Financial News

[Balta1701]

No, they're really not.

Well, considering we're going to try your method and actually worry about inflation rather than mine, do you want to put a number on how long you think unemployment will remain above 8%?

 

I'm going to say 2016.

 

Similarly, when will the Federal Reserve have raised rates above 4%?

[NorthSideSox72]

Well, considering we're going to try your method and actually worry about inflation rather than mine, do you want to put a number on how long you think unemployment will remain above 8%?

 

I'm going to say 2016.

 

Similarly, when will the Federal Reserve have raised rates above 4%?

I don't know when its a specific number, its not even a prediction I'd try to make. 2016? That's an awfully long way out.

 

[Balta1701]

I don't know when its a specific number, its not even a prediction I'd try to make. 2016? That's an awfully long way out.

Let me be a little more vague...I think it'll be a lot closer to 2016 than to 2012. Probably a bit too specific there. I think we have that far to go...and I think that right now, worrying about interest rates going up due to government spending is tantamount to saying that we are not losing government jobs fast enough...and we're losing government jobs right now faster than the private sector can create them.

[Balta1701]

The Post notes that the government has been ignoring warnings that the foreclosure mess was going to be a major problem for months.

Consumer advocates and lawyers warned federal officials in recent years that the U.S. foreclosure system was designed to seize people's homes as fast as possible, often without regard to the rights of homeowners.

 

In recent days, amid reports that major lenders have used improper procedures and fraudulent paperwork to seize properties, some Obama administration officials have acknowledged they had been aware of flaws in how the mortgage industry pursues foreclosures.

 

But the officials said they could take only limited action to address the danger. In part, this was because they wanted lenders' help carrying out federal programs to modify mortgages that had fallen into default or were poised to do so.

 

New concerns about improper practices - such as those involving faked documents or "robo-signers" who signed tens of thousands of documents without reviewing them - have prompted the mortgage servicing arms of the country's largest banks to freeze millions of foreclosures. As momentum builds for a national moratorium, the administration has begun assessing the potential impact, examining the threat it could pose for the ailing housing market and the wider financial system.

 

There is no evidence so far that the specific abuses made public in the past few weeks were known to government officials. Nor is it clear whether they were aware that the process of the selling and reselling of mortgages among financial firms - which became extremely common and highly profitable during the housing boom - was raising legal questions about who actually owned the loans and had the right to foreclose if they went bad.

 

But government officials were told repeatedly that the mortgage servicing industry was deeply troubled, according to administration officials, consumer advocates, housing lawyers and congressional aides.

 

"Have we talked to them about servicer incompetence? Repeatedly. Have we talked to them how the servicer system is broken? Yes," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "Have we talked to them about the costly stream of errors made by servicers? Yes."

[NorthSideSox72]

Let me be a little more vague...I think it'll be a lot closer to 2016 than to 2012. Probably a bit too specific there. I think we have that far to go...and I think that right now, worrying about interest rates going up due to government spending is tantamount to saying that we are not losing government jobs fast enough...and we're losing government jobs right now faster than the private sector can create them.

Who's worrying? Ultimately, it will be a healthy thing.

 

[Balta1701]

Who's worrying? Ultimately, it will be a healthy thing.

Wha?

[NorthSideSox72]

Wha?

If interest rates stay this low and inflation doesn't kick in at some point, then there is no recovery.

 

[Balta1701]

If interest rates stay this low and inflation doesn't kick in at some point, then there is no recovery.

Well yeah...which is why you don't worry about the volume of money kicked out until the recovery has taken hold and unemployment has significantly gone down (to the point that the stuff written about by today's Nobel Prize winner, job-lock and structural unemployment, become important).

 

Until you get to the point that you run into the structural damage done by leaving people unemployed for >2 years, inflation shouldn't be a concern at all. And if it does become a concern...the amount of steps the fed has taken to fight deflation give it enormous amounts of room to fight inflation.

[NorthSideSox72]

Well yeah...which is why you don't worry about the volume of money kicked out until the recovery has taken hold and unemployment has significantly gone down (to the point that the stuff written about by today's Nobel Prize winner, job-lock and structural unemployment, become important).

 

Until you get to the point that you run into the structural damage done by leaving people unemployed for >2 years, inflation shouldn't be a concern at all. And if it does become a concern...the amount of steps the fed has taken to fight deflation give it enormous amounts of room to fight inflation.

