Consumer confidence weak; finances abysmal

Via:  Yahoo finance

Consumer mood at four-month low

NEW YORK (Reuters) - U.S. consumer confidence fell to its lowest in four months in August on worries over high unemployment and dismal personal finances, though the mood managed to improve from earlier this month, a survey showed on Friday.

The Reuters/University of Michigan Surveys of Consumers said its final index of confidence for August fell to 65.7 from 66.0 in July.

That was the lowest since 65.1 in April but above economists' expectations for 64.5 and also higher than this month's preliminary reading of 63.2

"Confidence rebounded in late August as consumers increasingly expected improved conditions in the national economy even as they reported the worst assessments of their finances since the surveys began in 1946," the report said.

Consumers rated the current economic conditions the worst since March, when the stock market hit 12-year lows. This index fell to 66.6 from 70.5 in July. However this was also an improvement from 64.9 earlier this month.

Consumers' one-year inflation expectations fell to 2.8 percent from July's 2.9 percent. Five-year inflation expectations also dropped to 2.8 percent from July's 3.0 percent.

This slight drop is consistent with the usual level of noise in the Consumer Sentiment series.  Given the unemployment rate forecast shown (or considerably worse) the cycle is set to stagger forward to 2013 or 2014 when I expect the debt “death spiral” to kick in.  In my view it is very unfortunate that the policymakers will probably use the facsimile of a normal expansion to do nothing significant to reform the political economy. 

Next “animal spirits” update September 4.

It’s the debt *and* the politics, stupid

Paul Krugman has a good liberal heart but his attachment to macroeconomic figments has made him more than a little obtuse.  The bigger the deficit the better, says Paul, if it worked in World War II it will work this time.  But this flies in the face of history.  As Emmanual Saez has shown, WWII produced a miraculous equalization of the income distribution, which did not equalize much as a result of the New Deal.  Some hoped that 9/11 would be the “Pearl Harbor of the twenty-first century” to produce a similar result but it clearly didn’t.  The banking bailouts showed us how the government spends our money:  it distributes it according to the existing income distribution, with most going to the richest Americans.  And America now has a greater aggregate debt load than it did in 1929 (see this). 

As regular readers know, I propose giving a livable workfare and health coverage to the unemployed and involuntarily working part-time, now 25 million people, before spending a nickel on anything else.  They will spend the money wisely; research has shown that the bang for the buck is highest from direct income transfers like this (reference). 

The social contract is broken, Paul.  I’d like to hear your thoughts on how to remedy a broken social contract.  My proposal is hardly revolutionary, as it can be viewed as a way of keeping the people most likely to want wholesale change happy with their lot—but it addresses immediate human need and is better than validating the debt “death spiral” that you seem to be advocating, and that is much more likely to lead to revolutionary change—and war. 

Till Debt Does Its Part

By PAUL KRUGMAN

So new budget projections show a cumulative deficit of $9 trillion over the next decade. According to many commentators, that’s a terrifying number, requiring drastic action — in particular, of course, canceling efforts to boost the economy and calling off health care reform.

The truth is more complicated and less frightening. Right now deficits are actually helping the economy. In fact, deficits here and in other major economies saved the world from a much deeper slump. The longer-term outlook is worrying, but it’s not catastrophic.

The only real reason for concern is political. The United States can deal with its debts if politicians of both parties are, in the end, willing to show at least a bit of maturity. Need I say more?

Let’s start with the effects of this year’s deficit.

There are two main reasons for the surge in red ink. First, the recession has led both to a sharp drop in tax receipts and to increased spending on unemployment insurance and other safety-net programs. Second, there have been large outlays on financial rescues. These are counted as part of the deficit, although the government is acquiring assets in the process and will eventually get at least part of its money back.

What this tells us is that right now it’s good to run a deficit. Consider what would have happened if the U.S. government and its counterparts around the world had tried to balance their budgets as they did in the early 1930s. It’s a scary thought. If governments had raised taxes or slashed spending in the face of the slump, if they had refused to rescue distressed financial institutions, we could all too easily have seen a full replay of the Great Depression.

As I said, deficits saved the world.

In fact, we would be better off if governments were willing to run even larger deficits over the next year or two. The official White House forecast shows a nation stuck in purgatory for a prolonged period, with high unemployment persisting for years. If that’s at all correct — and I fear that it will be — we should be doing more, not less, to support the economy.

