Washington Post's Housing Collapse Fairy Tale

June 17, 2008

Elaine Meinel Supkis

The Washington Post continues its series about the global banking collapse. Only it is very trivial and sticks strictly to the surface. This doesn't surprise me. If we leave out important parts of a story, a novel can be turned into a short story! This 'Cliff Notes' version of recent history illuminates little. We have to change the entire basis of the floating currency/deficit war spending/free trade system we live under today. It is totally unsustainable. Talking about this is forbidden in the mainstream. The owners and advertisers who control all our media want to pretend nothing is really wrong that can't be papered over.

The Bubble: How the housing bust started a panic in Florida, felled a storied bank and raised the specter of recession.

By Alec Klein and Zachary A. Goldfarb

The Washington Post

Jan. 10, 2008. In his first public remarks of the year, Fed Chairman Ben S. Bernanke acknowledges that the problems that had begun in the subprime market now "affected the prospects for the broader economy."

Unemployment was rapidly rising, hitting its highest point -- 5 percent -- since November 2005. On Jan. 19, a Saturday, a weekend of urgent conference calls among Fed officials began.

Bernanke and his colleagues -- Vice Chairman Donald L. Kohn, Fed Governor Kevin M. Warsh, New York Fed President Timothy F. Geithner and others -- agreed that the central bank needed to sharply cut interest rates to stimulate the economy. But they debated whether a big cut before a routine meeting -- only a week and a half later -- would make the Fed seem as if it were simply responding to declining stock markets. Bernanke implored the group: If it's time to act, the Fed should act.

Two days later, on Martin Luther King Jr. Day, stock markets throughout the world suffered some of their largest drops since Sept. 11, 2001. Meeting by videoconference, the Fed voted to cut its key rate three-quarters of a point, the biggest single-day cut in nearly a quarter-century, and announced the move before U.S. markets opened Tuesday. The Fed continued to lower rates but couldn't stop the economy's plunge. More banks reported losses.

Meanwhile, President Bush, working with Congress, signed into law a $168 billion economic stimulus package, offering tax rebate checks.
*snip*
As he learned about the unfolding crisis, Bernanke feared a global economic collapse if Bear Stearns went under. Money-market funds where Americans deposit billions of dollars in savings had lent money to Bear Stearns. And the company's important role in the financial markets -- trading countless securities for big investors -- would come to a halt. Other investment banks, Bernanke worried, would be next.

The economic stimulus only made things worse. In anticipation of this bounty, many businesses held off dropping their prices and the oil industry anticipated a flood of easy money and so oil prices surged upwards starting in January. Much of this 'stimulus' has already been burned up by SUVs and trucks. The net gain for the productive side of the economy was trivial if any. This spending spree was not focused on any target. It was just an outright 'gift' handed out in Santa Claus fashion. But like so much of our spending money these last 20 years, it wasn't savings or profits being handed out.

It was DEBT which we have to pay back with interest for the foreseeable future! The fix is totally toxic. I do like getting money but I can see that this is NOT money at all but DEBT. When Congress, Bush and the Federal Reserve all joined in this helicopter drop of free money, they all neglected to inform us that we have to pay them back for this largess. Instantly, the media went to work broadcasting ads which were very focused on spending this huge loan on trivial, useless, stupid things. On top of this, as per usual, Congress joined Bush this year in voting yet another $160 billion on our two failing wars in the Muslim world.

The Taliban just blew up a prison and freed everyone and are now busy as ants stripping a picnic table of all food. I once amused myself as a child, in Death Valley, watching an army of ants get under my jelly sandwich and then they headed towards their nest, the bread rippling along the stony ground. When they got to the entrance, they couldn't get it in. It took them hours to tear it apart, crumb by crumb and haul the loot inside. A life lesson not to forget. The Taliban are like those ants. They go into their holes and hang out while we stomp around outside, killing everything in our path. Then they come out and haul off everything we leave behind.

