How Fannie n' Freddie Got Fucked Up

The Washington Post has a good article in today's edition noting that for years people pointed out the warning signs regarding Freddie Mac and Fannie Mae. Thing was, too many people in Congress and the government had a piece of the action. So rather than pursue any kind of reform that would ensure the companies were solvent, they bullied and intimidated the people who dared raise any warnings:

From a Washington think tank to the halls of Congress, from the Treasury to the Federal Reserve, from the Clinton to the Bush administrations, critics of the government-sponsored mortgage giants have long argued that they were allowed to operate with financial cushions that were too thin to support their far-reaching financial risks.

The critics argued that regulators should be empowered to require deeper capital cushions at Fannie Mae and Freddie Mac, but their persistent efforts were thwarted in the face of the companies' formidable lobbying. Many members of Congress defended the companies, contending that efforts to rein them in were tantamount to an assault on housing.

They were quite brazen about it too:

The political battle lines were drawn by 2000, when a senior Clinton administration official called on Congress to take steps that might have diminished the companies' special status. Treasury Undersecretary Gary Gensler also urged that regulators be given more power to set capital requirements for Fannie Mae and Freddie Mac.

The companies fought back.

"We think that the statements evidence a contempt for the nation's housing and mortgage markets," Freddie Mac spokeswoman Sharon J. McHale said at the time.

Even after Freddie Mac was shown to have manipulated earnings, Congress remained deadlocked over legislation to create a stronger regulator. Opposing one such bill in 2004, Sen. Charles E. Schumer (D-N.Y.) argued that a hostile regulator could use the proposed powers to choke the companies.

When a federal regulator accused Fannie Mae of cooking its books to increase bonuses, lawmakers lined up to denounce the regulator. Rep. William L. Clay Jr. (D-Mo.) said a House panel had no business holding a hearing on the matter -- "unless this is truly a witch hunt." Fannie Mae was later found to have overstated profits by $6.3 billion.

Former representative Richard H. Baker (R-La.), who chaired a subcommittee that oversaw the companies, struggled for years to rein them in and tried to show they were being managed for the enrichment of their executives. When Baker obtained data on Fannie Mae pay, a lawyer for the company threatened him with personal liability if he made it public, Baker recounted last week.

Also worth checking out, Mickey Kaus' dismantling of Paul Krugman's recent column on the matter.

Truckers Now Spending Whore Money On Gas Instead

The economic downturn continues to impact honest, hard-working folks, according to this AP story:

RENO, Nevada (AP) -- Rising fuel prices are putting a pinch on the world's oldest profession.

Nevada brothels that cater to long-haul truckers are offering gas cards and other promotions after seeing business decline as much as 25 percent from a year ago, industry officials said.

Geoffrey Arnold, president of the Nevada Brothel Owners' Association, said truckers account for up to 75 percent of business at the state's rural brothels along Interstate 80 and U.S. Highway 95.

He said business is down about 19 percent at his two northern Nevada brothels along I-80: Donna's Ranch in Wells and Donna's Battle Mountain Ranch.

"We're being affected by the economy like everybody else," Arnold said. "Times are tougher ... and truckers have less money to spend. They're not high-rollers anymore."
***
Hardest hit are independent truckers, who must pay for their own fuel, said George Flint, a lobbyist for the brothel owners' association.

"So there goes your disposable income to have a little fun," Flint told the Reno Gazette-Journal.

Since January, the number of long-haul trucks based in Nevada has dropped by 4,100, or 12 percent, said Paul Eons of the Nevada Motor Transport Association.

So, there is a Nevada Brothel Owners' Association and it has a lobbyist? Wow, how does one get that job?

House Rent Boogie

An op-ed in today's Washington Post by Charles Steele Jr. argues that blacks and Latinos are taking the brunt of the mortgage meltdown:

The subprime mortgage fiasco is sending tremors through Wall Street and has brought the U.S. economy near (if not into) recession. For African Americans and Latinos -- the primary victims of the debacle -- the mortgage meltdown may widen the considerable gap in wealth that already exists between whites and people of color. Even worse, some proposals to fix the problem of limited access to credit may end up doing more harm than good.

