Rolfe Winkler

From Shahien Nasiripour at HuffPo.

One wonders where news and approval ratings will be when Bernanke’s reconfirmation comes up for a vote….

I went on record with my Bernanke angst the day he was re-nominated. 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 occassional 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?

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)

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.

Is gold going to $6,300? Dylan Grice, an analyst with Societe Generale, says it’s possible, given the decline in central bank credibility. But investors need to keep one thing in mind: Gold is merely a vehicle to protect the purchasing power of money.

Gold is surging because investors see that the Federal Reserve — more concerned with deflation and unemployment than sound money — may be trapped in a never-ending cycle of monetary accommodation.

Ben Bernanke says he won’t monetize debt, but he already has. His Fed has bought $300 billion of Treasuries and is on pace to buy $1.45 trillion of government-backed mortgage debt all of which is being salted away indefinitely on the Fed’s balance sheet.

Why indefinitely? Because the Fed has no intention of unwinding its balance sheet so long as the economy is stressed. Witness comments this week from Bernanke, Fed Vice Chairman Don Kohn and San Francisco Fed President Janet Yellen all suggesting that the Fed’s “extended period” of low interest rates can be measured in years, not months. Today St. Louis Fed President James Bullard said rates aren’t going up till 2012.

So long as deficit spending continues, if the Fed wants to avoid deflation, it will be forced to monetize more debt.

[Elsewhere, capital controls are being erected in emerging economies like Brazil, Taiwan, and possibly Indonesia in order to keep speculative waters at bay. As Hong Kong's chief executive remarked last week, a dollar carry trade spawned by low rates threatens to inflate dangerous asset bubbles in emerging markets the same way low Japanese rates did in the '90s.]

Exploding debt throughout the developed world means other central banks face similar pressure.

(Click chart to enlarge in new window, reprinted with permission)

So confidence in paper currencies is waning.

Some people say it is absurd to buy gold; the metal has no intrinsic value. That may be. But is it any less absurd to hold paper? The best that can be said for paper is that if you lend or invest it, tomorrow someone will give you more paper in return. This is fine so long as its purchasing power is maintained. But it isn’t. A 2009 dollar is worth a 1914 nickel.

Eventually the value of all the paper you’ve accumulated goes to zero. The trick is to turn that paper into tangible assets with tangible value.

Gold may be volatile, but at least it maintains its real value:

(click chart to enlarge in new window, reprinted with permission)

Grice contends that the price of gold could reach $6,300 an ounce. He explains: “The U.S. owns nearly 263 million troy ounces of gold (the world’s biggest holder) while the Fed’s monetary base is $1.7 trillion. So the price of gold at which the U.S. dollar would be fully gold-backed is currently around $6,300. Gold is very cheap — at current prices, the USD is only 15 percent gold-backed.”

Absurd you say? It happened 30 years ago. President Nixon ended the Bretton Woods global monetary system and his compliant Fed Chairman Arthur Burns let inflation run wild. So by 1980 gold spiked to a level at which the dollar was “overbacked” according to Grice.

Did gold overshoot in 1980? Sure, but only because Paul Volcker was willing to hammer the economy to re-establish the Fed’s credibility. Today’s Fed has been very clear that it isn’t willing to put up with a recession of any kind in the service of sound money.

All of that said, investors should be careful. Grice’s chart shows that, over the long run, gold is likely to do no better than protect your purchasing power. An ounce of gold today buys a good men’s suit; in 100 years, it is likely to buy the same.

So gold won’t make you rich. But it may protect you from becoming poor.

One of my favorite economists talking about one of my favorite economists (ht Yves). Liberal use of the “pause” button to read his slides is recommended. He also goes into great detail about his “roving cavaliers of credit” thesis, which, in a nutshell, argues that money isn’t created by the Fed, it’s created by banks.

The slide on Bernanke around the 12 minute mark is very interesting.

See Debt to the penny.

Al de Molina’s tenure as CEO of GMAC was short and rocky, punctuated by bailouts and controversy over the morally hazardous tactics of subsidiary Ally Bank.

His strategy hasn’t worked and Ally’s anti-competitive behavior is hurting other banks. The new chief executive, Michael Carpenter, needs to restructure GMAC so that it is no longer dependent on a government lifeline.

