McCain offers a "Herbert Hoover" non-action to those being foreclosed

According to TPM Reader YA McCain, representing the elitist Republicans, asked two weeks ago

"how 4 million mortgages [could] cause this much trouble for us all," and suggested that if those borrowers just took fewer vacations and managed their budgets more effectively, they wouldn't be in trouble."

Let's remember now, he was a fighter pilot and a war hero forty years ago, but he graduated 6th from the bottom in his class of Annapolis. Not quite as bad as George Custer who graduated at the very bottom of his West Point class before leading his 7th Cav troops into disaster at the Little Big Horn, but this certainly indicates that McCain is not the sharpest tack in the box.

McCain parleyed his war hero status and a second marriage to a wealthy woman into a career in politics, but there is no indication that he ever got a lot smarter. Apparently he did catch some flack for his indifference to those who are having their homes foreclosed, so YA says he offered a new non-plan that conceals his indifference, but does nothing significant for the people being foreclosed. Here is YA's report on the new plan:

Today, he promised to help "every deserving American family or homeowner." So how many American families are deserving? McCain's top economic policy adviser, Douglas Holtz-Eakin, places the number between 200,000 and 400,000 households; just those families "who really need help."

Great. So to be clear, McCain thinks that millions of Americans are going to lose their homes, and all but a few hundred thousand are just getting what they deserve. Specifically, he's prepared to step forward and help only those who:

-Took out a subprime loan after 2005

-Can prove they were "creditworthy" at the time

-Are unable to pay that subprime loan

-But could pay a 30-year fixed rate loan

Of course, pretty much all those folks already qualify for assistance under the existing FHASecure program. McCain's proposal offers greater leverage over recalcitrant lenders, and shoulders some of the cost of restructuring the loans, but virtually everyone who meets his guidelines is already eligible for help. [Snip]

it's typical Republican bamboozlement. McCain says that perhaps a few hundred thousand homeowners deserve ever so slightly more help than they're already receiving, but that millions of others should lose their homes. And
it's worth pointing out that most analysts agree that the number of folks who would be helped by this plan is probably much smaller than Holtz-Eakin estimates. There's really not much difference between his initial position and his bold new plan - they both amount to inaction.

There it is. McCain has moved from indifference to the people being foreclosed to a refined plan that can be used to conceal the indifference but still does nothing effective.

Nothing effective to deal with the housing crunch and the Recession. That's Bush's position, also, and both are channeling that great conservative, Herbert Hoover, who similarly watched America sail into financial disaster and refused to act.

YA adds one more comment:

"John McCain says he'd be happy to see our troops in Iraq for another hundred years," the Democrats would do well to add, "John McCain says that millions of Americans deserve to lose their homes."

In the America that the conservatives are working hard to create there is no America, just a lot of individuals who are each on their own to fight, steal, rob and screw those around them to get ahead economically. The elite are the wealthy (like McCain) who are protected by their wealth. This is the Reagan Revolution, also known as the YoYo economy. That's "You're on your own," something demonstrated when Katrina hit New Orleans.

The World War II generation must be rolling in their graves as they watch Bush and his clone, McCain working to destroy America and pick its bones for their own wealth. But hey! The news media (especially FOX) has declared McCain a Maverick and he is a well-known war hero, so maybe he's good enough to elect President, right? Here is the example:



He'll just move in to the White House in time for his nap, I guess. He doesn't plan to take any actions, but at his age, he probably shouldn't exert himself too much anyway. A lot like Bush, who doesn't have the excuse of age, but has the same elitist idea that government is for and of the wealthy elites and the rest of us are here at their sufferance.

The homebuilding industry is in real trouble

From Calculated Risk:

The public builder BKs are coming. I'm not saying Horton will go BK [bankrupt], but more of the public builders probably will (like Levitt & Sons). There is simply too much capacity in the industry, plus too much debt, too much inventory, and poor demographics for housing in general. The next few years will be very difficult for the homebuilders, and I suspect 2008 will make 2007 look like a good year.

Greenspan kept the U.S. economy afloat during the Bush administration by lowering interest rates and encouraging both mortgage lending and the taking our of second mortgages to pay off credit card debt.

Consumer demand has been 70% of total demand and demand determines the level of the economy. Since real wages have not increased since 2000, the only source for increased consumer demand has been debt (credit card and then second mortgages or total refinancing to get access to the increased value from housing price increase during the housing bubble) or more work - moonlighting or overtime, or more work by the spouse - to fund consumer spending.

Now the housing bubble has collapse followed by the mortgage market, and as a reaction the credit markets which had expanded by borrowing on the supposedly secure home mortgages has also collapsed. The impact on the homebuilding industry is only just beginning.

