The Official Unemployment Rate falls to 7.8% but the U6 Unemployment Rate Holds Steady at 14.7%

Posted by PITHOCRATES - October 6th, 2012

Week in Review

The jobs report is out.  And the Left is trumpeting the great fall in the unemployment rate from 8.1% in August to 7.8% in September (see Table A-15. Alternative measures of labor underutilization posted 10/5/2012 on Bureau of Labor Statistics).  This is the official U3 unemployment rate.  That only counts people looking for full-time employment.  It doesn’t include those working part-time because they can’t find full-time work.  And it doesn’t include the people who just gave up looking for full-time work because there just isn’t any out there.  Which throws a little cold water on this 7.8% number.  For it doesn’t reflect a gain in new jobs.  It just reflects that they are counting fewer unemployed people.

A more accurate picture of the current employment climate is the U6 unemployment rate.  This number counts everyone who can’t find a full-time job for whatever reason.  Some have given up their search.  Some have retired early.  Some are living off of government benefits.  Some are working part-time jobs.  Some are working a couple of part-time jobs to make ends meet.  Interestingly, although the U3 rate fell 3 points the U6 rate held steady at 14.7%.  Which is puzzling.  For everyone included in the U3 rate is included in the U6 rate.  So if U3 fell U6 should have fallen, too.  For U3 and U6 generally rise and fall with each other.  As they have done in the past.  Such as in the years from 2006 to 2012 (pulled from the same Bureau of Labor Statistics website).

During the 2006 mid-term elections the Democrats were saying the economy was just terrible.  They hammered the economic numbers saying it was one of the worst economies ever.  Of course, the numbers say otherwise.  Whether you’re looking at the U3 rate or the U6 rate.  The economic numbers were very strong right until that sustained Keynesian monetary expansion forcing interest rates below market values and the government pressure on mortgage lenders to lend to people who could not afford a conventional mortgage blew up in their faces.  Beginning with President Clinton’s Policy Statement on Discrimination in Lending.  Which is why these lenders turned to the subprime mortgage.  Approving so many people for mortgages that housing prices soared.  Creating a huge housing bubble just waiting to be pricked by a rise in interest rates.  Which had to come.  As expansionary monetary policy eventually creates inflation.  And the only way to stop that is by raising interest rates.  Which was the time bomb ticking buried deep within those adjustable rate subprime mortgages.

Facilitated by the federal government and their GSEs Fannie Mae and Freddie Mac (who guaranteed and bought these toxic mortgages from the lenders they were pressuring to approve more toxic loans), subprime lending expanded.  As the GSEs sold these toxic mortgages to unsuspecting investors.  Which all blew up in the final months of 2008.  Creating the subprime mortgage crisis.  And the Great Recession.  The U3 rate rose as high as 10% in the fallout from this bad Keynesian expansionary monetary policy.  While the U6 rate soared as high as 17%.  Great Depression unemployment levels.  And neither has fallen much since these highs.  As the current numbers are closer to their highs than their previous lows.

Worse, the spread between U3 and U6 is far greater under President Obama then it was under George W. Bush.  Which tells us how poorly the U3 rate describes the current employment picture.  The greater the spread the more meaningless U3 is.  As it is simply not counting all the unemployed people in the economy.  The Left trumpets the 3 point fall in September but that only brings the U3 rate down to what the U6 rate was under Bush.  And the Left was calling the even lower U3 numbers under Bush some of the worst job numbers of all time.  So by their own standards President Obama is a far greater disaster to the economy than George W. Bush was.  For if it was horrible under Bush anything worse than Bush’s numbers must be more horrible.

