I’d be willing to bet most Americans thought Monday’s carnage on Wall Street was the direct result of Standard & Poor’s downgrade of the United States’ credit rating. However, developments across the pond related to the lingering sovereign debt crisis may have contributed to the sell-off as well. From the Wall Street Journal’s Brian Blackstone and Charles Forelle today:
The European Central Bank delivered on its promise to purchase Italian and Spanish bonds on a large scale, calming investors who had grown increasingly worried that euro-zone leaders might sit idly by while the debt crisis engulfed Spain and Italy.
Government bond yields of Spain and Italy plunged Monday, as did their yield spreads over safe German bonds. Italy’s 10-year bond yield fell to around 5.3% from just over 6%. Spain’s fell even further, to 5.15%.
The ECB bought those countries’ bonds for the first time since creating its debt-purchase program 15 months ago, said traders. The ECB didn’t say how much it bought or confirm what bonds it purchased, but estimates range from around €3.5 billion ($5 billion) to as high as €5 billion. In an interview with German broadcaster ZDF on Monday, ECB President Jean-Claude Trichet said the central bank’s actions “undoubtedly were significant,” and necessary to ensure that its interest-rate policies functioned smoothly…
The ECB’s purchases of Italian and Spanish bonds were no help to European equities, which tumbled along with the rest of the global markets Monday. Bourses in London, Paris and Frankfurt all traded lower; German and French indexes each shed more than 4%.
Well, if anyone still believed Spain and Italy were strong enough economically so as to be somehow immune to the debt contagion that’s already claimed Greece, Ireland, and Portugal, these actions by the European Central Bank demonstrate otherwise. And due to the size of their economies, such a condition is worrisome. Blackstone and Forelle noted:
Italy and Spain, the region’s third- and fourth-largest economies, have a combined gross domestic product of nearly €2.7 trillion, almost 30% of the euro zone total. Royal Bank of Scotland economists estimate the ECB and Europe’s bailout fund will eventually have to own €850 billion of Spanish and Italian bonds to safeguard those countries.
It might be a good idea to keep monitoring the sovereign debt situation over in Europe. Investors may be easing up after the ECB’s actions, but keep in mind that no intervention would have been necessary if the rosy pictures that had been painted recently of these two major European players were really true.
Blackstone, Brian and Forelle, Charles. “Italian, Spanish Bond Yields Decline.” Wall Street Journal. 9 Aug. 2011. (http://online.wsj.com/article/SB10001424053111904480904576496363709187284.html?mod=googlenews_wsj). 8 Aug. 2011.
Anyone been paying attention to the economic crisis unfolding in Belarus (former Soviet republic of Belorussia)? Some really depressing stuff going on. From the BBC News website yesterday:
Belarus has asked the International Monetary Fund (IMF) for an emergency loan of up to $8bn (£5bn; 5.6bn euros).
It comes a day after the government announced it was raising its main interest rate from 14% to 16%, and that it was freezing prices on a number of staple foods until 1 July.
Last week Belarus cut the value of the rouble against the US dollar by 36%.
The country faces high inflation and its most severe financial crisis since the collapse of the Soviet Union.
Reports of empty store shelves and food being hoarded are coming out of the Belarus capital of Minsk and elsewhere in the country. Apparently, the latest financial crisis stems from a sharp fall in the ex-Soviet republic’s foreign exchange reserves caused by populist social spending increases designed to support last year’s presidential campaign of long-time president Alexander Lukashenko. The Wall Street Journal’s Richard Barley talked about how Belarus got to this point on Wednesday:
Belarus is a repeat customer at the IMF. In 2009-2010, hit by a plunge in energy revenue, it borrowed $3.4 billion accompanied by a 15-month program of overhauls under which it managed to tighten monetary and fiscal policy, sustain growth and keep unemployment low. But structural problems remain. The state accounts for 70% of the economy, growth remains driven by rapid credit expansion, and there is a heavy reliance on imports.
Since the IMF program ended in March 2010, Belarus has gone backward. December’s elections saw state spending ramped up, while rival candidates, activists and journalists were detained. Officially, Mr. Lukashenko won 80% of the vote. The spending surge has contributed to the crisis, with the current account deficit widening to 16% of gross domestic product in 2010. Foreign-currency reserves have dwindled to just $1.4 billion. Moody’s pegs the country’s external financing needs for 2011 at $8 billion to $10 billion.
As some might expect, President Lukashenko, who has served in that role since 1994, first sought financial support from Russia to deal with this latest crisis. However, Belarus’ neighbor to the northeast wants some significant concessions. From the Financial Times’ (UK) Neil Buckley yesterday:
Some analysts cautioned that talk of turning to the IMF could be a tactic to strengthen Mr Lukashenko’s hand in talks with Moscow, which demanded tough conditions for any loan…
Mr Lukashenko has sought financial support from Russia and former Soviet allies, but Moscow demanded privatisation of strategic state assets, including a stake in Beltransgaz, the national gas pipeline operator – seen as a way of enabling Russian companies to buy control of key parts of the Belarusian economy on the cheap.
