Campbell Brown on The Bailout

The more one looks the less sense everything makes. Here is Campbell Brown's take on the bailout -




Like we said before, at least we have Elizabeth Warren looking over Paulson's shoulder. Now we just need to give her veto power!

First Find the Problem, Then Fix It

Things usually work better that way. Rather than trying to fix things before you actually realize what /where things are broken. Sounds pretty clever - right. Too clever for our Secretary of the Treasury.

This very interesting and informative article from the New York Times titled Bailout Monitor Sees Lack of a Coherent Plan gives us a view into what the bailout really is doing. And what the monitor - who happens to be the brilliant Elizabeth Warren - finds is that are just making things up as they go along. Pretty scary when you realize that these are the people "trying" to prevent an all-out economic collapse. Lets take a look -

The head of a new Congressional panel set up to monitor the gigantic federal bailout says the government still does not seem to have a coherent strategy for easing the financial crisis, despite the billions it has already spent in that effort.

Elizabeth Warren, the chairwoman of the oversight panel, said in an interview Monday that the government instead seemed to be lurching from one tactic to the next without clarifying how each step fits into an overall plan.

...

“Our objectives in asking Congress for a financial rescue package were to first stabilize a financial system on the verge of collapse, and then to get lending going again to support the American people and businesses,” Mr. Paulson said at one recent hearing. “If the financial system were to collapse, it would significantly worsen and prolong the economic downturn.”

...
The panel’s power, as sketched out in the law, extends a bit beyond the “bully pulpit” but falls far short of a veto over specific proposals or programs. Its main source of influence is that it will have the ear of lawmakers who can tighten the bailout purse-strings or rewrite its charter.

...
Meetings with Treasury officials so far have made her question whether they understand that “household financial health is profoundly tied to the economic health of the nation,” she said. “You cannot repair this economy if you can’t repair those families, and I’m not sure the people directing the bailout see that as their job.”

If you thought they were making it up as they go along - you were right! If you thought Paulson was just giving the money to his friends - it looks like you are right! Remember, Paulson's original plan called for no, No, NO oversight!!! We can see why that was proposed!

This is a great article. We are also given some hope that Ms. Warren will be looking over Paulson's shoulder.

The Foreclosure Avalanche

Foreclosures on taking an avalanche affect - the more foreclosures happening are forcing more people underwater, which in turn is causing more foreclosures. Add in the ever-increasing unemployment levels and some areas are getting decimated. Taxes are not getting payed, so even once stable government jobs are being eliminated. A example of this avalanche affect is discussed in an article from CBS news titled A New Foreclosure Wave Hits the Jobless. First lets take a look at the video portion -



(Ignore the $ typo at 52 seconds in the video - $2 million in loans would be only 3-4 houses in the middle class areas in NJ - should read 2,043,600 loans.)

Now lets take a look at the accompanying article -

More than 2 million prime mortgages, traditional loans for people with good credit, are now delinquent. That's 624,000 more than this time last year, according to the mortgage bankers foundation, Tracy reports.

...
It used to be if you couldn't afford your mortgage you could always try to refinance or sell your home and pay off your loan. But these days, for a lot of people, those options no longer exist.

That's because 12 million households now owe more than their homes are worth, according to Moody's.

Homeowners with risky adjustable rate mortgages are getting help from banks, but there are no programs to aid those who already have good loans but no jobs.

...
"If they don't, I'm not going to drain my savings, I am not going to drain my 401k, I am going to walk away," [recently unemployed, Judy] Jones says.

We have predicted before that walking away will gain popularity. As the huge number of foreclosures increases the stigma is fading. It is not looked on as an individual issue - it is now viewed as a systemic issue. Additionally, rational people will not just throw their savings away. Why drain your retirement or savings to pay off that an extra $200,000 on a mortgage than your house is worth? Why lose everything just to lose your home? For many people walking away is the best financial and personal choice they can make. It may be in their best, individual, interest.

The Recession is Official

Now that one argument has ceased how long to we start arguing about if we are in a depression. The standby argument seems to be that since the unemployment rate is not yet at 25% there is now way we are in a depression. It is as if everything must be the exact same as the Great Depression to officially be in a depression. We are not claiming that we are in a depression, just that it is short-sighted to only claim that a "depression" can only be real if it is an exact mirror image of the original.

Well, back to the news of the day - it is official that the recession has begun. It is what most of us have known - like the housing bubble - but is one of those areas where being wrong is preferable to being correct. From CNN Money, let look at an article titled Its official:Recession since Dec. '07. Here are some key parts of the article -

The National Bureau of Economic Research said Monday that the U.S. has been in a recession since December 2007, making official what most Americans have already believed about the state of the economy .

The NBER is a private group of leading economists charged with dating the start and end of economic downturns. It typically takes a long time after the start of a recession to declare its start because of the need to look at final readings of various economic measures.

...

The NBER did not give any reasons or causes of the recession. But it is widely accepted that the housing downturn, which started in 2006, is a primary cause of the broader economic malaise.

The fall of housing prices from peak levels reached earlier this decade cut deeply into home building and home purchases. This also caused a sharp rise in mortgage foreclosures, which in turn resulted in losses of hundreds of billions of dollars among the nation's leading banks and a tightening of credit.

The current recession is one of the longest downturns since the Great Depression of the 1930's.

One of the longest recessions since the GD. If the current projections are correct that an uptick will not take place until sometime next year it will be the longest downturn since GD. And everything traces back to the Great Housing Bubble.

But there as to be an upside to the story -

Still, [Lakshman Achuthan, managing director of Economic Cycle Research Institute] said he's not worried about the current recession turning into a depression, as many Americans fear.

"Even with indicators in a tailspin, this still is only a very severe recession," he said. "There's lots of gloom, but we don't see doom."

Don't fear - it is just gloom not doom. That is very comforting as we see more and more pictures like this -

First They Cut-Off My HELOC, Now My Credit Card

We as a nation rely on consumer spending to fuel our economic engines. Unfortunately that spending on the luxurious goods and services has come from money we do not yet have - debt! When housing values were rising we could just cash in some of the equity to fund our lifestyles. Now that money is no longer available so we have turned to credit cards to bridge the gap between what we spend and what we make. However that can not last forever.

People are constantly falling in too much debt - but we usually blame the person not the system. Now the system is changing because it was not sustainable. When housing prices first started falling we (collectively) had our HELOC lines shut down. Now the word is that our credit cards will be cancelled across the board as well. And the source is one of the best around - Meredith Whitney. In this article titled Credit card industry may cut $2 trillion of lines: analyst from Reuters we get a glimpse at what will probably be the future. Lets take a look -

The U.S. credit card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said.

The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted.

"In other words, we expect available consumer liquidity in the form or credit-card lines to decline by 45 percent."

...
Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said.

...
She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels.

"Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," the analyst said.

With 70% of the GDP reliant on consumer spending, these cutbacks will just compound the sprial downward into a depression or, at minimum, a long, hard recession.

As we are constantly stating (see here, here and here), a new economic paradigm will have to arise out of this rubble. We can not have a sustainable system that is built on a huge gap between spending and earning. It is going to be rough, but hopefully the what emerges on the other side is better.

Sad day in Cyberville

Tanta has passed away.

Our condolences to her family.

She has given us so much knowledge and succinctly explained incredibly complex issues in such a straight-forward way.

Here is a very nice tribute her from the New York Times - Doris Dungey, Prescient Finance Blogger, Dies at 47.

Hopefully her family and friends know how much she has given to all of us - and we are forever grateful.