The US is going bankrupt. I have yet to see a single headline in any major media that openly states the truth. Just like Pravda never had a headline, 'Soviet Union Iz Bankruptski!' nor did the East German news casters say, 'Der Mauer ist kaput!' People simply reacted to the obvious and the USSR went USSUnder and the Berlin Wall was torn apart by happy mobs. In our own case, what is announcing our bankruptcy is inflation. The Federal Reserve is ripping up our money into smaller and smaller pieces and saying, 'It is not torn up! Take it!'

In the WP story, they talk about the collapse of the Teacher's Fund in Florida. It has one detail that interests me:

Washington Post:

That's not good enough for Pons, the Leon County superintendent. "Everybody was chasing the interest rates," he said. Pons has been pulling out funds from the pool, and he plans to get out the rest -- about $20 million -- as restrictions permit. His new strategy: He's parked the school district's money over at Capital City Bank, where his good friends gave him the emergency loan. "So I can get to it," he said.

Yes, by gum! Everyone was CHASING interest rates! This is because the official rates were set well below the real rate of inflation! This is a crime. The Federal Reserve used every dirty trick they had to artificially keep rates too low starting from January, 2001---which was well before 9/11---to keep rates far below the real inflation rate. They did this even as Bush and the GOP----again, well before 9/11----dropped taxes. Anyone trying to get a decent return on their funds they saved were in serious trouble thanks to these actions.

As I have pointed out in the past, the money flowed heavily into real estate because rates there did NOT drop like the Fed's rates. The sweetheart deal the Fed had with the investment banks and other bankers was NOT extended to housing, etc. But rates for housing were still historically low. So people wanted to take advantage of this. By refinancing. The key thing here is, the profit spread between the artificially, dangerous low rates set by the Treasury and the Fed in collusion with each other and thanks to outright lies about inflation, this spread was more profitable than other forms of savings regimes. So everyone poured their savings into these new housing lending accounts.

The second temptation was, these accounts were ranked according to risk. And the loans handed out to illegal aliens, prisoners, con artists, condo flippers and real estate speculators were at a higher future rate that would supposedly go up and up and up WITH inflation...these were very popular and funds available for lending in this field shot right through the roof!

These loans had 0% down on top of everything. For a short while, it looked like everyone would become trillionaires. But the system collapsed when the first bills came due. Con artists, condo flippers and illegal aliens are not particularly trustworthy by definition. Sane people don't lend their life savings to characters that are outright outlaws. Yet this is what happened.

Normal banks that followed old banking rules and which were careful about who they lent these savings to were unable to compete because they couldn't offer a good return on savings. I know my bank in 2004 offered only 1.25% return on my cash! I was better off hoarding coal or diesel fuel than putting my money in a bank! So no one saved the old way.

By April, it was widely feared that the United States was falling into recession. Bernanke, appearing before Congress, would only allow that a "recession is possible."
*snip*
Alan Greenspan, who was famously opaque while presiding over the Fed during the bubble, bluntly defends his tenure. "The prevailing notion is that the bubble is indigenous to the United States, is caused by Federal Reserve policy and if the people at the Federal Reserve, especially the chairman, were sensible, this thing would not have happened," Greenspan said in an interview. "History is being rewritten, and I will tell you this is not the history that I remember."

His view is that long-term global interest rates, not the short-term rates that the Fed controls, drove housing bubbles around the world in the past decade. "The tie between Federal Reserve policy and housing prices is just not there," Greenspan said.

Greenspan should be arrested for impersonating an economist. Hell, arrest all these guys. They can't figure anything out or better still, they are deliberately lying to us. Greenspan is ultimately right: HE didn't create this mess. The US created this mess via our stupid floating currency regime coupled with free trade leading us to huge trade deficits. And our budget overruns due to wars. But note he doesn't mention the Bank of Japan's role here. Nor does he say, 'The New World Order idiots who are my good friends and drinking partners did this to us!' Nor does he point a crooked finger at the G7 negotiators who work day and night to insure this wicked, crooked system continues its destructive path.

