Tolerance and Economics

NEW YORK (AP) - Wall Street rebounded Tuesday after the Abu Dhabi Investment Authority said it will invest $7.5 billion in Citigroup Inc.

We tolerate all kinds of crap because we can afford to.

Between our trade deficit, entitlement programs, foreign policy la la land, and the real estate crisis, we are rapidly running out of money.

Analyze Drudge’s headlines. The UAE bought $7.5 billion of equity in Citi. Real estate prices dropped 4.5% this quarter. A 4.5% drop equates to around $1 trillion in lost real estate wealth. $7.5 billion is less than 1% of the real estate loss this quarter. And it is being heralded as rescuing the bank. It doesn’t make any sense.

Drudge’s ‘economic nightmare’ scenario has an aggregate bank loss of $300 billion. But $300 billion is only 1.5% of the US’s former real estate value. Prices are already down 35% in my market and still dropping. Watch Freddie Mac. Look for the Fed to print money to keep the banks afloat, causing big boy inflation and real pain in the population. The population in 1929 did not expect the government to provide for their needs.

Suffering populations don’t take too kindly to separatist enclaves with 50% unemployment who riot, consume taxes, burn cars, shoot at cops, and tell us how pure they are. No matter what Glen Beck says.

Eugenics, Disgenics, and Economics

“We have seen more than once that the public welfare may call upon the best citizens for their lives. It would be strange if it could not call upon those who already sap the strength of the State for these lesser sacrifices, often not felt to be such by those concerned, in order to prevent our being swamped with incompetence. It is better for all the world, if instead of waiting to execute degenerate offspring for crime, or to let them starve for their imbecility, society can prevent those who are manifestly unfit from continuing their kind. The principle that sustains compulsory vaccination is broad enough to cover cutting the Fallopian tubes.... Three generations of imbeciles are enough.”

--Oliver Wendell Holmes, Writing for the Majority, Buck vs. Bell, 1927

The 1920s may have been roaring, but people did not enjoy the creature comforts and perceived economic security that we enjoy today. We’ve grown soft and complacent. The population of the United States is set to undergo one of the sharpest losses in overall standard of living in our history, sometime in the next ten years. It’s just a mathematical fact. When the social safety net collapses, it’s going to make the middle class very angry, empower a nationalistic government (likely non-democratic), and allow ethnically-charged urban violence to flare.

The scapegoat will likely be the low IQ minorities that will be seen to be in large part responsible for the expansion and collapse of the social safety net. Recent and upcoming advances in the quantification of intelligence through gene mapping will be used to justify ‘non-discriminatory’ eugenic cutoffs. Maybe sterilization in exchange for government benefits. The government may justify a surrogacy program by claiming a need for more engineers. Darwin never leaves the building.

“…the argument of freedom or right of the individual can no longer hold good where the welfare of the state and society is concerned.”

-- Premier of Alberta, 1930s

http://www.pubmedcentral.nih.gov/articlerender.fcgi?artid=1127045

Snarky Commentary

New Wave of Mortgage Failures Could Create a Nightmare Economic Scenario

NEW YORK (AP) -- When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30 percent, he had a clear picture of how bad it could get.

His payment was scheduled to surge by an extra $1,500 in December. With his daughter headed to college next fall and tuition to be paid, he feared ending up like so many neighbors in Ft. Lauderdale, Fla., who defaulted on their mortgages and whose homes are now in foreclosure and sporting "For Sale" signs.
[…]

Yes, the 12% of the mortgage debt that is ‘sub-prime’ is a big problem, but what percentage of the other 88% is held by investors or rational landowners who are upside down?

"We haven't faced a downturn like this since the Depression," said Bill Gross, chief investment officer of PIMCO, the world's biggest bond fund. He's not suggesting anything like those terrible times -- but, as an expert on the global credit crisis, he speaks with authority.

In 1928, people were not addicted to government benefits and were relatively ethnically homogeneous. We had a positive trade balance, other countries did not lend us money to pay off our dependent masses.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40 percent in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago's Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations, or CDOs, could suffer far greater write-offs than the $75 billion already taken this year.

Prices have already fallen up to 40%.

Massive job losses would curtail consumer spending that makes up two-thirds of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there's no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

A nation cannot sustain itself by spending at the mall.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they'd welsh on a mortgage payment. They come from a broad swath -- teachers, pharmacists, and civil servants who were lured by enticing mortgage terms.

Too bad about those civil servants.

