December 2010

Delusions of Normalcy 2011 - Dismal Scientists Cheer Up

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Could a recession occur in 2011? Under the current state of the US economy and its heavy reliance on federal spending, we could answer this question quite simply if we knew when the US government credit card will reach its limit. At some point it must; the compelling reality of mathematical compounding alone makes it impossible for any country to continue to rack up new principal and interest obligations.

The consensus is in and there is strong agreement: the US economy is on the path to a sustained recovery. 2011 will be a year of surprises on the upside, and 2012 will be even better. Among a list of the top 25 economists surveyed, not one of them predicts a recession in 2011. There is hardly any investment strategist or economist to be found who sees any risks serious enough to derail the US economy. Here is just a sample of the consensus thinking that is to be found in end-of-the year forecasts:

*Economists in universities and on Wall Street have raised their growth projections for next year. Retail sales, industrial production and factory orders are on the upswing, and new claims for unemployment benefits are trending downward. Despite persistently high unemployment, consumer confidence is improving. Large corporations are reporting healthy profits, and the Dow Jones industrial average reached a two-year high this week. – New York Times

Are Non-Economists Entitled To An Opinion On the Economy?

Here is a debate I've been having with my brother-in-law over the past few weeks. I'd like to hear some thoughts on it:

My stance is that economics is extraordinarily complicated. I can pretty quickly come up with a list of well-pedigreed experts and Nobel prize winners on either side of any economic issue. The list of economists who think that the stimulus saved the US economy from depression is long, but so is the list of economists who think that FDR's efforts prolonged and deepened a recession.

I am a criminal lawyer, not an economist. I took two classes (Macro and Micro) in Economics in college. I listen to podcasts such as Russ Robert's EconTalk. I've read a few books such as Paul Krugman's The Return of Depression Economics, and I read the occasional posting on sites like this. However, the more I read, the more I'm convinced that I don't have the energy or the time to really delve into the complexities of these issues to the point where I could have what I would consider an informed, intelligent opinion.

My brother-in-law, in contrast, thinks that economics can be reduced to extremely simple principles that are readily understood by anyone realistic enough to face facts: 1) if you teach a man to fish, he'll eat for years, instead of just giving him a fish 2) deficit spending will destroy our children's futures and 3) taxing rich people destroys jobs and sends investments overseas.

Ally Bank, Formally Known as GMAC, to Pay Fannie Mae $462 Million Over Bad Mortgages, BoA Sued by Allstate

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GMAC, who changed their name to Ally Financial, is paying Fannie Mae $462 million to dump off their bad mortgages.

Ally Financial Inc, the lender formerly known as GMAC, on Monday said it agreed to pay $462 million to Fannie Mae (FNMA.OB) to avoid having to repurchase poorly underwritten mortgages sold to the housing finance giant.

Ally, which is majority-owned by U.S. taxpayers, said the agreement releases its Residential Capital LLC mortgage unit from any liability related to bad underwriting on $292 billion worth of loans sold to Fannie Mae, itself about 80 percent owned by the government.

Residential Capital owns GMAC Mortgage and Ditech Funding.

Ally, which is expected to go public next year, announced a smaller settlement with Freddie Mac (FMCC.OB) in March. Resolving questions about its potential liability could help Ally attract investors.

The lender, which is 56 percent owned by the U.S. government, said the agreements reduce the risk in its mortgage operations going forward.

Nice huh? Fannie Mae absorbs $292 billion worth of bad loans for less than half a billion dollars? According to the Wall Street Journal, Fannie Mae and Freddie Mac were demanding banks pay back bad mortgage loans when banks violated their mortgage purchase agreements.

Fannie and Freddie collected more than $9 billion from banks during the first three quarters of the year. At the end of September, another $13 billion in requests hadn’t been paid, including more than $4 billion that have been outstanding for more than four months.

Case-Shiller Home Price Indices Through October 2010

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The S&P/Case-Shiller Home Price indexes for October 2010 were released today. The composite-10 index is down -1.2% for the month and the composite-20 index decreased -1.3%. For the year, the composite-10 index is 0.2% higher but the composite-20 is -0.8% lower than October 2009. Below are the 20 city and 10 city S&P/Case-Shiller monthly indices.

Here Comes Oil

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Oil hit $94 a barrel, just in time for the Holidays, and is staying there. Now the blame is coming on speculation, inflation, QE2, the falling dollar and good old fashioned supply and demand. Despite even bills in Congress designed to curb commodities derivatives, the CFTC delayed rules introduced to curb oil speculation. Bottom line, it's back, we had a pause, due to the global economic slowdown, but we appear to be witnessing the return of $100 dollar oil.

Paul Krugman is saying the reason for increasing oil prices is emerging economies and limited resources:

What the commodity markets are telling us is that we’re living in a finite world, in which the rapid growth of emerging economies is placing pressure on limited supplies of raw materials, pushing up their prices. And America is, for the most part, just a bystander in this story.

98 TARP Bank Recipients May Still Fail

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The headlines are all a buzz over this Wall Street Journal article, declaring bailed out banks may fail. These 98 banks have received $4.2 billion in TARP funds, a token amount in comparison to the Banksters.

In Q2 2010, the number of TARP recipient banks who would fail anyway was 86. That said, every Friday at business close we get more bank failures. The tally for 2010 alone being 157.

Calculated Risk runs the unofficial problem bank list, currently outlining 919 problem banks. Most of these of the list did not get TARP funds.

There are also reports of the FDIC selling failed banks assets to TARP recipient banks, for pennies on the dollar and holds large amounts of seized failed bank assets.

The FDIC closed on the sale of $279 million of assets from nine failed bank receiverships. The winning bidder of the asset pool was Cache Valley Bank, Logan, Utah, with a purchase price of 22.2% of the unpaid principal balance of $279 million. The failed bank assets will be placed into a newly formed limited liability company (LLC) with the FDIC retaining a 60% stake and the balance owned by Cache Valley Bank.

Australia Finds out "Free" Trade Ain't So Free After All

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By way of Public Citizen, there is a new 400 page report on Australia's six NAFTA style trade agreements that concludes they ain't doin' much for their economy, Bloody onkus mate.

The Productivity Commission has told the government there is little evidence to suggest Australia's six free-trade agreements have produced substantial commercial benefits

Millions of dollars of taxpayer funds has been paid out to multinational corporations due to corporate lawsuits filed under NAFTA's investor-state dispute settlement provisions.

The Age reports Australia is losing millions to free trade agreements, over copyrights of all things.

Copyright provisions inserted in the US-Australia Free Trade Agreement could eventually cost Australia as much as $88 million per year as the nation pays an extra 25 per cent each year in net royalty payments, ''not just to US copyright holders, but to all copyright holders''.

The copyright provisions extend payments from 50 years after an author's death to 70 years and enshrine in Australian law ''rules that would otherwise be anti-competitive such as permitting the use of region codes on DVD players''.

The provisions have saddled Australia with copyright obligations ''even higher than in the US … because we matched their higher level of copyright protection but have maintained our lower level of copyright users' rights'', the report says.

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