G-8 Says Commodity Prices Replace Credit Squeeze as Major Risk

(Bloomberg) -- Finance ministers from the Group of Eight nations said surging food and fuel prices have replaced the credit squeeze as the biggest threat to the world economy.

``The predominant concern is the inflationary effect that oil in particular and also food prices are having,'' U.K. Chancellor of the Exchequer Alistair Darling said yesterday after G-8 officials ended talks in Osaka, Japan. Deputy German Finance Minister Thomas Mirow said oil's rise to a record means ``an enormous withdrawal of purchasing power.''

Now let's go to a Canadian bank report. They have a lot of the bad, bad, bad news and Greenspan should read this document. Ditto, Bernanke. If anyone thinks that this mess is over thanks to the government freebies and more misspending and more money lending by the Bank of Japan, they are nuts. It is going to get worse! As these graphs below clearly show us.

National Bank Financial weekly report:

Worst results since 1991

In the first quarter of 2008, U.S. FDIC- insured institutions posted their worst results since 1991, excluding the last quarter of 2007, marked by very heavy losses on securities trading and goodwill writedowns.

The poor showing in the first quarter of 2008 is attributable to provisions for loan losses. Per $100 of assets, this charge reached $1.13 after hitting $1.00 the previous quarter. Chart 2 shows that the last time such heavy loan-loss provisions were recorded goes back to the quarters following the 1990-1991 recession.

During Gulf War I, the US was having difficulties due to the invasion of Kuwait a year earlier. The US won that war pretty easily but then we settled down to restricting Saddam's oil sales. The US economy then fell off the cliff. So did Europe and Japan since they depend on our markets for sales. The chart below is all about the Producer Price Index. We can see clearly, inflation is not at 2%. Fed rates are set at that low level. But nothing sane is happening at that level.

Here is a graph from the bank report. I heavily amended it as usual.

First of all, there is the shocking sight that the return on assets completely collapsed this last spring! Wow. Secondly, we can see clearly the 1989-1992 recession and the savings and loan messes. Very suddenly, starting in 1993 but especially after 1994, onwards, we have this huge increase in net income as % of assets with the banks. The banks had it very, very good during that time span. But the collapse is complete and very sudden. This last quarter has been a slight improvement only because of heavy 'freebie' lending from the Federal Reserve and the taking in of all this bad debt by the Feds who now have isolated it from the banks bottom lines. This includes forcing Fannie Mae to eat a lot of the losses. But the present level is unsustainable. It is doomed to go negative soon.

More non-current loans in pipeline

The large loan-loss provisions set aside in the two previous quarters have amply exceeded net charge-offs, which were already greater than usual. The difference has boosted loan-loss reserves on the books from $87 billion to $121 billion over the period. These provisions could serve to cover future charge-offs. By posting hefty loss provisions in this latest quarter, might U.S. FDIC- insured institutions be trying to cushion their next results against other massive loan charge-offs?

If this is indeed the intent, we have every reason to believe that that these efforts will be for naught. Truth be told, insured institutions have been caught off guard as, despite the considerable charge-offs already posted, non-current loans1 (those not yet charged off) have gone from $83 billion to $136 billion over the same period. Consequently, loss provisions, which just barely covered the amount of non-current loans on the eve of the last quarter of 2007, totalled no more than 89% of these loans at the end of the first quarter of 2008. A coverage ratio at such low levels had not been observed since the first quarter of 1993.

In this regard, there are no indications that the escalation in non-current loans is about to turn around. In fact, instead of diminishing, the amount of loans 30-89 days past due has progressed slightly in the first quarter from $107 billion to $111 billion. A good portion of these loans are likely to become non-current in the second quarter.

Th is graph shows how the rate of default is shooting up far beyond the rate from the previous Gulf War period.

The level of default is nearly double of the rate of rise of the previous recession/war period. There was a slight bulge in defaults following the Dot Com collapse. I know that some of my 'wealthy' neighbors went under during that fiasco. Today, some of them are desperate to undo their debts too late and will probably end up running from the sheriff like the others who had fancy cars, fancy wives and private jets.