GMAC has already received $12.5 billion of TARP money and recently asked for as much as $5.6 billion more. In addition, the FDIC has guaranteed $7.4 billion of debt.

Ally has also received another $7 billion in federally subsidized loans in the form of advances from the Federal Home Loan Bank of Pittsburgh. As a government-sponsored enterprise, the FHLB has access to cheap capital. It passes the savings on to member banks like Ally.

At the same time, Ally is marketing deposit accounts with interest rates among the highest in the nation. Insulated from risk, depositors couldn’t care less about Ally’s health. They’ve poured money into the bank over the past year, raising GMAC’s total deposits 57 percent, to $28.8 billion.

This doesn’t sit well with other banks that don’t benefit from so much government largess and can’t afford to pay the same rates. Last May, the American Bankers Association complained to the FDIC, which put the screws to Ally. The bank reduced its rates, but only a little. According to the Wall Street Journal, Ally now pays 2.1 times the national average for a one-year CD, down from 2.3 in May.

Ally’s financial condition, meanwhile, continues to deteriorate. Chris Whalen of Institutional Risk Analytics gives Ally an “F” grade, pointing to charge-offs that doubled in the third quarter.

Whalen also notes the growth of Ally’s securities portfolio. It is becoming less of a conventional lender and more of a bond hedge fund, he says. So why is the government is supporting it?

Ally’s funding is also life-support for ResCap, the subprime mortgage unit that helped sink GMAC in the first place. The more cash GMAC/Ally pours down the drain at ResCap, the less taxpayers are likely to get back.

Carpenter should cut his losses by cutting off ResCap. That would be a good start to restructuring GMAC.

But if GMAC can’t fund itself without the magical elixir of bailouts, deposit insurance and nation-leading CD rates, then for the sake of taxpayers, depositors and banks struggling on their own, it should be put out of its misery.

Bartiromo asks some good questions, including “are banks adequately capitalized today?”

“No way” says Whitney.

She adds: “I don’t know what’s going on in the market right now ‘cuz it makes no sense to me.” The fundamentals aren’t there.

(ht Alexis N.)

This is the Times editorial page on the NY State deficit. Note how fiscally conservative they are when discussing this issue.

New York’s governor could not have spoken more plainly than he did last week before a joint session of the State Legislature. “Quite frankly, we are running out of money,” he said, as he asked members to help cut the budget. The plea has so far gone unanswered, even though, with each week, the fiscal problems get worse….

Gov. David Paterson has had a few awkward moments recently, but the fact that he’s taking a hard stand on balancing the state’s budget shows real leadership. If he sticks to his guns, he will have earned my vote next year.

Unfortunately, the Democrats running the State Senate seem to think things are not as bad as the governor makes out, and have advanced a plan that is politically palatable but also ludicrous. They would drain rainy-day funds and any other untapped pool of savings to pay the bills until March of next year.

That’s like cleaning out your 401(k) to pay the rent. And it leaves open the question of how the state would really manage once the savings were spent. Senators also want to refinance and extend loans on the tobacco settlement money, a scheme that does two things well — it helps the bond merchants of Wall Street and it forces future taxpayers to pay for today’s expenses.

It is time for the Legislature to face facts. New York spends twice the national average on Medicaid at $2,283 per person. That is the highest average in the country, with Rhode Island a distant second at $1,659. Mr. Paterson wants to scale back the health care budget by $471 million. That seems the least the state should do. Education is even more costly. The national average per student is $9,138; New York spends $14,884. Mr. Paterson’s plan to cut education costs by about 3 percent, or $686 million, is clearly in line with what’s necessary.

Budget issues have to be dealt with decisively. The sooner the better. As the foregoing paragraph emphasizes, the problem here in NY isn’t too-low taxes, it’s too-high spending.

This is equally true at the national level. Many have convinced themselves that the federal government’s ability to borrow money in a currency that it can print removes budget “constraints.” Mechanically, this may be true. But if we follow their prescription — borrowing and printing so long as there’s “an output gap” — latent inflation stored up in dollar-denominated assets overseas could go kinetic rather quickly.