But what about all that debt we’re incurring? That’s a bad thing, but it’s important to have some perspective. Economists normally assess the sustainability of debt by looking at the ratio of debt to G.D.P. And while $9 trillion is a huge sum, we also have a huge economy, which means that things aren’t as scary as you might think.

Here’s one way to look at it: We’re looking at a rise in the debt/G.D.P. ratio of about 40 percentage points. The real interest on that additional debt (you want to subtract off inflation) will probably be around 1 percent of G.D.P., or 5 percent of federal revenue. That doesn’t sound like an overwhelming burden.

Now, this assumes that the U.S. government’s credit will remain good so that it’s able to borrow at relatively low interest rates. So far, that’s still true. Despite the prospect of big deficits, the government is able to borrow money long term at an interest rate of less than 3.5 percent, which is low by historical standards. People making bets with real money don’t seem to be worried about U.S. solvency.

The numbers tell you why. According to the White House projections, by 2019, net federal debt will be around 70 percent of G.D.P. That’s not good, but it’s within a range that has historically proved manageable for advanced countries, even those with relatively weak governments. In the early 1990s, Belgium — which is deeply divided along linguistic lines — had a net debt of 118 percent of G.D.P., while Italy — which is, well, Italy — had a net debt of 114 percent of G.D.P. Neither faced a financial crisis.

So is there anything to worry about? Yes, but the dangers are political, not economic.

As I’ve said, those 10-year projections aren’t as bad as you may have heard. Over the really long term, however, the U.S. government will have big problems unless it makes some major changes. In particular, it has to rein in the growth of Medicare and Medicaid spending.

That shouldn’t be hard in the context of overall health care reform. After all, America spends far more on health care than other advanced countries, without better results, so we should be able to make our system more cost-efficient.

But that won’t happen, of course, if even the most modest attempts to improve the system are successfully demagogued — by conservatives! — as efforts to “pull the plug on grandma.”

So don’t fret about this year’s deficit; we actually need to run up federal debt right now and need to keep doing it until the economy is on a solid path to recovery. And the extra debt should be manageable. If we face a potential problem, it’s not because the economy can’t handle the extra debt. Instead, it’s the politics, stupid.

How can change come?

For me the litmus test of whether Bernanke will ultimately fail and lead the country into deeper depression—or whether he will reform the financial system—begins with this:  now that the immediate crisis is averted, over coming months does he weed out the bad debts and bad banks, letting the losses fall where they should according to law, or will he attempt to sweep them under the carpet as I suggested yesterday, to try to make them disappear into the black hole of the Fed?  The latter would complete the massive transfer of wealth from ordinary Americans to the financial elite that Hank Paulson initiated.  If Bernanke temporizes and “lets zombie banks run” we are assured a prolonged liquidity trap, more asset bubbles as the Goldman Sachs’s and other trading banks take advantage of free money from the Fed, and a grinding immiseration of the national psyche. 

• The troubling side of Ben Bernanke - Ambrose Evans-Pritchard h/t Yves
• Dismantle Bernanke's 'Happy Conspiracy' ... now! – MarketWatch h/t Mish
• Which Bernanke? Whose Bubble? – Baseline Scenario
• The case against Bernanke – Financial Times
• Audit The Fed "Dangerous"? – Market Ticker 

My proposal for fiscal policy is to provide livable workfare and health benefits to the unemployed before spending a nickel on anything else.  Ron Paul suggests bringing troops home to pay for national health insurance—that at this moment in history to cut everyone loose as his libertarian principles would require would be inhumane.  If the fiscal stimulus is distributed anything like the financial bailouts were, it will go to the richest Americans.  The political system has been corrupted by money and serves moneyed interests above all others. 

Let’s forget macroeconomic models, “fiscal stimulus” and “quantitative easing.”  Let’s concentrate on the American people.  The nation is a fiscal basket case—and the people don’t trust the government to spend their money any more.  They didn’t agree with the bailouts and no one listened to them.  They’re right to be concerned with the deficits.  They don’t trust the financial markets any more.  They have no idea how to invest their growing savings.

Let’s stop all the academic nonsense and help out the American people.  The American empire is showing all the classic signs of elitist, hubristic collapse.  It never ceases to amaze me how even commentators on the left can ignore what’s going on right under their noses while debating macroeconomic figments.  In this context the way that most of academic economics has circled its wagons to support Bernanke is particularly pathetic.  They did the same for Greenspan, while it was the “tinfoil hats” who were critical.

