It was a slow night. One small bank failed.

#124

• Failed bank: Commerce Bank of SW FL, Fort Myers FL
• Acquiring bank: Central Bank, Stillwater MN
• Vitals: at 8/28, assets of $79.7m, deposits of $76.7m
• DIF damage: $23.6m

Central has been busy. They also acquired the assets of Riverview Community Bank and Jennings State Bank in October, as well as Mainstreet Bank in August.

From Shahien Nasiripour at HuffPo.

One wonders where news and approval ratings will be when Bernanke's confirmation comes up for a vote....

I went on record with my Bernanke angst the day said he'd nominate Bernanke for a second term. At that time I qualified my opinion by saying that if Larry Summers was the other option, then I'd settle for BB. But I get the sense that Larry isn't that popular now either, that Washington wants a clean break from Bernanke/Summers/Geithner.

So take a shot on a new Fed chair Mr. President. One who's not afraid to challenge the banks, and run the occasional Fed fire drill.

Moody's/REAL released September data for their commercial real estate price index. Month over month drops have been fast and furious this year.

(Click chart to enlarge in new window)

• -8.6% Mar to Apr
• -7.6% May
• -1.0% June
• -5.1% July
• -3.0% Aug
• -3.9% Sept

Since the peak in October 2007, CRE prices are down 43%.

Residential real estate has been coming back lately, according to the Case-Shiller index. The composite 20 index rose 1.2% in August, after rising 1.7% the month before and 1.4% the month before that.  Again these are month over month changes. The index is still down 11% compared to last year.

There's a lot of skepticism that this indicates we've reached the bottom. Real estate agents will no doubt tell you they have. I doubt many are aware that the GSEs now guarantee a super-majority of all mortgages and that the Fed is printing money to put most of those on its balance sheet. Also ask what they think will happen when the homebuyer tax credit finally goes away next year. Without government support, the housing market wold be a ways down from where we are right now.

As always, keep in mind that the chart above comes with a BIG caveat. The Case-Shiller index is more robust than the Moody's CRE index. The former is based on millions of transactions. In September, there were a total of 363 commercial transactions, valued at $5.1 billion. Of those, 76 totaling $1.1 billion were repeat sales used in calculating the index.

(Click chart to enlarge in new window)

The market for CRE is as cold as ever. Will the Superdome be included in November's data?

By John M. Berry

John M. Berry, who has covered the economy for four decades for the Washington Post and other publications, is a guest columnist.

Politics is trumping common sense in Congress as Republicans and Democrats keep heaping abuse on the Federal Reserve. As a result, they could end up adopting an unworkable, risky overhaul of financial market regulation. 

Senator Christopher Dodd of Connecticut, chairman of the Senate Banking Committee, is leading the parade with his plan to strip the central bank of virtually all its oversight of commercial banks.

  ”I really want the Federal Reserve to get back to its core enterprises,” Dodd said. In recent years, the Fed’s regulation of bank holding companies and consumer lending “was an abysmal failure,” he charged. 
 
No, the Fed didn’t cover itself with glory in some of its regulation and supervision, but neither did any of the other financial regulatory agencies. Moreover, the most serious failures last year involved investment banks overseen by the Securities and Exchange Commission, not the Fed.

But there are three more important reasons to keep the Fed in a major role as a regulator of financial institutions.
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Everyone knows that Russia is corrupt, but did you know just how corrupt? The short answer is: more than any other country. That, at least, is the conclusion of a survey just published by PricewaterhouseCoopers, which examines the level of economic crime around the world.

PwC canvassed more than 3,000 companies in 55 countries, 89 of them in Russia. It asked them if they had been the victim of frauds such as embezzlement, bribery and crooked accounting. Russia topped the list, with 71% of respondents reporting at least one instance of fraud during the previous twelve months.

The PwC report makes alarming reading for potential investors. The extent of fraud in Russia is even worse than in Kenya (67%) or South Africa (62%), the next countries down the list. Russia’s score was also far above the global average (30%), as well as the averages for Central and Eastern Europe (34%) and BRIC countries (34%). What’s more, there has been a “shocking” rise in the prevelance of fraud in Russia since the last PwC survey in 2007. 

