Automatic Earth
The title for this entry comes straight out of a New York Times article by Andrew Martin, entitled Does This Bank Watchdog Have a Bite?, which deals with John Dugan, the present US Comptroller of the Currency (and a former bank lobbyist). The quote from the title doesn't come from some fringe lunatic, the man quoted is West Virginia Attorney General Darrell McGraw, and yes, he's talking about Washington DC. For good measure, Martin quotes a second Attorney General, Iowa's Tom Miller, who says this about Dugan:
"To have a regulator this partial and this helpful to the people he is supposed to regulate is, to say the least, very troubling,"Unfortunately for them and the rest of America (except the bankers), Dugan is a well connected man, and a close ally of Treasury Secretary Tim Geithner. Here's an example Martin provides of Dugan's work ethic:
When Darrell McGraw, the attorney general of West Virginia, decided to sue Capital One Bank in 2005, alleging credit card abuses, his office expected to face a phalanx of high-priced defense lawyers. What it didn't expect was that Capital One would get a hand from the federal government. As Mr. McGraw tells it, his legal team was thwarted every step of the way by Capital One and the [Office of the Comptroller of the Currency]. While Capital One didn't comply with Mr. McGraw's subpoenas, it did apply for a national charter with the O.C.C., which it obtained in March 2008. Soon afterward, Capital One notified Mr. McGraw that he no longer had authority over it. For more than a decade, the O.C.C. has beaten back state attorneys general who have tried to enforce state consumer laws against national banks, arguing that federal laws pre-empt those of the states: the O.C.C. has stopped Georgia from enforcing predatory lending laws, intervened in New York's effort to investigate discriminatory lending and opposed a campaign by New England states to curb gift card fees. "It's always disheartening when the federal government becomes the refuge for scoundrels," Mr. McGraw says.Many of you may say that we should just get rid of John Dugan ASAP. Me, I would say he's exactly where he belongs. More on that in a minute. In the wake of Obama's latest effort at allowing people to stay in their underwater homes, the plan I named "The New Losers Program", here's an interesting stat: nearly 14% of US mortgages are now delinquent. That's about one in every seven homes. And yes, once again, home prices will keep on dropping, so we'll see one in five, then one in four (that's how many are underwater today), etc.. Another good stat: half of all modifiied mortgages default again. What does that spell for the program? I'm happy to see I'm not the only one who thinks that the perverted madness of Fannie, Freddie, and the FHA guaranteeing your neighbor's mortgage with your money should stop. If only because, yes, home prices wil keep on dropping. And you will therefore be on the hook for the losses on both the mortgages AND the securities written on them, while in the long run nothing will have been saved or prevented, the "bad" things will have just been pushed a little bit further into the future. There are some smarter voices popping up, and that's good, even if they don't always seem to be able to think things through to their logical conclusions, likely because these are often of the bitter variety. Here's Bloomberg's Caroline Baum:
Lower Home Prices Can Fix What Government Can'tGood points (.. but?) . Former National Economic Council director Keith Hennessey has some more:Alas, all the Fed's purchases and all the government's men can't put the residential real estate market together again. Between them, the federal government and central bank can lower mortgage rates, modify mortgages, use their power to get private lenders to modify mortgages, and create incentives to move inventory, such as the first-time homebuyer's tax credit. What they can't do is manufacture enough artificial demand for an asset that was artificially inflated to begin with. Prices will have to fall, which is how supply is allocated in a market economy. (An occasional reminder is in order given the current spend-money-to-save-money mindset.) The Federal Reserve will complete its purchase of $1.25 trillion agency mortgage-backed securities at the end of this month. Its efforts on our behalf have driven 30-year fixed-rate mortgage rates to half-century lows of sub-5 percent, "which should have been more stimulative than it was,"[..] Almost one-quarter of all residential properties with a mortgage were underwater in the fourth quarter, according to First American CoreLogic. What's done is done. Throwing bad money after good makes no sense. The government can't save housing without sapping something else of needed capital.