How does change come when the President and Congress are so clearly compromised?

The Fed as black hole into which losses disappear?

Via:  Slate  When all this bad debt that the Fed is taking in begins to default, and the Fed has to write down the loss, are the “selling” bank’s reserves reduced accordingly?  Or is this really a sale?  Does the Treasury have to come up with the scratch, or do the losses disappear forever in the black hole that is the Fed? 

The Next Credit Bubble Is Now
Are you ready for a replay?
By Heidi N. Moore
Posted Tuesday, August 25, 2009 - 1:07am

Mortgage-backed securities—and the bankers who loved them—wreaked havoc last year, helping to pitch us into the deepest downturn since the Great Depression. Are you ready for a replay?

Gird your loins. The signs are growing that there's a new Wall Street gold rush under way—for those complex bundles of mortgage loans that fueled banks' profits between 2005 and 2007. This year, prices for mortgage-backed securities are rocketing as federal stimulus dollars flood the market. But the difference with this "boom" is the center of gravity has shifted: from giddy, cowboy bankers to the Federal Reserve. The Fed is so eager to save banks, create a demand for these securities, and stabilize the housing market that it's taking troubled loans and mortgages onto its own books. The problem is the Fed may be in well over its head.

The Fed is cleaning up the old mortgage securities in the market—mostly old residential mortgage loans backed by Fannie Mae and Freddie Mac. But it will soon be on the hook for new ones, too, as troubled commercial mortgages are expected to fail en masse in a crash. The institution has already received $2.3 billion in requests to buy commercial mortgages. Indeed, investors are so eager to dump their commercial mortgage-backed securities on the Fed that they have spurred an outcry against Standard & Poor's, which has said it may tighten its ratings requirements to keep the more problematic loans out of government hands. Put simply, the holders of such securities don't want anything to stand in the way of getting on the federal gravy train.

Both types of assets are creating a shadow boom in unworthy debt, based on the same excessive leverage and questionable financial judgment of the last credit bubble. Plus the Fed is making some of the same mistakes as banks did in 2005-07. The banks forgot they were in the "moving" business-of underwriting mortgage-backed securities—and got into the "storage" business of keeping those securities on their books. That's where the Fed is now. It has not yet articulated an exit strategy to dump up to $800 billion of mortgages from its balance sheet.

And if you thought U.S. banks holding all those sketchy mortgages was a bad idea, wait until you see what happens when the center of our country's money supply is saddled with bad debt. The Fed could bail out the banks; no one can bail the Fed out.

It's partly a matter of sheer dollars. The Fed has dug itself in deep, spending $64 billion over the last four weeks and $741 billion this year as it plans to purchase $1.25 trillion of securities backed by agencies like Fannie Mae and Freddie Mac.

At the same time, prices for some residential mortgage-backed securities have jumped 40 percent or more this year to as high as 85 cents on the dollar, even though 9.24 percent of all U.S. mortgages are now delinquent. Analysts have warned that mortgage prices are overvalued. And when about one in every nine is heading for delinquency, buyers have to question the quality of all the bundles they are buying, no matter how highly rated. That is especially true as fewer and fewer homeowners manage to catch up on missed payments. Fitch Ratings, for instance, found that only 6.6 percent of homeowners holding prime loans managed to catch up on late payments as of July. As the Wall Street Journal noted, "That compares to an average of 45% for the years 2000 through 2006."

While the mortgage market is getting worse, the Fed is getting in deeper. In fact, the Fed never owned a Fannie-or-Freddie-backed mortgage before 2009 and now controls about 15 percent of that market, according to Credit Suisse (CS). No wonder Fannie and Freddie shares pitched precipitously upwards in Monday trading, by as much as 50 percent.. Perhaps investors are getting wise that the agencies are in for a long and very lucrative ride as the federal government supports their debt.

Plus, the Fed's buying spree has attracted the attention of investors looking to cash out on mortgage-backed securities: Everyone from Beijing to veteran investors is getting in on the action. Financial firms are forming real estate investment trusts—or pools of capital that buy mortgages-to buy distressed mortgages fast. Investors like hedge fund Third Point entered the market with a $160 million investment in the second quarter and quickly made a $20 million profit. John Costas, a former UBS employee who founded a fund that nearly took down the Swiss bank with bets on subprime mortgages, has just started a new firm to trade mortgages again. Of course, what Wall Street wants is a replay of the early 1990s, when savvy buyers of troubled mortgage-backed securities made a fortune by holding onto the toxic assets until the market came roaring back.