Nothing’s for free, right?
Consider some of Belarus’ actions that have brought them to this point:
• Unsustainable social spending for political gain
• Government interference/dominance of the economy
• Excessive reliance on credit
• Too much of a dependence on imports
Remind anyone of another country to a certain degree?
“Belarus seeks IMF loan.” BBC News. 1 June 2011. (http://www.bbc.co.uk/news/business-13623584). 1 June 2011.
Barley, Richard. “IMF Must Be Tough on Belarus.” Wall Street Journal. 1 June 2011. (http://online.wsj.com/article/SB10001424052702303745304576359481343906012.html). 1 June 2011.
Buckley, Neil. “Belarus to seek IMF bail-out.” Financial Times (UK). 1 June 2011. (http://www.ft.com/cms/s/0/9a436604-8c6c-11e0-883f-00144feab49a.html#axzz1O4vYTZEY). 1 June 2011.
As much as Europe would like to, it can’t seem to shake the ongoing sovereign debt crisis. In recent weeks, a lot of attention has focused on Portugal. Now, it’s shifting back to Greece. And just because the United States is across the pond from Europe, it may not be immune from the repercussions of a Greek debt default should it get to that point. From Maria Petrakis on Bloomberg.com this morning:
Greece’s local and foreign currency bond ratings were cut to Caa1 from B1 by Moody’s Investors Service, which cited a growing risk that the country will default on its debt.
Moody’s said the outlook on Greek debt is negative, meaning that the rating could be reduced further. The rating is seven steps below investment grade and puts Greece below Montenegro as the lowest-ranked European nation.
“Greece is increasingly likely to fail to stabilize its debt ratios within the timeframe set by previously announced fiscal consolidation plans,” Moody’s said today in a statement. The country is also unlikely to meet its previously announced budget targets for 2011, it said.
European officials readying Greece’s second bailout in two years are preparing to ask investors to reinvest in new debt when existing bonds mature, overcoming central bankers’ objections to any restructuring. European leaders are trying to prevent the euro area’s first sovereign default after last year’s 110 billion-euro ($158 billion) rescue failed to prevent an investor exodus from Greece.
(Editor’s note: Italics added for emphasis)
Newsmax.com’s Forrest Jones pointed on May 29th that serious concerns exist over what a Greek default may mean for the United States:
Any default in Greece would pummel not only the economy there but spread across Europe and eventually to the United States, inflicting economic damage similar in speed to the subprime housing crisis from just a few years ago, says financial expert and author John Mauldin.
The problem, Mauldin tells Yahoo! Daily Ticker, is that banks all across Europe are exposed to Greece.
Should Greece default on its debt, the country would likely convert back to the drachma.
Immediately, all bank depositors would default on their debts due to the sudden weakening of their currency.
French and German banks would then write down their Greek exposure, and so would the European Central Bank (ECB).
On top of that, U.S. banks have been taking on risk in Europe via writing credit default swaps, instruments made famous during the U.S. housing meltdown that are basically insurance policies against defaults.
The result: everyone takes a hit.
Mauldin went on to add:
I’m worried that this one has a lot of contagion and it will infect the world.
(Editor’s note: Italics added for emphasis)
The sovereign debt crisis doesn’t seem to be going away any time soon. Stay tuned…
Petrakis, Maria. “Greek Debt Rating Is Cut to Caa1 From B1 by Moody’s.” Bloomberg.com. 2 June 2011. (http://www.bloomberg.com/news/2011-06-01/greece-cut-to-caa1-from-b1-by-moody-s-outlook-negative.html). 2 June 2011.
Jones, Forrest. “John Mauldin: Greek Default Would Threaten US.” Newsmax.com. 29 May 2011. (http://www.newsmax.com/Newsfront/Greece-Economy/2011/05/29/id/398142). 2 June 2011.
The bailouts keep coming in Europe. Greece, Ireland, and now Portugal, it seems. From Reuters’s Shrikesh Laxmidas this morning:
Portugal has reached a deal with the European Union and the IMF on a 78 billion euro 3-year bailout, although it is yet to be backed by the opposition and agreed by euro zone finance ministers in mid-May.
Below are some of the main terms of the bailout package, according to a copy of the memorandum of understanding obtained by Reuters:
BAILOUT LOAN VALUE, RATES, TIMETABLE
* Portugal to receive 78 billion euros [$115.7 billion] in loans, including up to 12 billion euros for the banking sector.
* The loans will span until 2013, after which Portugal is expected return to markets to finance itself.
* The interest rate Portugal will pay on the loans will be set by euro zone finance ministers at a meeting in mid-May.
(Editor’s note: Italics added for emphasis)
While that 78 billion euro figure is being tossed around publicly, it’s being reported that the bailout might end up costing more. Reuters’ Luke Baker wrote this morning:
Portuguese government officials said the aid would total 78 billion euros, with 12 billion of that going to Portugal’s banks. But a senior euro zone source said the range EU officials were working with was still 75-90 billion euros, depending on how much the banks ended up needing.
