THE BARRICADE

Bernanke Housing Re-inflation Plan Faltering (Bloomberg)

Federal Reserve Chairman Ben S. Bernanke’s efforts to bring down borrowing costs to revive the housing market and help the economy are stalling. Mortgage rates are almost back to where they were in March before the 30-year rate fell to a record and sparked a refinancing boom. Mortgage delinquencies rose to a record 9.12 percent of U.S. home loans and house prices dropped the most on record in the first quarter, industry reports show.

“Housing is not going to be the engine to get us out of this recession,” said Robert Eisenbeis, chief monetary economist for Vineland, New Jersey-based Cumberland Advisors Inc., and former research director at the Federal Reserve Bank in Atlanta. “They’ve squeezed a lemon and now they’re trying to squeeze some more, but you can only get so much juice out of a lemon.”

Is There Any Limit to Bank Arrogance (Seeking Alpha)

Incidentally, if the government were to truly follow the rule of law, they are required to fight this idea. The money for the public side of the public private partnership comes from the TARP program. The authorizing legislation for the TARP states:

(e) Preventing unjust enrichment. In making purchases under the authority of this Act, the Secretary shall take such steps as may be necessary to prevent unjust enrichment of financial institutions participating in a program established under this section, including by preventing the sale of a troubled asset to the Secretary at a higher price than what the seller paid to purchase the asset. 12 USCS § 5211(e).

This would seem to be a clear-cut case of unjust enrichment that Congress was trying to prevent when it put this language into the law. I know that the rule of law has become “quaint” when it comes to the bailing out of the banks, but there has to be a limit somewhere. After all, if the banks participated in kidnapping for ransom, would we allow that to happen simply because the proceeds would help out their balance sheets?

Oil Prices Are Feuled By Speculation, Mini Bubble (Huff Post)

Goldman Sachs and Morgan Stanley for example, have received TARP bailout money. The implication being that not only are the taxpayers underwriting “the impending bubble,” they are going to pay more at the pump too, because “these unregulated banks” use all the crude oil trading vehicles for their own selfish means. As far as I know, caveat emptor is omnipresent. The “speculator,” if that’s what you call CalPERs et. al., has the right to “not participate,” one of the most powerful tools in the speculator’s toolbox.

Some Redefault Rates May Reach 75% (WSJ)

Yesterday’s Journal reports that Fitch Ratings looked at mortgages bundled into securities between 2005 and 2007 and managed by some 30 mortgage companies. Fitch found that a conservative projection was that between 65% and 75% of modified subprime loans will fall delinquent by 60 days or more within 12 months of having been modified to keep the borrowers in their homes. This is an even worse result than previous reports by federal regulators. Even loans whose principal was reduced by as much as 20% were still redefaulting in a range of 30% to 40% after 12 months.

The reasons for the high redefault rate aren’t surprising. Many of the borrowers never could afford these homes in the first place, yet the political pressure has been strong to modify loans even for these borrowers. As home prices continue to fall in some markets, borrowers remain underwater and many of them simply walk away from the home and thus redefault.

Bank Profits and the Choice America Has Made (Ian Welsh)

The US has made the choice of continuing to put its primary efforts into pursuing a chimerical paper economy which promises easy alchemical gold, rather than fixing the real economy.

But there’s no such thing as free money, not on aggregate over the long run.

And the long run is here, and by “aggregate” I mean “you aren’t an executive with the power to pay yourself millions in bonuses for destroying the US’s economy.  But you will have less money because of them.”

Eliot Spitzer may love hookers, but he knows a conflict of interest when he see one (Slate):

The New York Fed is the most powerful financial institution you’ve never heard of. Look who’s running it.

Economist Calling for Sustained 6% Inflation–Bernanke Does Not Care (PBN)

Kenneth Rogoff, former chief economist of the International Monetary Fund, and Gregory Mankiw, former chairman of President George W. Bush’s Council of Economic Advisers, told Bloomberg News the economy would benefit from a higher inflation target than the Fed’s traditional annual target of 1.5 percent to 2 percent. Both men are now professors at Harvard University.

“I’m advocating 6 percent inflation for at least a couple of years,” Rogoff, who has been a prominent expert during the financial crisis, told Bloomberg. “It would ameliorate the debt bomb and help us work through the deleveraging process.”

“There’s trillions of dollars of debt, in mortgage debt, consumer debt, government debt,” Rogoff said. “It’s a question of how do you achieve the deleveraging. Do you go through a long period of slow growth, high savings and many legal problems or do you accept higher inflation?”

Do You Want 6% Inflation? (Blogging Stocks)

This sounds like a good idea, but 6% inflation would surely hammer the dollar. We must keep in mind that the dollar is the linch pin that keeps the economy on an even keel. Interest rates would surely rise and markets sell off. Markets look for a stable economy not one reeling from uncertainty. Such a move would shatter confidence in the Federal Reserve’s ability to keep the economy from falling apart.