You just agreed with me.

 

[Balta1701]

You just agreed with me.

Here's the original post that got me started.

Stocks are not overvalued - stocks are priced as they are only partially because of expectations of general recovery. The other big thing looming that the markets know, is that as the economy does grow a bit more, interest rates and inflation HAVE to rise. There is no way around it, with the amount of money having been shoved out there. And that means, even in a neutral economy, money will flow into the equity markets, and stocks will rise. They know that's coming, but no one knows for sure when.

 

 

The point I get from this is that the writer is arguing that "a bit" of growth will likely produce substantial inflation and increases in interest rates because of the volume of money that has been put out by the Fed.

 

My disagreement is that I think it needs substantial growth before that becomes even a remote concern, not just a bit. On top of that...at current growth rates...the level of substantial growth it would take to trigger legitimate inflation will not be reached for half a decade or more, and we're about to go for contractionary fiscal policy after November.

 

So yeah, if we're agreeing now, I still disagree with the sentiment in your original post. If I misinterpreted it tell me so. I think that interest rate increases are a decade away unless we actually get a >$500 billion-ish stimulus package through, and that ain't happening.

[NorthSideSox72]

Here's the original post that got me started.

 

 

 

The point I get from this is that the writer is arguing that "a bit" of growth will likely produce substantial inflation and increases in interest rates because of the volume of money that has been put out by the Fed.

 

My disagreement is that I think it needs substantial growth before that becomes even a remote concern, not just a bit. On top of that...at current growth rates...the level of substantial growth it would take to trigger legitimate inflation will not be reached for half a decade or more, and we're about to go for contractionary fiscal policy after November.

 

So yeah, if we're agreeing now, I still disagree with the sentiment in your original post. If I misinterpreted it tell me so. I think that interest rate increases are a decade away unless we actually get a >$500 billion-ish stimulus package through, and that ain't happening.

 

I'll try an illustration...

 

50 shrimp boats in the harbor. Conditions start to deteriorate - lowered demand and/or poor conditions for fishing, doen't matter - and boats start to close up shop. The boats able to survive, in the short term, tend to play it careful, just waiting it out and trying to survive. But as more boats fail, you essentially create opportunity. Some of those surviving boats will start to make aggressive plays for more of the market share, because even when things are bad, there is still demand for shrimp, and capitalism still dictates competition to survive and thrive. This happens in every economic cycle, macro to the US or even specific to an industry. And when interest rates are insanely low, and labor easy to come by, you strike.

 

Now, remember, we're talking 9.7% UE core, or 17% UE total. A healthy economy might be 7-8% core and 14% total, and a very healthy one at 5% and 12% or the like. So we're talking a band of 2 to 4% between current and fairly healthy.

 

How many shrimp boats is that? And how many have already closed up shop?

 

Not everyone will stay on the sidelines untul 2016, which would be 9 years of recession.

 

[Balta1701]

50 shrimp boats in the harbor. Conditions start to deteriorate - lowered demand and/or poor conditions for fishing, doen't matter - and boats start to close up shop. The boats able to survive, in the short term, tend to play it careful, just waiting it out and trying to survive. But as more boats fail, you essentially create opportunity. Some of those surviving boats will start to make aggressive plays for more of the market share, because even when things are bad, there is still demand for shrimp, and capitalism still dictates competition to survive and thrive. This happens in every economic cycle, macro to the US or even specific to an industry. And when interest rates are insanely low, and labor easy to come by, you strike.

The thing that I think counteracts your example is that the boats that are shut down can come back online at ease with just small repairs in the event that things turn around. That's the thing that prevents "aggressive plays for market share" from pushing inflation until you start running out of spare boats.

 

There's also the bigger problem that if they produce more and go for a larger market share...they can't sell the stuff because it's contaminated by oil their customers have no more money. That continues to be the real problem...the demand side. It's not that they can't produce more, it's that they can produce plenty but can't sell it.

[NorthSideSox72]

The thing that I think counteracts your example is that the boats that are shut down can come back online at ease with just small repairs in the event that things turn around. That's the thing that prevents "aggressive plays for market share" from pushing inflation until you start running out of spare boats.