Taxpayers on hook as some bailed out firms prove frail (Tse, WaPo) TARP investments in CIT and United Commercial bank were recently wiped out (= $2.6 billion). AIG and GM have received tens of billions they’ll never be able to pay back. Taxpayers may have purchased a bit of breathing room with TARP, but busted balance sheets will eventually have to be recapitalized anyway, as shareholders are wiped out while certain creditors eat their share of losses.

Bankruptcy rise slows with thaw in lending (Spector/Haywood, WSJ) Great article. The writers emphasize how the supposed “thaw” in lending markets is largely a head fake, that junky companies are being allowed to paper over their problems because the Fed is forcing investors to chase risk.

Unemployment rates by county (americanobserver, ht MW) Seeing maps like this, one understands why Krugman and other liberals are calling for another stimulus jobs bill. The trouble is, the reason we have so much unemployment today is because of all the debt we’re trying to work off from yesterday. Adding more debt doesn’t solve this problem.

After a summer of mixed messages, Roubini is back! (Wiesenthal, BusinessInsider)

GM says it will start paying back taxpayers (Isidore, CNN Money) Taxpayers shouldn’t expect to get much back. The $1 billion payment GM says it will make in December would be about 2% of what we put in…

The Great Wallop (Ferguson/Schularick, NYT) Talking Chimerica.

Chinese bank regulator says low rates inflating asset bubble (Zengerle/Choonsik, Reuters) The Fed maintains there’s no pressure on inflation. Trouble is, they don’t measure inflation the right way. They’re looking at things like the cost of goods and labor in the U.S. They’re ignoring the inflated price of assets, for instance junk debt (see again second link). Greenspan also ignored asset bubbles, choosing instead to focus on the unemployment rate and goods prices. How well did that work out?

DIY glasses for the world’s poor? (Addley, Guardian)

Crocodile attacked and killed by angry hippos (Telegraph) And see below…

Lawyer crashes after life in fast lane (Koppel/Esterl, WSJ) Big Florida ponzi.

Buffett admits: Burlington not cheap (Frye, Bloomberg) Buffett was so eager to deploy his cash that he was willing to overpay for Burlington. What I think may be going on in his head: in a world likely to experience many more bubbles and busts, lots of paper wealth will be wiped out. Not a bad idea to turn cash into tangible assets.

After spending binge, administration says it will focus on deficits (Allen/Vandehei, Politico) Not sure if I believe this. The Senate is already planning a third stimulus dressed up as a “jobs” bill.

Treasury confident Congress will increase debt ceiling (Christie, Bloomberg)

Deeds, not words, on the US dollar (David Merkel) Well said.

The last of the Bluefin Tuna? (Estabrook, Atlantic)

VIDEO: Balloon boy parents plead guilty (Reuters)

How pumpkin pie is really made (imgur)

For geometry lovers…. (best after the 5:00 mark)

IBERIABANK is busy tonight, acquiring $3.1 billion of failed bank assets. The bank also bought nearly $600m of assets from the estate of CapitalSouth Bank of Alabama back in August.

After these transactions, IBERIABANK will have increased its balance sheet nearly 67% since June.

It’s worth nothing that IBERIA received $90m worth of TARP money, though it exited the program in May.

There are cases in the past when other banks have taken multiple failures, expanding significantly, only to fail themselves later on. One example I recall (though am having trouble Googling the evidence) is Talman Federal in IL.

Is IBERIA too weak to be be growing so quickly? Perhaps not. The bank’s Texas ratio is around 24%, well below the dangerous 100% threshold. If readers have thoughts, please chime in with a comment.

#121

• Failed bank: Century Bank, Sarasota FL
• Acquiring bank: IBERIABANK, Lafayette LA
• Vitals: at 10/31, assets of $728m, deposits of $631m
• DIF damage: $344m

#122

• Failed bank: Orion Bank, Naples FL
• Acquiring bank: IBERIABANK, Lafayette LA
• Vitals: at 10/31, assets of $2.7b, deposits of $2.1b
• DIF damage: $615m

#123

• Failed bank: Pacific Coast National Bank, San Clemente CA
• Acquiring bank: Sunwest Bank, Tustin CA
• Vitals: at 8/31, assets of $134.4m, deposits of $130.9
• DIF damage: $27.4m