When they passed the stimulus bill they promised they would have 5% unemployment by 2012.  Even the president said he would be a one-term president if this didn’t happen.  Despite all of their spending these numbers haven’t fallen much.  Despite their Summer Recovery pronouncements of 2010.  Their economic policies have all failed.  And there is a simple explanation for that.  Their policies were Keynesian policies.  And Keynesian policies have never worked.  Nor will they ever work.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , ,

The Great Housing Bubble and The Subprime Mortgage Crisis

Posted by PITHOCRATES - December 27th, 2011

History 101

Putting People into Houses trumped Sound Monetary Policy, a Sound Currency and good Lending Practices

Housing has for a long time been the key to economic prosperity.  Because to build a house you need a lot of economic activity.  Industries produce lumber, concrete, sheetrock, brick, shingles, door frames, doors, windows, glass, flooring, plumbing pipes, plumbing fixtures, sump pumps, furnaces, heating ducts, insulation, air conditioners, electrical wiring and fixtures, carpeting, tile, linoleum, etc.  The bigger the house the more of this stuff there is.  Once built people have to buy them (stimulating the mortgage banking industry) and then furnish them.  This triggers a monsoon of economic activity.  Drapes, shades, blinds, paint, washers, dryers, stoves, refrigerators, freezers, microwave ovens, toasters, blenders, food processers, plates, dishes, knives, silverware, ceiling fans, televisions, home theaters, sound systems, computers, cable and internet services, utilities, shelving, furniture, beds, cribs, art, etc.  And, of course, the exterior of the house creates further economic activity.

This is why one of the most important economic indicators is new housing starts.  For each new house we build we create a whirlwind of economic activity.  So much that it boggles the mind trying to think about it.  That’s why governments do whatever they can to stimulate this particular economic activity.  They encourage borrowing by allowing us to deduct the interest we pay on our mortgages.  They use monetary policy to keep interest rates as low as possible.  They’ve created federal programs to help veterans.  To help low income people.  And to remove risk from lenders to encourage more risky lending (as in Fannie Mae and Freddie Mac).  They’ve even used the power of government to force mortgage lenders to qualify the unqualified (Policy Statement on Discrimination in Lending).

You see, putting people into houses trumped everything else.  Sound monetary policy.  A sound currency.  Good lending practices.  Everything.  Because that was the key to a healthy economy.  A happy constituent.  And healthy tax revenue.  Not to mention you can score a lot of points with the poor and minorities by helping them into houses they can’t afford.  So this coordinated effort to put people into houses did two things.  Made money cheap and easy to borrow.  And created a boom in new housing starts.  Which resulted in a third thing.  A housing bubble.

Subprime Mortgages were for those who didn’t have Good Credit or Stable Employment with Reliable Income

Builders couldn’t build enough houses.  People were buying them faster than they built them.  And the houses they bought were getting bigger and bigger.  As they qualified for ever larger mortgages.  Poor people and people with bad credit could walk into a bank and get approved without documenting income.  House flippers could walk in day after day and get loans to buy houses.  Fix them up.  And put them back on the market.  Without using any of their own money. The market was soon flooded with new McMansions.  And refurbished smaller homes that people were moving out of.  Demand for homes was high.  And interest rates were low.  So the supply of homes swelled.  As did home prices.

Interest rates were low.  But they didn’t stay low.  All this coordinated effort to put as many people into homes as possible created a lot of artificial demand.  Heating up the economy.  Increasing prices higher than they had been.  Leading to inflationary worries.  So the Federal Reserve began to raise interest rates.  To temper that inflation.  Which didn’t sit well with those low income house owners.  Who got into their homes with the help of the Policy Statement on Discrimination in Lending.  Which forced lenders to get creative in qualifying the unqualified.  To avoid undo federal attention.  And legal actions against them.  So a lot of poor people had subprime mortgages.  As did all of those house flippers.  People who used little of their own money.  Who put little down.  And had little to lose.

What is a subprime mortgage?  In a word, risky.  It isn’t a 30-year fixed-rate mortgage at a good interest rate.  No, for those you need a good credit score and years of stable employment with reliable income.  And enough money saved up to put close to 20% down.  Subprime mortgages were for those who didn’t have a good credit score.  Years of stable employment with reliable income.  Or any savings.  These people didn’t get the ‘prime’ mortgages.  They got the expensive ones.  The ones with the higher interest rates.  And the higher monthly payments.  Why?  Because risk determined the interest rate.  And the higher the risk the higher the interest rate.

