The American Bear

Sunshine/Lollipops

The Fed Is Still Way Out to Lunch on Financial Bubbles | Dean Baker

If the folks at the Fed, and the people who cover the Fed in the media, still cannot see the difference between the sorts of bubbles that pose real risks for the economy and the bubbles that only pose a risk for those speculating in narrow markets, then we have learned nothing from the economic crisis.

What’s Holding the Economy Back? The Collapsed Housing Bubble, End of Story | Dean Baker

The major media outlets did their best to ignore the housing bubble as it was growing to ever more dangerous levels. Incredibly, they still cannot recognize and understand the bubble even after its collapse sank the economy. Hence we get the Washington Post offering us 10 charts that explain “what is holding back the economy.”
Of course the Washington Post is a large corporation so they can waste money on unnecessary and misleading charts. Since CEPR is a small not-for-profit, we explain it all in one chart.
The basic story remains as simple as can possibly be. We had a huge building boom that went bust. Instead of building houses at a near record pace, construction fell back to the lowest level in 50 years due to enormous oversupply. Similarly, the consumption boom that was driven by $8 trillion in bubble generated housing equity faded when that wealth disappeared.
The Post piece holds out the hope that underwater homeowners will increase annual consumption by $400-$500 billion when they get above water. That would imply around $40,000 a year in additional consumption from families with a median income of around $70,000. This is not the sort of stuff that deserves to be taken seriously. It’s also important to remember that the ratio of consumption to disposable income is unusually high, not low.
The other items on my chart are the falloff in non-residential construction following the collapse of the bubble in that sector and the drop-off in state and local government spending that resulted from the loss of property taxes and other revenue following the collapse of the bubble.
This single chart very simply tells the story of the housing bubble. If the Post needs to make work projects they can always have people make up charts for no reason, but it would be better if they didn’t include them in the newspaper. It might confuse readers.

What’s Holding the Economy Back? The Collapsed Housing Bubble, End of Story | Dean Baker

The major media outlets did their best to ignore the housing bubble as it was growing to ever more dangerous levels. Incredibly, they still cannot recognize and understand the bubble even after its collapse sank the economy. Hence we get the Washington Post offering us 10 charts that explain “what is holding back the economy.”

Of course the Washington Post is a large corporation so they can waste money on unnecessary and misleading charts. Since CEPR is a small not-for-profit, we explain it all in one chart.

The basic story remains as simple as can possibly be. We had a huge building boom that went bust. Instead of building houses at a near record pace, construction fell back to the lowest level in 50 years due to enormous oversupply. Similarly, the consumption boom that was driven by $8 trillion in bubble generated housing equity faded when that wealth disappeared.

The Post piece holds out the hope that underwater homeowners will increase annual consumption by $400-$500 billion when they get above water. That would imply around $40,000 a year in additional consumption from families with a median income of around $70,000. This is not the sort of stuff that deserves to be taken seriously. It’s also important to remember that the ratio of consumption to disposable income is unusually high, not low.

The other items on my chart are the falloff in non-residential construction following the collapse of the bubble in that sector and the drop-off in state and local government spending that resulted from the loss of property taxes and other revenue following the collapse of the bubble.

This single chart very simply tells the story of the housing bubble. If the Post needs to make work projects they can always have people make up charts for no reason, but it would be better if they didn’t include them in the newspaper. It might confuse readers.

Is the Budget "Crisis" History? | Dean Baker

One of the major growth industries in Washington is the promotion of budget hysteria. Well-funded groups have weekly, if not daily, events designed to hype the country’s budget situation. Much of the national media, most importantly The Washington Post, have enlisted in this effort, devoting both their opinion and news sections toward this goal.

Unfortunately for the deficit crisis industry, the facts may stubbornly refuse to cooperate. Any discussion of the deficit requires separating out the short-term and the long-term story. The short-term story is very simple. The economy collapsed in 2008 when the housing bubble burst. That is the story of the large budget deficits that we have seen in the last five years, full stop.