The figures are expected to be finalized in talks in the coming days, the source said.
Factoring in Portugal, the total cost of European bailouts to date could be close to 285 billion euros ($423.4 billion). Baker added:
The bailout means three of the euro zone’s 17 countries are now effectively in financial intensive care — Greece accepted 110 billion euros of bilateral loans a year ago and Ireland signed an 85 billion euro bailout last November — with the long-term fiscal and economic prognosis for all three clouded.
And here’s the kicker. According to one U.S. congresswoman, through it’s obligations to the International Monetary Fund, American taxpayers are helping pick up a portion of the bill for these bailouts. Representative Cathy McMorris Rodgers (R-WA) explained on the BigGovernment.com website back on April 18:
Recently, Portugal officially requested a $116 billion bailout from the European Union and the International Monetary Fund. This makes Portugal the third European nation to seek such a bailout in the past year (Greece got $157 billion; Ireland $122 billion). What most people don’t realize is that the U.S. is the largest contributor to the IMF.
Therefore, U.S. taxpayers are paying for Portugal’s bailout which– like the earlier bailouts of Greece and Ireland – was caused by too much government spending and borrowing…
While the IMF refuses to provide a reliable number, we estimate that America’s contribution to a Portuguese bailout is equal to writing a check worth $600 for every man and woman in Portugal. This largesse makes it more likely that larger counties – particularly, Spain and Italy – will be standing in line for U.S. tax dollars tomorrow. That is unacceptable. We cannot take the “too big to fail” philosophy to a global level. The only thing “too big to fail’ is America itself.
(Editor’s note: Italics added for emphasis)
Laxmidas, Shrikesh. “Factbox: Main terms of EU/IMF bailout deal for Portugal.” Reuters. 4 May 2011. (http://www.reuters.com/article/2011/05/04/us-portugal-bailout-idUSTRE7433KA20110504). 4 May 2011.
Baker, Luke. “ Euro zone takes third debt crisis patient into care.” Reuters. 4 May. 2011. (http://www.reuters.com/article/2011/05/04/us-eurozone-idUSTRE7432S720110504). 4 May 2011.
McMorris Rodgers, Cathy. “U.S. Taxpayers on the Hook for Portugal Bailout.” BigGovernment.com. 18 Apr. 2011. (http://biggovernment.com/crodgers/2011/04/18/u-s-taxpayers-on-the-hook-for-portugal-bailout/). 4 May 2011.
Last week, Standard & Poor’s cut Portugal’s bond rating to BBB-minus- just above junk status. Then, Fitch Ratings downgraded Portuguese debt from AAA-minus to BBB-minus last Friday. Now, Moody’s has trimmed the Iberian nation’s bonds from A3 to Baa1- and placed it under scrutiny for further cuts. MarketWatch’s William Watts wrote this morning:
Moody’s Investors Service on Tuesday delivered the latest in a series of ratings-agency downgrades to Portugal’s government bonds, citing fears the country will have difficulty meeting its deficit-reduction goals and underlining expectations the country will be forced to seek a bailout.
Moody’s said it sees increased political, budgetary and economic uncertainty in Portugal. The country’s minority government recently fell apart after failing to win support in parliament for a fourth round of austerity measures, setting the stage for a June 5 general election.
Moody’s cut Portugal’s rating by one notch to Baa1 from A3 and put the rating on review for a possible further cut. The move comes after Moody’s cut Portugal’s rating by two notches last month.
“Moody’s believes that the government’s current cost of funding is nearing a level that is unsustainable, even in the short term. A critical part of the review will focus on the ability of the government to secure financing at a less elevated level, either through the capital markets or through [European Union] support,” Moody’s said.
If Portugal seeks a bailout, it will be the third European nation, behind Greece and Ireland, to do so in recent months. A deteriorating economic situation in Europe could have major implications for the United States. Among them, should the Euro fall and U.S. dollar strengthen significantly, American exports may not be as attractive overseas- hampering a recovery.
Watts, William L. “Moody’s downgrades Portugal on bailout fears.” MarketWatch. 5 Apr. 2011. (http://www.marketwatch.com/story/moodys-downgrades-portugal-to-baa1-2011-04-05). 5 Apr. 2011.
Portugal looks like it could be the next country of the notorious PIGS (Portugal, Ireland, Greece, and Spain) to request a bailout for their troubled economy. MarketWatch’s Polya Lesova and William L. Watts wrote yesterday afternoon:
The specter of an international bailout loomed over Portugal on Thursday, after additional austerity measures were rejected by parliament and the nation’s prime minister submitted his resignation.
The deepening political crisis in Lisbon will put Portugal at the top of the agenda as European leaders prepare to meet in Brussels for a much awaited summit that will take place on Thursday and Friday. If Portugal ends up requesting a bailout, it will be the third euro-zone country to do so after Greece and Ireland.