The report comes just a few days after Transparency International published its annual Corruption Perceptions Index, in which Russia scored lamentably in 146th place, level-pegging with Zimbabwe and Sierra Leone.

As if to ram home the point, the two reports also came the same week that Russian authorities reported an audacious attempt to embezzle $44 million from Russia’s Pensions Fund. (Unlike a similar swindle in March, this one was foiled at the last minute).

The recent surveys illustrate the huge gap that exists between official rhetoric and depressing reality in Russia. During his election campaign last year, President Medvedev made great play of his determination to fight what he called “legal nihilism”. He returned to this theme last week in his annual state-of-the-nation address, garnering rapturous applause with a promise “to sling [corrupt officials] into jail”.

But it’s hardly surprising that these fine-sounding words are met with weary scepticism by both ordinary Russians and foreign investors. Although Medvedev has drafted a package of new laws designed to fight corruption, Russia already has many laws that look wonderful on paper, but are never properly enforced.

Medvedev’s crackdown will in any case remain superficial, unless he also links it with wider democratic reforms, aimed at bolstering independent civil and political institutions capable of keeping the authorities in check. For example, greater public disclosure of information will be useless, unless there is also a strong and independent media, willing to use such information to campaign energetically against bent officials.

That is hardly a description of modern Russia. Even when newspapers do report about corruption – often at great risk to their journalists – the political reaction is usually non-existent. Russia’s most important medium, television, is firmly under state control, ignoring news that might embarrass the authorities. So far, Medvedev has shown no great inclination to break with this tradition.

The second fundamental problem is that Russia’s law enforcement agencies are themselves among the most corrupt institutions in the country, frequently aiding and abetting corporate fraud. A powerful call for action is published today in The Moscow Times by Jamison Firestone, a colleague of the lawyer Sergei Magnitsky, whose death in police custody this week has sparked an international outcry.

The need for police reform has become more obvious than ever over recent weeks, after a wave of police whistleblowers took to Youtube. Although Medvedev has acknowledged that there are widespread problems in the law enforcement agencies, he has proposed no serious reforms, calling instead for rigorous “internal investigations”. Such a timid, hands-off approach explains why corruption in Russia is today more rampant than ever.

Bill Gross says chase risk! (PIMCO) In his December letter, Gross laments the ultra low yields available to investors. Holding cash is a terrible idea he argues. (Luckily he's not saying to go far out on the risk curve.) Still, I disagree. While I believe there's an outside chance of a dollar crisis (highly inflationary...hence the reason many investors have a 5-10% position in gold for insurance), the more likely scenario over the next few years is the one laid out by the SocGen guys: debt deflation. In that case the purchasing power of cash goes up. Looking at the .01% nominal yield on cash equivalents is therefore unfair. The deflation-adjusted yield would be much higher. This is not a reason to try to "inflate away" debt however as that's not actually a solution. It just gets us closer to the dollar crisis scenario. 90% cash + 10% gold has done very well over the past two years (especially on a risk-adjusted basis!) I guess you can jump back into risky assets if you feel you "need" yield. Of course that's the mistake so many people made in response to Alan Greenspan's low rates. How well did that strategy work?

Fed makes capital foremost concern (Torres/McKee, Bloomberg) With the Fed/Treasury actively engaged in reflating the asset bubble (see next link), it's good to know they're paying attention to capital levels...

With FHA Help, easy loans in expensive areas (Streitfeld, NYT) Anecdotally this is quite scary. Remember a year ago when the size of "conforming" mortgage loans was raised over $700k? That means FHA is backing much larger home purchases (I'd forgotten this when I linked to that article on Toll calling FHA the new subprime). The scary quote (ht CR) comes from some technology guys who went in on a $900k property having been busted just a year ago: “We’re banking on real estate,” said Mr. Kurland, 24. “Everyone expects prices to keep going up.”

Can the postal service be saved? (Montopoli, CBS)

Asia considers capital controls to stem bubble dangers (Adam, Bloomberg) Low rates in the developed world are putting emerging markets in a dangerous position. With no returns available at home, hot money is again flowing East (and South, to Brazil).

SocGen's worst-case debt scenario (Murphy, Alphaville) Good sleuthing from Paul. He has a link to the report that Ambrose Evans Pritchard wrote up. Ambrose embellished a bit. Also the report is over a month old. Still, pessimism porn at its finest.