Fans of the Congressional Budget Office (CBO) can go back to see their projections from January of 2008, before CBO recognized the consequences of the bursting bubble. The deficit had been a modest 1.2 percent of GDP in 2007. The deficit was projected to stay near 1.0 percent of GDP over the next three years, until the end of the Bush tax cuts was projected to push the budget into surplus in 2012. Even if the Bush tax cuts had not been allowed to expire, the country can literally run deficits of 1-2 percent of GDP forever.

There were no huge new permanent spending programs or tax cuts put in place in 2008 or 2009.

The deficit soared because the recession sent tax revenue plummeting and caused spending on programs like unemployment benefits to jump. There were also temporary measures designed to counteract the downturn, such as stimulus spending and the payroll tax cut. However, had it not been for the downturn, these policies never would have been implemented.

This means that in the absence of the downturn, there is no short-term deficit problem. There would be nothing for the deficit crisis industry to do.

In the longer term, the deficit crisis industry can point to scary projections of large deficits in the next decade and even bigger ones farther out. These deficits were overwhelmingly driven by projections of exploding health care costs. The United States already pays more than twice as much per person for its health care as do people in other wealthy countries, with nothing much to show for it in the way of outcomes. The scary deficit projections assume that this gap in health care costs will continue to grow.

However, it now looks like health care costs may not be following the path assumed by the CBO and other official forecasters. The GDP data for the third quarter released last week showed that real spending on health care fell for the second consecutive quarter and that nominal spending grew at just a 0.5 percent annual rate.

In fact, the rate of growth of health care spending has been remarkably muted for several years. Nominal spending on health care services has risen by just 4.5 percent over the last year and a half. This compares to an 11 percent increase in overall consumption spending during the same period. Spending had been projected to grow at nearly twice this rate.

While it is still too early to draw definitive conclusions, it seems that health care costs in the United States may actually be stabilizing. If this pattern continues, then we won’t have a long-term deficit problem. If our health care costs were in line with those in other countries, we would be looking at projections of long-term budget surpluses.

Cynicism aside, why the NY AG's MBS suit vs JPMorgan matters | Alison Frankel

So why do I believe the [New York] AG’s suit is so significant? Because [Eric] Schneiderman is the first regulator to acknowledge in a legal complaint that the mortgage securitization process was rotten to its core. He is the first government official to stand up and demand legal accountability on behalf of the market and all of its participants, not just for investors in individual MBS deals like Goldman’s Abacus CDO or the Magnetar and Citigroup CDOs. “This action is brought by Attorney General Eric T. Schneiderman on behalf of the people of the State of New York,” his complaint said. “The Attorney General is charged by law with protecting the integrity of the securities marketplace in the state, as well as the economic health and well-being of investors who reside or transact business in the state.” You can read that as boilerplate, or you can think about what it means.

The attorney general doesn’t just represent a bond insurer or a major MBS investor like Dexia or the German regional banks or even Fannie Mae and Freddie Mac’s conservator. They’ve all got their own private lawyers pursuing federal securities claims on their behalf. He doesn’t only represent BlackRock or Pimco or any of the other institutional investor clients of Gibbs & Bruns who have asserted billions of dollars of put-back claims against JPMorgan. And he doesn’t merely represent the pension funds that have found MBS class action litigation to be such an exercise in frustration.

Schneiderman represents all of us — the people of New York and all of the investors harmed by the allegedly deceptive practices of mortgage securitizers. (I’m assuming that the JPMorgan suit is the first in a series of similar complaints against MBS issuers.) Everyone who lost even $1 of the $22.5 billion in losses suffered by Bear Stearns mortgage-backed notes in 2006 and 2007 has an interest in the AG’s case. Everyone whose pension fund or healthcare fund or retirement fund took a hit when the MBS market collapsed should be rooting for this litigation to succeed.

If you remember that Schneiderman seeks accountability on our behalf, his description of Bear’s alleged fraud sounds simple and elegant, not warmed over and rehashed: “The defendants’ misconduct in connection with their due diligence and quality control processes constituted a systemic fraud on thousands of investors,” the complaint said. “As a result of this fraudulent misconduct, investors were deceived about the fundamentally defective character of the mortgages underlying the RMBS they purchased. Mortgagors defaulted on their loans in exceedingly large numbers, causing the value of these securities to plummet, which in turn caused investors in RMBS to incur monumental losses.” On our behalf, Schneiderman is demanding that JPMorgan repay every penny that Bear unjustly derived from its alleged fraud.

