How Do You Take Your Catastrophe? Um, just a little at a time, please with two Splendas.


We really are, in large part anyway, a nation of petty, self-absorbed, badly behaved children, have you noticed that?  And that’s exactly how our elected officials treat us.


For the last couple of months, we’ve been bathing in the news of the recovery that no one sees or feels.  Nothing has changed, but yet housing has bottomed, our banks are pictures of health, jobs are becoming more plentiful, and then less plentiful… but interest rates are lower than ever before and investors are running around with pockets full of cash looking to buy homes so they can rent them out to the millions who have lost homes.


(Where are those people living now, by the way?  Are they looking for a rental now and can’t find one?  I looked online and saw quite a few.  It’s all very confusing.)


Fannie and Freddie… oh sure, they need a few billion more each quarter, but that doesn’t seem to be causing them any problems.  They have just as much influence as they always have.  FHA is leveraged beyond reason at something like 800 to 1, and with defaults approaching 20 percent should be requiring the next mega-bailout, but no… they’re writing loans with almost nothing down for people with relatively low credit scores and everyone’s just fine with that.


Our first quarter GDP was close to zero, truth be told, and the median family’s net worth has fallen by more than 40 percent, and media family’s annual income has fallen by more than 8 percent… and nothing could be reversing either of those trends… but things are getting better?


Even the scant number of jobs that we have managed to create have been the kind that don’t offer unemployment benefits, which means we haven’t created jobs at all… people are scrambling to sell Mary Kay and Amway to their neighbors.



And state budget deficits, which we’ve been ignoring because the money to fill the holes has been coming from President Obama’s first economic stimulus bill, are now certain to cause huge problems next year and the years after that.  But, hey… relax… things are looking up, right?


Every single day, it’s story after story being planted in publications all over the country on how things are improving.  One day foreclosures are down, delinquent loans are at their lowest point since Clinton was in office… until the next day when foreclosures are popping like popcorn… but which we’re told is a good thing.


Greece is about to explode, until a day later when everything is just hunky dory.  Then it’s Spain that’s about to blow up, until the next day when things are fine… followed by the next day when they need another couple of hundred billion.


And all the while, every single paid economist has a forecast that shows fabulous growth NEXT year and the years after that… which is exactly what they’ve been saying every year for the last six.  They’ve never even been close to right, so why do we care what they say now?


Barry Ritholtz, who writes The Big Picture blog, had a great piece on this phenomenon, titled: Yeah! The Housing Bottom is Here.  Check out the highlights:


  • The National Association of Realtors, whose spin has been astoundingly consistent, bullish and wrong, the whole way down.
  • These bad calls reoccur every spring, as the data begins its annual improvement. I use the phrase Perennially Wrong Bottom Callers and its acronym PWBC™ (I may have to trademark that!).
  • This year, the unusually mild winter threw the perennially wrong bottom callers into a tizzy. The January and February data gave them the early false belief that the bottom was here. Subsequent data demonstrated that it wasn’t.
  • … a chronological listing of articles and commentary (with links) over the past 7 years showing many of the bottom calls since 2006.


And check out Bloomberg, June 20th


Limited job growth may be weighing on housing. Employers added 69,000 positions in May, the fewest in 12 months, according to Labor Department figures. The jobless rate climbed to 8.2 percent from April’s 8.1 percent.


Bloomberg is never sure of things when it comes to housing.  Limited job growth MAY be weighing on housing?  Really… may it?  Or… may it not?  How could a lack of jobs possibly not weigh on housing?


Of course, the five million foreclosures just ahead, combined with half the country already being underwater, no credit available unless one has gold balls, and the 20-30 percent down payment requirements… they all have a tendency to weigh on housing as well, I suppose.  So the lack of jobs, in reality, probably isn’t really that big a deal, come to think of it.



The New York Times reported on the changes in attitude, changes in latitude at the Federal Reserve.  These guys go back and forth like a pushmi-pullyu in heat.  Watch the rhythmic pattern going on, you can play the bongos to it…


“… job creation and household spending both slowed in recent months. Mr. Bernanke said the housing depression, domestic fiscal policy and Europe’s downturn were dragging on growth.

The Fed said its senior officials now expected growth of 1.9 percent to 2.4 percent this year, half a percentage point lower than they forecast in April. They predicted the unemployment rate would not drop below 8 percent this year, and that inflation would not climb above 1.7 percent.

The Fed’s economic forecast, released separately, reflected reduced prospects for 2013.  Officials estimated the nation’s economy would grow from 2.2 percent to 2.8 percent next year, down from its April projection of 2.7 percent to 3.1 percent.