“The likelihood of Portugal soon needing external help is now very high,” said Christoph Weil, an analyst at Commerzbank, in a note…
“Portugal moved another step closer to needing a bailout yesterday,” said Gary Jenkins, head of fixed-income research at Evolution Securities.
“Even with complete political harmony, it was always going to be difficult for Portugal to persuade investors to continue to fund them and thus yields are likely to rise further from what has already been described as unsustainable levels by Portuguese officials,” Jenkins said in a note to clients.
Portugal’s “political situation will complicate any EU/IMF negotiations, and with over 4 billion euros [$5.6 billion] of bond redemptions in mid-April, the need for support is fairly urgent,” Jenkins said.
This morning, yields on Portugal’s 10-year bonds pushed above 7.8% from below 7.7% at yesterday’s close. Portugal’s five-year bonds now yield over 8.3%.
Fitch Ratings downgraded Portugal’s credit rating to A- from A+ on Thursday afternoon. Fitch also placed Portugal’s ratings on “ratings watch negative,” indicating the probability of a further downgrade in the next three to six months. Standard & Poor’s downgraded Portugal to triple-B from single-A-minus- two notches closer to junk- and kept the country on watch for a further downgrade. The Wall Street Journal’s Mark Brown and Neelabh Chaturvedi wrote this morning:
S&P’s rating is now two notches below that of Fitch and Moody’s Investors Service, “increasing the risk of both the other ratings agencies following suit and, more importantly, clearing houses raising their margin requirements for investors in Portuguese debt,” said Richard McGuire, senior fixed income strategist at Rabobank.
Brown and Chaturvedi added:
As of last night, Portugal had not asked for a bailout, but one senior euro-zone official said Thursday that Portugal will soon have to seek a bailout loan and that the amount could be about €80 billion.
Lesova, Polya and Watts, William L. “Portugal turmoil intensifies bailout talk.” MarketWatch. 24 Mar. 2011. (http://www.marketwatch.com/story/portugal-turmoil-intensifies-bailout-talk-2011-03-24?dist=beforebell). 25 Mar. 2011.
Brown, Mark and Chaturvedi, Neelabh. “Portugal Bonds Fall, Spain Dodges Contagion .” Wall Street Journal. 25 Mar. 2011. (http://online.wsj.com/article/SB10001424052748704517404576222302066910850.html). 25 Mar. 2011.
Here’s something I thought I’d never be discussing in a million years. At least, if this was before 2004. From the New York Times’ Mary Williams Walsh last week:
Policymakers are working behind the scenes to come up with a way to let states declare bankruptcy and get out from under crushing debts, including the pensions they have promised to retired public workers.
Unlike cities, the states are barred from seeking protection in federal bankruptcy court. Any effort to change that status would have to clear high constitutional hurdles because the states are considered sovereign.
But proponents say some states are so burdened that the only feasible way out may be bankruptcy, giving Illinois, for example, the opportunity to do what General Motors did with the federal government’s aid.
Beyond their short-term budget gaps, some states have deep structural problems, like insolvent pension funds, that are diverting money from essential public services like education and health care. Some members of Congress fear that it is just a matter of time before a state seeks a bailout, say bankruptcy lawyers who have been consulted by Congressional aides.
So where does this all stand right now? Walsh noted:
No draft bill is in circulation yet, and no member of Congress has come forward as a sponsor, although Senator John Cornyn, a Texas Republican, asked the Federal Reserve chairman, Ben S. Bernanke, about the possibility in a hearing this month.
House Republicans, and Senators from both parties, have taken an interest in the issue, with nudging from bankruptcy lawyers and a former House speaker, Newt Gingrich, who could be a Republican presidential candidate. It would be difficult to get a bill through Congress, not only because of the constitutional questions and the complexities of bankruptcy law, but also because of fears that even talk of such a law could make the states’ problems worse.
Lawmakers might decide to stop short of a full-blown bankruptcy proposal and establish instead some sort of oversight panel for distressed states, akin to the Municipal Assistance Corporation, which helped New York City during its fiscal crisis of 1975.
I hope current and retired state employees with pension plans aren’t freaking out too much right now.
Walsh, Mary Williams. “A Path Is Sought for States to Escape Their Debt Burdens.” New York Times. 20 Jan. 2011. (http://www.nytimes.com/2011/01/21/business/economy/21bankruptcy.html?_r=1&adxnnl=1&pagewanted=print&adxnnlx=1296062341-HvoRhv2fopvJJxd2K1X7rQ). 26 Jan. 2011.
Have you ever wondered how some people have gotten as far as they have in life?
The world is populated by “those who can”- and “those who can’t.” “Those who can” are not only able but willing to tackle whatever life throws at them head-on. Failure for this group is merely a hurdle in their quest to succeed at whatever it is they’re doing, and blame-throwing isn’t an option for these individuals.