I fervently hope that when Schneiderman talks about exacting justice, he means it. I hope that when he and the bank discuss a resolution of this case, he remembers the awesome responsibility he holds as our lawyer and his obligation to seek accountability on our behalf. I also hope that the AG’s JPMorgan suit is the beginning of a new era of MBS litigation, in which regulators target systemic flaws in the securitization process that sent housing prices to such unsustainable heights that the entire economy was wrecked when the balloon fell to earth.

Obama came to office in the midst of the worst economic crisis since the 1930s. The question should be how well he dealt with that crisis — and in particular whether the man seeking to replace him would have done better. And the facts of how we’ve done aren’t complicated: the economy was in free fall in January 2009; it stabilized and began growing by mid-2009; but growth has been disappointing, and employment has barely kept up with population. Paul Krugman (via azspot)

(via azspot)

Glass-Steagall and the Economic Crisis | Dean Baker

Andrew Ross Sorkin seems to be very proud of himself for having figured out that Glass-Steagall would not have prevented the economic crisis that hit the economy in 2007 and is still causing tens of millions of people to be out of work or underemployed today. He is of course right, except most of us knew this 4 years ago.

The crisis, which is an “economic crisis” not a “financial crisis” was caused by the collapse of an $8 trillion housing bubble. This bubble was driving the economy by sparking both a construction boom and a consumption boom. When house prices came back down to earth, these sources of demand evaporated and there was nothing to replace them. It’s a fairly simple story for those of us who learned arithmetic back in third grade.

Glass-Steagall played no direct role in the crisis or the buildup to it. Nonetheless, it does get to heart of one of the big unnecessary freebies that the government gives to the financial sector. The point of the law was that if you held government-guaranteed deposits then there should be restraints on the sort of risks you can take.

It is understandable that the spoiled brats who run big banks on Wall Street think that they should be able to get handouts from the government with no strings attached, but that is not the way a market economy is supposed to work. If the banks don’t want the government’s guarantees for its deposits, no one is forcing them to take the guarantee. But, if they take the guarantee, then they don’t get to take big risks like Jamie Dimon’s big bet.

This tradeoff is pretty straightforward. Even an NYT business columnist should be able to figure it out.

Predator GE: We Bring Bad Things to Life | The Nation

If the Justice Department wants to get serious about investigating financial fraud by Wall Street big boys, it ought to drop by the White House and interview Jeffrey Immelt, CEO of General Electric. Immelt is chair of President Obama’s jobs and competitive council, where he strategizes about how to revive American manufacturing. In some other places, only thirty miles from the White House, Immelt is known as the subprime foreclosure king.

General Electric preyed upon low-income minorities—people of color and immigrants—with notorious subprime mortgages designed to fail. And fail they did. GE Capital’s mortgage subsidiary originated some $700 million in housing loans to families in Prince William and Manasses—high-cost, predatory loans of which $218 million wound up in foreclosure. GE, well known for its inventiveness, pioneered online loan origination in which borrowers did not have to prove they had any income. Naturally, they were charged sky-high interest rates and sold weird mortgages with variable rates that went up but never went down.

Nearly 50 percent of Prince William homeowners are still “underwater” on their mortgages, still struggling to hold on their houses. The county has particular meaning for this year’s presidential election because Prince William is the first county in Virginia to have a “minority majority”—voters who are non-white. They are especially meaningful for Obama because he needs to win big again in Prince William to have any hope of carrying Virginia as he did 2008.

Mortgage-making was a messy but lucrative business for GE. It became the tenth-largest subprime lender in the nation. Its failure rate was the highest among the big-name banks working the northern Virginia territory. But GE made sure it got out before the borrowers failed. WMC Mortgage, the GE subsidiary that originated the dubious loans, immediately sold them to other companies or packaged them as mortgage-backed securities and sold them to Fannie Mae and Freddie Mac, the federally guaranteed housing finance companies now in conservatorship. Some minor portion of the $150 billion in losses Fannie and Freddie have dumped on the taxpayers can be credited to Jeffrey Immelt’s brilliant banking. When the mortgage scam became a national scandal, GE sold the company that had done its dirty work.

