and financial crisis, the statement said. GMAC Financial Services last month discontinued credit for new inventory for some of the company’s dealerships.” [LVRJ] (emphasis added) So, when we add up an inventory too full of SUVs and trucks, high fuel prices, and pile on a lack of financing for customers the total includes lost jobs at the dealerships.

Customers looking for a 48 month loan in Las Vegas will find Capital One offering one for 5.54% with “excellent credit only,” available for franchise dealerships only. Wells Fargo ranges from 6.89% to 12.39% with the 48 month version costing 7.89%. Nevada State Bank is offering 7.29% and a $50 fee; Bank of America is willing to lend for 5.84% with a $200 fee. [BR.com] Nevada Federal Credit Union auto loans range from 6.0% to 15.99% depending on individual credit standing, collateral age, collateral value, and loan term. [NVFed] Loans within the 4-5% range available five years ago for 48 month payment schedules are a little segment of history gone by. The situation is about the same in the Reno metropolitan area.

In the Reno area, Bank of America offers 48 month loans at 5.84%; Wells Fargo ranging from 6.89-12.39%; Nevada State Bank at 7.29%; Capital One “excellent credit only,” “franchised dealerships only” at 5.54%; U.S. Bank 6.29% with $50 fee. [BR.com]

This situation resembles a whirlpool in which lending institutions, loaded up with mortgage based securities of highly questionable value, (if, in fact, they can be priced at all) de-leverage by making fewer loans; leading in turn to less credit available to consumers; the less credit available to consumers, the fewer cars they buy – the few cars sold the more likely the local dealerships fold – local jobs are lost and the newly unemployed find it more difficult to make rental or mortgage payments. This is what an economic death spiral looks like at the local level.

Rep. Heller’s “roofer” wanted to know when Wall Street was going to feel the pain? [LVRJ] The fact that the 4.35% auto loan available to those with good credit ratings in 2003 has now increased to at least 5.54% should be a good indication that Wall Street is already feeling the pain and is passing it along down the food chain to the average Nevada auto shopper.

The Bush Administration economic growth figures – a house with no foundation. Two-thirds of the U.S. economy is based on consumer spending, and from 2004 through 2006 Americans “pulled about $840 billion a year out of residential real estate, via sales, home equity lines of credit and refinanced mortgages, […] and “financed as much as $310 billion a year in personal consumption.” [IHT] To this loss of equity we can add the loss in property value that happens when foreclosed, vacant, properties burden the neighborhood. Should an expected level of foreclosure materialize the U.S. is looking at a loss of more than $200 billion in home equity, and Nevada’s share would be about $3 billion. [FLNW] Granted that some people took out home equity loans for some fairly silly notions, but many used their homes to finance medical or educational expenses. Whatever the rationale, solid or silly, home equity rates declined, home values declined, and the consequent devaluation of real estate derivatives held by lending institutions into “fire sale” territory means that consumer credit is getting harder and harder to find.

Nevada consumers won’t be getting any more loans from the First National Bank of Nevada [MSNBC] it was declared ‘undercapitalized’ and shut down by the FDIC in July 2008, nor will they get credit from the Silver State Bank in Henderson. Silver State was shut down in September 2008 after over-exposure to risky real estate loans. [MrktWtch] Paper from these two is, no doubt, still floating out there somewhere in Derivative Land, its value somewhere in the fictive Fire Sale and Hold to Maturity price range.