Obama’s Magic Bubble Deflator (Von Mises)

Everyone knows Bad Things happen in the economy because of wicked speculators and grasping businessmen. If someone were to ask whether the Federal Reserve’s creation of $8 billion out of thin air every week on average for four solid years might have had a tiny bit to do with the housing bubble, well, we’d have to remind such a cynic that the Fed was created in order to give us macroeconomic stability. Our present crisis was caused by excessive “leverage,” you see — though we won’t bother asking where major economic actors managed to get all this credit in the first place. That might lead people to ask hard questions about the Fed yet again, and as we’ve seen, the Fed is our Wonderful, Stabilizing Friend.

Pakistan Rapidy Growing Nuke Stockpiles–why? (NYT)

The dimensions of the Pakistani buildup are not fully understood. “We see them scaling up their centrifuge facilities,” said David Albright, the president of the Institute for Science and International Security, which has been monitoring Pakistan’s continued efforts to buy materials on the black market, and analyzing satellite photographs of two new plutonium reactors less than 100 miles from where Pakistani forces are currently fighting the Taliban.

China Continues Gradual Moves Away From Dollars (Reuters)

China has engineered a subtle yet significant shift in the investment of its foreign exchange reserves, a sign of how it is willing to act on concerns about financing an explosion of U.S. debt.

World’s Natural Gas Supply Set to Continue Strong Growth

Saudi Aramco has enlisted help from foreign companies to search for gas, including joint ventures with Royal Dutch Shell Plc, OAO Lukoil, China Petroleum and Chemical Corp., and Eni SpA and Repsol YPF SA. The four ventures completed 18 of 27 exploration wells in 2008, and four of the remaining wells were being drilled at the end of year, Aramco said.

The kingdom plans to boost gas-processing capacity to 12.5 billion cubic feet a day from 9.3 billion, according to Aramco.

The Khursaniyah gas plant will have a processing capacity of 1 billion cubic feet a day when it is completed mid-year. The plant will be able to produce 560 million cubic feet a day of sales gas and 280,000 barrels a day of ethane and natural gas liquids, Aramco said.

To Sustain The Unsustainable (Kuntsler)

Obama’s White House mounts a campaign to sustain the unsustainable in the economic realm. Everything they’ve done for four months involving money management and enterprise policy — from backstopping hopeless banks, to gaming the bankruptcies of the big car companies, to the bungled efforts to prop up artificially-high house prices — amounts to a gigantic exercise in futility. Worse, it gives off odors of dishonesty or stupidity, since the ominous tendings of our system are so starkly self-evident…

Not least of the problems entailed in all this are the scary political consequences. It’s one thing for a business such as a bank to fail; its another thing for the public to lose confidence in banking, or their own currency, or the credibility of all the people who work in banking, or the authority of those charged to regulate these activities, or the courts and their officers who are supposed to adjudicate misconduct in them. When faith in all these things starts to go, all bets are off for even larger social constructs like democracy, justice, and the destiny of a federal republic

Whats The Matter With Bankruptcy? (The Atlantic)

America is the most bankrupt nation on Earth. Our government is for the nonce relatively solvent, its AAA rating intact…

Our leniency toward those with unsustainable debts helps not only profligate debtors, but the rest of us as well. Less onerous bankruptcy procedures boost rates of entrepreneurship: reduce the cost of failure, and people become more willing to take risks. America’s business environment is much more dynamic than that of Europe or Japan, for many reasons—and our generosity to capitalism’s losers is one of them…

Constitutional Amendment to Prevent Moral Hazard:

From the chat board at calculated risk (sorry can’t find the link):

“We can solve the systemic regulator question and the too big to fail issue with one simple, two sentence constitutional amendment:

All non-public enterprises, regardless of their asset size, potential for systemic risk, or inter-creditor relationships, shall forever remain non-public. The government shall never provide debt or equity funds for any reason to non-public enterprise.

These two sentences would prevent any moral hazard violation and the market would take care of itself.”

The Destructive Implications of the Bailout - Understanding Equilibrium

One of the features that has enabled the bureaucratic abuse of the public during the past year has been the frantic, if temporary, flight-to-safety by investors. The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured. But by transferring wealth from those who did not finance reckless loans to those who did – providing monetary compensation without economic production – the bureaucrats at the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery…

The bottom line is that the attempt to save bank bondholders from losses – to provide monetary compensation without economic production – is not sound economic policy but is instead a grand monetary experiment that has never been tried in the developed world except in Germany circa 1921. This policy can only have one of two effects: either it will crowd out over $1 trillion of gross domestic investment that would otherwise have occurred if the appropriate losses had been wiped off the ledger (instead of making bank bondholders whole), or it will result in a stunning and durable increase in the quantity of base money, which will ultimately be accompanied not by a year or two of 5-6% inflation, but most probably by a near-doubling of the U.S. price level over the next decade. As I’ve noted previously, the growth rate of government spending is better correlated with subsequent inflation than even growth in money supply itself, particularly at 4-year intervals. Regardless of near-term deflation pressures from a continued mortgage crisis, our present course is consistent with double digit inflation once any incipient recovery emerges.