“Those who can’t” require others (“those who can,” go figure) to carry them through life (by the way, in this post I’m referring to individuals who consciously choose this approach, not the mentally/physically-impaired- God bless them). “Fix it!” is their battle cry. Regrettably, their numbers seem to have grown through the years. I guess it was only inevitable, as comfortable times during the closing years of the American Century only perpetuated this terribly-misguided mentality. Economy got you down? No worry- Washington will fix it for you (at least, that’s the impression they wanted to give). Depressed about the value of your stocks? Don’t fret, the Fed will cut interest rates and subvert the economic cycle for you. Happy now?
Washington only made matters worse in the last decade, sending the wrong message with bailouts, modifications, and neglect in holding certain parties responsible for the problems the nation now faces.
But for the “those who can’t” crowd, the message couldn’t have been any clearer. Not only was their counterproductive mentality seemingly-condoned by those in power, but a Nanny State was possible in their minds, and it was their job to elect those supporting Big Government to bring about such change.
Hope and change, that is.
While some politicians latched onto the idea of a Nanny State because of some impossible utopian dream, others pushed Big Government to perpetuate their political careers:
Sell the idea of the Nanny State to “those who can’t,” and it’s state dinners, lear jets, and none of that crappy ObamaCare for you!
Or so both parties thought. Going forward, I have some bad news for the “those who can’t” crowd- they’re toast. The numbers don’t lie- the nation’s financial health is in really bad shape. Astronomical national debt, unsustainable deficits, deteriorating infrastructure, entitlement bills coming due, local governments going broke, the list goes on. Seriously, does anyone actually believe we’ll ever be able to come up with the funds to pay for all this stuff? We’ve managed to kick the can down the road this far. But when you take into account an economic “recovery” that’s on artificial life support (trillions of stimulus dollars) and a Federal Reserve that’s running out of bullets, you might understand why I believe a financial crash will take place. As I’ve mentioned before- this is not the end of the world or anything like that. Economic crashes have occurred throughout history. However, I anticipate things will get a whole lot worse before they get better, and in such a scenario, the “those who can’t” crowd won’t do very well.
Yet, history has shown some well-spoken strongman, not unlike a Hitler or Mussolini, could take advantage of terrible socioeconomic conditions to run for political office on the promise of stability and the establishment of a Nanny State. The “those who can’t” crowd may actually see their wish come true- while losing their freedom in the process.
Obviously, they stand to lose either way.
My advice to “those who can’t” is this- be someone who can. Before it’s too late. For you and god forbid any of your loved ones who are forced to depend on you.
“I’m a Dog”
You Tube Video Link
During the early days of the financial crisis, the Capital Purchase Program, or CPP, was established under the Troubled Asset Relief Program (TARP) to provide U.S. banks access to bailout funds. From the “Factsheet on Capital Purchase Program” at FinancialStability.gov (a U.S. Treasury website):
The Capital Purchase Program (CPP) was a voluntary program in which the U.S. Government, through the Department of Treasury, invested in preferred equity securities issued by qualified financial institutions. The CPP is now closed. Participation was reserved for healthy, viable financial institutions that were recommended by their applicable federal banking regulator… A necessary precursor to lending and economic recovery is a stable, healthy financial system. Healthy banks, not weak banks, lend to their communities and the CPP was a program for healthy banks.
I love how the word “voluntary” is emphasized in light of all that talk about the banks being forced into accepting bailout funds. Anyway, while Americans were told that their hard-earned taxes would be assisting healthy banks, the Wall Street Journal has revealed this might not have been the case. On December 26, Michael Rapoport wrote on their website:
Nearly 100 U.S. banks that got bailout funds from the federal government show signs they are in jeopardy of failing.
The total, based on an analysis of third-quarter financial results by The Wall Street Journal, is up from 86 in the second quarter, reflecting eroding capital levels, a pileup of bad loans and warnings from regulators. The 98 banks in shaky condition got more than $4.2 billion in infusions from the Treasury Department under the Troubled Asset Relief Program.
When TARP was created in the heat of the financial crisis, government officials said it would help only healthy banks. The depth of today’s problems for some of the institutions, however, suggests that a number of them were in parlous shape from the beginning.
Seven TARP recipients have already failed, resulting in more than $2.7 billion in lost TARP funds. Most of the troubled TARP recipients are small, plagued by wayward lending programs from which they might not recover. The median size of the 98 banks was $439 million in assets as of Sept. 30. The median TARP infusion for each was $10 million, federal filings show.
“We certainly understand and recognize that some of the smaller institutions are experiencing stress,” said David Miller, chief investment officer at the Treasury Department’s Office of Financial Stability, which runs TARP. He noted that Congress mandated that banks of all sizes be eligible for TARP, adding that the government’s TARP investment as a whole is performing well.
This year has seen the highest number of bank failures since 1992 according to figures released by the Federal Deposit Insurance Corp. (FDIC). To date, 157 banks have failed over the past 12 months, up from 140 in 2009. Furthermore, 860 institutions were on the FDIC’s “problem” banks list as of September 30- the highest number since 1993.