In their Effort to sustain Economic Activity the Government caused the Worst Recession since the Great Depression

But this posed a problem.  Because of the Policy Statement on Discrimination in Lending.  Making loans available to the unqualified was no good if the unqualified couldn’t afford them.  Enter the adjustable rate mortgage (ARM).  These mortgages had lower interest rates.  And lower monthly payments.  How you ask?  By making them adjustable.  A fixed-rate mortgage has to account for inflation.  And adjustable-rate mortgage doesn’t.  Because if there is inflation and the interest rates go up the ARM resets to a higher value.  Which is what happened right about the time housing prices peaked.

When the ARMs reset a lot of people couldn’t make their monthly payments anymore.  Having put little down and having made few monthly payments, these homeowners had little to lose by walking away from their homes.  And a lot of them did.  Including those house flippers.  And that was just the beginning.  With higher interest rates the new home market contracted.  Those artificially high house prices began to fall.  And when the ARMs reset they caused an avalanche of defaults and foreclosures.  The market was correcting.  There were far more houses for sale than there were buyers looking to buy.  Home values began to fall to reflect this real demand.  People who bought the biggest house they could afford because they thought real estate prices always went up soon discovered that wasn’t true.  People were making monthly payments on a mortgage that was greater than the value of their house.  Some walked away.  Some got out with short sales.  Where the lender agreed to eat the loss equity.

The housing market was imploding.  Thanks to a great real estate bubble created by the government.  In their quest to put as many people into houses as possible.  By making mortgages cheap and easy to get.  Relaxing lending standards.  And encouraging risky lending.  None of which would have happened had they left the housing market to market forces.  Where the market sets interest rates.  And housing prices.  The irony of the subprime mortgage crisis is that in their effort to sustain economic activity the government caused the worst recession since the Great Depression.  The Great Recession.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Bill Clinton created the Subprime Mortgage Crisis with his Policy Statement on Discrimination in Lending

Posted by PITHOCRATES - November 6th, 2011

Week in Review

The proof is in the pudding.  And that pudding is the Federal Register.  Or as some would say the smoking gun in the subprime mortgage crisis (see Smoking-Gun Document Ties Policy To Housing Crisis by PAUL SPERRY posted 10/31/2011 on Investors.com).

At President Clinton’s direction, no fewer than 10 federal agencies issued a chilling ultimatum to banks and mortgage lenders to ease credit for lower-income minorities or face investigations for lending discrimination and suffer the related adverse publicity. They also were threatened with denial of access to the all-important secondary mortgage market and stiff fines, along with other penalties.

The threat was codified in a 20-page “Policy Statement on Discrimination in Lending” and entered into the Federal Register on April 15, 1994, by the Interagency Task Force on Fair Lending. Clinton set up the little-known body to coordinate an unprecedented crackdown on alleged bank redlining.

The edict — completely overlooked by the Financial Crisis Inquiry Commission and the mainstream media — was signed by then-HUD Secretary Henry Cisneros, Attorney General Janet Reno, Comptroller of the Currency Eugene Ludwig and Federal Reserve Chairman Alan Greenspan, along with the heads of six other financial regulatory agencies.

“The agencies will not tolerate lending discrimination in any form,” the document warned financial institutions.

So this is where it all started.  In 1994.  When the government pressured lenders to qualify the unqualified.  To put people into houses they couldn’t afford.  Or else.

The unusual full-court press was predicated on a Boston Fed study showing mortgage lenders rejecting blacks and Hispanics in greater proportion than whites. The author of the 1992 study, hired by the Clinton White House, claimed it was racial “discrimination.” But it was simply good underwriting.

It took private analysts, as well as at least one FDIC economist, little time to determine the Boston Fed study was terminally flawed. In addition to finding embarrassing mistakes in the data, they concluded that more relevant measures of a borrower’s credit history — such as past delinquencies and whether the borrower met lenders credit standards — explained the gap in lending between whites and blacks, who on average had poorer credit and higher defaults.