Green Slime Drives Our Financial Crises | Bill Black

From Bill Black, associate professor of economics and law at the University of Missouri-Kansas City, comes this handy How-to on financial fraud and bubble-making:

The infected, odiferous, and bad tasting pink slime (aka, the “higher standard”) secretly added to our burgers for over a decade would be embarrassing to any system that pretends to the label “free enterprise,” but it has special resonance amongst economists. Adam Smith’s most famous saying, which captures his central vision of markets, is a seemingly paradoxical tale about butchers. He wrote that we could rely on the butcher providing us with wholesome meat not because of his altruism, but because of his far more reliable devotion to self-interest. Our butcher may not care about us, but he cares about whether he gets our business. This causes him to act reliably as if he cared for our well-being. He knows that if he sells us unfit meat we will cease buying meat from him and his business will fail. Pink slime is inconceivable in Adam Smith’s ode to the self-interested butcher.

Relying on corporate butchers’ self-interest (greed) has been proven to be unreliable by the pink slime deception. Greedy corporate butchers taught that they should not really care about the customer’s well-being realized that they could maximize their self-interest by selling us pink slime as long as they could do so secretly.

[…]

As with the perversion of Adam Smith’s reliable butcher into a corporate butcher specializing in aiding the secret adulteration of our burgers with pink slime, the CEOs of our leading financial firms have adulterated our financial system with green slime (the color of our money.) Pink slime was limited to 15% of our burgers and it generally does not makes purchasers sick. Green slime became one-third of the mortgages made in 2006 and close to 100% of our collateralized debt obligations (CDOs). Green slime typically caused severe financial losses. The financial CEOs did not add Mr. Clean to their green slime to reduce its endemic infestation by pathogens. They did, however, tell us to “expect a higher standard.” Indeed, they ensured that the rating agencies would rate the green slime “AAA” and the outside auditors would give clean financial opinions to financial statements claiming that green slime was “prime” and free of adulteration. The meat butchers and the financial butchers called their slimed products “prime” – prime meat and prime loans.

Green slime drove the current crisis, just as it did the Enron era frauds and the second phase of the S&L debacle. Studies of “liar’s” loans have shown their fraud incidence to be 90% — they are virtually all fraudulent. The Orwellian term that BPI used to disguise the nature of pink slime was “Lean Finely Textured Beef.” The Orwellian term the industry favored to disguise the nature of green slime was “Alt-A.” “A” signifies that the mortgage is of the lowest credit risk – it is “prime.” “Alt” is short for “alternative” and, falsely, implies that the loans were underwritten by an alternative process. Failing to underwrite, e.g., by verifying the borrower’s income, is not an “alternative” means of underwriting. Honest mortgage lenders do not make liar’s loans (the term that the lenders used in private to describe their green slime) because they create severe “adverse selection” and encourage endemic fraud. Both results mean that the expected value of making such loans is negative. In plain English, that means that the lender will suffer catastrophic losses and fail.

Read the whole thing

Obama Sells Out Homeowners Again: Mortgage Settlement a Sad Joke | Ted Rall

What about those who got kicked out of their homes illegally? They split a pool of $1.5 billion.

Sounds impressive. It’s not. Mark Zuckerberg is worth $45 billion.

“That probably nets out to less than $2,000 a person,” notes The Times. “There’s no doubt that the banks are happy with this deal. You would be, too, if your bill for lying to courts and end-running the law came to less than $2,000 per loan file.”

Readers will recall that I paid more than that for a speeding ticket. 68 in a 55.

This is the latest sellout by a corrupt system that would rather line the pockets of felonious bankers than put them where they belong: prison.

Remember TARP, the initial bailout? Democrats and Republicans, George W. Bush and Barack Obama agreed to dole out $700 billion in public—plus $7.7 trillion funneled secretly through the Fed—to the big banks so they could “increase their lending in order to loosen credit markets,” in the words of Senator Olympia Snowe, a Maine Republican.