“Factsheet on Capital Purchase Program.” FinancialStability.gov (U.S. Treasury). 3 Oct. 2010. (http://www.financialstability.gov/roadtostability/CPPfactsheet.htm). 29 Dec. 2010.
Rapoport, Michael. “Bailed-Out Banks Slip Toward Failure.” Wall Street Journal. 26 Dec. 2010. (http://online.wsj.com/article/SB10001424052970203568004576044014219791114.html?mod=googlenews_wsj). 29 Dec. 2010.
“California Transit Agencies Need Stimulus Too”
-calitics.com, January 29, 2009
“Clean-Tech Start-Ups Need Stimulus, Too”
-New York Times, February 25, 2009
“Seniors need stimulus too”
-Sun Sentinel, April 8, 2009
“Need Stimulus Spending Ideas? Think Early Childhood”
-Education Week, April 8, 2009
“Cyber Stimulus: Blogging Is Shovel-Ready, Too”
-Wall Street Journal, October 2, 2010
Yesterday, CNN Money ran a “stimulating” piece on its website about the cost of the federal government’s stimulus efforts to-date. Chris Isidore wrote:
Since the recession began three years ago, Congress has poured a total of $2.8 trillion into the economy in an effort to spur hiring, get people spending again and prop up industries struggling to stay afloat.
While the $858 billion package of tax cuts passed last week was the biggest slice of stimulus yet, it accounts for less than a third of all the money spent since the start of 2008, according to multiple cost estimates prepared by the nonpartisan Congressional Budget Office over the last three years.
The rest came from a combination of the $700 billion Troubled Asset Relief Program, the $787 billion stimulus bill passed in the early days of the Obama administration, and various smaller stimulus programs.
$2.8 trillion? The following graphic puts this figure into perspective:
To put that $2.8 trillion number into further perspective, World War II cost the United States $288 billion, or $3.6 trillion when adjusted for inflation.
Isidore, Chris. “Stimulus price tag: $2.8 trillion.” CNN Money. 20 Dec. 2010. (http://money.cnn.com/2010/12/20/news/economy/total_stimulus_cost/index.htm). 21 Dec. 2010.
This morning, instead of my usual weekday routine of researching and writing, I found myself driving around the Chicago suburbs helping my father do errands. While listening to housing market news on a local news radio station, my dad turned to me and said, “You know, for anyone looking, now is the time to buy a home.” I’d heard this many times before, as he owned multi-family properties and was a full-time real estate agent in a past life. I replied, “That’s not what my research suggests.” He argued, “But mortgages are so low.” I answered, “Yeah, but I read somewhere there’s a ton of foreclosures coming down the pipeline, and that can’t be good for house prices.” Thankfully, we didn’t spend the rest of the day arguing about the state of housing. But I did manage to dig up that Wall Street Journal piece I had referred to earlier, in which Amy Hoak wrote:
Brace yourself for another rough year in housing: The number of foreclosures is expected by many to increase in 2011 as more troubled mortgages work their way through the pipeline.
Next year could very well be a peak year for foreclosures, says Rick Sharga, a senior vice president at RealtyTrac, an online marketplace for foreclosure properties. The market is expected to tally about 1.2 million bank repossessions in 2010, up from 900,000 in 2009, he says. “We expect we will top both of those numbers in 2011.”
According to Sharga, 2011 looks to be a “banner-year” for foreclosures due to issues regarding processing, continued high unemployment, as well as upcoming interest-rate resets on adjustable-rate mortgages that look to be heading higher.
In addition, remember that U.S. Treasury program designed to help prevent foreclosures? Well, it’s not performing as Washington politicians had hoped (big surprise?). Lorraine Woellert wrote this past Monday on the Bloomberg website:
A U.S. Treasury program aimed at preventing 3 million foreclosures is likely to fulfill less than a third of its goal, a congressional watchdog reported.
The Treasury’s homeowner aid effort is “ineffective” and has failed to hold mortgage companies accountable, the Congressional Oversight Panel for the Troubled Asset Relief Program said in a report released today.
“The program has turned out to be a lot smaller and have a lot less impact on the housing market than we expected,” said former U.S. Senator Ted Kaufman, the chairman of the panel.
The Home Affordable Modification Program, or HAMP, pays lenders and servicers to rewrite loan terms for borrowers who can’t make their current mortgage payments. Since its 2008 creation, HAMP’s goal of preventing 3 million to 4 million foreclosures “has been repeatedly redefined and watered down,” the panel said.
“If current trends hold, HAMP will prevent only 700,000 to 800,000 foreclosures,” a small portion of the 8 million to 13 million foreclosures expected by 2012, said Kaufman, a Democrat from Delaware.
“8 million to 13 million foreclosures expected by 2012.”
All I can say is, wow.
So what does all this mean for housing prices? From the Wall Street Journal piece:
High housing inventory, along with high unemployment, will likely add up to continued depressed home prices in the year ahead in many markets, says Nichole Jordan, banking and securities industry practice leader for Grant Thornton, an accounting and business advisory firm.