Atrios points out that the unemployment rate is inching up. The CNBC report he links to also points out that inflation is creeping up. the New York Times also points out that Federal Reserve is pumping money into the economy by letting banks borrow directly from the fed - that indicates that the banks can't get the money they need to keep operating from the markets, so they are going hat-in-hand to the fed. That money being pumped into the economy, together with increased prices for imports (especially oil) as the dollar drops is going to cause more inflation.

The fed is trying to keep the inevitable 2008 recession from being a serious one, but what they are really doing is kicking the can down the road so that the coming Democratic President is in office before they let the full force of the Recession hit. Like Greenspan did in Bush's first term, the fed will keep interest rates as low as possible during the Republican administration, then turn around and deal with the inflation they are currently causing by sharply increasing interest rates in 2009.

This is not a conspiracy theory. Look at what Greenspan did - lowered interest rates through the 2004 Presidential election and released the mortgage brokers to issue junk mortgages to people who couldn't pay them back. Then, immediately after Bush was sworn in the second time he started increasing the interest rates sharply, killing the housing bubble he had created. The timing makes it clear that it was all about manipulating the economy to ensure Bush's reelection.

Bernanke is kicking the can of recession down the line until after the November 2008 election to protect as many Republicans as possible. Then, the Federal Reserve will have to deal with the inflation the only way possible - make the Recession even worse by increasing the interest rates.

The Wall Street Republicans got us into this mess to keep Bush in office. They will do everything they can to prevent the Democrats from being able to deal with the problems.

Count on it. Watch the the fed let inflation grow in 2008 along with a mild recession, then watch the fed crack down in early 2009 and end the inflation with increased interest rates that cause a hard recession. The Wall Street Republicans wouldn't have it any other way.

Another mortgage company in trouble

From Bloomberg:

Nov. 15 (Bloomberg) -- The risk of Residential Capital LLC defaulting on its debt soared on concern the biggest privately held U.S. mortgage lender may violate bank loan agreements, trading in credit-default swaps show.

Traders are speculating that Cerberus Capital Management LP and General Motors Corp. may allow the Minneapolis-based mortgage unit of GMAC LLC to fall into bankruptcy as the U.S. housing slump continues to deepen.

``As we continue to see conditions get worse and worse, the company clearly at some point has to reevaluate,'' Kathleen Shanley, an analyst at Gimme Credit Publications Inc. in Chicago, said in an interview. ``ResCap has an awful lot of secured debt, which raises the issue of `is it worth it.'''

Credit-default swap investors are demanding upfront payments of 37 percent and 500 basis points a year to protect ResCap bonds from default for five years, the highest on record, according to CMA Datavision in London. That compares with 32.5 percent upfront and 500 basis points a year yesterday. The cost rises as investors grow less confident in a company's ability to repay debt.

Credit-default swaps are financial instruments that cover losses on the underlying debt if the borrower fails to meet payments. A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

A buyer of contracts for ResCap would pay $3.7 million upfront and $500,000 a year.

As long as new stories about companies in trouble because of the housing slump or the credit crisis keep appearing, things are getting worse rather than better.

Our mismanaged economy is in a bind

The LA Times reports today that

The supply of unsold U.S. homes ballooned to an 18-year high in August as demand for existing homes fell to a five-year low, according to a report by the National Assn. of Realtors. The Washington-based trade group blamed the onset of the global credit crisis last month for the drop in sales. [Snip]

Also today, a separate report indicated that home prices were falling at an increasing rate. The closely watched S&P/Case-Shiller home prices index, which tracks results in metropolitan areas and is considered a leading measure of U.S. single-family home prices, showed an annual decline of 4.5% for the 12 months ended in July, representing the biggest drop since 1991.

Remember that

GDP = Consumer spending + Investment spending + Government Expenditure

and the only one of those three which has been growing since 2000 has been consumer spending. Se we need to look at the sources of money that has allowed that consumer spending.

Since wages have not gone up in that time, Consumption (and thus the total Gross Domestic Product (GDP)) has depended on the increase in home prices (provides cash) and new home production (provides wages) to keep the economy at its already rather anemic growth level.

The drop in sales of homes and in home prices strikes at the heart of both available cash (second mortgage or sale of the house) and at employment. That's why the Federal Reserve dropped the federal funds rate by half a percentage point, to 4.75 percent last week.

The stock market, in a mass stampede based on a fantasy made from hope over reality, immediately increased sharply. Unfortunately, the dollar dropped sharply against the Euro and has dropped to match the Canadian dollar for the first time in thirty years. The price of oil by the barrel is the highest it has ever been in dollar terms, and this is not supply and demand for oil. It is a precursor of inflation since all the goods we import will get more expensive.