I colored in yellow the 'good times' between the two bankruptcy peaks. This was a time when our government ran up trillions in red ink. And the trade deficit shot up even worse. This report, by the way, mentions that the rate of default is growing worse, not improving. As we can see from this graph above, the rise in defaults from 1984-1991 lasted for over half a decade. The improvement took another half a decade. The bell curve from 1984 lasted until 1995 which is 11 years. Then there was stability, more or less, based entirely on the production of vast seas of red ink elsewhere.

Then the next rise and fall of defaults was from 2001 to 2005 with the peak at 2003. This is when the housing bubble was pumped up to an extreme thanks to Greenspan dropping Fed rates to 1%. The 1% free money for banks that pushed savers into taking on greater risks to beat that super-low-sub inflation rate immediately, not after, say, 5 years but INSTANTLY set off a rise in defaults! These began to shoot up in less than ONE YEAR after the bottom was reached for dropping default rates! In other words, there was nary a pause from declining rates to a sudden hike in default rates!

From 2005-god alone knows when--we are in an era of rising default amounts and rates. It is already far greater than the 1991 rate! And has barely begun. In the beginning of 2007, it was already obvious that we were going into a recession as bad or worse than the earlier ones. The rate of default was exactly as high as the highest rates in the 1991 recession! As I keep saying, it takes 5 years to go into a housing contraction and another 5 to depart. This present case is a clear example that this rule is iron-clad. The mini-recession that Greenspan 'cured' by dropping rates to 1% simple proves this point. The height of defaults was coincident with the beginning of higher rates! The time delay effect is obvious: the housing bubble blew up right when it looked like things were getting better! Defaults were dropping! But this illusion of health vanished instantly with the higher rates. And defaults took off with a vengeance.

The Holy Grail for the central bankers is to produce infinite wealth with no inflation and no peasants pounding on the doors, carrying torches and pitchforks. The virtues of ancient systems are not good enough because they regulate things only approximately. This means there are cycles of booms and busts. But the cures that supposedly prevents these happy times/unhappy times are not stopping this dynamic. I fear, these fixes are worsening things. For humans are poor agents for regulating things. Mother Nature does this via the cruel method of 'survival of the fittest.' If we want a civilization, we have to balance our desires with a forward looking view of forces at work. We have to be able to understand the dynamics at work. And we have to realize that some forces are best left to work their way just like flood waters can't always be stopped nor earthquakes prevented. We can only build solid structures that can survive floods, lightning, earthquakes and other hazards. We can't have no hazards. That is impossible.

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Comments

[RobG]

The 'pirates' are gloating over their spoils (Yahoo):

JPMorgan Chase’s top investment banking executives conceded yesterday that their acquisition of Bear Stearns was worth far more than the rock-bottom $10 a share price they paid, but that the market turmoil is still taking a toll on investment-banking profits and may result in further layoffs, CNBC has learned.

The executives—CEO Jamie Dimon, as well as investment banking co-heads Steve Black and Bill Winters—made the comments late yesterday afternoon during their first company address to the newly combined investment bank. JPMorgan (NYSE:JPM - News) acquired Bear Stearns in mid-March, first offering a paltry $2-a-share price before later upping their bid to a still-low $10 a share.

The meeting was held in JPMorgan’s large cafeteria, attended by about 1,000 employees. Executives with the firm estimate that another 2,000 employees called in to hear the widely anticipated talk.

[Blunt Force Trauma]

Here is some reading to kick you in the teeth:

LEAP/E2020 Summer 2008 Alert - July-December 2008: The world plunges into the heart of the global systemic crisis

(top of page 6 is great - you'll love it)

.pdf warning

http://www.stevequayle.com/News.alert/08_Money/080617.GEAB.pdf

(flashback) Alert from February 2008:

Global systemic crisis / September 2008 - Phase of collapse of US real economy

http://www.leap2020.eu/GEAB-N-22-is-available!-Global-systemic-crisis-September-2008-Phase-of-collapse-of-US-real-economy_a1298.html

[Richard]

Elaine, another timely and helpful article.