 

There's also the bigger problem that if they produce more and go for a larger market share...they can't sell the stuff because it's contaminated by oil their customers have no more money. That continues to be the real problem...the demand side. It's not that they can't produce more, it's that they can produce plenty but can't sell it.

That's what I was illustrating with the real difference in employment. People see a recession, they see UE go up, and they think no one can spend money. Except, well, that's not nearly true - the actual change in demand isn't quite so dramatic. GDP numbers show you this.

 

[Balta1701]

I'll try an illustration...

 

50 shrimp boats in the harbor. Conditions start to deteriorate - lowered demand and/or poor conditions for fishing, doen't matter - and boats start to close up shop. The boats able to survive, in the short term, tend to play it careful, just waiting it out and trying to survive. But as more boats fail, you essentially create opportunity. Some of those surviving boats will start to make aggressive plays for more of the market share, because even when things are bad, there is still demand for shrimp, and capitalism still dictates competition to survive and thrive. This happens in every economic cycle, macro to the US or even specific to an industry. And when interest rates are insanely low, and labor easy to come by, you strike.

 

Now, remember, we're talking 9.7% UE core, or 17% UE total. A healthy economy might be 7-8% core and 14% total, and a very healthy one at 5% and 12% or the like. So we're talking a band of 2 to 4% between current and fairly healthy.

 

How many shrimp boats is that? And how many have already closed up shop?

 

Not everyone will stay on the sidelines untul 2016, which would be 9 years of recession.

You know, the more I thought about this post last night, the more I wanted to make an example of it...because I think it illustrates very well exactly the thinking of our political class right now and why the politicians have chosen to allow us to stay in this hole rather than get out of it; they're unable to think about anything but the supply side.

 

Take your specific example...boats starting to close up shop. There is a huge difference between lowered demand and poor fishing conditions because the response is totally different. If the fishing conditions are poor and that is what has lowered demand, that is in essence a business problem; business has used its resources inefficiently and things need to be repurposed. Customers still have money to spend but they're choosing to spend it elsewhere. This is a supply side issue. This is more like the 2001 Recession. Consumer spending continued increasing through the full 2001 recession despite an increase in unemployment...the thing that decreased significantly was business investment.

 

The solution on that issue is to help business repurpose itself. Fishing conditions have deteriorated? Well, either the government can step in and help clean up the oil that has ruined the fishing, or the Fed can create conditions such that it's cheap enough for the business to invest in new ways of producing non-oil-soaked fish. Business tax credits can make a dent here. Job training programs can make a dent. Better regulation can make a dent. In that case...it does exactly what you said; the better prepared companies will eventually find a way to make moves for increased market share, and those moves are inflationary; they buy out their competitors, or they invest in a larger fishing fleet. Eventually if you keep the business credits running, you push on the inflation button; that is 2006.

 

On the other hand...if the problem is that their customers saw 1/3 of their wealth evaporate in the space of a few months and therefore stopped buying the product...no amount of supply-side intervention will do anything. If you offer business tax credits for expansion, cut the capital gains tax, and put more money in the hands of the wealthy, what can they do with it? If they invest in new ways to produce fish, it doesn't matter, because that doesn't make their customers able to buy anything else. They might invest some of it while investment is cheap, but they're going to be cautious because they won't know when their customers will return.

 

The only way for them to truly make a move for market share is to make a deflationary move. They need to cut costs to undercut their competitors, or they need to increase the quality of what they're offering without increasing the price. So they cut half their staff and run their boats out there with skeleton crews, losing a little production but pushing prices down. Or they invest in a fancy new GPS system, but then they use that increase in productivity to cut back on employees. Neither of those efforts are inflationary.

 

Our government is so used to thinking about big business that the sensible center has no means to deal with a collapse on the demand side. The solution to every problem previously is tax cuts and business investment credits. Eventually maybe business comes up with a super new technology that drags you out of that hole (solar panels on the ships!), but that's a roll of the dice and customers still might not have the money to buy them. The way out of that hole is to get the people who stopped buying fish back buying them. It's a demand side problem and it can't be solved without getting demand back up. In that situation, steps that usually would be inflationary produce no reaction, because the problem isn't on that side.

[NorthSideSox72]

You know, the more I thought about this post last night, the more I wanted to make an example of it...because I think it illustrates very well exactly the thinking of our political class right now and why the politicians have chosen to allow us to stay in this hole rather than get out of it; they're unable to think about anything but the supply side.