"We estimate the total loss of wealth for people of color to be between $164 billion and $213 billion for subprime loans taken during the past eight years. We believe this represents the greatest loss of wealth for people of color in modern U.S. history," the Boston-based organization United for a Fair Economy noted in its report "Foreclosed: State of the Dream 2008."

A little later in the same article Steele notes this factoid:

As a result of laws enacted to address housing discrimination, the rate of African American homeownership rose from 42.3 percent in 1994 to 49.1 percent in 2004, the highest level in U.S. history. As great an achievement as that is, a 49.1 percent rate is about where white U.S. ownership stood in 1900.

Umm, Chuck, did it occur to you that there might be a connection between these two things? That adjusting the laws to put people whose finances may not be that great into homes may be one reason why we're having so many foreclosures? Just throwing it out there ...

Is that a Rebate Check in Your Pants, Or Are You Just Erect?

Brothels in Neveda getting hit hard by high fuel costs and a weakening economy are looking for creative ways to drum up business. Nothing beats the Bunny Ranch's special tax rebate promotion:

Media exposure certainly has its benefits. Featured in the ongoing HBO reality series, Cathouse, Hof's Bunny Ranch is going strong. While others brothels saw a slump in revenues, Hof experienced a 30 percent jump in May. But he's not resting on his laurels. Last week he began offering a recession special: The first 100 customers who show up with their tax rebate checks receive twice the "services" for the price of one. "We always give our customers the most bang for the buck," he says. "You bring your $600 check in, and we give you the $1,200 George Bush party--three girls and a bottle of champagne."

Full story here.

The Up Side of a Recession ...

... is that snooty yuppies have lately stopped bitching about urban sprawl. As the Washington Post reports:

Once the dominant topic in regional politics, taming residential development has largely been eclipsed by the fiscal woes created by the slowdown. Rising construction costs, plummeting property assessments, soaring foreclosures and high gas prices have local officials debating how to craft budgets with limited resources instead of arguing over new subdivisions.

It's a fiscal scenario affecting fast-growing areas across the country. In Collier County, Fla. (Naples), Sacramento County, Calif. (Sacramento), and Maricopa County, Ariz. (Phoenix), for example, strained income sources -- including impact fees for new construction and sales and property taxes -- means officials are debating a mix of deferring capital improvements, freezing hiring and scaling back services.

"Counties are getting hit right, left and sideways," said Jacqueline Byers, director of research for the National Association of Counties.

And of course this has sprawl fighters delighted:

Slow-growth advocates say the downturn will allow localities to "take a breather" and focus on improving existing communities rather than trying to keep up with the impact of booming growth.

It would have been nice if the Post writer had put two and two together and realized that this recession is what the anti-sprawl movement is basically about: ending economic growth because that's somehow better for us.

Whoa

Quote from Hillary Clinton right now on Jim Cramer about more market regulations, greater SEC and Fed powers: "..they just want the market to work its magic, you know, we haven't done that since the Great Depression"

Isn't it great when people get to make up history? Or as I like to say...Lie.

Related Hilliary-is-done-point, Obama gets an interview with Maria Bartiromo, Hillary gets Jim Cramer on MAD MONEY!!! Enough said.

Bonus pic of Maria added for no reason, other than I like to look at her.

Pre-Lunch Links

Zimbabwe update.

Who knew fax machines were such an important component of diplomatic relations on the Korean Peninsula?

Meanwhile, South Korea's Defense Ministry sent a fax message to the North Korean military asking it to stop trying to rile its neighbor. The North's moves came after the South's top military officer said last week the country could strike suspected North Korean nuclear targets if there were signs of an imminent atomic attack.

Meanwhile South Korea also complained that North Korea "never sends confirmation of receipt" of their faxes, and always "claims that the fax never went through, even when we (South Korea) have a confirmation on our end".

That's so 1995 Koreas. Word is, South Korea would have sent an email to North Korea's Hot Mail account, but their e-mails always get marked as spam so it is faxes or ICQ messages for the neighboring country.

Sen. Jim DeMint makes a lot of sense when he says the tax-code makes no sense:

[...]a change in the American tax code two years ago that has raised considerably the tax burden facing many American expatriates - and which, in turn, often makes it more expensive for U.S. companies operating abroad to keep Americans on their payrolls.

"It makes absolutely no sense," said Senator Jim DeMint, Republican of South Carolina, of a system that makes the United States the sole developed country to tax income earned by its citizens abroad.