“It’s going to take several years to work through the excess inventory,” she says.
Ms. Jordan and others are looking to 2012 for anything resembling a recovery in housing. Even then, it’s going to be a long journey to stabilization; it historically takes five to seven years for prices to stabilize after a deep correction, Ms. Jordan says.
“Realistically, you’re not going to see home prices appreciate next year,” says Jason Kopcak, head of whole loans at financial-services firm Cantor Fitzgerald. In fact, many in the industry are expecting prices to fall another 10% next year on a national basis, he says. RealtyTrac’s Mr. Sharga says the national decline could be around 5%. Other economists are expecting prices to remain flat.
Sorry Dad. It sounds like time may still remain on the side of prospective homebuyers.
Hoak, Amy. “More Foreclosures Expected in 2011.” Wall Street Journal. 12 Dec. 2010. (http://online.wsj.com/article/SB10001424052748703518604576014011451160994.html?mod=googlenews_wsj). 16 Dec. 2010.
Woellert, Lorraine. “U.S. Foreclosure Prevention Program to Fall Short, Watchdog Panel Finds.” Bloomberg. 13 Dec. 2010. (http://www.bloomberg.com/news/2010-12-14/u-s-foreclosure-prevention-program-to-fall-short-watchdog-panel-finds.html). 16 Dec. 2010.
After more than a year of watching helplessly as the Iceland financial crisis caused their government to collapse and their economy to crumble, many Icelanders woke up Sunday feeling that they finally had something to celebrate.
With more than 98 percent of the ballots from Saturday’s nationwide referendum counted, more than 90 percent of voters have resoundingly rejected a $5.3 billion plan to pay off Britain and the Netherlands for debts spawned by the collapse of an Icelandic Internet bank.
But while the poll may at last have delivered a sense of empowerment for some of the 316,000 inhabitants of a country regarded as Europe’s worst casualty of the 2008 financial crisis, others are waiting to see if the result might even jeopardize its fragile recovery.
-Christian Science Monitor, March 7, 2010
Since falling into financial chaos only two short years ago, Iceland has been clawing back to economic prosperity. Some attribute this reversal to its refusal to bail out its failed banks. Ambrose Evans-Pritchard compared Iceland with Ireland’s situation in The Telegraph (UK) yesterday:
The Nordic economy grew at 1.2pc in the third quarter and looks poised to rebound next year. It ends a grueling slump caused largely by the “New Viking” antics of Landsbanki, Glitnir and Kaupthing, the trio of lenders that brought down Iceland’s financial system in September 2008.
The economies of the two “over-banked” countries have both contracted by around 11pc of GDP, but Iceland has achieved it with inflation that devalues debt, while Ireland has done it under an EMU deflation regime that raises the burden of debt.
This has led to vastly different debt dynamics as they enter Year III of the drama. Iceland’s budget deficit will be 6.3pc this year, and soon in surplus: Ireland’s will be 12pc (32pc with bank bail-outs) and not much better next year.
The pain has been distributed very differently. Irish unemployment has reached 14.1pc, and is still rising. Iceland’s peaked at 9.7pc and has since fallen to 7.3pc.
The International Monetary Fund said Iceland has turned the corner, praising Reykjavik for safeguarding its “valued Nordic social welfare model”.
“In the event, the recession has proved shallower than expected, and Iceland’s growth decline of about minus 7pc in 2009 compares favorably against other countries hard hit by the crisis,” said Mark Flanigan, the IMF’s mission chief for the country.
Total debt will peak at 115pc, before dropping to 80pc by 2015 in what the IMF called “robust debt dynamics”.
Meanwhile, Ireland’s debt will continue rising for another three years to 120pc of GDP. The contrast will be very stark by the middle of the decade. Iceland may have a lower sovereign debt than Germany by then.
Icelandic leaders have attributed the recovery to their country’s refusal to bail out its failed banks. Evans-Pritchard added:
Iceland’s president, Olafur Grimsson, irritated EU officials last month when he said his country was recovering faster because it had refused to bail out creditors – mostly foreigners.
“The difference is that in Iceland we allowed the banks to fail. These were private banks and we didn’t pump money into them in order to keep them going; the state should not shoulder the responsibility,” he said.
Iceland’s response to the financial crisis has contrasted sharply with not only Ireland, but the United States as well. The question begs to be asked:
Should the American leadership have pursued a course of action similar to Iceland where failed institutions are not rescued and the resulting sharp financial pain is tolerated so that true economic prosperity can be regained as soon as possible?
To be fair, we must be reminded of the tremendous differences between Iceland’s financial system and that of the United States. Even Iceland and Ireland, as Evans-Pritchard noted:
Comparisons between the Irish and Icelandic banks must be handled with care. Iceland is tiny. It could walk away from liabilities equal to 900pc of GDP without causing a global systemic crisis.
If the United States had followed Iceland’s example, what kind of waves would it have made throughout the global financial system? Such a situation would need to be considered.
