1--Financial reform starts with raising the down payment to 20%, Dr Housing Bubble
Excerpt: If we want to start with some serious housing reform we need to increase the down payment amount. I’m not a big fan of Fannie Mae, Freddie Mac, or the FHA but there was a long period of time, decades in fact where the system seemed to be working. At the very least there was no national housing bubble. The government backed loans with strict underwriting and this included sizeable down payments of close to 20 percent. In the late 1990s and starting in the early 2000s Wall Street investment banks thought it would be a smart idea to go with “easier” standards (aka a pulse) and fueled the housing mania. Fannie Mae and Freddie Mac was put into conservatorship after the collapse and yet little has changed in terms of housing finance. New discussions on reforming the mortgage market do very little in addressing how we went decades with a rather stable housing market with government subsidies in the mortgage market to this once in a lifetime bubble. The FHA has now stepped into the place of exotic mortgage financing to bring buyers into homes with pathetically low down payments. Low down payments are one of the main reasons why home prices became inflated and also lead to future foreclosures as we will explain shortly.
There was a time for many decades when the typical down payment requirement was 20 percent. Incredibly over this time Fannie Mae and Freddie Mac did an okay job. Sure, I’m not a fan of the government subsidizing home purchases because in the end this inflates prices but we didn’t have anything close to a national housing bubble. All of this hit when Wall Street figured out they could lower the bar even further to make criminal bonuses and when things were certain to go bust, then the taxpayer would be there to clean it up. How did they know this? They bought politicians who wrote laws in favor of these leeches. All of it played out as planned and it is no surprise that banking bonuses are off the charts again while the economy is mired in distress.
2--Eat the Future, Paul Krugman, New York Times
Excerpt: On Friday, House Republicans unveiled their proposal for immediate cuts in federal spending. Uncharacteristically, they failed to accompany the release with a catchy slogan. So I’d like to propose one: Eat the Future....
The new House majority promised to deliver $100 billion in spending cuts — and its members face the prospect of Tea Party primary challenges if they fail to deliver big cuts. Yet the public opposes cuts in programs it likes — and it likes almost everything. What’s a politician to do?
The answer, once you think about it, is obvious: sacrifice the future. Focus the cuts on programs whose benefits aren’t immediate; basically, eat America’s seed corn. There will be a huge price to pay, eventually — but for now, you can keep the base happy.....
If you didn’t understand that logic, you might be puzzled by many items in the House G.O.P. proposal. ... Once you understand the imperatives Republicans face, however, it all makes sense. By slashing future-oriented programs, they can deliver the instant spending cuts Tea Partiers demand, without imposing too much immediate pain on voters. And as for the future costs... — well, tomorrow is another day.
3--Bernanke Acknowledges Risings Yields a Sign of Success, macromarketmusings.blogspot.com
Excerpt: For some time now, I have been making the case that a sign of QE2 success would be rising yields rather than falling yields. Yes, interest rates may initially fall, but if QE2 is successful in raising expectations of real growth then interest rates should start to increase. For example, back in December, 2010 I said the following:
If QE2 is successful, then we would expect treasury yields to rise! A successful QE will first raise inflation expectations. This alone will put upward pressure on nominal yields. However, expectations of higher inflation are in effect expectations of higher nominal spending. And higher expected nominal spending in an economy with sticky prices and excess capacity will lead to increases in expected real economic growth. The expected real economic growth should in turn increase real yields. It is that simple.
Given this understanding, it has been frustrating to watch the Fed sell QE2 to the public as working through the lowering of interest rates. This marketing of QE2 creates the false impression it will only work if yields remain low. It gives critics of QE2 more ammunition and ultimately undermines the effectiveness of the program. Thus, I was please to see Bernanke say this today in his speech:
A wide range of market indicators supports the view that the Federal Reserve's securities purchases have been effective at easing financial conditions... Yields on 5- to 10-year Treasury securities initially declined markedly as markets priced in prospective Fed purchases; these yields subsequently rose, however, as investors became more optimistic about economic growth and as traders scaled back their expectations of future securities purchases. All of these developments are what one would expect to see when monetary policy becomes more accommodative.
4--Fannie/Freddie Market Share Plummeted During Boom, The Big Picture
Excerpt: You may have missed Matt Phillips massive read Friday afternoon on the GSEs in the WSJ blog Marketbeat.