He is sponsoring legislation to remove the limit - currently $82,400 - on the amount of foreign-earned income exempt from taxation.

I've come to like Jim DeMint much more than I thought I would when he was running for Fritz Hollings's open Senate seat in 2004. I happened to be living in South Carolina at that time and was forced to listen to him say relatively (for the state he was running in) crazy things during a tight race like, "gays and unmarried woman shouldn't be allowed to be school teachers". In fairness to him he said even crazier things like "I will work to get rid of the IRS". He hasn't accomplished that goal, but I'd give him 2 out of 5 stars for his efforts against excessive government spending and taxation. That's practically an A+ in the Senate.

Best Buy beats expectations in the 4th quarter, and helps to confirm what the mall parking lot has been telling me for some time.

April 2 (Bloomberg) -- Best Buy Co., the largest U.S. electronics retailer, said fourth-quarter profit fell less than analysts estimated as the company sold more higher-priced items including laptops and video-game consoles.

'Cause you know, X-boxes, VIAOS and Mac Books are important things to have during an economic depression.

What Do These Five "Recession-Proof" Industries Have In Common?

I found an article on CNN.com entitled "Is your job recession-proof?" that starts by reassuring that, despite the slowing economy and housing markets, employers are generally still hiring. At first, it seemed to be just another commentary on the economy.

However, something really caught my attention in the second half of the article, in which a consulting firm notes five industries "expected to offer the best opportunities for job seekers during the predicted slump." The five "recession-proof" industries listed in the article are education, energy, environmental sector, health care and security.

Why are these five industries doing so well these days, while "retail, manufacturing, finance and technology, are vulnerable during recessions?" What is it that these industries have in common? Well, their success is either directly or indirectly driven by government.

Education is almost completely a government monopoly. Government pays for about half of Americans' health care and heavily interferes with and regulates the entire system. Security, especially airport security, is booming due to the "War on Terror." Energy and environment go hand in hand to an extent, and government is either acting or about to act on both. Energy is largely controlled (see: public utilities) or subsidized (see: ethanol) by government.

The article does not explicitly note the involvement (intrusion) of government into the noted five industries. But a critical reader can read between the lines and catch the hints.

Hmm, do you think the extensive government involvement in these booming industries might play at least some role in the plight of the rest of the economy?

Leading Economic Indicators

How weak is the U.S. dollar? Well, a Chilean strip club has decided to accept dollars at 2004 exchange rates as a way to lure the gringos back, according to a story in Bloomberg News:

Bikini-clad pole dancers, mini- skirted hostesses and a deal on foreign exchange await customers at Passapoga, a Santiago nightclub, who pay with U.S. dollars.

At banks and foreign-exchange bureaus, $1 fetches less than 430 pesos. Passapoga pays 600 pesos.

``This campaign has had considerable success,'' said Jaime Retamal, 55, the club's manager. ``Customers come from all over, but a lot from the U.S.''

The dollar has lost a quarter of its value against the peso in the past three years, increasing U.S. travelers' expense for hotels, taxis and restaurants in Chile. Passapoga is discounting the exchange rate to discourage Americans from cutting back on nightclub visits.

***

Patricia Kart, a Passapoga hostess for 2 1/2 years, said workers agreed to the plan even though it reduces their commissions. The promotion is bringing in more customers, she said.

``We have to take what the house gives us, and our job is to do what it takes to make the clients happy,'' Kart, 28, said in a telephone interview from the club. ``They are very content.''

Montana's Booming Economy

While the rest the America's economy is floundering, Montana's keeps chugging along. It has been buoyed by high commodity prices from mining exports. Nice to see one state is taking advantage of a weak dollar. Story from The Economist.

Wine Store Recession Index

On New Year's eve I visited my wine store and the wine buyer was glum. Yes, people were buying bottles of wine and champagne but no one was buying cases anymore. The party era was over. He had called his peers throughout the District and they all reported a major slump, one that was the worst they could recall in their professional lives.

As a big wine purchaser (lush) the wine buyer used to walk me up the register and dictate major discounts for me. That is gone now too and I pay retail.

Wine stores are the canary in the coal mine about the economy, and the canary died.