The Fed's reaction to inflation is to increase interest rates and slow down the economy, but that does not work when the inflation results from a drop in the dollar. So we are going to see either inflation or a slowed-down economy and there is nothing the Federal Reserve can do about it using monetary methods.

Inflation might be preferred to keep unemployment low, but it will also kick up the interest rates as lenders in anticipation of increased inflation start to increase the interest rate they charge for loaning money.

If the government can take actions that puts the credit markets back onto an even keel (and no other agency is large enough to do anything at all) and the whole problem can be limited in time, maybe it won't be severe. Whether that is even possible is beyond my limited knowledge.

However it turns out, I think 2008 is going to be an economically rocky year.

DOW Jones down sharply for second day

Apparently investors have been looking at the recent reports of trouble in the mortgage market and have suddenly decided to ignore the politically motivated "Great Economy! Rah! Rah! Rah!" that has been coming out of Washington, D.C.

From the Associated Press by way of Yahoo Financial News:

Thursday July 26, 4:22 pm ET
By Joe Bel Bruno, AP Business Writer

Stocks Plunge on Lending Worries, Dow Industrials Plunge More Than 300 Points

NEW YORK (AP) -- Wall Street suffered one of its worst losses of 2007 Thursday, leading a global stock market plunge as investors succumbed to months of worry about the mortgage and corporate lending markets. The Dow Jones industrials closed down more than 310 points after earlier skidding nearly 450.

Investors who had been able for months to largely shrug off discomfort about subprime mortgage problems and a more difficult environment for corporate borrowing finally decided it was time to sell after the Commerce Department issued another disappointing home sales report.

Feeding the plunge were concerns that higher corporate borrowing costs will curb the rapid pace of takeovers that had driven stocks higher this year. Investors also feared the sluggish environment for home sales and continued defaults in subprime loans would spur debt defaults and weigh on corporate earnings.

While stocks plummeted, investors poured money into the safe haven of the bond market. The soaring price of Treasurys pulled yields lower, and the rate on the 10-year note plunged to 4.79 percent from late Wednesday's 4.90 percent.

"Worries that have been out there for the past couple of years are coming to a head right now," said investment strategist Edward Yardeni, president of Yardeni Research Inc. "It's show time."

The fact that the economy is not too stable is not surprising news, but the recent reports of trouble have all come at the same time.

"Wall Street continues to walk a wall of worry," said Ryan Larson, a senior equity trader at Voyageur Asset Management. "The housing market continues to be a story, and nobody knows when it will rebound. But, the real concerns are about credit and oil pushing higher."

Also stunting stocks was the Commerce Department's disappointing durable goods report. Though sales of big-ticket items increased by 1.4 percent last month to a seasonally adjusted $217.07 billion, durable goods excluding transportation equipment had an unexpected drop.

The Labor Department reported that jobless claims fell by 2,000 to 301,000 in the week ended July 21, slightly better than analysts' expectations.

Investors also reacted negatively as oil prices climbed to almost $77 per barrel during the session, stoking the market's worries about inflation. However, crude pared gains in the afternoon when a barrel of light sweet crude fell $1.23 to $74.95.

The stock market moves largely based short term reaction to new reports. That is what we are seeing here. The theory is that anything that is a long-term prediction for the market is already built into the market behavior, so short term moves do not create a long term trend. But the lack of large, sudden movements of the market can also indicate that the short-term traders are failing to recognize long term changes that will go against them. A sudden flurry of mostly negative reports from different sectors of the market will create a short term drop like the one we have seen yesterday and today, but the drop itself signals that a lot of people need to get their heads up out of day-to-day trading and look at the longer term trends.

We have just seen the short term market reaction (and very likely will see more Friday) but we have not yet seen the results of reexamination of long term economic trends. We may see example of those longer term evaluations on the market after the weekend.

I can't say that I see the longer term prospects for the market are going to look especially attractive, but I'm just one person with the limited information I can find, limited time, and other interests. Now that the market has gotten the interest of the professionals, they are parking their investment money in less risky locations (the bond market) and we are going to get some idea of what the longer term prospects for the money-makers and money-lenders really are when they have begun to decide what, if anything, has changed. They are right now collecting information from sources they don't look at on a day-to-day basis, and over the weekend they are going to be discussing those results among themselves. That's why I think the first real indicators of how they will invest their money will really start after the weekend.

My personal bet is that the increasing stock market is over for a while. But that is only a bet, not sure knowledge. I don't like the long-term trends, but I have no clue right now whether the short-term traders will try to build a rally or will try to get their money to safer locations. That is psychology more than economics.

We'll begin to get real hints early next week. Tomorrow is almost certainly further down as more money goes to less risky locations. But as I say, that is my bet, not my certainty.