The approaching precipice

Lest you wonder why I was confident enough to take such a firm position with the title of the new book:

This OCC and OTS Mortgage Metrics Report for the second quarter of 2009 provides performance data on first lien residential mortgages serviced by national banks and federally regulated thrifts. The report covers all types of first lien mortgages serviced by most of the industry’s largest mortgage servicers, whose loans make up approximately 64 percent of all mortgages outstanding in the United States. The report covers nearly 34 million loans totaling almost $6 trillion in principal balances and provides information on their performance through the end of the second quarter of 2009 (June 30, 2009)….

The percentage of current and performing mortgages in the portfolio decreased by 1.4 percent from the previous quarter to 88.6 percent of all mortgages in the portfolio. All categories of delinquencies increased from the previous quarter, with serious delinquencies—loans 60 or more days past due and loans to delinquent bankrupt borrowers—reaching 5.3 percent of all mortgages in the portfolio, an increase of 11.5 percent from the previous quarter. Foreclosures in process reached 2.9 percent of all mortgages, a 16.2 percent increase.

First, keep in mind that “The subprime losses of $150 billion in 2007 required US government aid of $13.2 trillion as of 19 June 2009”. Now, do the math reported above. 88.6 percent of the $6 trillion in mortgages are current. 11.4 percent representing $684 billion are not. Some of those late mortgages will cure, but most will not. Assuming that the 36 percent of mortgages not represented in the report reflect similar percentages, that indicates potential defaults in the realm of $1.1 trillion dollars assuming that the default rate does not continue to rise. The chart below indicates that this is unlikely. Since average losses on foreclosures are reported as $45,000 (Banker & Tradesman) and $60,000 (Freddie Mac), this indicates an average loss per mortgage of around 30 percent, which means that the banking system will have to absorb at least another $330 billion in losses, of which $81 billion is already in process even if no more homeowners fall behind on their mortgages!

Friedman addresses the wrong audience

But why let a chance to wax dramatic about the possibility of an assassination go by?

Sometimes I wonder whether George H.W. Bush, president “41,” will be remembered as our last “legitimate” president. The right impeached Bill Clinton and hounded him from Day 1 with the bogus Whitewater “scandal.” George W. Bush was elected under a cloud because of the Florida voting mess, and his critics on the left never let him forget it.

And Mr. Obama is now having his legitimacy attacked by a concerted campaign from the right fringe. They are using everything from smears that he is a closet “socialist” to calling him a “liar” in the middle of a joint session of Congress to fabricating doubts about his birth in America and whether he is even a citizen. And these attacks are not just coming from the fringe. Now they come from Lou Dobbs on CNN and from members of the House of Representatives.

Again, hack away at the man’s policies and even his character all you want. I know politics is a tough business. But if we destroy the legitimacy of another president to lead or to pull the country together for what most Americans want most right now — nation-building at home — we are in serious trouble. We can’t go 24 years without a legitimate president — not without being swamped by the problems that we will end up postponing because we can’t address them rationally.

The only questions about Obama’s legitimacy are those result of Obama hiding his records. Obama could end the questions about his legitimacy in about five minutes; if Friedman is genuinely worried about the issue, he should join Joseph Farah and Lou Dobbs in demanding the complete release of all records that are even remotely relevant to it.

The cold reality is that despite all their hand-wringing about potential dangers to Obama, there are few things the American Left would like better than to see him become a martyr to the cause. It’s already apparent that as president, Obama will be an ongoing series of political disasters for the Left for another three years and possibly seven. But as a martyr, he would be useful for generations.

Friedman’s disingenuousness is highlighted by Jonah Goldberg, who points out the irony of a fan of Chinese communist autocracy feigning concern about American liberal democracy.