The study did not take into account a host of other relevant data factoring into denials, including applicants’ net worth, debt burden and employment record. Other variables, such as the size of down payments and the amount of the loans sought to the value of the property being bought, also were left out of the analysis. It also failed to consider whether the borrower submitted information that could not be verified, the presence of a cosigner and even the loan amount.

When these missing data were factored in, it became clear that the rejection rates were based on legitimate business decisions, not racism.

Still, the study was used to support a wholesale abandonment of traditional underwriting standards — the root cause of the mortgage crisis.

So there was no racism.  No redlining.  Just good mortgage lending practices.  But good mortgage lending practices don’t buy you votes.  Or get you kickbacks from mortgage lenders.

Confronted with the combined force of 10 federal regulators, lenders naturally toed the line, and were soon aggressively marketing subprime mortgages in urban areas. The marching orders threw such a scare into the industry that the American Bankers Association issued a “fair-lending tool kit” to every member. The Mortgage Bankers Association of America signed a “fair-lending” contract with HUD. So did Countrywide.

HUD also pushed Fannie and Freddie, which in effect set industry underwriting standards, to buy subprime mortgages, freeing lenders to originate even more high-risk loans.

So how do you qualify the unqualified and avoid the wrath of the federal government?  That’s easy.  You create the subprime mortgage market.  And then you get Fannie Mae and Freddie Mac to buy these toxic mortgages and pass them on to unsuspecting investors.  Freeing up the mortgage lenders to make more bad loans.  And putting the world on a course to financial calamity.

All in a day’s work for an activist, corrupt, Big Government.

Clinton’s task force survived the Bush administration, during which it produced fair-lending brochures in Spanish for immigrant home-loan applicants.

And it’s still alive today. Obama is building on the fair-lending infrastructure Clinton put in place.

As IBD first reported in July, Attorney General Eric Holder has launched a witch hunt vs. “racist” banks.

“It’s a more aggressive fair-lending enforcement approach now,” said Washington lawyer Andrew Sandler of Buckley Sandler LLP in a recent interview. “It is well beyond anything we saw during the Clinton administration.”

Guess we haven’t learned the lessons of the subprime mortgage crisis.  Or we have and just don’t care.  Because buying votes and getting kickbacks from mortgage lenders is more important than preventing another subprime mortgage crisis.

All of this, of course, means that Wall Street didn’t cause the mess we’re in now.  Bill Clinton did.  And his racist lending policies.  To correct for a racism in mortgage lending that wasn’t there.  By qualifying the unqualified.  And putting them into houses they couldn’t afford.  Which the Obama administration appears to be doubling down on.

Boy.  I’d hate to be in our shoes.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , ,

Keynesian Governments play with Interest Rates giving us Asset Bubbles and Crises

Posted by PITHOCRATES - September 5th, 2011

Subprime Mortgage Lending – Qualifying the Unqualified

Housing has led the economy since World War II.  Home ownership.  The magical elixir.  So the government policy has been to put as many people into homes as possible.

They pushed mortgage lenders to approve mortgages.  And threatened them when they didn’t.  Especially to minorities in depressed inner cities.  Worse, activists were protesting.  Accusing them of redlining.  All this pressure forced the lenders to come up with ways to qualify the unqualified.  And the vehicle of choice was the subprime mortgage.

Adjustable Rate Mortgages (ARMs).  Interest only mortgagesNo-documentation mortgages.  Etc.  These were putting people into houses like never before.  Even if they couldn’t afford a house.  They got in at low interest rates.  Kept low by easy monetary policy.  To get as many people approved for these dirt-cheap mortgages as possible.