The dismal connection between the shuttered car dealerships and the Bush Administration can be seen in the President’s cheerleading for “economic growth” predicated on consumer spending. After the attacks of 9/11/2001 we were encouraged to “go shopping.” We did. Some of us used home equity lines of credit and second mortgages to do so. Some took up offers of low interest loans for vehicles. Some just used the house as a stick built ATM. However, when the dust settled on the Bush Mirage, and when the stagnating wages, increasing health care costs, and inflation pressure set in – the balloon was pricked, and even though some of the punctures were small it didn’t take much to constrict the system causing the current tight credit market. Indeed, what goes around, comes around – even in the rarefied air of Pure Free Market Capitalism where there is enough “pain” for everyone.

desertbeacon.blogspot.com

>Bail Out: The 800 Pound Unanswered Gorilla Question in the Room

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The Wail Street Bail Out is a bitter pill for independently minded Nevadans to swallow – in part or as a whole. However, for all intents and purposes it is, indeed, the only real game in town. There are some interesting, and possibly useful, proposals on the table, but most are too little and all are too late. First, a brief review:

The current mess is a direct result of too many investors crammed into too narrow a market. The Bush Administration emphasis on the Ownership Society helped attract capital into the housing market, and the Bush Administration’s disinclination to actually do any real oversight contributed to the Wail Street Blues after all the mortgages had been sliced, diced, and sold off in packages – the losses in which to be “insured” by credit default swaps, and other arcania. This situation fuels the public’s distaste for bailing out the idiots who erected this house of cards (paper.)

The central question: The aforementioned idiots built their houses of paper (AIG, Bear Sterns, Lehman Bros. Merrill Lynch, Washington Mutual, IndyMac, etc.) on foundations of highly leveraged positions. Translation – they had way too much questionable debt on their books. In the case of Fannie Mae and Freddie Mac they started to “eat their own” paper, like the investment banks they bought up the asset based securities. Now, the central question is – How much are these asset based securities worth? Are they only worth the fire sale prices at best 30 cents on the dollar? Are they worth the ‘hold to maturity’ price, given that only about 24% of subprime mortgages are in real trouble, and even fewer of the Alt-A or Prime mortgages are subject to foreclosure. Herein lie the problems with the so-called alternatives.

Personally, I’m all in favor of ripping the cords off the Golden Parachutes, and taking a long hard look at the way publicly traded corporations remunerate their officers. However, that doesn’t address the central question: How much are the asset based securities on the books worth? The corner office crews who bought asset based securities at Merrill Lynch, Lehman Bros., Fannie Mae, Freddie Mac, and Bear Sterns, are for the most part long gone, leaving others to clean up their memorable messes. The officers at Wachovia [MSNBC] who thought it would be a grand idea to buy Golden West – up to its nose in the real estate market – deserve all the vilification they can get. But, vilification doesn’t come close to answering that nagging question – how much are the derivatives worth?

As long as there are derivatives on the books that require the corporations to de-leverage their firms, AND the value of those derivatives is an unknown, there will be a stopper in the flow of money to be borrowed. How can an officer at any of these financial institutions intelligently de-leverage (decrease the debt) his or her company without any idea what the ABSs are really worth? What other firm would buy the ABSs without a clear idea of their actual value? Answer – no one in his or her right mind.

I’m also in favor of making it easier on those 74% of the subprime mortgage holders who are keeping up with their payments, and the Alt-A and Prime Mortgage holders who are doing likewise. Obviously, the more the current holders of mortgages can stay out of the foreclosure process the better – and the more Asset Based Securities containing those mortgages will be worth. Suggestions that Congress improve the Bankruptcy laws, and provide assistance to mortgage holders, are good ideas and should be explored to insure that the current credit crunch doesn’t continue to metastasize. Once again – for all the good that is intrinsic in these proposals they do not answer that nagging inquiry – how much are the current ABSs worth? Supporting mortgage holders is good. Supporting mortgage holders may contain the problem and cause more firms to be interested in purchasing the ABSs, thereby increasing their value – but increasing from What?

One of the actions that should come as a result of this chaotic morass is a requirement that lending institutions limit their leverage ratios. The Bush Administration action to allow five firms to leverage up to 40:1 was not only silly, it was downright tragic. That said, bringing the debt to asset ratios down to a more reasonable 12:1 doesn’t help when it isn’t known what the One is worth.