Ambrose Evans-Pritchard is at least confident in his assessment of how the crisis should have been handled. He concluded the article by declaring:
Yet the underlying tale of Ireland and Iceland, and the tale of the 1930s, is that a devaluation shock may cause a violent crisis – that looks and feels terrible while it happens – but the slow-burn of policy austerity and debt deflation does more damage in the end.
America didn’t seem to learn this lesson the first time around, and I fear the country is in store for a brutal reminder.
Quinn, Ben. “Iceland financial crisis: Voters reject debt repayment plan.” The Christian Science Monitor. 7 Mar. 2010. (http://www.csmonitor.com/World/Europe/2010/0307/Iceland-financial-crisis-Voters-reject-debt-repayment-plan). 9 Dec. 2010.
Evans-Pritchard, Ambrose. “Iceland offers risky temptation for Ireland as recession ends.” The Telegraph (UK). 8 Dec. 2010. (http://www.telegraph.co.uk/finance/financetopics/financialcrisis/8187476/Iceland-offers-risky-temptation-for-Ireland-as-recession-ends.html). 9 Dec. 2010.
Guess I should close up shop. According to Rochdale Securities banking analyst Richard Bove, the financial crisis is over. From CNBC staff writer Jeff Cox this afternoon:
The Federal Reserve’s report this week on its $3.3 trillion bailout of the global banking system shows that the financial crisis is finally over, banking analyst Dick Bove said.
While the information on who borrowed from the US central bank contained surprises—such as the extent to which European banks had access to the money and that Goldman Sachs was “significantly weaker than anyone knew”—the overview is that the bailout helped save the system, said Bove, of Rochdale Securities.
“The biggest point that one should derive from this information, because what has been revealed now is ancient history, is that the only entity that needs this money any longer is the United States government,” he said in a research note to clients entitled “Financial Crisis Is Over.”
Last year, Bove also said that the U.S. housing crash is over. On October 21, 2009, He told CNBC’s “Squawk Box”:
I really believe that the industry has bottomed, that we’re not going to see further crashes in home prices or in home sales.
As much as I’d like to believe Mr. Bove regarding his assessments of housing and the financial system, I think I’ll continue writing a bit longer.
After all, Bove might be having another Wells Fargo moment.
Cox, Jeff. “Fed’s Bailout Report Shows Financial Crisis Is Over: Bove.” CNBC.com. 2 Dec. 2010. (http://www.cnbc.com/id/40473315/). 2 Dec. 2010.
“Housing Market Has Bottomed, Banking Analyst Bove Says.” CNBC.com. 21 Oct. 2009. CNBC.com. (http://www.cnbc.com/id/33411724/Housing_Market_Has_Bottomed_Banking_Analyst_Bove_Says). 2 Dec. 2010.
Yesterday, Megan McArdle, The Altantic’s business and economics editor, pondered the persistence of the sovereign debt crises in the QFTW:
This is starting to throw off more echoes of the Great Depression, where you have a sequence of crises, each touched off by the ones that came before, like dominos falling into some diabolic design.
What if all of these crises were really just part of a larger global debt crisis? Martin Weiss, chairman of The Weiss Group (which includes Weiss Research and Weiss Ratings) and author of The Ultimate Depression Survival Guide: Protect Your Savings, Boost Your Income, and Grow Wealthy Even in the Worst of Times wrote in his free investment newsletter Money and Markets yesterday:
Politicians talk about the U.S. debt crisis of 2008 … the Detroit bankruptcy crisis of 2009 … the European sovereign debt crisis of early 2010 … the Greek debt tragedy … the Irish debt mess … the California budget debacle … the U.S. municipal bond collapse … and more.
Then, they talk about the urgent need to make a show of resolve to bail out the world — to stop the “contagion” from spreading from one sector or region to the next.
But these are not separate, isolated disasters. Nor is the contagion of fear the true source of the problem.
Instead, what we are experiencing is one, single, integral debt crisis that never ended.
It is one crisis that has spread from the U.S. to Europe and beyond … morphed from a private-sector banking crisis to a public-sector government debt crisis … grown in scope and power … and begun to drive the large debtor nations on a collision course beyond anyone’s control.
This is a view shared by his fellow “crash prophet” Peter Schiff of Euro Pacific Capital and author of Crash Proof 2.0: How to Profit From the Economic Collapse, who warned in his Schiff Report Video Blog last Friday:
But believe me, the sovereign credit crisis is coming to the U.S. It’s going to be even bigger.
Weiss, Martin D. “New phase of debt crisis! Striking NOW! Despite rescues!” Money and Markets. 29 Nov. 2010. (http://www.moneyandmarkets.com/new-phase-of-debt-crisis-striking-now-despite-rescues-41310). 30 Nov. 2010.
Schiff, Peter. “Dollar rally, sovereign debt, black Friday, Schiff Radio.com.” YouTube.com, 26 Nov. 2010. (http://www.youtube.com/watch?v=kbXPu8RnsqQ). 29 Nov. 2010.
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