[…]

Colombo, who lives in the planned community of Weston just outside Ft. Lauderdale, said the reset on his home would have "destroyed' his financial situation. He went to Mortgage Repair Center, one of hundreds of debt counselors trying to bail out desperate homeowners, to work with his lender.

"But many people in my neighborhood didn't get help, and some have literally just walked away from their homes," said Colombo. "There are over 133,000 homes on the market in Broward-Miami-Dade counties, and some of them were actually abandoned. People in this situation don't like to talk about it, and end up getting hurt because they don't."

Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else's well-being and that of the nation. After all, the amount of mortgages due to reset is just a fraction of the United States' $14 trillion economy.

Colombo, you are the sucker. The banks weren’t doing you a favor by finding a way to make you happy to keep sending them money on an asset in which you are probably upside down. Your neighbors likely walked away because they were rational and had a calculator.

[…]

This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks -- losses that could spill into the huge pension and mutual funds that also invest in these securities and that the average worker or investor expects to depend on.

The number is closer to $2 trillion

[…]

There's more pain left for Wall Street: "We're nowhere close to the end of the collapse," said Mark Patterson, chairman and co-founder of MatlinPatterson Global Advisors, a hedge fund that specializes in distressed funds.

"I just assumed banks could stomach these kind of losses," said Wendy Talbot, an advertising executive when asked about the subprime crisis outside of a Charles Schwab branch in New York. "I guess you don't really pay attention to things until your forced to. ... You put out of your mind the worst things that can happen."

Insert sexist comment here.

The subprime wreckage could dwarf the nation's last big banking crisis -- the failure of more than 1,000 savings and loans in the 1980s. The biggest difference is that problems with S&Ls were largely contained, and the government was able to rescue them through a $125 billion bailout.

But this situation is far more widespread, which some experts say makes it more difficult to rein in.

"What really makes this a doomsday scenario is where would you even start with a bailout?" housing consultant Lawler asked.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through non-profit organizations to homeowners that need help, he said in an interview with The Associated Press.

If Schumer was really looking out for his constituents, he would tell them to walk away from negative equity situations. Schumer is making good with his banking friends. Screwd.

"There is a worst-case scenario because housing is the linchpin of our economy, and more foreclosures make prices go down, that creates more foreclosures, and creates a vicious cycle," Schumer said. "You add that to the other weakness in the economy -- on one end is the home sector and the other is the financial sector -- and it could create a real problem."

He also believes Federal Reserve Chairman Ben Bernanke should do more to help the economy. Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

Translated print money. Gold up. Dollar down. Wheelbarrows futures up.

There's also been talk of letting government-backed lenders like Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors. This would extend the government's support, and its exposure, to the mortgage market to help alleviate stress.

The dumbest thing for our elected representatives to do.

Either way, the impact of a fresh round of subprime losses remains of paramount concern to economists -- especially since there's little certainty about how it would ripple through the U.S. economy.

"We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it," said Lawler, who was once chief economist for Fannie Mae.

And who should be hanging from a highway overpass.

"We've never been in this situation before."

Technology Bubble.
Housing Bubble.
Government Bubble.
Democracy Bubble.

Take It Easy

I spent some time in a part of the military where you had to go to a lot of schools. One of my instructors was from Winslow, Arizona. He was probably bragging when he talked about standing on a corner.

Seven years later: struggling to make mortgage payments, with a $200/mo. renter, playing guitar at a Chinese restaurant for tips, beer, and food. Singing the words “we may lose, or we may win, but we will never be here again.” I believed it at the time, and I was right. We used to walk outside after a few cocktails and look at the setting sun. It was beautiful.

Gloat Away

"Naturally, by the crash of the dollar, America's empire will crash," Chavez said at a joint news conference with Ahmadinejad. The two presidents share the same viewpoint in denouncing U.S. influence in the world.

The wonder-twins may be able to push the dollar over the edge. But they take too much credit, we’ve done it to ourselves. These guys should be careful about what they wish for.

This Is Utter Bullshit

"As the waters are growing more acid this process is decreasing, with incalculable consequences for the life of the seas, and for the fisheries on which a billion of the world's people depend for protein. Every single species that uses calcium in this way, that has so far been studied, has been found to be affected. And the seas are most acid near the surface, where most of their life is concentrated."

--A World Dying, But Can We Unite to Save It?:
http://environment.independent.co.uk/climate_change/article3172144.ece

They are making an argument that increased carbon dioxide in the atmosphere will lead to increased levels of carbonic acid in the world’s oceans. Carbonic acid is formed at the interface of carbon dioxide and water. One of the oxygen molecules seperates from the CO, creating carbonic acid. Sounds scary.