Nine days into the chaos the House Republicans authored their version, saying that the Federal government shouldn’t purchase ABSs but rather the Treasury Department should design a system to insure mortgage based securities with the securities holders paying premiums to finance the insurance. Fine – but, tell me, how to you “value” the securities on which the insurance is to be purchased? The last time I looked, my homeowners insurance was based on the value of my home. How is an institution supposed to purchase insurance on assets the value of which is undetermined? How is anyone supposed to calculate the premium for insuring assets the value of which no one knows?

Of course, the House Republicans turn next to “injecting capital” by “removing regulatory and tax barriers that are currently blocking private capital formation.” [Crypt] Ah yes, let’s further de-regulate a market that got into this mess in large part because it was so minimally regulated!

Further along, the House Republicans call for “temporary tax relief provisions, …to free up capital,” (nothing new here) and then make this inexplicable recommendation: “Immediate Transparency, Oversight, and Market Reform. Require participating firms to disclose to Treasury the value of their mortgage assets on their books, the value of any private bids within the last year for such assets, and their last audit report.” Any firm can disclose the “value of their mortgage assets on their books,” just like I can tell you that I think my living room furniture is worth a million dollars. Any firm can report “the value of any private bids,” if indeed there are any. This suggestion seems to address solving the problem by ignoring the fact that it exists. The value of the mortgage assets on the books is a function of their value in the market, and if there is no market then there is no value. In the parlance of the business reporters, these assets are “illiquid” meaning no one wants to buy them. We are right back to square one: How much are these mortgage based securities worth? Little wonder Treasury Secretary Paulson rejected the House GOP plan as unworkable.

There are things that can, and probably should, be done as the Congress works through the Debt Debacle. CEO’s need their wings clipped, homeowners need some assistance staying out of the foreclosure process, financial institutions need to be more open and forthcoming about their businesses, rating agencies need to be supervised, exotic financial instruments need to be regulated, and the Federal regulatory agencies need to develop some spine. While all of these outcomes would improve our economic situation, none answer the specific and immediate cause of our financial meltdown – How do we determine the value of the mortgage based securities clogging the books of our financial institutions?

As much as it pains me to say so, the only plan on the table to establish a value is that presented by Secretary Paulson. He will no doubt not get the blank check he originally had in mind, and he will probably have to accept some regulatory provisions he may find unappealing – but he will get the chance to see if the Treasury Department can devise a way to answer what has thus far been unanswerable – how much are those financial artery clogging assets really worth?

desertbeacon.blogspot.com

>Distraction Accomplished: McCain will debate

>

The situation: The San Francisco Fed, which governs the western region including Nevada, summed up the housing market and financing situation in a memo released September 19th:

“Outside of expanded lending by the FHA, there is now little or no lending to higher-risk residential mortgage borrowers. Jumbo mortgages for prime borrowers are available, but at historically high spreads over rates on conventional mortgages, as banks have been reluctant to make these loans. Beyond higher rates, many depositories are tightening the terms of their lending, capping or terminating some home equity loans, and in general trying to reduce their exposure to credit losses by reducing the scale of their lending. Importantly, the government-sponsored agencies—Fannie Mae and Freddie Mac, the largest of all mortgage lenders—have suffered credit losses and are having to pare back their crucial roles in the mortgage market. The result of all of this is a severe economy-wide credit crunch, comparable to the one that hit the economy in the recession of the early 1990s.” (Janet Yellen, CEO) [SF Fed]

Translation: Lending institutions are trying to cut back on their losses by reducing the loans on their books. The result is that as banks seek to reduce their “exposure” (risk) they’ll pull back on loans making them more expensive (see jumbo loans above) or unavailable (no more subprime mortgages). No money = no housing market recovery. No housing market recovery = continued high unemployment in the construction sector and related declines in retail consumption (everything from new appliances, to furniture and home improvement and maintenance purchases). Note: I’ve argued for at least a year now that housing is a “mid-stream” economic sector with ripples that move both up and across the economic food chain. And now, the lending institutions are pulling back from the precipice by increasing the cost for consumer credit, tightening student loan requirements, and squeezing lines of credit to manufacturers, wholesalers, and retailers. This would, indeed, be enough to put Treasury Secretary Henry Paulson on his knees before House leadership pleading for assistance mitigating the underlying risk. It would also be sufficient to make House Speaker Nancy Pelosi tell the Secretary that he might first look to the ideologically driven House Republican caucus for the cause of the legislative logjam.

Enter Senator John “The economy is not my strong suit” McCain: The Senator spent 26 hours getting from New York to Washington to offer his “help” in this “dire situation.” Exactly how and in what form this assistance might take remains a mystery. The Arizona Senator’s been all over the lot. About 10 days ago, the “fundamentals of the economy were strong,” followed by “we need a commission to study the issue.” Senator McCain then reversed course and announced that there was, in fact, a serious crisis, which required immediate action. What action? Regulation? On September 16^th Senator McCain was proposing “strong regulatory oversight of Wall Street,” [TP] after, of course, he’d spent his career opposing just such regulatory oversight. The Paulson Plan (Cash for Trash) was released last Friday, Sept. 19^th, and by his own admission Senator McCain hadn’t read all three pages of it until the 23^rd. [TPM]

During an interview with a Philadelphia radio station on the 23^rd McCain tacked once again, saying “people don’t want regulation,” and re-iterating his contention that he has been calling “for fixing Fannie and Freddie a long time ago.” [TP] This doesn’t answer those who have inquired about the level of his involvement with S. 190 or why he hasn’t signed on as a co-sponsor of the current version S. 1100, Senator Hagel’s bill to increase oversight of Fannie Mae and Freddie Mac.

When in doubt – Distract: Given the Senator’s on-again – off again comments on regulation and oversight, and his initial subdued reactions to the credit crunch, McCain pulled the “Hail Mary Pass” card from his deck. He’d “suspend his campaign,” and “skip the Friday debate.” Unfortunately, the McCain campaign sent its e-mail about campaigning while ‘not’ campaigning to the entire Colorado media list. [CO Ind] Most of the corporate media dodged to McCain’s feint.

The “question” distracting the Chattering Class of Television Punditry is NOT the progress of Congressional negotiations on the bail out proposal; or, even McCain’s refusal to take a position either solidly with the White House or the House Republican caucus. The Pundits are obsessed with “whether or not McCain will show up” in Oxford, MS this evening for the scheduled debate. Kudos to the McCain campaign – it played the media like a harp.

What’s not being headlined? While the chatterati are obsessing over McCain’s distraction, the seizure of Washington Mutual by the FDIC, and its subsequent sale to JP Morgan Chase, [NYT] the largest bank failure in American history, goes relatively uncommented upon. The expense of insuring Wachovia’s debts rose after the WaMu collapse. [Reuters] The New York Times headlines, “Credit enters a lockdown,” and some might want to attend to “Lessons from 124 banking blow ups.” The Department of Commerce has revised U.S. economic growth figures downward. [NYT] and KB (one of the largest homebuilders in the U.S.) reported that its third quarter losses quadrupled from one year ago. [NYT] On the energy front King Abdullah of Saudi Arabia wants to lower prices to secure long term demand and is running into opposition from other OPEC ministers. [BusWk]

President Bush spoke more soothing words to Wall Street in a brief public announcement this morning, and Senate Majority Leader Harry Reid (D-NV) said, “We’re going to get this done and stay in session for as long as it takes to get it done.” [NYT]

Apparently, the McCain campaign was finished “suspending,” and found the meager news about the bail out negotiations re-starting sufficient to announce that “yes” the Senator would attend tonight’s debate. [Reuters]

Distraction Accomplished.

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