The entire piece is definitely worth your time, but I found one chart especially compelling: It shows Fannie & Freddie’s market share plummeting from over 70% to under 40%, as Wall Street securitized all manner of non-conforming mortgages (must see chart)
There is no way to reconcile this chart with the jihadist blatherings of folks like AEI and CATO.
The facts of the matter are simply this: During the housing boom, it was Wall Street, and their mad purchases of Sub-Prime, Alt A and non conforming loans for their privately issued securitization that drove the credit bubble. Not, as the ideologically blinded Peter Wallison claims, Fannie & Freddie.
5---Judge roils MERS: "this process does not comply with the law”, The Big Picture
Excerpt: “MERS and its partners made the decision to create and operate under a business model that was designed in large part to avoid the requirements of the traditional mortgage-recording process. The court does not accept the argument that because MERS may be involved with 50 percent of all residential mortgages in the country, that is reason enough for this court to turn a blind eye to the fact that this process does not comply with the law.”
-U.S. Bankruptcy Judge Robert E. Grossman
To be technically precise, they lack the ability to legally transfer mortgages. That doesn’t mean they are invalid, but it does eliminate their reason for existence.
Merscorp Inc., operator of the electronic-registration system that contains about half of all U.S. home mortgages, has no right to transfer the mortgages under its membership rules, a judge said.
U.S. Bankruptcy Judge Robert E. Grossman in Central Islip, New York, in a decision he said he knew would have a “significant impact,” wrote that the membership rules of the company’s Mortgage Electronic Registration Systems, or MERS, don’t make it an agent of the banks that own the mortgages.
“MERS’s theory that it can act as a ‘common agent’ for undisclosed principals is not supported by the law,” Grossman wrote in a Feb. 10 opinion. “MERS did not have authority, as ‘nominee’ or agent, to assign the mortgage absent a showing that it was given specific written directions by its principal.”
6--Already, concerns of 'terrifying' exuberance in CMBS, Zach Fox, snl.com
Excerpt: Virtually dead only a matter of months ago, the CMBS market has roared back to the point where industry observers have started to raise concerns that irrational exuberance might be around the corner.
Driving the recent buzz in the marketplace has been some conference talk and a pair of relatively large deals: a $2.2 billion issuance from Deutsche Bank and UBS, and a $1.55 billion security from Morgan Stanley and Bank of America Merrill Lynch.
At several recent conferences, market participants enthused about the prospects for CMBS in 2011.
There is budding interest from "nontraditional" funds in B-piece investing, said Gabe Poggi, an analyst with FBR Capital Markets who recently issued a note outlining CMBS market participant sentiment during a January CMBS conference hosted by the Commercial Real Estate Finance Council. These funds do not typically invest in CMBS but have become starved for yield in the low-interest rate environment and are entering the CMBS markets in search of relative value.
"Is that terrifying? Absolutely," Poggi said, adding that the nontraditional investors are still showing prudence. "I think it becomes, 'Uh-oh, put on the brakes time,' when the see-saw goes heavily weighted toward the nontraditional guys coming in and taking stuff down just to take stuff down....
"There are more players today than there were in the heyday of CMBS in 2005 to 2007," he said. "It's incredible."
At yet another conference — the American Securitization Forum — the mood around CMBS was similarly giddy.
7--Kyle Bass' Latest Must Read Letter: "The Cognitive Dissonance Of It All", zero hedge
"Dear Investors: We continue to be very concerned about systemic risk in the global economy. Thus far, the systemic risk that was prevalent in the global credit markets in 2007 and 2008 has not subsided; rather, it has simply been transferred from the private sector to the public sector. We are currently in the midst of a cyclical upswing driven by the most aggressively pro?cyclical fiscal and monetary policies the world has ever seen. Investors around the world are engaging in an acute and severe cognitive dissonance. They acknowledge that excessive leverage created an asset bubble of generational proportions, but they do everything possible to prevent rational deleveraging. Interestingly, equities continue to march higher in the face of European sovereign spreads remaining near their widest levels since the crisis began. It is eerily similar to July 2007, when equities continued higher as credit markets began to collapse. This letter outlines the major systemic fault lines which we believe all investors should consider." Kyle Bass, Hayman Capital
8--Regional Economy and Trends in Household Debt, New York Fed
Excerpt: During the crisis, weakness in the housing market contributed to financial strains as many families found that their mortgages were "underwater," that is, their homes were now worth less than their mortgage balances. As a result, they had no financial buffer they could tap if their finances came under stress. And, as the economy weakened further, many households faced sharply reduced incomes as family members lost their jobs or had their work hours cut. So, more families found it difficult to pay their credit card bills and other debt obligations on time.