Texas accidentally bans straight marriage (Spak, Newser) HT Felix.

Satan, the great motivator (Fitzgerald, Boston Globe) "A pair of Harvard researchers recently examined 40 years of data from dozens of countries, trying to sort out the economic impact of religious beliefs or practices. They found that religion has a measurable effect on developing economies - and the most powerful influence relates to how strongly people believe in hell."

College students arrested for not paying tip (Mucha, Philly Inquirer)

Commuter cat star of bus route (BBC)

Nunchuck (imgur)

Why  is the Motorola Droid apparently gaining traction in the smartphone market, when Microsoft and Nokia are failing so miserably?

The Droid, built on Google’s Android mobile operating system, sold 250,000 in its first week on the market. That’s way behind the 1.6 million iPhone 3Gs sold in the first week after its launch, but it’s still enough for Motorola to see possible salvation after years of decline and for Google to feel self-congratulatory about its venture into mobile.

Some of the success of the Droid, and the increasing number of Android-based phones available, can be ascribed to its clean and versatile operating system. Reviewers and users agree that Android still lags the iPhone, but the gap is closing. In contrast, Microsoft’s Windows Mobile has stumbled through numerous iterations — it’s now on version 6.5 — and endless renamings. No one has ever liked it.

 Nokia once ruled the roost with its Symbian-based smartphones, but its market share has been declining steadily. Nokia still sells more mobile phones than anyone else in the world, but Apple — which sold 7 million phones versus 113 million for Nokia in Q3 — astoundingly makes more profit, $1.6 billion on handsets in Q3 this year against $1.1 billion for Nokia.

The operating system alone, however, doesn’t explain the Droid’s initial success, or even the iPhone’s ascendancy. What Apple has done so successfully is build a thriving ecosystem around its product. The various Android-based phones are following the same path. There are now more than 100,000 applications (dubbed apps) for the iPhone, with hundred more appearing every week. As the advertisements tell consumers, there’s an app for that, whether it is timing your cooking for a complicated dinner party, using Facebook, tracking FedEx packages or getting snow reports from ski resorts.

As more apps are developed, there are more and more reasons to buy an iPhone rather than the competitor, the phenomenon economists call network effects. In contrast, there are about 10,000 apps available for Android-based phones. That probably covers the vast bulk of what most users want to do, but the perception is that the iPhone can do much more (hence the Droid’s advertising slogan: Droid Does).

Apps, overwhelmingly built by third-party developers, are nothing new. Apple’s innovative idea was to put an app store on its device, so users could browse, choose and buy apps casually and spontaneously. You didn’t need to search for different vendors, or download apps to your computer for future syncing with your phone. So the ecosystem becomes the phone itself, the app store and the thousands of developers.

But there’s a dilemma with such an ecosystem which is being exposed by the contrast between the iPhone and Android. The differing philosophies pose a choice companies in other fields seeking the benefits of an ecosystem around their products will need to weigh. True ecosystems grow organically, and the process can be messy. One reason why many companies have shied away from encouraging an ecosystem around their products is that coordination and control can be difficult. Apple and Android take radically different approaches.

Apple exercises severe control on what developers can do. Apps go through an opaque, lengthy and at times arbitrary review process before they are accepted into the App Store. Apps can be rejected without explanation. One developer, Rogue Amoeba, says that it took four months to get a bug fix approved for one of its apps. One of the most prominent app developers, Joe Hewitt, who created the Facebook app for the iPhone, recently announced that he was quitting developing for the platform because of Apple’s review process. Another prominent developer, Justin Williams, also stopped his iPhone development, tweeting, “Baseless app rejections, an unsustainable pricing structure, piss-poor developer relations and a blackbox review system. Where do I sign up?”

Android, in contrast, is letting a thousand flowers bloom in its ecosystem. There is no approval system to put your app in the Android Market. That may sound a recipe for chaos and a steady stream of junk apps, but the web is a similarly open and unrestricted. No one can tell a web developer that they can’t launch their new idea, which has led to extraordinary innovation (as well as plenty of junk).There are certainly problems for developers in the Android model, particularly that different handset manufacturers use different versions of the Android system, meaning it’s hard to develop one app that can work across many phones. But the best developers relish the freedom Android provides.

