Monday, August 15, 2011

Today's links

1--Most Americans can't afford a $1,000 emergency expense, CNN Money

Excerpt: When the unexpected strikes, most Americans aren't prepared to pay for it.

A majority, or 64%, of Americans don't have enough cash on hand to handle a $1,000 emergency expense, according to a survey by the National Foundation for Credit Counseling, or NFCC, released on Wednesday.

Only 36% said they would tap their rainy day funds for an emergency. The rest of the 2,700 people polled said that they would have to go to other extremes to cover an unexpected expense, such as borrowing money or taking out a cash advance on a credit card.

"It's alarming," said Gail Cunningham, a spokeswoman for the Washington, DC-based non-profit. "For consumers who live paycheck to paycheck -- having spent tomorrow's money -- an unplanned expense can truly put them in financial distress," she noted.

2--The next massive debt bubble to crush the economy – 10 charts examining the upcoming implosion of the student loan market. $1 trillion in student loans and defaults sharply increasing, My Budget 360

Excerpt: In the land of predatory bubbles it looks like higher education is now fully caught up in the credit market implosion.

In the same debt produced vein as housing, college used to be a relatively cheap bet with decent results in the long-term. Even if you went to public universities and picked up a degree in a field with low job prospects, at least you didn’t have the cloud of student loans hanging over your head when you graduated. Today it is a very different ballgame and the mythology behind college is being used to lure people into institutions that are little more than paper mill factories. Even quality institutions are having a harder time justifying tuition and fees that cost upwards of $50,000 per year (or the median household income of an American family). Can the next major crisis come from the student loan market? There is currently close to $1 trillion in student loan debt outstanding. During this crisis most debt sectors contracted except for student loans. Let us examine 10 charts to see why a bubble in student loan debt is about to implode.

Moody’s Analytics came out with a comprehensive analysis of the student loan bubble. The data presented does not add confidence to the problems occurring in higher education. More to the point, it is the way people are financing their college endeavors. Part of the problem is college costs are soaring while incomes are stagnant or falling. So you have graduates coming out with heavier debt burdens and their incomes are much lower. It is a mathematical problem that was destined to cause issues. As the chart above shows, high cost states which already eat deeply into middle class incomes also have the highest student loan balances only doubling the problem in these states.

No other sector in our economy has seen costs rise so quickly like those of colleges. Tuition and fees have far outpaced every other sector in our economy even surpassing items like healthcare and housing which is hard to believe. ...

A 4-year degree no longer protects you with secure employment. For the first time in our record keeping history do we have over 4 percent of those with a 4-year degree unemployed (roughly 1 out of 4 working Americans has a bachelor’s degree or higher). Yet recent graduates have it much worse. This figure will soar as many more paper mills push out graduates with very little real world employment prospects.

We can see where this higher education bubble is going but in the meantime, you have investment banks and those connected in the government making money hand over fist on the exploitation of working and middle class Americans. I think many Americans are being educated for free on how the system is currently rigged.

3--The higher education bubble has popped? CS Monitor

Excerpt: Traditionally, Americans have firmly believed in two core investments: college and home ownership. Then the housing bubble popped. Is education next?...

A true bubble is when something is overvalued and intensely believed. Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It's like telling the world there's no Santa Claus.

The excesses of both college and homeownership were always excused by a core national belief that, no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.

The New York Times' David Leonhardt even claims,

Construction workers, police officers, plumbers, retail salespeople and secretaries, among others, make significantly more with a degree than without one. Why? Education helps people do higher-skilled work, get jobs with better-paying companies or open their own businesses.

Using data from the Center on Education and the Workforce at Georgetown University, Leonhardt asserts that dishwashers with college degrees make $34,000 a year while those without make $19,000.

No employer in their right mind would pay nearly double for a dishwasher with a college degree. However, there are plenty of fresh college graduates cobbling together multiple low-level jobs just to make ends meet.


"More college graduates are working in second jobs that don't require college degrees," writes Hannah Seligson in the New York Times, "part of a phenomenon called 'mal-employment.' In short, many baby-sitters, sales clerks, telemarketers and bartenders are overqualified for their jobs."

Nearly 2 million college graduates were mal-employed last year, up 17 percent from 2007. Nearly half of all college graduates are working at a job not requiring a degree.

4--FBI: Mortgage fraud still prevalent, hard to catch, SF Gate

Excerpt: Mortgage fraud remains widespread in the depressed housing market, with perpetrators motivated by high profits and little risk of getting caught, the FBI said Friday.

The FBI's annual report on mortgage fraud said such schemes are particularly resilient and hard to discover, and their total cost is unknown. Real estate firm CoreLogic says more than $10 billion in loans were made with fraudulent application data in 2010, the report noted.

Fraud last year stayed at levels seen in 2009 as the housing market remained in distress, providing ample opportunity for schemes, the report said. It predicted that perpetrators would "continue to seek new methods to circumvent loopholes and gaps in the mortgage lending market."

"These methods will likely remain effective in the near term, as the housing market is anticipated to remain stagnant through 2011," the FBI said. The bureau's pending investigations into mortgage fraud increased 12 percent last year over 2009, officials said.

The most prevalent schemes involve falsifying financial information to qualify buyers who otherwise would be ineligible for a loan. Other crimes involve inflated appraisals, including schemes that use dishonest appraisals to sell homes at elevated prices. Some get-rich-quick schemes persuade investors to buy rental property or land believing the price will appreciate quickly.

5--BofA Sells Part of Mortgage Portfolio to Fannie Mae, Wall Street Journal

Excerpt: Bank of America Corp. has agreed to sell part of its home-loan portfolio to government-controlled housing giant Fannie Mae, as the bank looks to shed assets and pare its exposure to an array of mortgage woes.