 

Take your specific example...boats starting to close up shop. There is a huge difference between lowered demand and poor fishing conditions because the response is totally different. If the fishing conditions are poor and that is what has lowered demand, that is in essence a business problem; business has used its resources inefficiently and things need to be repurposed. Customers still have money to spend but they're choosing to spend it elsewhere. This is a supply side issue. This is more like the 2001 Recession. Consumer spending continued increasing through the full 2001 recession despite an increase in unemployment...the thing that decreased significantly was business investment.

 

The solution on that issue is to help business repurpose itself. Fishing conditions have deteriorated? Well, either the government can step in and help clean up the oil that has ruined the fishing, or the Fed can create conditions such that it's cheap enough for the business to invest in new ways of producing non-oil-soaked fish. Business tax credits can make a dent here. Job training programs can make a dent. Better regulation can make a dent. In that case...it does exactly what you said; the better prepared companies will eventually find a way to make moves for increased market share, and those moves are inflationary; they buy out their competitors, or they invest in a larger fishing fleet. Eventually if you keep the business credits running, you push on the inflation button; that is 2006.

 

On the other hand...if the problem is that their customers saw 1/3 of their wealth evaporate in the space of a few months and therefore stopped buying the product...no amount of supply-side intervention will do anything. If you offer business tax credits for expansion, cut the capital gains tax, and put more money in the hands of the wealthy, what can they do with it? If they invest in new ways to produce fish, it doesn't matter, because that doesn't make their customers able to buy anything else. They might invest some of it while investment is cheap, but they're going to be cautious because they won't know when their customers will return.

 

The only way for them to truly make a move for market share is to make a deflationary move. They need to cut costs to undercut their competitors, or they need to increase the quality of what they're offering without increasing the price. So they cut half their staff and run their boats out there with skeleton crews, losing a little production but pushing prices down. Or they invest in a fancy new GPS system, but then they use that increase in productivity to cut back on employees. Neither of those efforts are inflationary.

 

Our government is so used to thinking about big business that the sensible center has no means to deal with a collapse on the demand side. The solution to every problem previously is tax cuts and business investment credits. Eventually maybe business comes up with a super new technology that drags you out of that hole (solar panels on the ships!), but that's a roll of the dice and customers still might not have the money to buy them. The way out of that hole is to get the people who stopped buying fish back buying them. It's a demand side problem and it can't be solved without getting demand back up. In that situation, steps that usually would be inflationary produce no reaction, because the problem isn't on that side.

This is all very interesting, but, you are focusing on only half my post. Well, its the wordier half, so its more like two thirds, but the point is, you are pretty much ignoring my comments about UE and GDP numbers. The demand side, I didn't go into as much detail, because I thought the point was actually simpler. How many shrimp boats is the lowered demand worth? And how far beyond that will the initial reaction go, causing the inevitable bounce? Which other boats will decide to take advantage of the overcorrection that always occurs? And what makes you think that you need an increase in demand to cause more competition? Or, what makes you think that aggressive plays in the market mean increasing output?

 

[Balta1701]

This is all very interesting, but, you are focusing on only half my post. Well, its the wordier half, so its more like two thirds, but the point is, you are pretty much ignoring my comments about UE and GDP numbers. The demand side, I didn't go into as much detail, because I thought the point was actually simpler. How many shrimp boats is the lowered demand worth? And how far beyond that will the initial reaction go, causing the inevitable bounce? Which other boats will decide to take advantage of the overcorrection that always occurs? And what makes you think that you need an increase in demand to cause more competition? Or, what makes you think that aggressive plays in the market mean increasing output?

You'll have competition in either case. However, in the case of the depressed-supply market, moves to increase market share are expansionary. If I want to increase my market share in that case, I expand. I produce more of my product because I'm able to sell more of it. That involves investing in something to improve my business, I can't just rest on my laurels. If I start aggressively cost-cutting, it can go in the wrong direction by decreasing quality at a time when consumers are able to spend. That's an inflationary move.