Should taxpayers subsidize underwater homeowners?Mr. Hennessey is getting close. But then he veers off the road like a steamroller:Who is eligible? Under one program, called HAMP, the Home Affordable Modification Program, you are eligible if you:
... live in an owner occupied principal residence, have a mortgage balance less than $729,750, owe monthly mortgage payments that are not affordable (greater than 31 percent of their income) and demonstrate a financial hardship. The new flexibilities for the modification initiative announced today continue to target this group of homeowners. Excuse me? We're going to subsidize someone with a mortgage balance of $700,000?! Let's do a quick back-of-the-envelope calculation. Suppose you have a mortgage balance of $700K, with 28 years left on your 30-year mortgage at a fixed 7% 5.25% . Your monthly mortgage payments would be almost $4,800. If that's greater than 31% of your income, you make less than $186,000 per year.[..] [..] let's look at a homeowner with a fixed rate mortgage who is “underwater” because his home has declined in value so that the house is worth less than the mortgage. His net worth has declined because the value of his home plummeted, and that's tragic. But since he has a fixed rate mortgage, his monthly mortgage payment has not changed. The decline in the value of their home has not affected his ability to make his mortgage payment, and therefore to remain in that home. He can continue to live in his home and wait for the value to appreciate, just as a stockholder can hold onto a stock after a decline and wait for the price to recover. I don't see why taxpayers should subsidize him because he lost money on an investment, just as taxpayers shouldn't subsidize him if he lost money in the stock market.[..] Imagine twin brothers, each with $180K of annual income. One rents, and the other has a $700,000 mortgage on a home that declined from $800,000 in value to $600,000 in value. Both brothers lose their jobs. Why should the renter pay higher taxes to subsidize his brother's mortgage payments? Losing a home due to financial hardship is tragic. Does that make it someone else's responsibility? Why should a broad-based decline in housing prices shift responsibility for planning for a financial loss from a homeowner to taxpayers? Why do policymakers (on both sides of the aisle) think we should make taxpayers (some of whom struggle to make their own mortgage payments, and others of whom rent housing) subsidize someone who lost money on an investment? I would like to hear a sound and compassionate policy argument that addresses my twin brother example. To make sure your argument works, please assume there is also a triplet brother who also rents but recently lost $200,000 in the stock market, and explain how your policy applies to him.
To have good arguments not to do something, and then propose to do it anyway, I'm going to have to guess that stems from, as I just said, the fear of "bitter conclusions". Moreover, none of it would work if prices keep falling. And more importantly, Mr. Hennessey misses out on the underlying truth behind the New Losers Program. Barry Ritholtz does not. He catches it, so to speak, full frontal:I would be willing to use some tax dollars to subsidize a subset of those homeowners who were fooled or deceived into buying bad adjustable rate mortgages. I would subsidize only the ones who, with a little taxpayer assistance, could afford to keep their home. The hard part is determining who was fooled or deceived. This subsidy would apply only to bad ARMs made in the past and therefore would not be designed as a permanent program.
More Foreclosures, Please . . .There we go. Now, was that so hard, Ms. Baum, Mr. Hennessey? Twiddling around with these programs, a little more of this, little less of that, is of no use whatsoever, because the intention behind them never was to help homeowners. And if you need a real good strong reason why the programs must be stopped as soon as possible, look no further than this from the Economic Collapse Blog:The various foreclosure programs are essentially a way the banks don't have to take their write offs now. Avoid the hangover, have another shot of tequila, push the pain of into the future, regardless of economic cost. Were the banks required to report their mortgages accurately and/or write them down, they would be revealed as insolvent. Now we get to the ugly Truth: The mortgage mods and foreclosure abatement programs are really all about propping up insolvent banking institutions on the taxpayer dollar and at the expense of the middle class. These programs are another losing round of helping Wall Street at the expense of Main Street. It is the worst kind of trickle down economics.