But carbonic acid is unstable and quickly breaks down into CO2 gas and water. Even in something as small as a raindrop, only the very surface of the drop is effected. I’ve personally reserved judgment on ‘global warming’. If this is the standard the UN sets for ‘science’, its pretty clear that the whole deal is nothing more than a socialist money grab. They are lying and they know it.

http://www.chemgapedia.de/vsengine/vlu/vsc/en/ch/12/oc/vlu_organik/c_acid/reaktionen_organoli_carbons.vlu/Page/vsc/en/ch/12/oc/c_acid/decarbox/decarbox_1.vscml.html

The Declaration of Independence

My favorite "To prove this, let Facts be submitted to a candid world" item:

"He has excited domestic insurrections amongst us, and has endeavoured to bring on the inhabitants of our frontiers, the merciless Indian Savages whose known rule of warfare, is an undistinguished destruction of all ages, sexes and conditions."

My second favorite:

"He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our people and eat out their substance."

http://www.ushistory.org/declaration/document/index.htm

The Economist does a write up, hitting oil, the housing market, the loss of manufacturing capacity, and the falling dollar:

http://www.economist.com/opinion/displayStory.cfm?Story_ID=10134118

They do not assess the impact of:

1. The fact that 65% of federal revenues are now allocated to social programs;
2. The housing issue goes way beyond 'sub-prime';
3. We have made $70 trillion in promises to the electorate which we cannot afford, rising by $3 trillion per year and accelerating; and
4. The advancing sense of entitlement among the Citizenry.

1789

An economy is founded on the efficient production of three things:

1. Stuff that is mined.
2. Stuff that is grown.
3. Stuff that is manufactured.

Everybody should have the chance to have a small business and run interference against the system. It has become very difficult and expensive to actually do things here. The aircraft carrier that cost around a billion dollars thirty years ago, now costs over five billion. Half of that rise is inflation, the other half is dumb government mandates. Slow, steady, and never ending.

The rational free market responds by outsourcing production and importing workers who do not enjoy the workplace protections of Citizens. The guys at the top make higher margins, the middle is squeezed, the low are on the government tit anyway so they don’t care, and the illegals love the $20k/yr/household that they get in freebies. Back home the per capita GDP is a fifth of that.

All well and good, but financially unsustainable. Imports lower the value of the dollar, making it more expensive to borrow the money we’re addicted to. Foreign oil makes it worse. The housing fraud has the Fed running liquid-cooled printing presses to keep the banks stable. Eventually the credit rating will go away and the checks will stop showing up for the dependent.

And the Second American Republic will emerge, whatever it ends up looking like. I’m rooting for something like the Founding Fathers came up with back in 1789.

Keep Your Good Clients

Robert Bailey, of Jena 6 fame, preparing to pay his legal bill.

Peak Oil

USGS estimates on peak oil. Very interesting.

http://tonto.eia.doe.gov/FTPROOT/presentations/long_term_supply/sld001.htm

I'll Say It Again

Subprime borrowers are likely to default on 30 percent to 40 percent of debt, Mayo wrote. Losses on loans to people with poor credit histories may be as much as half the sum lent, Mayo wrote. The forecasts on total writedowns are based on ``seat-of-the- pants'' estimates using losses announced by the biggest securities firms, he said.

Banks and brokers may have to write off $60 billion to $70 billion this year, Mayo wrote. The estimate is based on known charges of $43 billion and expected additional losses of $25 billion. The report didn't include writedowns at Frankfurt-based Deutsche Bank, which were 2.16 billion euros ($3.15 billion) in the third quarter.

These guys are still denying it. Yes, sub-prime loans are 12% of the $10 trillion in outstanding mortgage debt. But what percentage of the other 88% of debt is held by real estate investors, who had little equity at the market peak, and are now upside down? Or rational homeowners of means who can do the same math?

These landowners, who owe $250,000 on an asset now worth $160,000, and are paying taxes on top of it, owe nothing to the bank. Many will walk away. And the bank will be holding the bag. The supply-demand imbalance is still pretty wide.

The banks also financed many speculative land projects, which they now own and are worth pennies on the dollar.

I put the total loss of real estate wealth at $7 trillion, with the banks holding around $3 trillion of that loss.

DNA

An assessment of the three most influential events of the 20th Century:

1. Post-WWII economic surpluses.
2. The use of these surpluses in an attempt to equalize industry and intellect throughout the population.
3. The development of weapons of mass destruction.