The deal, finalized last Friday, will deliver the rights to process and collect payments on a pool of 400,000 loans with an unpaid principal balance of $73 billion, people familiar with the deal said. The purchase price is more than $500 million, one of these people said.

The move is part of the Charlotte, N.C., lender's strategy to sell noncore holdings, rid itself of mortgage problems and preserve capital as it repositions its balance sheet to withstand future economic shocks. The bank's shares are down 43% this year amid concerns about BofA's ultimate exposure to mortgage-related losses and lawsuits.

The rights to the 400,000 loans will be transferred to Fannie Mae over four months, starting in September with the first slug of 100,000.

6--Withdrawals From Stock Funds Biggest Since ’08, Bloomberg

Excerpt: Investors pulled the most money from global stock funds since 2008 in the past week as the Standard & Poor’s downgrade of Treasuries and the deepening European debt crisis prompted a flight into cash and gold.

Funds that buy global equities suffered $3.5 billion in net withdrawals in the week ended Aug. 10, the most since the second week of October 2008, according to Cameron Brandt, director of research at Cambridge, Massachusetts-based EPFR Global. Investors removed $11.7 billion from funds that invest in U.S. equities, the most since May 2010 when investors pulled money following a one-day market crash that briefly erased $862 billion.

“This week had a feeling of capitulation as we saw investors running for cover,” Brandt said in a telephone interview. “The last time we saw this kind of flight to safety” was in 2008, he said.

Investors have rushed into money-market funds and gold as global equity markets lost $6.8 trillion in value since July 26. On Aug. 5, S&P downgraded U.S. debt for the first time, sending the benchmark Standard & Poor’s 500 Index down by 6.7 percent on the first trading session after the move. In Europe, riots swept across Britain and the sovereign-debt crisis deepened in the countries that use the euro.

7--Empire State Survey indicates contraction, Calculated Risk

Excerpt: From the NY Fed: Empire State Manufacturing Survey

The August Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to worsen. The general business conditions index fell four points to -7.7, its third consecutive negative reading. The new orders index also remained below zero, at -7.8, while the shipments index was positive at 3.0.

Price indexes continued to retreat, with the prices paid index falling fifteen points to 28.3 and the prices received index falling three points to 2.2. The index for number of employees was slightly positive, while the average workweek index was slightly negative.
The index decreased from -3.8 in July, and is well below expectations of a reading of 1.0. This is the first regional survey released for August and shows that manufacturing in the NY region is still contracting.

8--White House Debates Fight on Economy, NY Times via Economist's View

Excerpt: As the economy worsens, President Obama and his senior aides are considering whether to adopt a more combative approach on economic issues...

Mr. Obama’s senior adviser, David Plouffe, and his chief of staff, William M. Daley, want him to maintain a pragmatic strategy of appealing to independent voters by advocating ideas that can pass Congress, even if they may not have much economic impact. ...

But others, including Gene Sperling, Mr. Obama’s chief economic adviser, say public anger over the debt ceiling debate has weakened Republicans and created an opening for bigger ideas... Even if the ideas cannot pass Congress, they say, the president would gain a campaign issue by pushing for them. ...
So far, most signs point to a continuation of the nonconfrontational approach ... that has defined this administration. Mr. Obama and his aides are skeptical that voters will reward bold proposals if those ideas do not pass Congress. It is their judgment that moderate voters want tangible results rather than speeches. ...

But Christina Romer, who stepped down last year as the chairwoman of the president’s Council of Economic Advisers, said Mr. Obama should fight for short-term spending in combination with long-term deficit reduction.

“Playing it safe is not going to cut it,” said Ms. Romer... “Not proposing anything bold and not trying to do something to definitively deal with our problems would mean that we’re going to have another year and a half like the last year and a half — and then it’s awfully hard to get re-elected.”

But there is little support for such an approach inside the administration. ... Several of his political advisers are skeptical about the merits of stimulus spending, and they are certain about the politics: voters do not like it.

Mr. Plouffe and Mr. Daley share the view that a focus on deficit reduction is an economic and political imperative, according to people who have spoken with them. Voters believe that paying down the debt will help the economy, and the White House agrees, although it wants to avoid cutting too much spending while the economy remains weak.

9--Department of "Huh?!": I Really Do Not Understand the Obama White House, Grasping reality with both hands

Excerpt: Calculated Risk writes:

Calculated Risk: White House Debates Doing Little or Nothing: This is depressing ...from the NY Times: "White House Debates Fight on Economy":

Mr. Obama’s senior adviser, David Plouffe, and his chief of staff, William M. Daley, want him to maintain a pragmatic strategy of appealing to independent voters by advocating ideas that can pass Congress, even if they may not have much economic impact. These include free trade agreements and improved patent protections for inventors. But others, including Gene Sperling, Mr. Obama’s chief economic adviser [argue] for bigger ideas like tax incentives for businesses that hire more workers…

Tax incentives are the "bigger idea"? It sounds like the debate is between doing nothing and doing very little.

If I arrived on the scene today - with a 9.1% unemployment rate and about 4.6 million homes with seriously delinquent mortgages or REO - I'd be arguing for an aggressive policy response.

If Herbert Hoover were president today, he would be using the Treasury and the Federal Reserve to try to fix the housing market and boost infrastructure spending. There is a lot of running room for Federal Reserve and Treasury action to boost the flow of spending even though nothing can get through Congress. FHLB and RFC, anybody?

And your two Federal Reserve governors.



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