The FDIC can’t borrow solvency

I’ve been repeatedly asserting that the FDIC’s Deposit Insurance Fund has run dry, while most economic sites have been insisting that the running DIF balance doesn’t actually matter because the FDIC has access to the $500 billion credit line with the Treasury established in May. That argument never quite made sense to me. Someone who is bankrupt is still bankrupt even if someone else promises to lend him more money, because taking that loan would only increase his liabilities and put him in a worse position than before.

This statement from the FDIC yesterday should settle the matter:

An alternative—borrowing from the Treasury or the Federal Financing Bank (FFB)— would also increase the liquid assets available to fund future resolutions but would not increase the Fund balance as there would be a corresponding liability recorded. Nevertheless, the FDIC has several options for returning the reserve ratio to the statutorily mandated 1.15 percent and meeting its liquidity needs.
Restoration Plan and Assessment Rates Staff projects that failures will peak in 2009 and 2010 and that industry earnings will have recovered sufficiently by 2011 to absorb a 3 basis point increase in deposit insurance assessments. Adopting a uniform increase in assessment rates of 3 basis points now, effective January 1, 2011, should ensure that the prepaid assessments would address current liquidity needs without materially impairing the capital or earnings of insured institutions. Advance adoption of the rate increase also should help institutions plan for future assessment expenses….

In staff’s view, requiring that institutions prepay assessments is also preferable to borrowing from the U.S. Treasury or the Federal Financing Bank (FFB). Prepayment of assessments ensures that the deposit insurance system remains directly industry-funded. Additionally, staff believes that, unlike borrowing from the Treasury or the FFB, requiring prepaid assessments would not count toward the public debt limit. Finally, collecting prepaid assessments would be the least costly option to the Fund for raising liquidity as there would be no interest cost.

In other words, the FDIC is doing essentially the same thing as Cash for Clunkers and every other federal stimulus program by spending tomorrow’s cash today in the hopes that it will allow them to survive long enough until the recovery magically begins. They’re gambling that $77 billion in cash and liquid assets will be enough to get them through 2009 and 2010.

Of course, this strategy is predicated on the worst case being the “jobless recovery” scenario. These reserve ratio projections from mid-2007 should demonstrate the precision and reliability of their forecasts – their worst case scenario for 2009 was 1.18 percent vs 0.27 percent for last quarter. And given that they’ve already blown through at least $45 billion in the first half of 2009 alone, (they admit to $25 billion in the report, but the FDIC Quarterly shows otherwise), I expect that even with three years of pre-paid assessments, the DIF will run dry again before the third quarter of 2010. Notice that the requirement to return the DIF to the statutorily mandated minimum reserve ratio of 1.15 percent has been increased twice in seven months, giving them eight years just to get back to normal. And notice that they’re announcing their intention to hide the data henceforth because the DIF as previously calculated is empty and the reserve ratio is negative.

Near the end of the third and fourth quarters of 2009, if there is a reasonable possibility that the reserve ratio has declined to a level that could undermine public confidence in federal deposit insurance or to a level which shall be close to or below zero, staff will estimate the reserve ratio for that quarter from available data on, or estimates of, insurance fund assessment income, investment income, operating expenses, other revenue and expenses, and loss provisions (including provisions for anticipated failures).

On a tangential note, there’s some evidence that the loss-share deals the FDIC is striking with banks that are acquiring the asserts of failed banks are driving up foreclosure rates, thus putting more downward pressure on housing prices. And if that’s not bad enough, Denninger is now calculating that the entire banking system is insolvent, since it faces the absorption of a conservatively estimated $869 billion in single-family mortgage defaults alone.

“The entire banking system and likely The Fed, given the quantity of Fannie and Freddie paper it has been and is “eating”, is insolvent. These facts are why the government is lying – they’re well-aware of the near-zero cure rates and know that these facts mean that the banking industry has nowhere near sufficient capital to withstand these losses without folding like a paper cup getting stomped on by an elephant. (Remember that these numbers do not include any commercial real estate losses and we have found that banks are frequently over-stating their claimed values for these loans by 50% or more – as was seen with Colonial.)”