But the Fed should be driving a harder bargain instead of paying richly enough to create a boom. Not surprisingly, the hype for mortgage-backed securities is all in classic bubble language: Wall Street is just happy to have some business to do. Analysts goad on "vulture" investors in distressed mortgage securities by predicting returns of "several hundred percent" for savvy buyers who jump into the market now. Like many bubbles, however, those returns won't last forever. Eventually, supply and demand will fall out of whack again.

If the Fed wants to save banks and consumers by buying these securities, Wall Street is happy to play along. This boom will be hard to stop—and impossible to regulate—because it is spurred by the Fed. On the surface, everyone wins: Banks get to dump some bad assets and gain fees for selling them to the Fed. The Fed gets to enact a stimulus that helps the banks and gets the mortgage markets moving. Politicians can be delighted that Fannie and Freddie are getting some love, because they lend to consumers and that in turn wins votes. But, as we found out during the last boom, something that feels great at first can feel terrible later.

Must read links 8/25

• Good morning, worker drones: this week in mayhem – Zero Hedge continues to break big stories, this one that the Fed seems by its own statistical admission to be trading derivatives – heavily; and a hot war threatens in Central Asia
• Bernanke's Self-Promotional Reappointment Campaign A Stunning Success – Mish, drawing upon John Hussman.  Doubling-down has become a way of life in D.C.
• The Electronic Police State, 2008 National Rankings, Cryptohippie – h/t orlingrabbe.com  Assume that any computer connected to the Web is a public place; that all your non-cash financial transactions are known to the government; that you have broken some law somewhere that the government could use to destroy you financially by forcing you to defend yourself in a court of law
• Clarion Call from Cantarell – Mexico’s biggest oil field running dry; more chaos to the south likely
• Nils Gilman on the ascent of deviant economies in the coming post-Western, post-modern age – h/t/ orlingrabbe.com

The Wile E. Coyote moment for the U.S. economy

Via:  Business Wire  While there is a natural tendency for “animal spirits” to buoy the business cycle for a couple of years here, I do not see an immediate double dip (see “animal spirits” update).  However, we are only part-way through our deflationary collapse in my analysis, as evidenced by the article below (see also this). 

We are living through the “Wily Coyote moment” for the United States economy, where the economy has gone off the cliff but hasn’t realized it.  America is a basket case:  give us a livable workfare and health benefits for the unemployed before the country becomes a humanitarian disaster area.

Fitch: Delinquency Cure Rates Worsening for U.S. Prime RMBS

NEW YORK--(BUSINESS WIRE)--While the number of U.S. prime RMBS loans rolling into a delinquency status has recently slowed, this improvement is being overwhelmed by the dramatic decrease in delinquency cure rates that has occurred since 2006, according to Fitch Ratings. An increasing number of borrowers who are 'underwater' on their mortgages appear to be driving this trend, as Fitch has also observed.

Delinquency cure rates refer to the percentage of delinquent loans returning to a current payment status each month. Cure rates have declined from an average of 45% during 2000-2006 to the currently level of 6.6%. It is important not only to observe total roll rates, but delinquency cure rates as well, according to Managing Director Roelof Slump.

'Recent stability of loans becoming delinquent do not take into account the drastic decrease in delinquency cure rates experienced in the prime sector since the peak of the housing market,' said Slump. 'While prime has shown the most precipitous decline, rates have dropped in other sectors as well.'

In addition to prime cure rates dropping to 6.6%, Alt-A cure rates have dropped to 4.3%, from an average of 30.2%, and subprime is down to 5.3% from an average of 19.4%. 'Whereas prime had previously been distinct for its relatively high level of delinquency recoveries, by this measure prime is no longer significantly outperforming other sectors,' said Slump.

The general deterioration in home prices appears to be a key driver in the worsening cure rate behavior. Due to home price declines, loans that have recently become delinquent have an effective loan to value ratio that is on average approximately 23% higher than those loans that are current on their payments, and are typically over 100%. Since home price declines have been relatively more severe in certain areas such as California and Florida, these areas tend to have a higher degree of representation in the non-current category. While California and Florida represent 49% of the remaining outstanding balance of currently performing prime loans, these states make up 62% of the non-current category and are under-represented in the 'cured loan' category as well. Furthermore, up to 25% of loans counted as cures are modified loans, which have been shown to have an increased propensity to re-default.