Free Money!!!!*

Quickly, someone print the "I'm a Slave for the Government, and All I Got was $300" t-shirts:

The top business news from The Associated Press for the morning of Thursday, Jan. 24, 2008:

Deal for Economic Rescue Package Closer

WASHINGTON (AP) — House Democratic and Republican leaders are looking for imminent agreement with the White House on an emergency package to jolt the economy out of its slump after negotiators on all sides made significant concessions at a late-night bargaining session. House Speaker Nancy Pelosi agreed to drop increases in food stamp and unemployment benefits during the Wednesday meeting in exchange for gaining a rebates of at least $300 for each person earning a paycheck, including low-income earners who make too little to pay income taxes.

Are they even going to pretend to find the $250+ billion anywhere in the budget? Or is that money just being printed as we speak?

If the goal of this stimulus is to jolt the economy with increased consumer spending, why don't we give different amount of money to different types of spenders? People like me, who are prolific spenders should get like 5x the normal rebate. Please, $300 is child's play. It's not even warm-up spending money -- I'll spend $300 on English muffins and Bic lighters before noon. And you know that some people won't even spend the measly $300 that they do get. They'll pay off credit card debt or put it into savings, or something equally stupid -- like put it into their kid's college fund. Losers.

So I'm asking the Federal Government: Let me do my part to help this great country; give me the spending respect I deserve and I will single-handily keep this economy from falling of the cliff.

AP report on the compromise here.

*Post title reference explained here.

George Will on the Economy

In his latest Newsweek column, George Will has one of the best takes I've read to date on the economy and the inevitable stimulus package. I can't do the article justice by quoting a paragraph or two, so I recommend the whole thing.

From Will's article from the November 19th issue of Newsweek, the hard copy of which I just received last weekend due to the administrative cluster fuck involved in forwarding my mail to Japan, comes this great quote:

Everyone should remember the witticism that the stock market has predicted nine of the last three recessions.

Besides George Will and John Tierney, can anyone think of any other MSM columnists you'd recommend to a libertarian? I'm sure there are one or two more who I just can't think of right now or maybe have never even heard of.

Added: I later remembered PJ O'Rourke, who I guess can still be considered MSM.

Dear Bush, Bernanke and Congress,

I have heard the news that you plan to release an economic stimulus package that entails giving each American taxpayer a lump sum payment of, tentatively, $800 per person.

Therefore, I feel compelled to disclose that I plan to spend my "stimulus" payment primarily on marijuana, with the remainder going towards a beer chaser and cigarettes. Likely there are many Americans, young and old, who plan to spend their checks in a similar manner.

I hope you realize that your policies on drugs, alcohol and tobacco will mostly likely prevent such expenditures from stimulating the economy whatsoever. For instance, the marijuana I plan to buy is inflated in cost due to the risks involved in growing, transporting and selling it in the black market. So instead of my "rebate" being injected back into the economy, most of it will end up in the pockets of various levels of dealers who don't pay taxes on drug income, likely don't invest in the market, and will probably spend the money in a way of which you wouldn't approve.

The remainder, which I will spend on beer and cigarettes, will indeed go into the economy. But since these industries are taxed so heavily in the name of "public health," you'll probably be taking back a good chuck of this sum anyway. If the money is - at least in part - going right back into your hands regardless, then why bother with the lump sum payout to me in the first place?

I realize that my economic rationale in this letter may not be flawless. But I do sincerely believe that it's better than all of yours. I have been waiting, but so far left wanting, for an explanation of exactly how sending just a small part of the taxes we pay back to us is going to stimulate the economy at all. Please feel free to explain your rationale in the comments section of this post.

Sincerely,
Nate

The Rich Are Getting Richer, The Poor Are Getting Richer

Send this old Coyote Blog post to anyone whom you hear say "The rich are getting richer; the poor are getting poorer."

For a quick taste, here's the closing paragraph:

Here is a man, Mark Hopkins, who was one of the richest and most envied men of his day. He owned a mansion that would dwarf many hotels I have stayed in. He had servants at his beck and call. And I would not even consider trading lives or houses with him. What we sometimes forget is that we are all infinitely more wealthy than even the richest of the "robber barons" of the 19th century. We have longer lives, more leisure time, and more stuff to do in that time. Not only is the sum of wealth not static, but it is expanding so fast that we can't even measure it. Charts like those here measure the explosion of income, but still fall short in measuring things like leisure, life expectancy, and the explosion of possibilities we are all able to comprehend and grasp. [Links in original]

HT: The optimistic Cafe Hayek blog.