Chart: Dissapearing Home Equity (Clusterstock)

For most consumers, one’s house is one’s biggest source of wealth.  Economists have demonstrated that a loss of wealth leads to cuts in spending–from psychology and necessity.  A 50%+ drop in home equity is one whopping-big loss of wealth.  And it will have a lasting impact on consumer spending.

China and Japan and Our Currency (Telegraph)

Japan beware, crashes have a habit of bringing regime change.

Et tu Tokyo? If Washington is counting on Japan to act as last-resort buyer of US dollar bonds, it may have to think again. Masaharu Nakagawa, finance chief of the Democratic Party of Japan (DPJ), told the BBC that his country should not purchase any more US debt unless issued in yen as “Samurai” bonds, akin to “Carter bonds” in 1978.

Good Perspective From Howard Zinn

I would love to hear reaction to this Zinn piece from any reader

Zombie Bank Parody Song

Forbes Declares Recession Over

Once the “real” recession started–the one that began in September–we consistently forecast it would be over by mid-2009, earlier than many (including the Federal Reserve) predicted. Now it looks like our V-shaped recovery is underway. When the NBER eventually gets around to declaring the recession end date, we think it will be May 2009.

(Anybody buying this?)

Creditors May Have Pushed For Chrysler Bankruptcy To Rake In Bailout Cash (Huffington Post)

Many of the Wall Street firms holding Chrysler bonds may also own credit default swaps that they bought to hedge their bets. These swaps, which are essentially like an insurance policy on the bonds should Chrysler default, were likely mostly issued by AIG.

AIG, thanks to the government bailout, has paid off swaps in the past at 100 cents on the dollar. Under the deal they would have had to accept with Chrysler, the bondholders would have received as little as 30 cents on the dollar, for example.

Why take 30 or 35 cents on the dollar from Chrysler when you can get the whole buck from the American taxpayer?

The Mirage of Recovery (Asia Times)

Bernanke’s optimism is the result of the aggressive monetary policy that he forced under the George W Bush administration and has continued to expound under Obama, irrespective of the devastation it has caused to the banking sector and subsequent fiscal bailouts. Bernanke has gained the reputation of the doctor of the “Great Depression” and proponent of monetary anarchy. For him and his school of thought, inflation seems to be of little concern. His aggressive monetary policy has sent the US economy, and with it the world economy, into financial collapse and recession.

…Bernanke has simply dismissed traditional central banking and decided, based on his own Great Depression doctrine, to go beyond the twin mandates that were prescribed by the Congress and to create high-risk instruments that go beyond traditional government bonds held by a central bank for open market operations. No central bank has the mandate to lend directly to non-depository banks or to the private sector. That would constitute a violation of standard central banking practice. No government in the world would allow its central bank to violate its mandate and hold assets other than government bonds and member banks’ discounts.

More Homeowners Underwater (Calculated Risk)

There is substantial disagreement on the number of homeowners underwater (they owe more than their homes are worth). At the end of 2008, American CoreLogic estimated there were 8.2 million homeowners underwater.

Zillow.com is now estimating 26.9 million homeowners with negative equity.

From the WSJ: House-Price Drops Leave More Underwater

Real-estate Web site Zillow.com said that overall, the number of borrowers who are underwater climbed to 26.9 million at the end of the first quarter from 16.3 million at the end of the fourth quarter.
…
Moody’s Economy.com estimates that of 78.2 million owner-occupied single-family homes, 14.8 million borrowers, or 19%, owed more than their homes were worth at the end of the first quarter, up from 13.6 million at the end of last year.

This is a substantial difference. Apparently Zillow assumes that borrowers with HELOCs have drawn down the maximum amount, and I suppose they use their house price software. My guess is Economy.com’s estimate is closer.

No matter - the number is huge. And many of these borrowers are in danger of default if they experience a negative event (death, disease, divorce, unemployment, etc.)

Absent the Fed propping the credit market day after day, the entire system is on the verge of systemic collapse (Zero Hedge)

Absent the Fed propping the credit market day after day, the entire system is on the verge of systemic collapse. The problem is that despite what Bernanke is saying right now that he doesn’t view government stakes in banks as long-term propositions, there is really no way to extricate the government without suffering the kinds of economic tremors on par with the Lehman collapse. As such it is likely we will be seeing the Fed take an ever increasing role in all aspects of the market for many years.