For an ecosystem to succeed it will need the best developers. Apple’s policy of near-tyrannical control ensures certain quality and standards, but it also risks scaring off the best talent.

Paul Krugman is complaining of deficit hysteria over on his blog again. Where are the bond vigilantes? he wonders. Since we're still able to sell debt so cheaply, why is anyone worried about more deficit spending?

As always, there are numerous holes in his argument that he chooses to ignore.

1. The chart he uses is the most charitable view of America's public debt burden. It's simply public debt outstanding. This ignores money the government owes itself to fund future benefits. More importantly, it ignores unfunded liabilities. Paul puts debt to GDP at 60%. In reality, public debt is closer to 500%. And that's using 2005 figures.

2. Krugman ignores private debt (household, business, financial) which still stands at a suffocating 300% of GDP according to the latest flow of funds report. If households are drowning in private debt, they can't exactly afford tax increases to pay off more public debt. This is a key argument against those who say that we can borrow more because we have in the past, specifically during the '40s when we were fighting WW2. Yes, public debt was much higher then. But private debt had been virtually wiped out by the Depression. So the total public + private debt burden was far lower than it is today.

(Click chart to enlarge in new window)

Again, the chart above excludes unfunded liabilities. Including them would put the total debt burden closer to 800% of GDP. Truly an astonishing figure.

What bothers me most is how Krugman caricatures the fiscally conservative as Scrooges unconcerned with high unemployment. To the contrary, we see that the root of the employment problem facing the country is debt itself. That's why we find ourselves in this financial crisis.

Digging ourselves a deeper hole means worse unemployment down the road.

But PK needn't take my word for it. He made the argument himself quite cogently back in 2003.

Rep. DeFazio calls for Geithner and Summers to be fired (YouTube) Geithner has done many other things wrong besides paying out 100% to AIG's counterparties. Slamming banks together to avoid resolving their balance sheets was another big one. As for Summers, I still don't understand why he's so revered at the top of Democratic policy circles. His prior support of the CFMA and Gramm, Leach, Bliley -- two of the biggest regulatory blunders of our time -- should be enough to disqualify him from his current post.

FHA-backed lending is a train wreck says Toll (Gittelsohn, Bloomberg) Maybe a reader can correct me, but I'm guessing Toll Brothers, because it's a higher-end builder, doesn't rely much on FHA-backed lending to move its inventory. Still, it's interesting that a homebuilder would criticize the government for providing too loose credit. Homebuilders wouldn't have much of a business without it.

Jobless benefits to end for 1 million in January (Eckholm, NYT)

Audit the Fed effort under threat in House (Grim, HuffPo)

Cash for caulkers (Leonhardt, NYT)

Costco no longer carrying Coke products (AP)

California faces new $21 billion budget hole (Goldmacher, LA Times) CA lawmakers have more tough decisions to make...

On the shoreline (Boston Globe) The latest from the Globe's Big Picture blog.

Students unhappy with big tuition hike at UCLA. Education is expensive and CA's public university students have benefited from state subsidies for years. With CA's budget in tatters, the free ride is over...

From Mark Guarino at CS Monitor.....New tale of Detroit’s woe: Pontiac Silverdome sold for $583,000

Ever want to own a domed football stadium?

The question was a plausible one Monday when it was announced that the Pontiac Silverdome — once home to the NFL’s Detroit Lions — was sold for $583,000, or about 1 percent of the $55.7 million it took to build in 1975.

The Silverdome, an 80,300-seat stadium located in Pontiac, Mich., is the latest example of how comprehensively the recession has socked southeastern Michigan.

Mass layoffs and automotive plant closures have wreaked havoc on the local economy. Budget deficits are deep, foreclosures are widespread, and the population shrinking – from about 2 million people in the 1960s to about 900,000 today.

The article doesn't mention if the buyer assumed any debt as part of the purchase. And apparently the sale is on hold.

The real cost to the buyer isn't this initial layout, most likely it's the cost of converting the property into something that is revenue generating -- they've envisioned a soccer stadium -- not to mention the continuing cost of maintenance.