Recent data shows prime current-to-delinquency rates at 89% of the December 2008 levels, though new rolls-to-delinquency are still elevated when compared to historical standards. Recently observed three-month average roll rates of 1.1% are nearly twice the level seen from the 2000 through current averages for prime. Additionally, the gross roll rates do not reveal some additional important information relating to prime loan performance.

Other stresses may also be playing a part in the worsening cure rates. Although current credit score information is not generally available for all borrowers, some significant differences are noted between the original credit profiles of the current and delinquent prime loans. On average, current prime loans had credit scores at origination that are seen to be 25 points higher than the delinquent loans. Also, the loans that are current have shown a higher percentage of full income documentation than those that have recently become delinquent. 'As income and employment stress has spread, weaker prime borrowers become more likely to become delinquent in their loan payments and are less likely to become current again,' said Slump.

Regardless of aggregate roll-to-delinquent behavior, it will be difficult to argue that the market has stabilized or that performance has improved, until there is a concurrent increase in cure rates. This is especially true in the prime sector, which remains performing many times worse than historic averages. Prime 60+ delinquencies have more than tripled in the past year, from $9.5 billion to $28 billion total, or roughly $1.6 billion a month.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

Quantitative easing and fiscal stimulus are both fool’s games

Via:  Daily Finance

It is still the pathetic wet dream of neo-Keynesians and neo-conservatives alike that inflation is going to accomplish the debt jubilee that they think is going to “reflate” our deflationary economies.

PIMCO: Fed needs to 'be irresponsible' if deflation appears
Joseph LazzaroJoseph

To borrow a phrases from the late, great Jimi Hendrix, wrap your mind around this one: would you root for an "irresponsible" Fed?

PIMCO's Managing Director Paul McCulley is doing exactly that. McCulley, in a PIMCO commentary, said that, if the U.S. economic recovery does not begin as expected in Q3/Q4, the Federal Reserve should push inflation above its long-term target to encourage U.S. consumers to spend money.

"The way to make monetary policy effective is for the central bank to promise to be irresponsible," McCulley wrote, citing a 1998 paper written by Nobel Prize-winning Princeton University economist and New York Times (NYT) columnist Paul Krugman.

My primary objection to this line of thinking is that it ignores the primary cause of deflationary depressions, too much debt on a highly unequal income distribution.  Simply put, some people have too much money while everyone else has very little money and too much debt—not enough money to spend to keep the circular flow of income and product going, let alone service their debt.  This is where we are today.  America is a rich country compared to most others and compared to ourselves a generation ago—there’s plenty to go around, but since Reagan the game has been tilted toward capital and rich folks.

But what qualifies Krugman’s remarks as obtuse, in the sense of biting off his own nose to spite his face (and I apologize for getting wonky a bit here, it’s something I’ve sworn off of since leaving academic economics, but every once in a while fall back into) is that the Fed can’t at once be credible in its stated policies of monetary control and at the same time promise to be irresponsible by igniting inflation.  That is incredible, literally.

It’s the debt, stupid, and the income distribution, the fact that the game is rigged by social conventions accepted by—or imposed upon—folks up to now.  Bad debts don’t get repaid by reflation, the cash flow coverage on the loans was never right and won’t be made right by inflation.  And not to get wonkish again, but you introduce all kinds of inefficiencies into the economy when you cause uncertainty about relative prices—because as Hayek pointed out, he who raises his price first wins—and given the state of our social contract, that’s not likely to be the people who need help the most.

What to do?  Follow William Black’s example in the S&L crisis and bust bad bankers, close their banks, write off their crap, break up Goldman Sachs (bring back Glass Steagall—there’s no way Goldman should be getting free money from the Fed), and provide a livable workfare-style dole and health benefits to the unemployed, who are going to be with us for a while. 

Quantitative easing and fiscal stimulus are both fool’s games, blind to the true nature of the problem, the broken distribution.  Fiscal stimulus will be distributed as unequally as the banking bailouts were.  The social contract needs to be renegotiated.

Reference: Income inequality, debt, crisis and depressions