They now expect the unemployment rate to range from 7.5 to 8 percent at the end of 2013, up from an April forecast of 7.3 to 7.7 percent.

Fed officials appeared united earlier this year in the view that monetary policy had done enough to bolster growth.”


Ba dum bum pa!  Can you dig it?


Chairman Bernanke is flat out lost.  All he knows how to do is lower interest rates and wait for the growth to commence, so this situation is disorienting for him.  It’s like Greenspan said, “There’s a flaw in the Matrix.”  Or was that “in the model.”  I get the two quotes mixed up… one was a sci-fi movie and the other a very dark comedy about the end of the world.


Here’s Gentle Ben at his best…


“We have to get further information about the state of the economy, about where things are going and about what’s happening in Europe,” Ben S. Bernanke, the chairman of the Federal Reserve.


Alrighty there, Benjamin.  We’ll just be over here hanging by a thread while you’re gathering the information you need to realize how f#@ked we are.  Take your time. We want you to be comfortable so you can get back to doing absolutely nothing in order to make no difference whatsoever.


Bloomberg was in a somber mood this past week as well…


“Home prices have shown few signs of strengthening as foreclosures put more properties on the market. Foreclosure starts grew in May for the first time since January 2010… according to a report last week from RealtyTrac Inc.”

“Be careful of the signals that you’re translating into recovery because they’re not very strong,” said Michael Feder, chief executive officer of Radar Logic Inc. in New York, which tracks home prices. “Some of the signs of an early spring recovery were actually the result of a mild winter in some markets and some investor buying.”


Of course, the National Association of Realtors (“NAR”) simply cannot help itself.  This is a group that would have referred to the “Great Depression” as the “Good Decline.”


“Cheaper properties and lower mortgage rates pushed up homebuyer affordability to a record in the first quarter, according to the NAR. The average rate on a 30-year fixed mortgage dropped to a record-low 3.67 percent in the first week of June, according to figures from Freddie Mac.”


Yeah, and you might as well make the rate 2.67 percent or even 1.67 percent for all the growth it’s going to get you.  My parents bought a home in the early 1960s and paid a higher rate than 3.67 percent.  If this is the economy we get at that rate, do you really think it would matter if you dropped it another point or two?


The good news is that Bernanke is just starting to figure this dynamic out…


“Access to credit is a major issue” for some Americans wanting to buy a home, Bernanke said. “Mortgage access is much tighter than it has been for a long time. What that does, to some extent, is it mutes the impact of the Fed’s actions.”


Yes, Benjamin, my erudite eunuch.  To some extent, the fact that half the population under age 70 has a sub-prime credit score, and that the other half has no interest in borrowing… oh, and that you need a hundred grand down to buy a $400k home… yep, those things could have a tendency to mute the impact of the Fed’s actions.


Ben… how you could possibly be surprised by this fact… it’s absolutely stupefying.  After all, it’s what you, Timmy G. and Lord Slummers all wanted, wasn’t it?  You designed it this way.  Let them eat cake, wasn’t that the plan, Benny no Regrets?


You know, it’s been a while since I’ve broken into song in the middle of an article, and for some reason Benny has me feeling like singing, so come on… you know how the song goes.  We can apologize to Elton John as we take a few minutes out of our regularly scheduled article to sing… it’s the Karaoke version below…

“Benny No Regrets”


Hey y’all, losing homes together

You can live outside in states where there’s always good weather

We’ll kill the middle class this year, so stick around.

You’re gonna’ see the rich get richer

Yes they will rebound.


Say, Jamie and Warren you won’t see them sweat

Oh, cause there was no doubt,

B-B-B-Benny no Regrets…

Yes, even richer is wonderful,

Oh, Benny it’s downright obscene

They wear expensive suits… they’re in cahoots

They like you for your money printing machine, oh-oh-oh

B-B-B-Benny no Regrets


We know, we put you in a pickle

But just hang around ‘cause this much wealth is bound to trickle

If you survive, it’ll only make you strong

You can Occupy, camp in the streets, just don’t forget the bong…


Say, Jamie and Warren you won’t see them sweat

Oh, cause there was no doubt,

B-B-B-Benny no Regrets…

Yes, even richer is wonderful,

Oh, Benny it’s downright obscene

They wear expensive suits… they’re in cahoots

They like you for your money printing machine, oh-oh-oh

B-B-B-Benny no Regrets


Benny… Benny… Benny… Benny… print some more….

Benny… Benny… Benny… print some more… we need more…


But, hey… Benny… don’t let any of that stop you.  Go right ahead and lower rates again and let’s get to refinancing the same folks we’ve been refinancing annually since 2009.  I’m sure eventually it will add up to… well, let’s see… nine plus seven… carry the three… times four… hmmm… I’ve got it… absolutely nothing.