To Sexy for the Dollar

News flash! The dollar isn't looking too hot right now. The BBC reports that supermodel Gisele Bundchen is refusing to be paid with stacks of Washingtons and is now only signing contracts to be paid in euros. More contracts these days are being to be signed in euros, only fueling doubts of the future of the dollar.

Oil Prices Up, Exxon Down

High oil prices are usually associated with bursting profits for the oil titans. Information released today points contrary to this populist notion.

Oil prices rose above $96 dollars a barrel today, but Exxon issued a weak earnings report causing its stock to drop.

The reasons are simple, a weak dollar which translates to only a slight increase in the price of oil by 1% when economic adjustments are taken to account. So far the oil companies are bearing the burden of higher prices and not consumers.

Stories from the International Herald Tribune and New York Times.

Putting Buffaloes Down

We all know from Rob's constant bitching that Baltimore is a wretched city. While many focus on the urban revival that has swept through Washington D.C. and New York many are forgetting a once major city in upstate New York, Buffalo.

While it does not have the entertaining murder scene of Baltimore it does illustrate what a depressed American city looks like. Income in Buffalo is 60% less than the national average and the city has lost about 55% of its total population. Check out the full article from the City Journal of the demise of the Jewel on Lake Erie.

Oil Companies Working for You…Kind of..

The New York Times reports on the mounting difficulties facing oil companies as they attempt to keep up with global demand. Discovery and development technologies to extract oil have tripled since 1999 to $15 a barrel.

Oil prices are only expected to rise in the next 25 years. United States analysts predict that over this period global demand will increase by 50%. As oil becomes more costly to extract and demand rises, the days the cheap gas will be over soon, even if supply remains high.

Future Flows of Foreign Direct Investment Predicted to Grow

The flow of capital across borders in expected to rise in the coming years according to the UN. Despite fear of the volatility of the global market this survey by UNTAD shows the resilience of investors to take risks, seize opportunities, and secure growth.

Foreign direct investment is the one of better ways to determine if a developing country is on the right track. Businesses want stability and security for their investments and in return will provide infrastructure, industry and jobs, in developing nations. All countries listed in this report as the probable top states for investment fit in this category.

Europe Wants a Stronger Dollar

The Financial Times reports that at the next G7 meeting Eurozone policy makers will push for a stronger dollar by taking a stance against the volatile global currency markets. Why is Europe so worried? It seems that Europe is unwilling to shoulder burden of existing global imbalances.

Canadian and US Dollars Trade at Parity, Not Good

The Fed goosed up the equity market yesterday by lowering the Fed Funds rate. But that move also drove the dollar down sharply lower.

If you want to have the economy that the US did in the 70s then you will applaud the Feds's action. Not since 1976 did the Greenback equal one Canadian dollar.

The Greenback also took a hit against the Euro, trading at about one dollar to $1.40 Euros.

Countries such as Saudi Arabia, who tie their currency to the dollar, are reconsidering.

The mission of the Fed is to stabilize the dollar. Bernanke has gone way beyond that mission by trying to manage the equity markets and the economy. Can we get Volcker back again?

EU Economic Growth

In a continent usually associated with stagnant economic policies. The European Union has been able grow, but with varying degrees of success. Who was the biggest winner? Slovakia, with a second quarter growth rate of 2.4%. Some countries, while they are not specified in the article from Financial Times, only had growth rates of 0.2%. There are some concerns of the sustainability of growth with the U.S. subprime market and of a strong Euro hurting exports. Its all good, but I still won’t be sold on the EU until Germany doesn’t invade France for 100 years.

"Smashing Capitalism"

Why I never read The Nation:

The American poor, who are usually tactful enough to remain invisible to the multi-millionaire class, suddenly leaped onto the scene and started smashing the global financial system. Incredibly enough, this may be the first case in history in which the downtrodden manage to bring down an unfair economic system without going to the trouble of a revolution.

I don't get it. I get the topic, but the piece reads like it was a satirical writing assignment given to a special education class. No, I take it back. I mock mentally retarded kids too much and it's not fair. Those kids could have pounded out a better example of whatever type of lame piece she was trying to write. Read it and see what you think.