Bad Government Policy caused a Housing Boom, a Housing Bubble and a Crisis

But that’s not all the government did.  Via Fannie Mae and Freddie Mac, they guaranteed these subprime mortgages.  And bought them from the mortgage lenders.  Removing these highly risky mortgages from their balance sheets.  Removing all risk from the lender.  And passing it on to the taxpayer.  And as you would guess such a policy would do, the lenders approved more of these risky subprime mortgages.  And why not?  They made money.  And were insulated from all risk. 

Then Fannie and Freddie chopped and diced these risky subprime mortgages.  Created mortgage-backed securities (MBS).  And collateralized debt obligations (CDO).  And sold them on Wall Street.  They were high yield.  But super safe.  Because they were backed by historically the safest of all debt.  Mortgages.  Only these weren’t safe mortgages.  They were very risky subprime mortgages.  And why were they so risky?  Because when interest rates go up, so do their monthly payments.  Likely more than the home owner can pay.  And when those interest-only mortgages had to be refinanced, the new higher interest rates made the new mortgages more costly than the old.  More than a subprime borrower could afford.  Which meant one thing.  Default.

So all this bad government policy (to put as many people into homes as possible) caused a housing boom.  And a housing bubble.  The economy was overheating.  So the Federal Reserve tapped the monetary brakes.  By raising interest rates.  And all hell broke loose.

Government enabled Risky Subprime Mortgage Lending

The government’s housing policy gave us the subprime mortgage crisis.  And spread this contagion around the globe.  Thanks to Fannie and Freddie.  Enabling all that bad mortgage lending.  Giving us the Great Recession.  That appears more depression-like than recession.  Now the go-to government policy of boosting economic activity won’t work.  Because the housing market is in shambles.  And it will get worse before it gets better (see Uncle Sam is a reluctant landlord of foreclosed homes by Lorraine Woellert and Clea Benson, Bloomberg Businessweek, posted 9/5/2011 on MSNBC).

For sale or rent by distressed owner: 248,000 homes. That’s how many residential properties the U.S. government now has in its possession, the result of record numbers of people defaulting on government-backed mortgages. Washington is sitting on nearly a third of the nation’s 800,000 repossessed houses, making the U.S. taxpayer the largest owner of foreclosed properties. With even more homes moving toward default, Fannie Mae, Freddie Mac and the Federal Housing Administration are looking for a way to unload them without swamping the already depressed real estate market.

The U.S. taxpayer is the largest owner of foreclosed properties.  Because government enabled risky subprime mortgage lending.  They guaranteed or bought risky mortgages.  So risky that no mortgage lender would have approved them if they had to carry the risk on their own balance sheets.  Which makes the government incompetent.  Or devious.

The government caused this problem.  By putting as many people as possible into homes.  Whether they could afford it or not.  And now they have a big problem on their hands.  Or, rather, the taxpayers do.  For government’s problem is ultimately the taxpayers’ problem.  It is our money after all that they are playing with.

Since the 2008 financial collapse, the government has spent billions of dollars trying to extricate borrowers from high-cost loans, aid delinquent homeowners and stabilize neighborhoods. The results have been disappointing. The Obama Administration’s signature loan-modification program has helped about 657,000 homeowners — far short of its goal of 3 to 4 million. The program was a victim of its complexity and its inability to cope with overwhelming demand.

Yes, they’re good at creating BIG problems.  But not very good at fixing them.  To put it mildly.  And yet we keep turning to government for help.  Go figure.

Selling High-Risk Securities Masquerading as Safe High-Yield Investments 

And it’s not only the U.S that made a mess of their mortgage market.  Europe has her own subprime problems.  On top of their sovereign debt crisis.  As if they didn’t have enough to worry about already (see Europe banks slide to 29-month low on multiple headwinds by Simon Jessop, Reuters, posted 9/5/2011 on Yahoo! Finance).

European bank shares slid to a 29-month low on Monday, leading the broader market down on fresh sub-prime mortgage woes, fears of recession and yet more evidence of political disunity that could hamper efforts to solve the region’s debt crisis…

“The chances of a near-term recovery remain slim as euro zone debt concerns, structural reform and a lawsuit for allegedly mis-selling mortgage debt all weigh heavy on the sector,” Manoj Ladwa, senior trader at ETX Capital said.