The Silent Entitlements Monster: Social Security, Medicare And Interest On The Debt Will Gobble Up Every Single Tax Dollar By 2020Ten years from now, and probably quite a bit sooner, The United States of America will be hopelessly bankrupt. That's what its own Government Accountability Office says. But people like John Dugan, Tim Geithner, and yes, Barack Obama, keep on inventing plans that shield the banks from losses, but not the citizens. Indeed, the citizens' money goes directly towards keeping banks afloat while ever more Americans find their homes underwater. And that's why Comptroller of the Currency John Dugan is in the right spot at the right time. He sticks out like a sore thumb, but cutting him off is no use: the whole hand is mortally wounded. And mortgage modification plans or financial regulation schemes don't matter anymore. As I've often said, this is not a financial crisis, it's a political one. It's the politicians who owe their plush seats to the very institutions they now pretend to want to re-regulate, who have allowed it to happen. And even for the lone voice who's halfway sincere, it doesn't matter anymore, we're long past that stage. As I've also often said, and was pleased to recently hear Michael Moore repeat, the only thing that works is to get money out of politics. However, in the present political system, that means the politicians, the very people who would presently be tasked with getting that money out of politics, are the ones who most benefit from keeping it in. And that defines a political crisis like nothing else does. Politicians would lose their votes if they cut entitlements and debt (which will bankrupt the nation), and they would lose their campaign money (and further perks) if they go against the money cabal (which will keep the government in the hands of the few, acting against the many) . How you solve that by any means other than pitchforks, or worse, you tell me. Mortgage mods ain't going to cut it. Not even a new Glass Steagall will. The Daily Telegraph's Jeremy Warner, interwoven with curious Thatcher admiration (shouldn't the Brits just LOVE Angela Merkel?), gets a few things right about his own country, and many others like it.In fact, according to an official U.S. government report, rapidly growing interest costs on the national debt together with spending on major entitlement programs will absorb approximately 92 cents of every dollar of federal revenue by the year 2019. By 2020, that figure will be up around 100 cents of every dollar of federal revenue. It turns out that the "recession" that we have just been through has hit Social Security revenues really hard. And unfortunately, as waves of Baby Boomers start retiring, these "Social Security deficits" are going to get even worse. So where will the money come from to pay the benefits that are owed? For now, the money will come from the $2.5 trillion Social Security Trust Fund that has been accumulated. But keep in mind that the $2.5 trillion figure is extremely misleading. There are not $2.5 trillion dollars sitting around in a bank account somewhere to pay these benefits. The truth is that the Social Security Trust Fund does not contain any actual assets. The only assets the Social Security Trust Fund has are IOUs from the U.S. government. So basically the U.S. government owes the Social Security Trust Fund $2.5 trillion dollars, and now it turns out that the Social Security system is going to start needing that money. So where will the U.S. government get that money? Well, they will borrow it of course.[..] As a society, we are really between a rock and hard place. If we continue on the same path, the United States government is going to go bankrupt. But any politician who tries to cut benefits or raise taxes will likely face the wrath of the voters at the ballot box. So for now the U.S. government just continues to spend even more money and continues to go into increasing amounts of debt - apparently hoping that somehow everything will just turn out okay. But things are not going to turn out okay. We are headed for a financial mess of horrifying proportions. [..] until severe financial pain starts happening, a large percentage of the American people are not going to be motivated to do anything about this problem. But by then it will be too late.
Strikes and strife are only just beginningEven the Chancellor now concedes that when the axe falls it will need to be deeper and tougher than anything attempted under Margaret Thatcher. Using published Treasury projections, the Institute for Fiscal Studies calculates that after taking account of "protected" areas of spending such as health and schools, the cuts elsewhere in public services and administration will have to be of the order of 25 per cent. In the event of a fully blown funding crisis, they would be deeper still. Nothing quite like it has been attempted since the 1930s. Is Labour, still trailing the vestiges of its socialist roots, substantially funded by union donations, and politically dedicated to the provision of state-funded services and welfare, really up to the job? If Labour ministers were being asked to poison their own children, the task that awaits could scarcely be grimmer. The reason the Chancellor is not telling us how he might do it is not just because he fears the truth would cost votes, but because he doesn't know.
We are a tragic species indeed. We can see ourselves drown, and can't do a thing to prevent it.
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