Never happened. [++]

States Settle for…a Poke in the Eye | Maria Tomchick

[…] The banks say this settlement will help the nation put the mortgage mess behind it, and it will ultimately help the housing market recover. They’re wrong. Four million people have lost their homes to foreclosure since 2008. The settlement barely covers less than one-fifth of those households. And most US homeowners won’t qualify for debt relief, either. Fannie Mae and Freddie Mac own over half of the mortgages in the US, but they’re not a party to the settlement, and neither are people whose mortgages were bundled and sold to private investors as mortgage-backed securities. That mess could take more than a decade to unravel.

In short, the settlement is a very, very good one for the big five banks. It will help them put the mortgage scandal behind them so they can get back to record profits, huge executive pay packages, and business as usual. And because the penalty was so small, the banks won’t be cleaning up their act any time soon.

We’ll have to wait and see if the federal government, particularly Obama’s new mortgage crime-fighting unit, can extract meaningful penalties from these scofflaws. So far, the federal government’s record isn’t good: over the past 20 years, the SEC has let these banks off the hook time and time again for the same violations, with only minimal financial penalties. And the federal government, unlike the states, has a vested financial interest in seeing these banks succeed, so we can’t expect them to be more aggressive in taking these big banks to court.

The big banks win again | Matt Stoller

On Thursday, a group of well-connected and powerful men announced that the federal government and state attorneys general had agreed to a multi-billion settlement of claims relating to falsified foreclosure documents. The image of former corporate lawyer-turned-Attorney General Eric Holder and Iowa official Tom Miller complimenting each other on their courage and bravery was a stark reminder of how little power foreclosure victims have in Washington. The terms of the settlement were still secret, but we saw hints of what is to come — the web site set up to inform the public noted that homeowners may not know for up to three years whether they are eligible for help.

Rather than settling anything, this agreement is simply a continuation of the policy framework of both the Bush and the Obama administrations. So what exactly is that framework? It is, as Damon Silvers of the Congressional Oversight Panel which monitored the bailouts once put it, to preserve the capital structures of the largest banks. “We can either have a rational resolution to the foreclosure crisis or we can preserve the capital structure of the banks,” said Silvers in October, 2010. “We can’t do both.” Writing down debt that cannot be paid back — the approach Franklin Roosevelt took — is off the table, as it would jeopardize the equity keeping those banks afloat.

This policy framework isn’t obvious, because it isn’t admissible in polite company. Nonetheless, it occasionally gets out.  Back in August 2010, at an “on background” briefing of financial bloggers, Treasury officials admitted that the point of its housing programs were to space out foreclosures so that banks could absorb smaller shocks to their balance sheets.

continue →

Really this looks like America’s public prosecutors just wilted before the prospect of a long, drawn-out conflict with an army of highly-paid, determined white-shoe banker lawyers. The message this sends is that if you commit crimes on a large enough scale, and have enough high-priced legal talent sitting at the negotiating table after you get caught, the government will ultimately back down, conceding the inferiority of its resources. Why the Foreclosure Deal May Not Be So Hot After All | Matt Taibbi (via ronmarks)

(via ronmarks)

[This] settlement is yet another raw demonstration of who wields power in America, and it isn’t you and me. It’s bad enough to see these negotiations come to their predictable, sorry outcome. It adds insult to injury to see some try to depict it as a win for long suffering, still abused homeowners. The Top Twelve Reasons Why You Should Hate the Mortgage Settlement | naked capitalism

If the new Federal task force were intended to be serious, this deal would have not have been settled. You never settle before investigating. It’s a bad idea to settle obvious, widespread wrongdoing on the cheap. You use the stuff that is easy to prove to gather information and secure cooperation on the stuff that is harder to prove. In Missouri and Nevada, the robosigning investigation led to criminal charges against agents of the servicers. But even though these companies were acting at the express direction and approval of the services, no individuals or entities higher up the food chain will face any sort of meaningful charges. The Top Twelve Reasons Why You Should Hate the Mortgage Settlement | naked capitalism