When will rates rise? -- reprise

Bernanke Shocker: "No Rate Normalization During My Lifetime" – Zero Hedge

As I pointed out recently in Interest rate reality check I agree that it will be quite a while until rates normalize. The analytical criterion is of course when the ratio of monetary base to GDP returns to longer term averages, which would require the ratio to drop to about 25 percent of its current level of ~0.22.

One way for this to happen would be for the Fed to charge off all the bad debt it is hiding for the banking system, and to stop paying them interest on fictitious reserves.

I don’t know how bad the debt in the monetary base is—no one does, even within the Fed, apparently—but this (absent a huge increase in GDP growth) is what would have to happen. And as base has been growing at >20 percent annual rates and GDP at… well, you know.

John Hussman deserves credit for saying that it is the illusion of solvency created by FAS 157 that has sustained the (stock market) recovery.

Will the Western banks do this? Not a chance. The Fed and ECB seem determined to kill their economies and start another world war.

Another indication that the big tiger may leapfrog us is Jim Rogers’ assertion that the PBOC is actually requiring banks to charge off bad debts. A sharp contraction followed by really robust growth (after a couple of years) would be the implied forecast.

Even Barry Ritholtz is questioning whether FAS 157 should remain in place.

But it won’t matter, if the Fed keeps buying up and hiding all the bad debt, will it? Thanks Alan, thanks Ben. Martin Armstrong says his sources in the big “banks” (i.e., Goldman et al., the hedge funds stealing money from the American people via the discount window and Fed largesse in general) tell him the Fed is saying they’re only going to bail out depositors next time—which is exactly what I said they should have done last time, which would have let the system clear and avoided a hell of a lot of moral hazard—and to get their trading risk models tuned accordingly.

We shall see. I hope Janet is up to the task.

Interest rate reality check

There is a lot of talk about when “the Fed” is going to “raise rates.” Rates are actually determined mostly by supply and demand in the money market. Without getting into an academic fracas, I am going to present some graphs representing very strong empirical regularities that suggest interest rates, long or short, are not going up any time soon.

I’ve presented one of these before, the long term chart; here I’ve added the 3-month T-bill. These graphs show the relationship between interest rates and the ratio of the St. Louis monetary base to GDP. Data is to April or first quarter 2014. The ratio of base to GDP is ~0.23 currently.

Here is the trajectory of the base/GDP ratio. Can you spot the taper?

Here is the trajectory of base:

From these empirical regularities I draw the following conclusions:

• Interest rates aren’t going up any time soon. The “taper” is really a reduction in the rate of addition to base, not a reduction of base.
• Nor is inflation taking off any time soon, except for stagflationary cost-push. Negative real interest rates will continue. The labor market has no power; the reserve army of the unemployed (whether they are categorized as such or “not in the labor force”) is growing. There is no wherewithal for a wage-price spiral to get started.

This mirrors the experience of the Thirties. ZIRP in that period lasted until near the end of WWII. It took a war to get the inflation started. Federal debt exploded. But America had relatively less sovereign debt going into that war; we are already at comparable levels.

So people who suggest that the Fed “raise interest rates” are really asking the Fed to reduce the size of the monetary base a huge amount. There is no question the Fed would crash the stock market if they did this, purely because of the “optics,” so it won’t happen. Moreover, if the Fed sent all those bad debts back into the banking system they’d be subject to “stress testing” (heaven forbid they were actually marked to market) that I somehow doubt the Fed does on the stuff they hold. (Comment if you know better than I, please.)

Plutocracy World, the Global Casino, rocks on for years to come. The banking system hangs like an albatross around the neck of the world economy. China seems to be making the same mistakes; it will be interesting to see what they do with all their bad debt.

The great economic task of the first half of the twenty-first century will be to reform the world’s monetary system.

William Black on our corrupt regulators

This is much-watch, especially if you’ve been seduced into drinking some of Obama’s financial reform Kool-Aid.  Obomba has proven himself a spineless cut-out for the military-industrial-financial Establishment many times over.  He may have good intentions, he may face a fecally-impacted Washington, he may face death threats every day, he may be doing all he thinks he can do given the cards he’s been dealt, but the fact remains that no significant reform of a broken America is taking place. 

Bill Black lays the blame where it belongs, on the industry-captive (industry-whore) regulators who had the power to preclude and then to clean up the mess all along:  Alan Greenspan, Ben Bernanke, Tim Geithner, Larry Summers, and so on ad nauseum. 

Say no to a recourse refi

Via:  Market Ticker  Posted as a public service.  See also On the coming neo-feudalism 

The Dumbest Thing I've Seen Yet

President Obama and James Lockhart have decided to (financially) rape Americans.

Yes, really:

June 19 (Bloomberg) -- President Barack Obama’s program to help more homeowners refinance may be expanded to include borrowers who owe more than 105 percent of their homes’ values, Federal Housing Finance Agency Director James Lockhart said.

The Obama administration is considering allowing Fannie Mae and Freddie Mac to refinance loans with current loan-to-value ratios of 125 percent or higher, Lockhart said at a National Association of Real Estate Editors Association conference in Washington yesterday.

Let me be absolutely clear so nobody can ever accuse me of being less than straightforward on this.

If you are underwater on your house and take a deal like this, you are as dumb as a box of rocks and have just consented to being bent over the table and violated repeatedly.  That our government would propose "allowing" such a thing is fomenting financial rape upon The American Public.  Period.

Under conventional financing terms loan-to-value (LTV) ratios over 80% have required what is called "PMI" - private mortgage insurance.  The purpose of this is to guarantee for the lender that they can recover if you don't pay and, post-foreclosure, your home isn't worth enough to satisfy the mortgage.

One of the reasons for this requirement is that in most states purchase money first mortgages are non-recourse.  That is, if you default they can take the house and ruin your credit - but it ends there.  In those states they cannot pursue you beyond foreclosure and reclamation of the house.

In every state if you refinance the resulting mortgage is a recourse loan, which means they can sue you for any deficiency if you subsequently default and come after any other assets (other than retirement funds - which is why you NEVER EVER raid a 401k or IRA to stay afloat!) and even try to get a wage garnishment - and they just might!

For this and other reasons nobody should ever refinance a mortgage that is in trouble without getting qualfiied legal and accounting advice.  It could be the cheapest $500 you ever spend.

President Obama's original "refi" program exempted LTVs from 80-105% from PMI requirements, ostensibly as a way of "helping" homeowners.  What it really did was rape the taxpayer, because such loans are very dangerous in that if there is a subsequent default the lender will, after expenses, almost always lose money, and may lose a LOT of money.

We have since discovered that the majority of "refinanced" workout loans default again, because the underlying problem is that the buyer used exotic financing to get around their inability to actually cover the fully-amortizing payment of a conventional mortgage.  When faced with a fully-amortizing payment, even when restructured, they re-default because they bought through a fraudulent device - they were never able to afford the house in the first place.

This plan will not change that. 

Only one thing will change that: lower house prices.

But see, the NARites and other politically-connected rubes will not allow the truth to be told, or the market to assert itself so long as the government can bury you in insoluble debt.

The Chinese and Japanese will fully rise (they're already half-awake) soon and when they do, the curtain will be called down on this stupidity via the bond market.  Indeed, the blow-out of MBS spreads yesterday might have been due to a leak of this stupidity - there is no more-certain way to guarantee that Fannie and Freddie, now wards of the Federal Government, will detonate and leave a thermonuclear-sized hole in the Federal balance sheet than this piece of stupidity.

WHERE ARE THE DAMN ADULTS?