 

If I take an inflationary move by aggressively expanding in a demand-constrained market, I'm going to wind up wasting my investment. We have the capacity to create as many houses and cars as we could in 2007, and we have as many or more hotel rooms, service locations, etc. But now, if I want to expand my market share by building another factory, I build that factory and everything it produces sits there unsold. I open a giant new Vegas hotel and 2/3 of the rooms sit there empty unless I start aggressively cutting prices. I might increase market share but I've killed profit margins and I'm just playing for survival...and now every one of my competitors is forced to cut their prices to try to avoid losing market share. It's deflationary, and it pushes job losses throughout. The trap comes if those job losses then start forcing further cuts to avoid continuing market share declines; that's the deflationary spiral.

 

We've managed to avoid the spiral so far by putting enough people back to work with the stimulus package that we stopped losing huge numbers of jobs; it did exactly what it was supposed to do at its size, prevent everything from spiraling down. But there's still a huge output gap, there is still huge unemployed capacity, and there is still a hugely depressed demand side that isn't going to be solved until people have money to spend.

[NorthSideSox72]

You'll have competition in either case. However, in the case of the depressed-supply market, moves to increase market share are expansionary. If I want to increase my market share in that case, I expand. I produce more of my product because I'm able to sell more of it. That involves investing in something to improve my business, I can't just rest on my laurels. If I start aggressively cost-cutting, it can go in the wrong direction by decreasing quality at a time when consumers are able to spend. That's an inflationary move.

 

If I take an inflationary move by aggressively expanding in a demand-constrained market, I'm going to wind up wasting my investment. We have the capacity to create as many houses and cars as we could in 2007, and we have as many or more hotel rooms, service locations, etc. But now, if I want to expand my market share by building another factory, I build that factory and everything it produces sits there unsold. I open a giant new Vegas hotel and 2/3 of the rooms sit there empty unless I start aggressively cutting prices. I might increase market share but I've killed profit margins and I'm just playing for survival...and now every one of my competitors is forced to cut their prices to try to avoid losing market share. It's deflationary, and it pushes job losses throughout. The trap comes if those job losses then start forcing further cuts to avoid continuing market share declines; that's the deflationary spiral.

 

We've managed to avoid the spiral so far by putting enough people back to work with the stimulus package that we stopped losing huge numbers of jobs; it did exactly what it was supposed to do at its size, prevent everything from spiraling down. But there's still a huge output gap, there is still huge unemployed capacity, and there is still a hugely depressed demand side that isn't going to be solved until people have money to spend.

You seem to think that making aggressive moves to take over more market share mean a net increase in total market production. That is not the case. The total market can decrease, and has and will, while certain companies take chunks of the market that is leaving other companies because the struggle or fail.

 

To try to extend my demand side argument to the shrimp boats, here is what typically happens. Demand decreases, prices paid for shrimp decrease, and some boats start shutting down (some temporarily, some permanently). Maybe 5 of 50 boats shuts down, let's say, to make it an easy number to work with. Among the other 45 shrimp boat captains, some of them will take some of the market that 5 boats was using. They can do it more cheaply than the other companies could, because labor is in abundance and expanding an existing business generally has less overhead than a parallel company (new or existing). And they don't actually have to push it back up to the level of all 5 - maybe they take 2 of 5 worth of market. But they do it more efficiently, and hire some of the people from those other boats in the process. They can sell more to make up the price gap, and still do well.

 

This is a commonplace trend in recessions, its what usually drives the economy out of it (that and new shrimp boats or new shrimping technologies).

 

But what ALSO tends to happen is, demand and prices only decrease by, say, 3%. But 10% of boats shut down due to various factors. This overreaction isn't necessarily intentional - its more of a Darwinian thing, the weak players die first when things get tough. But it inevitably happens beyond the actual decreases in demand. If you have any doubt of that, look at the overall economic numbers - GDP has been increasing for a number of quarters now, yet employment has yet to recover. Its the natural cycle of things.

 

[Balta1701]

Switching topics again...I'm starting to think that the foreclosure fraud issue poses a much bigger systemic economic risk than I would have thought a few weeks ago.

It featured Adam Levitin, a Georgetown University Law professor who specializes in, among many other financial regulatory issues, mortgage finance. Levitin says the documentation problems involved in the mortgage mess have the potential "to cloud title on not just foreclosed mortgages but on performing mortgages."

 

....