Then there’s DS News, the news magazine you might call, “Your Servicers’ Friend.” Well, they managed to find some economics outfit from across the pond to say some very upbeat… and downright hysterical things… about our housing market.


Here’s DS News, June 21st


“The US Housing Market Analyst for Q2 2012 speculated that modest recovery in the housing market will not only continue for the rest of the year, it will spread and cause an increase in house prices. The recovery will spring from positive valuations and investor activity, the report said.

“Extremely favourable valuations are the foundations on which the housing recovery will be built. But with credit conditions remaining exceptionally tight, it will be cash-buyers and investors who will be able to take advantage and drive a gradual improvement in housing market demand,” said the report.


The recovery will SPRING from positive valuations?  See, and here I thought home prices were driven by those two things… what are they again… oh yeah, that’s right… supply and demand.  Well, it’s good to know I was wrong about that, because if it were those two things then we’d have no shot at recovery in the housing markets for a long time.


So, it’s cash buyers AND investors that are going to pull our housing markets up out of the gutter?  Seriously?  Cash buyers AND investors.  You mean to say they’re not the same thing?  There are cash buyers who aren’t investors?  Why, I never… who would have even thunk it?


These guys at Capital Economics are smoking crack.  Here’s the follow-up paragraph with the disclaimers…


… the report noted that current forecasts are made under the assumption that the United States would shrug off the economic crisis occurring in the euro zone.


Oh, is that all?  Well, no problem then… I’m sure that will happen.  When monkeys fly out of my ass.  (Sorry about that.)


“The report also speculated that the national mortgage settlement may lead to a transfer of shadow inventory houses into the visible supply, unbalancing the recent improvement in demand. If these events happen, housing prices could fall at the rate of five percent a year for several years.”


So, in other words, our first paragraph was just thoughtless blathering.  What happened to all the cash buyers and investors?  Go on, you guys are a hoot.


For the most part, states in which housing is significantly undervalued are expected price increases in the coming years. The exception is Nevada, where undervalued housing continues to drop in price. An estimated 61 percent of mortgage holders in the state are in negative equity, “which is crimping demand.”


Lord, I do hate crimped demand, don’t you?  So, what makes Nevada so different?  Don’t answer that… the answer is NOTHING.  That’s the thing about this credit crisis thing… it’s global.  As in housing in England, Ireland, Spain, and soon everywhere else will suck too.


Leave it to The Wall Street Journal, June 19th to talk about the root of the problem, but dumb it down until I start to feel like never talking again for the rest of my life.


“The U.S. recovery is hobbled by an economic divide that separates Americans not by income or wealth but by their access to credit.

The housing bust left behind millions of people with credit records damaged by plunging home prices, lost jobs, past overspending or bad luck. Many are now walled off from the low interest rates engineered by the Federal Reserve to spur the economy and remedy the aftereffects of the borrowing boom.

Millions with good credit, meanwhile, are taking advantage of the easy money, a windfall in many cases for people who don’t especially need it.

Last year, nearly 90% of all new mortgages originated went to households with high credit scores; before the financial crisis, it was about half, according to Moody’s Analytics and Equifax Inc., a credit monitoring service.”


Gosh, I wonder why the programs we’ve put in place to mitigate the damage being caused by the foreclosure crisis haven’t been effective.  Do you think it’s because they’re all focused on the people not yet in the foreclosure crisis?  Don’t worry though… our leaders and elected officials are making sure they will be part of the crisis soon enough.


It gets even better, I swear it does…


“Shrunken access among credit have-nots is triggering more than personal plight. It has weakened the influence of the Fed—one of the best hopes for spurring stronger economic growth—and raised doubts within the central bank about whether it is doing much to reduce unemployment.

The credit divide factors into their thinking. Fed officials have been frustrated in the past year that low interest rate policies haven’t reached enough Americans to spur stronger growth, the way economics textbooks say low rates should.

By reducing interest rates—the cost of credit—the Fed encourages household spending, business investment and hiring, in addition to reducing the burden of past debts.

But the economy hasn’t been working according to script.”


I don’t know about everyone else, but this is laugh-out-loud funny.  It’s not working the way it says it will in the textbooks?  Stop it, stop it… you’re killing me… my cheeks are hurting… stop, stop… Hahahahahahahaha!


I don’t think the guys at the Fed finished the class… skip ahead a few chapters, I’m almost positive this sort of situation is covered in some detail.

And the economy’s not following the script?  Bad economy, bad economy.  Good thing it’s the economy and not the guys in charge of driving it.