Oh Shit, It Went Down 387 Points at the Close

This is an amendment to my earlier post. We are now officially in a very confused economy.

The Credit Crunch and Market Meltdown

Now we know the answer to two questions that anyone who lives in DC has been asking for years: how can so many people afford such expensive homes and how the hell are my middle-class friends bankrolling such expensive home renovations? The answer: easy and dumb credit.

The Dow is down 270 points as I write, mortgage and corporate credit markets are in chaos and even French banks are taking a hit.

How can we fix this mess and prevent it from happening again? Hillary has it wrong. She has proposed a $1 billion fund to bail out the people who took on exotic loans that they no longer can afford. This would mean that Joe Renter and Joe 30 year fixed rate loan have to pay for the ill-advised excesses of their fellow citizens. It also creates a moral hazard, in which risk takers do not suffer the consequences of their risk-taking when it goes South, so they take on more risk. From Wikipedia, the definition of 'moral hazard':

Rescue operations carried out by governments, central banks, or consortiums of financial institutions can encourage risky lending, if lenders know that in case of serious problems they will not have to take losses.

One poster on a Wa Post web chat with Steven Pearlstein, that paper's economic guru, made another interesting point:

it's interesting to reflect that it used to be considered a scandal to withhold% loans from minorities, whereas now it is apparently reprehensible to extend too much credit.

To be intellectually honest, do the Feds want more or less credit available to the poor?

The federal government's policy of promoting home ownership versus renting also had a hand in this debacle. The IRS's treatment of mortgage interest as tax deductible makes people want to purchase a home for tax reasons and wildly inflates the cost of homes. That is insane and should stop.

I have two simple proposals that I think would protect consumers without interfering with the markets:

1. Mortgage documents ought to be written in plain English, just as SEC docs are required to be. Nowhere in my mortgage docs was something so simple as: this is a 30 year fixed rate with an interest rate of x% ever noted. I had to keep calling the lender on the phone to understand and clarify what I was getting into.

2. Mortgage brokers ought to be held to the same standards that stock brokers are. For most people, a mortgage is their biggest financial commitment, yet mortgage brokers have no professional commitment to give clients good advice. Stock brokers, in contrast, have a "suitability" requirement that is enforced by the NASD. They can be fined and disbarred for recommending a financial commitment that is "unsuitable" for the customer. This is a simple reform that could be governed by a non-Federal entity and would protect borrowers as it does stock investors.

A Hedge Fund Primer

The news lately is consumed with stories about hedge funds. The press reports on hedge funds do not explain what they are, so here goes.

A hedge fund is similar to a mutual fund in that its managers invest money from third parties. It differs from a mutual fund in two main ways:

One, a hedge fund's investors are required to be "sophisticated investors," which means that they have a net worth of $2 million or more. This "sophistication" test, which ensures that small investors are not at risk, enables hedge funds to avoid the reporting requirements of mututal funds.

Two, hedge funds are allowed to take "short" positions in a stock, which is called hedging, hence their name. Mutual funds are prohibited from shorting by the SEC as mutual funds accept any investor. A short position can be very prudent, but can also be risky. A short is when you borrow a stock in the hope that the stock goes down and when the date comes that you have to give it back to the owner he owes you money. If it went up, you owe the owner.

The Democrats don't like hedge funds. But if you are John Edwards, they are a good way to pay for your $400 hair cuts while you campaign about the Two Americas and actually live in the one that you campaign against.

Where's My Resume..

From the Sun:

Maryland's unemployment rate improved to an unusually low 3.6 percent as employers added 4,500 jobs last month, the federal government said today.

Oh, but don't worry. Even though the economy seems to be doing well, there is always something to worry about, or some qualifier to the good news.

Despite the positive monthly numbers, which are preliminary and adjusted for seasonal variations, Maryland's job growth over the past year remains far below average. Employers created just 19,800 jobs since March 2006 -- about a third of the growth during the dot-com days of the late 1990s, according to federal numbers. Annual statistics are not seasonally adjusted.

The speed of local job growth in the past 12 months was also about half as fast as the nation's.

I also found the use of "unusually" rather odd and misleading. Perhaps someone with a background in economics could explain to me why it is, or why it is not. Full article here.