Launch Party!

If this doesn’t establish Linux on the desktop, nothing will. The funniest thing is that two days after sending me the link to this video, Big Chilly was invited to a real Windows 7 launch party! Microsoft is really terrible at this sort of thing… everyone knows that a genuinely vibrant advertisement would have included a gay Asian and a fat, but funny Hispanic.

Kill him now, Chilliette. It would be kinder.

VPFL Week Three

67 Mounds View Meerkats (3-0)
43 Masonville Marauders (0-3)

60 Valders Valkyries (3-0)
39 Judean Front (2-1)

86 Alamo City Spartans (2-1)
48 Burns Redbeards (0-3)

55 Black Mouth Curs (2-1)
19 Greenfield Grizzlies (0-3)

88 Winston Reverends (1-2)
57 Bane Silvers (2-1)

Definitely a good week if you’re a Vikings or Meerkats fan. Also, in a nod to popular opinion, I’ve decided that the winner of the VP-AFL will claim a spot in the VPFL the following year.

Lesbian Dorito Night (3-0) – 94.35
Supernaut’s Jihad (0-3) – 83.90

Az Hammeroids (3-0) – 109.30
COS McRays (0-3) – 83.95

Masonville Marauders (3-0) – 91.35
The Thunder (1-2) – 89.70

Village Valkyries (3-0) – 94.35
Cranberry Bogs (1-2) – 81.65

Oakies (1-2) – 113.95
South Plains Storm (0-3) – 94.25

A new book

On October 29th, 2009, the 80th anniversary of Black Tuesday, WND Books will publish The Return of the Great Depression, a book addressing the economic contraction of 2008-09, the reasons for its occurrence, and its implications for the future.  Beginning with my experience in Japan at the height of the Heisei boom twenty years before the global financial crisis, the book delves into economic theory and economic history in constructing a perspective on the likely outcome for the global economy over the next ten years.

A number of pre-release readers have been kind enough to express their opinion of the book.  One of them is the notorious financial writer known as The Mogambo Guru, who in his Inimitable Mogambo Manner, (IMM), provided an amusing and colorful blurb that the publisher absolutely refused to consider printing on the dust jacket, mostly because doing so would preclude putting anything else there.  Since the notion that there could possibly be anything that needs to be said about a book that has not already been said by the Mighty Mogambo is clearly a ludicrous one that hardly merits articulation, let alone consideration, it gives me great pleasure to share with you The Mogambo Guru’s verdict.

“I heartily recommend Vox Day’s book, The Return of the Great Depression, although it is a case of a smart guy writing a smart book full of serious-yet-fascinating smart-guy economic stuff about the shameless shenanigans of the last 20 years or so, and is such a varied feast of economic and financial information and insights that a poor, borderline mental defective like me could never finish reading all of it, much less comprehending any of it, despite the highly-illuminating original graphs and charts, although I wish, I wish, I wish I could, especially in light of today’s economic turmoil.

So my recommendation is based on a shameful scheme of raw desperation and deception, which is to leave a copy on my desk, where people passing by would see it and they would think to themselves “Oh! He must be a smart guy to read such a book! We ought to fire him last!”

In my defense, if you have as little going for you as I do, you increasingly find that you must rely on those kinds of intangible goodwill benefits, hence the recommendation to buy and use the book, although one must but marvel at how much I would benefit from being able to read it!

Which I hope you can!”

And which I hope you will.  An amount of the material will be familiar to the readers of this blog, but most of it is either new or examined in more detail than is usually the case in the columns and blog posts. Among other things, the book goes into considerably more detail on Keynesian general theory,  Friedmanite monetarism, and Paul Samuelson’s conversion of general theory into modern applied Neo-Keynesian macroeconomics than I customarily do here, as it was my goal that the book will not be of benefit only to those who happen to read the book during the present situation, but also for those who do so well after the crisis has passed.