Okay, this next part is pure Saturday Night Live material…


Chris Hordan, who emerged from the financial crisis financially unscathed, is one of the beneficiaries of Fed policies.

With a good income and pristine credit, he has refinanced the $417,000 mortgage on his home in Hermosa Beach, Calif. three times in 17 months, shaving his monthly payments by $390.

Multiply the fruit of cheap credit across millions of households—with healthy portions of interest savings spent on goods and services—and the U.S. should be recovering more quickly, according to textbook economics.


Well, if I’m Barack Obama reading this, I’m getting ready to send whoever advised me to create the programs my administration has created, to Guantanamo.  This guy refinanced three times in 17 months and saved $390 a month that he doesn’t need.


One problem is that financially secure households are less likely than lower-income households to spend their interest rate savings. Wealthier households are more likely to save or invest a windfall because they can already consume as much as they want, according to standard economic theory and research.

Mr. Hordan, for example, is spending his mortgage savings on such investments as gold, emerging markets, U.S. stocks and European banks.


See, what did I tell you?  This guy is investing his $400 am month in what?  Gold, emerging markets, U.S. stocks and European bank?  Well, like I said, he’ll be finding out about the foreclosure crisis soon enough.


In previous downturns, the lowered interest rates triggered broad waves of mortgage refinancing and new borrowing. The spending that resulted helped power the recoveries.

This time around, many would-be borrowers with lower incomes or blemished credit histories are finding it difficult and more costly, or sometimes impossible, to refinance their mortgages or get new loans.


Yeah, that’s part of it, but you want to know another part?  For you WSJ types, a much scarier part?  We don’t WANT more loans… more credit… you burned us bad this time around and we won’t be borrowing like we were… EVER.  You guys and your policy have killed the golden goose… the stupid, buy anything, charge anything, American consumer.


We’re done with that program for good.  So, your days as a real estate tycoon or RMBS investor are gone, gone, gone.  It’s back to the minimalist yields of Treasuries for you.  I think it’s going to be fun to watch the Wall Street guys try wooing us back into their Debtmobile.  I’m not going for that ride again, I’d rather walk, thanks.


“This is a big limitation on the potential effects of monetary policy,” Charles Evans, president of the Federal Reserve Bank of Chicago, said in an interview last month. “Normally we’d have a very large refinance boom. People would be able to trade in their high-interest-rate mortgage for lower ones and their mortgage payment would go down. That would put more spending power in the hands of anybody in a position to do that. That would increase aggregate demand. That is the way it is supposed to work.”

A 2010 study by Paul Willen, a researcher at the Federal Reserve Bank of Boston, and Andreas Fuster, a New York Fed economist, found the Fed’s mortgage purchase program in 2008 and 2009 led to a tidal wave of refinancing, but mostly by households with superior credit records.

“You want the money to go to people for whom credit is an issue, and those are exactly the people to whom credit isn’t going,” Mr. Willen said. “Monetary policy is having no effect on the vast majority of people.”

He called Fed efforts “monetary policy for rich people.”


Will wonders never cease?  Seriously, this is “news” for these people.  There are people finding it necessary to study this stuff.  I don’t know how these guys cross streets by themselves.


The bottom-line was summed up, as usual, by Dr. Housing Bubble.  You owe it to yourself to read this next section carefully.  Not that you haven’t read it on Mandelman Matters 100 times over the last four years, but still… it’s nice when someone else is doing the heavy lifting…


Dr. Housing Bubble

Over 60 percent of mortgage holders in Nevada are in a position of negative equity.  California is close to 30 percent.  Georgia is a state that we rarely talk about but over 40 percent of mortgage holders in the state are in a negative equity position. 

What impacted everyone is the crushing blow to the financial system and how banking is structured in the United States.

The situation in Greece is an interesting one because it is a situation of unsustainable debt.  To sum up the issue, Greece in reality cannot adequately service their debts.  On the surface this would appear to only hurt Greece but large European banks have their bets on Greece and the contagion would also spread to them. 

This is why the sub-prime problems were a tiny aspect of the housing problem.  The issue and financial crisis came from banks having bets many times the size of the underlying assets that needed to be unwound.  The problems with CDOs, CDSs, and other securitized debt is at the core of the problem that remains to this day. 

Today the banking system is largely a ward of the state living off bailouts, easy access to Fed Funds, and pumping out government secured mortgages.

It should be obvious that with over 10,000,000 Americans in a negative equity position that housing is still in tough shape.  Keep in mind the Fed report only ran up to 2010.  What has happened from that point on?


