Monday, April 12, 2010

Retro Review: Financial Armageddon

Reviewed by: Ms. Cairo

Recommendation: YES

Amazon Subscription Page: Financial Armageddon


Blog description: Insights on debt, derivatives, government guarantees, the retirement system, and the coming economic unraveling.

My review: This blog may provide a gloomy view of investing, but it's a must read. Well written, by someone who seems to know the subject thoroughly.

Let me say it again - you've got to read this blog. It's your money - make sure you don't lose it!

Sample post:
It All Makes Sense
I've been somewhat perplexed by how well consumer spending has held up, at least on a relative basis, given that 1) "underemployment" is above 20 percent and the number of long-term employed is at a record; 2) income has not kept pace with consumption; and, 3) the housing industry is nowhere near a recovery (and the foreclosures just keep on coming).

No doubt the government has played an important role in underpinning demand, especially through its emergency unemployment benefits programs and certain other stimulus efforts. But that didn't seem to explain matters fully.

Then I read the following post, "How Obama's 'Extend & Pretend' Mortgage Policy Explains The Apparent Disconnect Between Housing And The Consumer," at Business Insider's The Money Game (citing the excellent HousingWire blog) and, suddenly, it all made sense. The reason why no small number of Americans can afford to keep on spending is because they've got one less (big) bill to pay:

Our screens are filled with signals that the econom""y is recovering, and yet one area where there's no discernable improvement is housing. At best the bleeding has stopped. At worst there's plenty of room to fall.

This should stand in sharp contravention with news that the consumer is coming back, especially given the conventional wisdom that the home is (or was, anyway) the ultimate ATM, and that it was the so-called housing wealth effect that fueled years and years of American spending.

What gives?

Paul Jackson at HousingWire reckons that what we're seeing is the twisted result of Obama's mortgage schemes. Basically, scads of troubled Americans are living in their homes, waiting for some type of modification, not paying their mortgages, and thus freeing up an unusual amount to spend on stuff.

Jackson's logic:

There are 7.4 million non-current loans in this country (a ton of folks living in a home but not paying at the moment for said home).
Most Americans behind on their mortgages have now gone a year without paying a single bill.
As we know, Americans are discontinuing their mortgage payments before other payments.
And he writes:

Consider the following individual as a case study — an actual ‘HAMPlicant’ at one of the nation’s larger servicing shops, as highlighted in a guest post at the Calculated Risk blog. They had an $1,880 monthly payment on their mortgage they’d defaulted on, yet their bank statements for the past 30 days included the following expenses:

visits to the tanning salon
visits to the nail spa
some kind of gourmet produce market
various liquor stores
A DirecTV bill that involved some serious premium programming or pay-per-view events
Over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker
His conclusion: If half the 7.4 million homeowners are skipping a $1,000 monthly mortgage payment, that provides a potential $3.7 billion boost to consumer spending.

If Jackson's reasoning is correct, it suggests that critics of Obama's mortgage schemes are attacking them from a completely wrong angle.

It's not about, as the Santellis of the world might suggest, that it's some grave evil to be helping your neighbor who may or may not have gotten in over their head. It's more basic: the scheme is creating serious economic distortions, and are bound to unravel in ways that the market isn't properly anticipating.

For all the flaws of "crass Keynesianism" (see today's wankfest between The White House and over cash-for-clunkers) characterized by charges of pulling demand forward is just as silly. The real economic violence comes from messing with economic signals, which appears to be what's going on here.

Jackson's point also jibes with what we heard when we talked to a Phoenix mortgage pro, who noted the violence to his market that mods were creating.

Until these really filter through the system, these, mortgage mods not only make the housing market suspect, but obviously other areas of the economy as well.

The last four entries:
--Safe, or sorry: Americans investing in municipal bonds. They *used* to be safe, but now more and more cities are in danger of defaulting.
--No Wonder Americans Are Pessimistic: job news isn’t really as good as its been portrayed
--The Next Phase of my Evaluation: Michael Panzer points out that Greenspan, Paulson and Greenspan are not economic experts.
--A Secular Shift: The recession has battered the US economy, but the lobbying industry is humming along in the nation’s capital, even for companies that have shed thousands of jobs in the past year.

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