 

The mortgage is still owed, but there's going to be a problem figuring out who actually holds the mortgage, and they would be the ones bringing the foreclosure. You have a trust that has been getting payments from borrowers for years that it has no right to receive. So you might see borrowers suing the trusts saying give me my money back, you're stealing my money. You're going to then have trusts that don't have any assets that have been issuing securities that say they're backed by a whole bunch of assets, and you're going to have investors suing the trustees for failing to inspect the collateral files, which the trustees say they're going to do, and you're going to have trustees suing the securitization sponsors for violating their representations and warrantees about what they were transferring.

[StrangeSox]

My neighbor, who has been dead for about a year now, is being evicted on Monday.

[Balta1701]

I wish i could excerpt this whole thing. Read the rest and I'm interested in replies.

You thought the foreclosure mess was bad? You’re right about that. But it gets so much worse once you start adding in a whole bunch of parallel messes in the world of mortgage bonds. For instance, as Tracy Alloway says, mortgage-bond documentation generally says that if more than a minuscule proportion of notes in a mortgage pool weren’t properly transferred, then the trustee for the bondholders can force the investment bank who put the deal together to repurchase the mortgages. And it’s looking very much as though none of the notes were properly transferred.

 

But that’s not even the biggest potential problem facing the investment banks who put these deals together. It also turns out that there’s a pretty strong case that they lied to the investors in many if not most of these deals.

 

I mentioned this back in September, and I’ve been doing a bit more digging since then. And I’m increasingly convinced that the risk to investment banks isn’t only one of dodgy paperwork; there’s also a serious risk of massive lawsuits from the SEC or other prosecutors, as well as suits from individual mortgage investors.

[NorthSideSox72]

I wish i could excerpt this whole thing. Read the rest and I'm interested in replies.

Flushing out these problems is a good thing. I don't think the impact of it will be anything like, say, the toxic unwind, in terms of scale. So that's good. But it could still have an impact, though I think the impact will be uneven (big for some banks, none for others). This sort of thing is healthy in the long run, making the industry pay for its messes.

 

Problem is this run we seem to be making at freezing all foreclosures, etc. Doing that for any significant length of time will be devastating, a far worse impact that any of the current problems going on with existing mortgages and their holders.

 

[Balta1701]

Problem is this run we seem to be making at freezing all foreclosures, etc. Doing that for any significant length of time will be devastating, a far worse impact that any of the current problems going on with existing mortgages and their holders.

Well, the counterpoint is that every time a bank or an investor forecloses on someone when they don't have the correct paperwork, they're opening themselves up to a lawsuit. There seems like there's the potential for a class action suit here involving literally millions of people if they don't clean this up, and they haven't figured out how to clean it up despite being 2+ years into the crisis.

[NorthSideSox72]

Well, the counterpoint is that every time a bank or an investor forecloses on someone when they don't have the correct paperwork, they're opening themselves up to a lawsuit. There seems like there's the potential for a class action suit here involving literally millions of people if they don't clean this up, and they haven't figured out how to clean it up despite being 2+ years into the crisis.

Class action only works if it was done wrong in the same way, across "millions" of mortgages. And further, such a class action would only succeed if the problems in foreclosure were found to be material in any way. Further still, the amount of damages they could claim are only significant if it was found that the foreclosure action itself was improper, because any other finding would only results in small liability.

 

So for all the bluster we are seeing over this, unless the foreclosures are all beyond messy and downright fraudulent or illegal, I don't see this becoming a huge impact.

 

[Balta1701]

So for all the bluster we are seeing over this, unless the foreclosures are all beyond messy and downright fraudulent or illegal, I don't see this becoming a huge impact.

If you read the data given in that Reuters link...that could well be the case for on the order of 40-50% of them.

[NorthSideSox72]

If you read the data given in that Reuters link...that could well be the case for on the order of 40-50% of them.

No, the article is saying 40-50% of them could be "sold" back to the underwriter. That means it failed to meet underwriting requirements, which certainly would include flawed foreclosures, but also an array of other things. The author is making a leap over the hole in his theory, without addressing what's there.

 

I mean, yes, if indeed 40-50% of foreclosures were materially flawed in their execution in a way that directly effected the homeowner, or if the mortgage itself was flawed in a similarly material way, then yeah, that could be a HUGE problem. But that isn't the case here, at least in so far as this author's exploration goes.