Ooh, ooh, ooh… pick me, pick me!  I know what happened since 2010… I can’t remember much anymore, but I can go back that far.  How about… IT GOT WORSE.


And finally, someone who understands that the problem was never the sub-prime loans… it’s wasn’t about the loans… not about the loans.  Loans… not.  No, it wasn’t.  Say it to yourself as you go to sleep at night.


And to cap it all off… here’s a headline and story that won’t be finding it’s way to cable news anytime soon…


U.S. Government Funded by Shell Game as Fed Buys 80% of Debt

It appears that foreigners are no longer lining up to buy U.S. government debt. As reported in the article below, the Federal Reserve is now buying around 80% of the debt issued by the U.S. government to fill its $1.4 Trillion record annual budget deficit. This is a disturbing development and confirms that the U.S. government is essentially broke.

This action by the Federal Reserve represents extreme market manipulation.  Normally what would happen is that interest rates on U.S. treasuries would rise until there were enough buyers to meet the supply.

But the Federal Reserve is not letting that happen.  Instead they are swooping in and “buying” any treasuries that have not been sold at extremely low interest rates.

In this way, the Federal Reserve is keeping interest rates at ridiculously low levels.  You see, if interest rates on treasuries started to skyrocket, that would immediately cause interest rates on everything else throughout the U.S. economy to fly through the roof.

If interest rates did skyrocket, there would be a massive cascade of mortgage defaults and personal bankruptcies and it would be an absolute death blow to the U.S. economy.

So instead of letting the free market have its way, the U.S. government and the Federal Reserve are manipulating the markets in an effort to keep interest rates artificially low.

But they can’t do it forever.

And they are making the long-term economic problems of the United States far worse.


Remember something about this story above… the Fed buying our debt is not a case of us owing money to ourselves… we don’t own the Federal Reserve, remember?  The Federal Reserve is a private central bank that is owned and operated for profit by a group of international bankers.


But, look… I’m sure if we ever get in trouble financially, those bankers won’t treat us the way they’re treating Greece… or Spain… or Ireland… or… uh oh.  Maybe we should talk about something else.



Here’s the real deal about all of this.  They’re just giving us the bad news little bit at a time… a teaspoon here and a teaspoon there.  And they’re counting on us not being able to look around and think for ourselves.


Ben Bernanke is not changing his mind week by week.  He has access to very sophisticated diagnostic tools, he knows more than he says… a lot more.


We need growth, or we’re not getting out of this alive.  It’s the only way.  We can’t borrow and spend our way out of this one, like we have all the past recessions, or at least the ones since 1980.  And starting WWIII won’t work either, although I’m sure our government has considered it anyway.


No, growth is the only way, and that won’t happen as long as consumers can’t or won’t spend. We either write down or restructure the debts, or Main Street is ultimately going to strangle Wall Street.



We also have to continue to government spend, because if we don’t there’ll be no spending… and no spending means no growth.  Businesses won’t expand when they know that customers aren’t going to be spending.  That’s just the old “businesses aren’t stupid” rule.


And customers won’t spend when they don’t have jobs, or have low-paying jobs… or are afraid they could lose the jobs they have.


But, all of this has to start somewhere.  You eat an elephant one bit at a time, right.


Well, that first “bite” has to be stopping the flood of foreclosures, or mitigating the damage the free fall in home prices continues to cause, because… and why everyone can’t see this by now is beyond me… it’s the hole in the bottom of our boat.


Prices aren’t going to go up for a long time… that’s not the point.  What we have to do is stop them from falling and with almost five million foreclosures on the way… and some say more than that… we’re going nowhere but down.  And that means spending goes down, unemployment goes up, and as the state coffers increasingly come up short… austerity measures that raise taxes and cut services.


It’s a bad path we’re allowing ourselves to stay on.  We’ve had six years of learning and we still don’t seem to have learned much.


The problem at the core is that the political risk of forgiving debt is untenable, so we’re our own worst enemy.  We have to continue to increase the political pressure on our elected officials.  We have to let them know that they won’t get our votes unless they take steps in the right direction.  They need to know that we’re not stupid, and we’re not children.  We may act like it st times, but that doesn’t mean we’re okay with any of this.


We’ve already done more stimulus spending than any country in the history of the world.  I think that’s true anyway, if not… then we’re certainly in the running to be the top stimulator.  And its created no growth.  So, now we’re going to do it some more and again, somehow delude ourselves into believing that this time will be different.


I wrote about this a while ago… it’s all about one thing.  We have to stop punishing the “irresponsible borrower.”  We have to understand that the crisis we’re facing continues to grow and spread.  And, just like a forest fire burning out of control, it will burn until it runs out of forest.


Mandelman out.

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