Goldman: Global Oil Storage Capacity Could be Filled by June (Yves at Naked Capitalism):

During the oil price runup of 2008, economists liked to harangue market participants and observes who thought a move that rapid could not be solely the product of fundamentals. Where were the inventories, they demanded. If the price was “too high” as in excess of supply and demand, surely there would be excessive inventories. ..

Stress Test Results: BofA Needs $34B (SeekingAlpha)

It seems to me that BofA is in some weird state of denial here, where a $35 billion capital shortfall can be considered evidence that it actually has more regulatory capital than it really needs. What’s more, the bank now seems to be happy going on the record with this kind of analysis. Which doesn’t instill in me a great deal of confidence in its management.

Why Should Natural Gas Prices Stay So Low? (Commodities Roundup)

Because it will take some time to work through the burdensome stockpiles. Despite producers finally beginning to curtail new drilling in the 2nd quarter, it could be late 2009 before supplies begin to recede back to even average levels. More bad news for the bulls, is that Natural Gas just shifted from one key cyclical phase to another. “Drawdown” season in the US has just ended and “injection” season has just begun. During winter months, end users and distributors tend to “draw down” the Natural Gas supply in storage in order to meet winter heating needs. At the end of winter, Natural Gas supplies tend to reach a cyclical low for the year. At this point, producers begin a seasonal effort to replenish supply levels by “injecting” new gas back into storage in preparation for summer cooling needs (Natural Gas is often used to power electric plants - more of which is needed during the summer months to power air conditioners). Prices will often strengthen during drawdown season (as supplies dwindle) and weaken during injection season (as supplies build). However, where supplies fall in the historical spectrum can also play a role - as we can see this year. As supplies remained near historical high levels in 2009 (for this time of year), prices continued to falter even in drawdown season. As April 1st marks the unofficial beginning of injection season, we are once again seeing supplies begin to build. Our question is, if prices cannot rally when they are “supposed” to (when supplies are falling), how are they going to rally when supplies are building - a time of year when prices have been historically weak? It’s hard to see it happening.

Gas bulls touting the fuel as the energy of the future may be right. But translating that to substantially higher prices may be a different story. Anybody who read Thursday’s (April 30) front page of the Wall Street Journal may see why. Aside from a comment on how the US is now “swimming” in Natural Gas supplies, it reports on the discovery of the Haynesville Shale, a dense rock formation in Louisiana that could hold as much a 200 trillion cubic feet (tcf) of Natural Gas - an amount equivalent to 18 years worth of US oil production. With new discoveries in other states such as Texas and Pennsylvania, the Journal suggests the US could be sitting on as much as 2200 trillion cubic feet of Natural Gas, enough to power the country for 100 years. While this has little impact on prices in the near term, the front page of the Journal can set a psychological precedent in trader’s minds.

The Financial Power Elite May Not Bounce Back

Simon Johnson on Seeking Alpha and Baseline Scenario: “We’re looking at a near term dominated by the existing economic power structure. The remaining big banks (in the US) and big banks/corporates (elsewhere) are made invincible by campaign contributions, political connections, and everyone’s reasonable fear of a great depression. It will be hard for outsiders to challenge that structure effectively – either as new companies or with new ideas. But you won’t see a great deal of innovation, investment, and growth coming from these survivors.”

U.S. Dollar Can and Will Drop

I find the assumption that China will remain content sitting in the USD trap laughably arrogant, short-sighted, and lacking imagination. It may happen in the end. But don’t take it for granted. It’d take a fundamental shift in US’s China policy for China to stop trying to get out of the trap. So far they’ve talked about SDR, arranged a slew of bilateral currency swaps, and piled up on gold. None of the approaches is the end solution. But it’d be foolish not to take their effort seriously.

Smallest U.S. Wage Gain on Record Is ‘Upside’ for Profits

The deceleration in employment costs raises the risk of deflation, or a prolonged decline in prices that is harmful to the economy. Slowing incomes may set back the nascent recovery in consumer spending, prompting companies to pass along the lower labor costs to customers by cutting prices.

Canada’s individual bankruptcies to hit record in 2009

Since individuals are carrying a greater amount of debt, they have a greater risk of insolvency regardless of economic conditions.

Pakistan Army Pounds Taliban Militants in Northwest

US vs Europe: Who is the Welfare State?

-Europe has cradle to grave health care plans, generous unemployment benefits, and free or subsidized college costs. -The US gives away public assets (oil, gas, mineral rights)  for pennies on the dollar, has huge subsidies and tax breaks, and bails out reckless speculators

Stiglitz, Simon Johnson Argue In Congressional Hearing for Breaking Up Big Banks

A Contrarian View of the Green Revolution (NY Times)

Harvard Students Handling Rejection

Global Economic Slow Burn

Volcker Fires A Shot at the Fed

Jim Rogers’ View: An American in Singapore