A prediction of the three most influential events of the 21st Century:

1. The economic collapse of the welfare state.
2. The spread and use of weapons of mass destruction.
3. Advances in DNA mapping that allow differences in human ability to be quantified.

That being said, it is stunning to me that the New York Times would run the linked article: "In DNA Era, New Worries about Prejudice". The scientists must be getting close.

http://www.nytimes.com/2007/11/11/us/11dna.html?pagewanted=1&_r=1

Will Work for Food

I hadn’t expected to see this emerge until the welfare state collapses. Those who think that high-IQ populations will simply fade away are making a bad bet.

http://www.cnsnews.com/ViewForeignBureaus.asp?Page=/ForeignBureaus/archive/200711/INT20071108c.html

Noted without Comment

DJIA, CNN, and Reality

NEW YORK (CNNMoney.com) -- The Dow industrials and S&P 500 set new records Friday, while the Nasdaq ended at its highest point in six years as investors welcomed upbeat readings on job growth, manufacturing and inflation, as well as a strong earnings report from Dell.

Hooray! Pop some Champaign! Gold’s up too, $820 an ounce!

But wait a second.

Silver has doubled too. Oil has doubled. Corn has tripled. The commodity-backed Canadian dollar is now worth more than the US Dollar (so quickly that the toll-takers are still discounting it 25%).

Which means that the DJIA, indexed in US Dollars, has been steadily dropping. Looking at the gold charts, the drop is accelerating. Details, details. CNN.

We're Here to Help

"Gov. Blagojevich launches program to help working families in immigrant and minority communities buy homes"
-11DEC05

"Buying a home is a key first step for many working families to start realizing the American Dream. But when you are paid in cash, or you can’t open a checking account or establish a credit history, applying for a mortgage loan in a lot more difficult," said Gov. Blagojevich. "That’s why we created the Opportunity I-Loan program to help Latino families, African-American families, Asian-American families and so many other families qualify for a loan and buy a home. Our new program helps families build equity and security for their future, it protects them from predatory loans, and it will help thousands of families across Illinois build better lives."

http://www.ihda.org/admin/Upload/Files/4736957e-9c7e-4928-98a2-b98c857c70b8.pdf

This Guy Probably Still Feels Self-Righteous

Despite his contribution to the pain being felt by the people he was supposed to be ‘nurturing’. As well as the rest of us.

SoftSecond™ was created in 1990 after a Federal Reserve Bank of Boston study found a pattern of discrimination in mortgage lending to low-income and minority homebuyers. In reaction, MAHA and a coalition of other community groups worked with the Massachusetts Housing Partnership (MHP), city and stateofficials and the banking industry to create SoftSecond™ as a mortgage product for low and moderate-income first-time homebuyers.
--From the 2004 article linked below

http://www.mhp.net/homeownership/news.php?page_function=detail&mhp_news_id=57

Another One Bites the Dust

"The source of Citigroup's write-down is at least as significant as its size. The bank's estimate of its losses has changed so rapidly in large part because the models it used to value hard-to-trade securities relied heavily on credit ratings, according to people familiar with the models."

Solid sources tell me that thirty years ago, when a party walked into a bond lawyer’s office; he could expect the lawyer to take a hard look at his project’s finances. It was a thing called ‘due diligence’ and it had a lot to do with legal ethics (which still existed at the time, so I hear). If the project were not solid, the attorney would not endorse it. The attorney would walk away from a healthy fee that he surely could have got if he had only endorsed a shaky project, putting the investing public at risk. Bad for business, good for integrity.

It’s different now. Teams of lawyers, assessors, and accountants, who should all be working independently but don’t, travel around in suits. Certification of risk assessment is a big business, and the groups who get hired are the one’s who provide the biggest bottom line for the borrower. And the results are starting to play out in the housing market. Now, drum roll please…

These are the same teams who set credit ratings for government bonds. You know, the one’s for schools and roads that assume application fees from a thousand new building permits per year, the associated slush fund of builders’ impact fees, and a steady increase in tax revenue from a constantly rising housing values.

RIP Charles Prince.

Death Threats for Ms. Whitney

Ms Whitney, Forbes’s second-highest ranked stock picker for 2007, told The Times: "People are scared to be negative, especially when a company has such a wide holding. Clients are not pleased with my call and I have had several death threats.

"But it was the most straightforward call I’ve made in my career and I am surprised my peer analysts have been resistant. It’s so straightforward, it’s indisputable."

http://business.timesonline.co.uk/tol/business/markets/article2796774.ece