Subprime mortgage woes.  And a debt crisis.  All caused by activist Keynesian governments.  Playing with interest rates.  To stimulate the economy with an artificial demand.  Which always ends the same way.  Asset bubbles.  And crises.  In Europe.  The U.S.  And everywhere where activist governments think they can outsmart the free market.

Royal Bank of Scotland…

… is among the worst-placed of European lenders facing a multi-billion-dollar U.S. regulatory lawsuit accusing them of misrepresenting the checks they made on mortgages before securitising them.

So Europe, too, has been dabbling in mortgage-backed securities (MBS).  And collateralized debt obligations (CDO).  Doesn’t look like things ended any better for the Europeans.  They sold high-risk securities masquerading as safe high-yield investments.  Because of those ‘safe’ mortgages underlying these investments.  That were anything but safe.

“The banks’ cost of funding goes up in tandem with the country’s cost of funding, and eventually they get denied access to the credit market.”

That relationship was once again thrown into focus on Monday as both Italian and Spanish 10-year yields rose to near 1-month highs. Peripheral euro zone sovereign CDS yields also rose, with French yields at a record high.

The financial crisis is not only hurting investors, it’s hurting countries.  By raising borrowing costs.  Which is a BIG problem for countries that like to spend beyond their means.  Because they have to borrow to pay today’s bills.  As well as borrow to pay yesterday’s bills. 

As bonds come due they have to borrow money to redeem them.  And all this new borrowing is at higher and higher interest rates.  So high that governments even have to borrow to pay the interest on the money they’ve borrowed.  And the interest on their debt becomes an ever growing line item on their budgets.  Which makes it harder to pay retirement benefits.  Health care benefits.  Education benefits (i.e., free college tuition).  Etc.  Eventually requiring budget cuts.  And austerity.  Which the people often respond to with riots.

Adding to growing concern over a return to recession in the developed world, data showed euro zone services sector growth eased for the fifth consecutive month in August.

Recent data showed a world economy growing at “near stall speed,” analysts at Societe Generale (Paris: FR0000130809 – news) said in a note, although they did not believe the world would return to recession as it needed a trigger, “which we believe will remain absent.”

“Taming burgeoning public debts on both sides of the Atlantic (Stuttgart: A0J3C9 – news) will take time and we forecast a prolonged period of low growth for both the US and Europe,” they add.

All this government spending is paid for (in part) with high taxes.  As the borrowing costs grow governments turn to raising tax rates.  Which puts the brakes on economic activity.  Which, in turn, reduces the amount of tax dollars collected by the government.  Making a bad problem worse.

You Never Want a Serious Crisis to go to Waste

This is Keynesian economics.  Keep interest rates low.  Depreciate your currency.  And keep on spending.  Their rationale is that governments can do anything they want.  For it’s their fiat money.  They can always print more.  And the resulting inflation will make yesterday’s debt easier to pay tomorrow.  We call it screwing our creditors.  I mean, monetizing the debt.

But debt has consequences.  The European sovereign debt crisis is a crisis because they can’t borrow any more money to continue their excessive government spending.  Standard and Poor’s just downgraded U.S. bonds because of excessive debt.  The tax and spend Keynesians say poppycock.  Keep spending.  And raise taxes.

But the responsible people say, “Wait a minute.”  For they see these crises as debt crises.  And they think ‘what if’ there wasn’t excessive debt.  Would there be a crisis then?  And the answer is, of course, no.  So they understand that too much debt is a bad thing.  And if it’s a bad thing, adding more of it will only make it more of a bad thing.  And unless you think a crisis is a good thing, you don’t want more of one.

But if you think a crisis is a good thing.  That “you never want a serious crisis to go to waste.”  Then you probably want more of a bad thing.  And you’re probably a Big Government Keynesian liberal Democrat.  Using that crisis to advance an agenda you couldn’t through the normal legislative process.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , ,