Posted: December 18th, 2010 | Author: jenny | Filed under: Uncategorized | No Comments »
Is anyone doing any holiday shopping yet? I can’t believe how empty the parking lots have been across the suburbs of Los Angeles lately. Perhaps we’ve all taken to the computer this year, finally. The deals and selection are certainly superior, and it sure beats driving through traffic and rain. But if empty parking lots are any indication of what holiday sales are doing, we’re sure to see some anemic numbers coming down the pipeline for the retail sector this Christmas shopping season.
I just heard on Marketplace yesterday that the economy has actually recovered more than anyone realizes. Apparently it has actually grown over the last five quarters and retail sales numbers are up to pre-recession levels. Wow, if that is indeed the case I have to ask where is this growth coming from and is it sustainable? I ask only because there has been no marked improvement in the job market, while the middle class continues to slowly slip further toward oblivion. So what’s been funding this new growth and manufacturing? Is it all the effect of stimulus money? Are the super rich going for broke with their holiday shopping this year? Consumer confidence is important in getting folks out and spending – and apparently confidence has grown as well – but I wonder how it can sustain the economy if people aren’t actually earning any more so they can act upon that confidence with integrity. Perhaps the weaker dollar since QE2 has increased sales and demand for American products abroad enough to compensate for our lack of purchasing power at home. I did read that sales are up on exports recently, but we’re talking about five quarters of growth here.
Christmas is coming, the geese are getting fat
Pleased to put five quarters in the old man’s hat
If you haven’t got five quarters a credit line will do
If you haven’t got a credit line then God bless you!
Back at the ranch, people are letting their home loans default and waiting to see what happens. They are paying no mortgage and no rent, and they are finding they’re able to stay put in their homes for months and even years for free without consequence. Newly established laws that allow for banks to be fined for failure to keep foreclosed properties up to snuff mean banks are just as happy to let defaulting borrowers keep their names on the paperwork as long as possible. Not to mention banks avoid any write downs those properties would require if they were to be officially reclaimed, which would blow their mark-to-make-believe accounting and force their failing hands at the ponzi poker table. Not to mention, also, banks are facing an unprecedented tsunami sized wave of foreclosures hitting their books, which they are entirely ill equipped and understaffed to handle processing and getting to market. Not to mention, in addition to that, there is nobody willing to buy most of the defaulting property even if it does get to market without improved job stability and major further reductions in price, especially with interest rates on the rise in the wake of the Fed’s latest economic injection. Not to mention, furthermore, pressure to slow the foreclosure process is mounting due to moratoriums being considered and in some cases implemented by the banking industry in response to the recent controversy over fraudulent and illegal practices concerning existing foreclosures. In other words, there is not much incentive for banks to push foreclosures through right now, so they just let people stay put.
On the other side of the equation strategic default is on the rise, where people who actually can afford to pay their mortgages are deciding not to for the financial advantage. In most cases these homeowners are underwater, where they owe more money on their property than it is worth because of deflating prices in the housing market. Interestingly, according to a new white paper coming out of the Philadelphia Federal Reserve, most homeowners deciding to default in this way are doing so on their primary mortgages while opting to keep payments current on their second liens. Rather than paying the first mortgage in order to reduce house payments and avoid foreclosure, a far larger percentage are opting to let their first mortgages go while keeping their second liens current in order to keep their Home Equity Lines Of Credit (HELOCs) available. On top of this, for some unknown reason banks are not punishing people who default on their first mortgages by limiting their access to home equity credit. People are basically being allowed to keep access to lines of credit that are based on imaginary wealth, and they are doing just that in order to use that credit to buy more stuff. This wealth is imaginary first because the equity collateral supporting these home lines of credit is either nonexistent or diminishing while credit limits remain unaffected, and secondly because the risk attached to the defaulting of these borrowers is not reflected in the availability of credit (in fact, in 3 to 6% of cases HELOC limits have actually been raised despite default). These lines of credit represent claims to wealth that cannot be accounted for. Eventually someone in the chain of consumption will be left with no chair when the music stops playing. Someone will take the loss. If history is any indication of what lies ahead, it will most likely be the US taxpayer who’s left with any unpaid bills… that is to say, the people of the middle class. So the insanity of housing bubble finance lives on.
I would venture to say consumption continues to find considerable funding from deterred housing costs. Essentially, millions of people are living for free and using those diverted dollars as disposable income. Many are funding their spending with HELOCs that have no viable collateral behind them. This boosts consumer spending and gives the appearance of growth, but it is definitely not a sustainable recovery. The denial is astounding here. Denial is a symptom of any addiction, and we are addicted to consuming. Our capitalist culture relies upon it. You can call it “retail therapy,” or an American “birthright,” or you can just “shop till you drop.” We in the U.S. are chasing the dragon of accumulating bigger, better, faster and more. We were saving our pennies for a while there, but we have begun to show some slack in that effort. We are back to spending and running up credit when there has been no increase in real wealth to base it on. For some of us without income it is a survival strategy. Many of us are still jonesing to keep up with the Jones’s and we just can’t seem to put the brakes on it. I do think there is a long term shift in consumption underway, but this sort of large scale social change ebbs and flows in waves of contraction and not without a good deal of resistance. However, spending what we do not have is a game that cannot continue for long at this point. It’s tough to do without, but the well is running dry and when it does there will simply be no water left to drink. Denial allows us to postpone facing the truth of our circumstances, but fundamentally it does nothing to change them.
So, I’m pretty excited cause I’m fortunate enough to have had the means to do a little Christmas shopping this year and it was a lot of fun. I’m pretty much done actually, and just in time to enjoy having the kids home from school. It involved no credit card debt I couldn’t pay off in full when the bill arrived, and no home equity line of nothin’ (I’m a renter!). With the deflationary trend in toys, clothes, personal and household items going on these days there’s no reason that with a little effort you can’t buy fabulous quality and name brand gifts for a fraction of their original value. I managed to score some amazing discounts this year- and I’ve got two young children and no babysitter, so shopping doesn’t come easily nor does the time needed to do it. Now I can focus on the reason for the season – the Winter Solstice! Oh, and the Jesus story is lovely as well – the pure potential of that darling little baby ringing in the new. That little family had nothing but love and some borrowed hay to sleep on. No credit cards. No Home Equity Line of Credit. Not even a hotel room. ‘Tis the season less is more.
American Public Media
December 17, 2010
Discover Profit Beats Forecast; Credit Card Use Up
December 16, 2010
Strategic Defaulters Opt to Continue Paying on Second Liens
Dec 14, 2010
Posted: December 3rd, 2010 | Author: jenny | Filed under: Uncategorized | 2 Comments »
Meredith Whitney is concerned about the state of the states. She’s the financial analyst who rose to fame from obscurity after accurately predicting the meltdown of the banking industry three years ago. After two years of exhaustive research her New York based company, Meredith Whitney Advisory Group, recently released a report entitled A Tragedy of the Commons which assesses and rates the state of finances amongst the individual U.S. states. She sees the situation with the states today as parallel to that the banks were in before the crisis, and she’s warning of another massive taxpayer funded bailout to come. Based on the information uncovered during the investigation Whitney is now warning of systemic problems that may lead to crisis in the municipal bond market and the risk of state default. The states are highly leveraged to the housing market due to their dependence on tax revenue, and just as Whitney predicted months ago it is now evident the housing market is indeed heading into a double dip. This implies, of course, that tax revenues will continue to shrink and place additional stress on the balance sheets of state budgets.
Basically, states are currently spending 27% more than they are earning in taxes. Municipal debt has doubled since 2000. State spending from 2000 to 2008 grew 60% while revenue grew 45%. For the fiscal year of 2011, the gap in state budgets stands at $121 billion and the total could exceed $200B without Federal help. States constitutionally have to maintain balanced budgets. They have used off-balance-sheet leverage and compensation schemes that borrow from the future, mostly in terms of raiding pensions, to create the illusion of balanced budgets. Whitney calls it “generational robbery.” Balanced budgets and abundant services get politicians reelected, and so that became the priority during the housing boom years when property values and high salaries were generating exponentially growing revenues. Hiring for state jobs and increased spending on local programs makes for powerful well-liked politicians… at least in the short run while the going remains good. Time has now run out on the sort of ponzi-structured approach it took to maintain the expenditures of such a plan.
It should be noted that not all the states are fairing badly according to Whitney’s report. Texas, Virginia, Washington and North Carolina are holding their own quite nicely. The states with the worst ratings are California, New Jersey, Illinois, Ohio, Michigan, Georgia, New York and Florida. California is by far the most precariously perched, by virtue of its sheer magnitude. It represents the world’s eighth largest economy if it is measured as a country, and it is highly exposed to the housing market with very few resources left to pull funding from. Some states like Florida are in worse shape in terms of foreclosure problems, but Florida has the option to implement an income tax to help counter any further losses in property tax revenue. California has already played all its cards and is in a very tenuous position. It already has an income tax. Its sales tax is one of the highest in the country. The legislature already took a twenty percent pay cut some time ago. The option to legalize, industrialize and tax its largest cash crop- marijuana- failed at the polls. There may not be a lot of options left besides making further cuts to government spending, privatizing services and restructuring pension funds. Raising taxes is a limited option in a state with a 12.4% unemployment rate, twice that number in underemployed, and a tanking housing market. Additionally and of major importance, California has already completely raided its pension system funds. Whitney predicts California and likely the other worst rated states in the report will soon be facing the risk of default.
Can a state default? Will California face bankruptcy? Legally, no. In California bondholders are constitutionally guaranteed payment. Only public schools have greater priority in their claim to state treasury funds. Public pension funds are also guaranteed. States cannot default on their debt technically, but effectively that is in fact the risk we are facing because there is just no money there. Legally, US taxpayers are required to make up for any shortfall in pension funds. Legally, everyone’s going to be required to pay higher taxes to compensate for budgetary shortfalls amongst the failing states. That is what we’re up against. This will not be an easy solution to implement, however. It may not even be viable. Citizens in fiscally conservative states like Texas who’s austerity and responsible spending got them through the crisis relatively unscathed are probably not going to be too happy about paying higher taxes to cover the tab for what they view as irresponsible spending sprees in California and the like. That would be a difficult move politically.
Beyond taxing the people, the government will look at the possibility of cutting spending. This will come down to cutting back and eliminating services. The main problem with this is that it will destroy jobs and lead to higher unemployment, which would be very dangerous to the health of the greater economy. The country is already seeing the worst unemployment situation since The Great Depression. California is currently at a 12.4% unemployment rate. What will happen if that rises? There is no easy solution here. Also, implementing cuts to government services and jobs will be strongly resisted by unions and labor advocate groups. Again, this may not be politically viable.
States are protected by a Federal safety net, so the real pressure will fall on local towns. Risk is not with the state debt service. It is with the local municipal debt service and cities. Expect to see damage there. A third of local municipal funding comes from the states. When a state gets into trouble it will protect itself and neglect the municipalities. Support of the municipalities will be compromised. The northern California city Vallejo actually declared bankruptcy two years ago when the cost of police and firefighters soared while the housing slump cut into tax revenue. Cities in California, New Jersey and other hard hit states have dismantled whole police departments in favor of contracting out to neighboring cities at less of an expense. These are the kinds of situations we can expect to see more of as well as a possible crisis in the municipal bonds market and further stress in regional banking.
In an op-ed piece published in the Wall Street Journal in early November, following the release of her latest report, Meredith Whitney revealed she had uncovered information showing the bailouts of states have actually already begun. The first attempt at creating a solution to the problem was to sidestep altogether the issues of raising taxes and cutting spending, and avoid at all costs calling the effort a bailout.
“Over 20% of California’s debt issuance during 2009 and over 30% of its debt issuance in 2010 to date has been subsidized by the federal government in a program known as Build America Bonds,” she wrote. “Under the program, the U.S. Treasury covers 35% of the interest paid by the bonds. Arguably, without this program the interest cost of bonds for some states would have reached prohibitive levels. California is not alone. Over 30% of Illinois’s debt and over 40% of Nevada’s debt issued since 2009 has also been subsidized with these bonds. These states might have already reached some type of tipping point had the federal program not been in place.”
But of course! Lure rich investors with subsidized profits! Clever, clever. Most subversive. So, Wall Street secretly saves the day. Those guys are like heroes. You know, now that’s why they get paid the big bucks. Uh, for now that is… can’t get into it right here, but Ms. Whitney also predicts a huge number of layoffs in the financial sector next year. Hush, hush… (Of course, the bill on those interest subsidies lands on the tax payer, as usual, so go ahead and give yourself a pat on the back and a big fat holiday bonus too!)
The Build America Bonds are not enough, though. The government is just kicking the can down the road and buying time on making the hard decisions necessary to turn this thing around. Meredith Whitney finds the level of complacency around the issue alarming.
“Most assume,” she continues, “that the federal government will simply come to the rescue of the states, without appreciating the immensity of the cumulative state-budget gaps. I expect multiple municipal defaults to trigger indiscriminate selling, which will prompt a federal response. Solutions attempted in piecemeal fashion, as we’ve seen thus far, would amount to constantly putting out recurring fires.”
Whitney suggests states need to take responsibility now and come up with the hard solutions. As a resident of California I can say I am skeptical at best that this will be the plan of action in the hardest hit of states, if past experience is any indication of what’s likely to come. The budget continues to be based on outdated revenue statistics and balanced by sucking imaginary revenue from the future. Of course this is not sustainable, but I imagine the California can will be kicked till it hits some sort of rock or a hard place. Perhaps the other states in trouble will take a more reasonable approach.
Meredith Whitney Interview on State Finances (Video)
September 30, 2010
The Wall Street Journal
State Bailouts? They’ve Already Begun.
November 3, 2010
States Are Poised to Be Next Credit Crisis for US: Whitney
September 28, 2010
Los Angeles Times
Maywood to lay off all city employees, dismantle Police Department
June 22, 2010
Vallejo, California, Plan to File For Bankruptcy
Michael B. Marois
May 7, 2008