In my linked article, I've documented the tremendous influence that the Alan Greenspan, and more recent Bernanke, TAF, TSL, and PDCF facilities have had on the financial markets.

I've also reviewed the powerful influence of the Yen Carry Trade liquidity as well.

I encourage that one invest in gold.

[Elaine Meinel Supkis]

Rob, as usual, I was right when I said that Bear Stearns was not in any worse trouble than the other houses, they were in a classic squeeze operation pulled by JP Morgan. This, by the way, happened to my mother's mother's father in 1892. He committed suicide after losing his battle with JP.

[Buffalo Ken]

You know something suggests to me that we shouldn't disregard the workers, the peasants, the small folk of the US of A. The supposed country that is "of, by, and for" the People. You know, the People might just demand that it actually be this way.

Well, lets see what happens.

[calvino]

Actually Bear had the best equity trading desk on the street, meaning they were real stock pickers. Jaime wanted those. The joke is that JPM has the highest leverage on the street, along with HSBC.

[Elaine Meinel Supkis]

Correct, Calvino. I looked at JP Morgan's Derivative Beast numbers. It was at $77+ TRILLION. Bear Stearns was at $14 trillion.

[Buffalo Ken]

Leverage sucks.

[Buffalo Ken]

Elaine, I didn't know you were about to post, but sycronicity (or something like that) might of....(known.....).

Peace,
Ken of the trignitillion

[Elaine Meinel Supkis]

Oh darn. I went up into the woods to remove a barbed wire fence when you posted here, Ken. Rats.

[Buffalo Ken]

OK, my last post for the evening. Are you trying to make me out as Charlie O'Brien?

Please - don't.

Regardless, this site is one that I think all economics students should study.

Peace,
Ken

[rockpaperscizzors]

Well, Obama has chosen the role as errand boy for the pirates and thieves. From the Nation:

Obama's Chicago Boys
Naomi Klein

Barack Obama waited just three days after Hillary Clinton pulled out of the race to declare, on CNBC, "Look. I am a pro-growth, free-market guy. I love the market."

Demonstrating that this is no mere spring fling, he has appointed 37-year-old Jason Furman to head his economic policy team. Furman is one of Wal-Mart's most prominent defenders, anointing the company a "progressive success story."

Another of Obama's Chicago fans is 39-year-old billionaire Kenneth Griffin, CEO of the hedge fund Citadel Investment Group. Griffin, who gave the maximum allowable donation to Obama, is something of a poster boy for an unbalanced economy.
http://www.thenation.com/doc/20080630/klein

Obama has to makeup his mind as to whether he's a candidate for the US Presidency or the new houseboy servant for the elites.

"Change does not roll in on the wheels of inevitability, but comes through continuous struggle. And so we must straighten our backs and work for our freedom. A man can’t ride you unless your back is bent."
Martin Luther King, Jr.

[Buffalo Ken]

We really don't know what "Obama" has chosen. He is an uncertain entity. Oh how the US of A needs this. If not from mi-re, then perhaps it will happen one day.

Regardless, don't you think we will head towards balance?

Peace,
Ken

[Buffalo Ken]

Oh, and sorry about that "last post for the evening" post. Now I mean it.

Peace - really, peace is what we need.

Ken

[Paul S]

Not to worry. "Dubaya", 5+ years into the Iraq war, has finally put Osama bin Laden #1 on his hit list. Atta boy Cowboy. You are going to leave office standing tall in the saddle. Oh it'll happen. Before ya know it--thanks to "Dubaya"--there will be Democracy in every country in the Middle East.

[Elaine Meinel Supkis]

All Bush has to do is call his buddy on the cell phone.

[Buffalo Ken]

The thing is, I don't know about you, but I'm tired of playing their game. I'm checking out from that game and starting up my own new effort. It is going to be local.

I'll say it again, this site is awesome. All economic students and really many other students should be coming here to get an education.

Peace,
Ken