But that, as the book explains, is probably going to take a while. In the meantime, serious econobloggers and financial writers who are interested in reviews or interviews can contact me via email.

FDIC games

How is this even remotely okay?

[I]t appears the FDIC will ask for three years of assessments in advance, or about $36 billion according to Reuters. The advantage to the banks of prepaying assessments (as opposed to another special assessment) is the banks don’t have to record the expense immediately.

Need any further evidence that the FDIC is out of money? So, the banks will prop up their insurance fund by $36 billion, but will pretend they’ve still got the cash so they don’t fail and cause the fund to be drawn down. Yeah, that should work great!

I find that $36 billion to be interesting in light of how my calculations currently have the FDIC Deposit Insurance Fund’s pre-assessment balance around -14.8 billion as of last Friday, assuming that the ratio of actual losses to estimated losses is still running at the second quarter’s 1.69 rather than the first quarter’s 1.91. Since there was a $14 billion difference between my calculation and the FDIC quarterly report thanks to the second-quarter assessment, this suggests that the reason the Fed wants to collect advance assessments is because the fund has run out even on a post-assessment basis. I wonder, however, why they don’t want to tap their credit line as everyone had assumed they would.

One interesting theory is that the reason the FDIC bank closures have suddenly slowed down of late – three in two weeks – is that they are having problems coming up with the cash to cover the losses.

UPDATE – Make that $45 billion upfront. In cash, please. And you can be certain that losses will reach $100 billion long before 2013; they’ve already blown through $50 billion in three quarters this year.

This is a joke, right?

This disinterest in communication not only smacks of reprehensible irresponsibility on the part of the present inhabitant of the White House, but outrageous farce:

“I’ve talked to the president, since I’ve been here, once on a VTC ,” Gen. Stanley McChrystal told CBS reporter David Martin in a television interview that aired Sunday.

“You’ve talked to him once in 70 days?” Mr. Martin followed up.

“That is correct,” the general replied.

I’ve been an advocate of bringing the troops home from the occupied countries since 2004, but even if I hadn’t been, they must be brought home immediately now. If the titular Commander-in-Chief can’t be bothered to even talk to the freaking commanding general, this farcical pretense of playing at war must immediately stop. American soldiers deserve far better than to be shipped off to play mercenary globocop / political pawn while their so-called commander ignores them. Every military family with men stationed in the theater should be furious about this incredible abdication of responsibility.

There was never any serious doubt that the war in Afghanistan would ultimately fail, but this is downright insane. It also appears to conclusively settle the question about Obama’s fitness for office. And if you know anything about military etiquette, you’ll recognize that Gen. McChrystal is flashing a subtle, but perfectly clear signal regarding his opinion of his civilian superior here.

Evading the obvious

Steve Sailer points out the salient point that is never discussed whenever the topic of immigration is broached:

Immigration is probably the single broadest, deepest, most intellectually challenging topic in all of public policy. There’s no knottier or more significant question you can ask than: When the government elects a new people, how many and whom should it elect?

The harsh reality is that everyone, including the most starry-eyed immigrant enthusiast who thinks Guatemalans emit vibrant rainbows instead of methane and jihad-sworn Saudis merely want their shot at the American Dream of a white picket fence and 2.5 wives, believes in limits on immigration. There is no way that anyone is going to cheerfully permit 300 million Chinese to immigrate next year, so the conversation isn’t actually about whether to limit immigration or not, but rather, which immigrants and how many them will be permitted entry. As the old joke goes, we’ve already established what the lady is, now we’re just haggling over the price.

Given the way that many immigrant cultures have actively conspired to significantly modify Constitutional WASP America to suit their foreign preferences, it appears likely that history will eventually judge much of the immigration that was permitted in the previous century to have been a tremendous mistake. And it appears even more likely that this current wave of immigration from the Third World will work about as well for America as Visigothic immigration did for the Roman Empire.