As a consequence of these strains, households began the painful process of deleveraging. They started reducing the amount of debt they owed, relative to their income. During the run-up to the recession, households were saving only about 2 percent of their income; now they are saving around 6 percent of their incomes. This increase in saving was mostly used to pay down their debts, but it also included adding to their savings accounts and borrowing less. Of course some of the reduction in debt reflects loan charge-offs of bad debts. But work done here with the Consumer Credit Panel shows that some consumers also became more frugal, rebuilding their net wealth by paying down their debts. These actions enabled families to rebuild their financial reserves—precautionary funds that could be used in the event of a job loss or illness—to maintain their consumption and keep up with their mortgage payments. But to save more, it also means that they had to consume less, which dampened economic activity further.
Interestingly, student loans are the only part of household debt that continued to rise throughout the crisis. More families and students may have needed to rely on loans to fund education during the difficult times. And going to school was more attractive for some, given the deterioration in labor market conditions.
Just as households began deleveraging during the crisis, banks needed to respond in light of the large loan losses that they were taking. As defaults rose, banks tightened their underwriting standards and raised the margins that they charged on loans. As a consequence, they made fewer loans. This tightening of credit availability exacerbated the decline in real activity. It created an "adverse feedback loop" between the financial and real sectors of the economy that deepened the recession.
Where are we now?
There are several signs that we are now convalescing; this damaging dynamic—the adverse feedback loop—now appears to be reversing. From historical experience with financial crises we know that this phase is a gradual transition process—not a quick event—as households and banks slowly complete their painful adjustments. Once the adjustments are completed, households can consume more and regain their access to credit, and these developments help to support a more vigorous economic recovery.
Of course, we don't yet know precisely where we are in this adjustment process. For example, families may choose a permanently higher rate of saving in order to rebuild their retirement savings. What they decide to do will depend in part on their expectations for future income, their outlook for the economy, what they think will happen to housing and stock prices, and prospects for taxes and benefits such as social security and Medicare payments. However, we do know that during good times few households are likely to be delinquent on their bills. And, overall, we'd expect their borrowing to grow at least modestly as the economy strengthens.
The Household Debt and Credit Report released today indicates that there has been a pick-up in credit flows. Households increased their non-mortgage debt last quarter, a development not seen since the fourth quarter of 2008. The number of credit card applications increased—an indication of a pick-up in consumer demand for credit. And, the number of open credit card accounts also increased slightly—as more accounts were opened than were closed. Of course, signs of distress continued: households are still reducing their housing-related debt and delinquencies continue to be a problem. So, the adjustments remain far from complete.
It is encouraging that credit flows are no longer contracting because households' renewed demand for credit has no doubt supported some of the recent rise in consumer spending.
9--Why Mubarak is out, Paul Amar, jadaliyya.com
Excerpt: Paralleling the return of organized national(ist) capital associated with the military and ranged against the police (a process that also occurred during the struggle with British colonialism in the 1930s-50s) there has been a return of very powerful and vastly organized labor movements, principally among youth. 2009 and 2010 were marked by mass national strikes, nation-wide sit-ins, and visible labor protests often in the same locations that spawned this 2011 uprising. And the rural areas have been rising up against the government’s efforts to evict small farmers from their lands, opposing the regime’s attempts to re-create the vast landowner fiefdoms that defined the countryside during the Ottoman and British Colonial periods. In 2008 we saw the 100,000 strong April 6 Youth Movement emerge, leading a national general strike. And in 2008 and just in December 2010 we saw the first independent public sector unions emerge. Then just on 30 January 2011 clusters of unions from most major industrial towns gathered to form an Independent Trade Union Federation. These movements are organized by new leftist political parties that have no relation to the Muslim Brotherhood, nor are they connected to the past generation of Nasserism. They do not identify against Islam, of course, and do not make an issue of policing the secular-religious divide. Their interest in protecting national manufacturing and agricultural smallholdings, and in demanding public investment in national economic development dovetails with some of the interests of the new nationalist capital alliance.
Thus behind the scenes of the non-governmental organizations (NGOs) and Facebook-driven protest waves, there are huge structural and economic forces and institutional realignments at work....
Mubarak is already out of power. The new cabinet is composed of chiefs of Intelligence, Air Force and the prison authority, as well as one International Labor Organization official. This group embodies a hard-core “stability coalition” that will work to bring together the interests of new military, national capital and labor, all the while reassuring the United States. Yes, this is a reshuffling of the cabinet, but one which reflects a very significant change in political direction. But none of it will count as a democratic transition until the vast new coalition of local social movements and internationalist Egyptians break into this circle and insist on setting the terms and agenda for transition.
I would bet that even the hard-line leaders of the new cabinet will be unable to resist plugging into the willpower of these popular uprisings, one-hundred million Egyptians strong.
10-- The Egyptian Labor Uprising Against Rubinites, Matt Stoller, naked capitalism
Excerpt: Deregulation, globalization, and privatization. This should be a familiar American recipe, commonly associated with former Treasury Secretary and Goldman Sachs chief Bob Rubin..... Mubarak’s inner circle aligned themselves with international investors and set themselves against domestic business and military interests....In other words, this is a revolt against Rubinite economic policy....
The political architecture of the Mubarak regime was directly pulled from the neoliberal shadow government model, right down to the political rhetoric of toughness as a mask for theft. Paul Amar has by far the most persuasive account of the Egyptian revolution. Amar goes beyond the absurdist Facebook revolution narrative, and points out that what is going on is in effect a youth-driven labor uprising, combined with fights between Mubarak-centric Rubinite elites and the domestic nationalist business community tied to the military. Mubarak had made tight alliances with the Islamic right, while slashing the social safety net and bringing in international investors to open low wage manufacturing...
This revolt began gradually at the convergence of two parallel forces: the movement for workers’ rights in the newly revived factory towns and micro-sweatshops of Egypt especially during the last two years, and the movement against police brutality and torture that mobilized every community in the country for the last three years. Both movements feature the leadership and mass participation of women (of all ages) and youth (of both genders). There are structural reasons for this.
First, the passion of workers that began this uprising does not stem from their marginalization and poverty; rather, it stems from their centrality to new development processes and dynamics....
In the place of food subsidies and jobs they have offered debt. Micro-credit loans were given, with the IMF and World Bank’s enthusiastic blessing, to stimulate entrepreneurship and self-reliance. These loans were often specifically targeted toward women and youth. Since economically disadvantaged applicants have no collateral to guarantee these loans, payback is enforced by criminal law rather than civil law. This means that your body is your collateral. The police extract pain and humiliation if you do not pay your bill. Thus the micro-enterprise system has become a massive set of police rackets and “loan shark” operations. Police sexualized brutalization of youth and women became central to the “regulation” of the massive small-business economy. In this context, the micro-business economy is a tough place to operate, but it does shape women and youth into tough survivors who see themselves as an organized force opposed to the police-state. No one waxes on about the blessings of the market’s invisible hand. Thus the economic interests of this mass class of micro-entrepreneurs are the basis for the huge and passionate anti-police brutality movement. It is no coincidence that the movement became a national force two years ago with the brutal police murder of a youth, Khalid Saeed, who was typing away in a small internet café that he partially owned. Police demanded ID and a bribe from him; he refused, and the police beat him to death, crushing his skull to pieces while the whole community watched in horror.
What is going in Egypt represents a remarkable new political coalition striking deep at the heart of the Washington consensus. Social media mattered, in that it was the language by which the youth expressed themselves and their hatred of the torture inflicted upon them to extract maximal profit. This alliances, of a domestic business-military community, women’s groups, and a youth-driven labor movement, has parallels in the 1930s New Deal coalition and the 1850s anti-slavery coalition. It is also interesting that the pre-Facebook blogosphere of 2004-2005 played an important role in unmasking torture and delegitimizing the authority of the state, including the justice system and the media.
Seen in this context, Egypt is part of a global conflict of financial oligarchs fighting with leftist human rights activists, unions, and domestic industries. (Today's "must read")