25 October 2009

Emergency Government

“The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary.” -H. L. Mencken (from Ralph Benko, from an addendum to a Mark Tapscott story at the Washington Examiner, found via Instapundit)

Yes we have yet another emergency, this the Swine Flu which was predicted months ago and the President promised that there would be enough vaccine for everyone, and from the folks who brought you:

"You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before." - Rahm Emanuel

That was when the entire economy was going to go poof overnight and we needed, desperately needed, the stimulus package to do something!  Or perhaps it was the big, bad banks who were following federal regulations on lending and putting money out to borrowers who couldn't pay it back in housing and other areas that needed, oh, so needed, the TARP and rescue package because they were too big to fail! The auto companies were going down and they would be forced to go bankrupt and re-organize which would be awful because that would mean massive job loss and we just had to do something! And we have to have more lending in the housing market because that will collapse and the entire Nation will go to wrack and ruin , so we have to do something!  And the stimulus has pushed unemployment far above the expectations of doing nothing that we now need, desperately need, a second stimulus package, because we just can't sit by and do nothing!

Meanwhile, those Nations that didn't go on a spending binge are out of their recessions, worried that the US will pull down the rest of the world market as we flush our economy down the drain with emergency spending, and wondering just why the hell we can't stop doing things and let the recovery take over.  But those are the so very wise European governments that we are supposed to take our wisdom from... say, just why can't we follow their leads and let the economy recover and not try to tax and spend ourselves to oblivion and take much of the rest of the world economy with us?  For all the grousing, moaning and complaining about how much of the world's resources the US uses, it is also a fact that we are a quarter of the world's economy, produce much more per capita than anyone else around, and the world depends on us to be sober in our spending habits.

Instead we have gotten a massive hit to our economy, massive job loss, a disorganized private sector because government now sees fit to invalidate contracts on whim, and tax money flowing out in a tidal wave that will cause massive structural debt, increased inflation, devalue the dollar, and bring instability to all those countries holding securities in the US who are seeing their investment in our way of life go poof!

Now here's the question on structural debt via Non-Performing Loans (NPLs).

I've heard the US is heading north on NPLs, which are loans 90 days past due and unlikely to ever be paid off.  A large part of that is due to the new home market, which ripples through the economy to durable goods and consumer sectors.  We brought that on ourselves by encouraging those who are economically marginal to actually get federally pushed loans via lenders and the FHA then packaged those up (along with Freddie and Fannie) and put the 'US Govt Safe' seal of approval on them, when the loans, themselves, were anything but safe.  Now I'm going to start stealing some data from one of my previous articles to look at the NPL problems that have happened elsewhere:

NPL are Loans that are in default or close to being in default. And this International Journalists' Network article by Anya Schiffrin on the large role of NPLs in banking crises, points out that once a Nation gets over 9% NPL on all outstanding loans, it is starting to look at real trouble.

The role of NPLs in a Nation's economic structure cannot be over stated.  At the time of writing that article, the US NPL was less than 2% with the majority of that being in consumer debt, not institutional or business debt, and the majority of that consumer debt in the NPL status was in credit cards.

Now a note of update on my article via a Business Insider 23 OCT 2009 article by Joe Weisenthal who references this Financial Times article by Arthur Kroeber on 06 OCT 2009:

So just how big is China’s NPL time-bomb? That is largely a function of economic growth rates.

Average annual nominal GDP growth of 11 per cent, 9 per cent and 7 per cent over the next decade would generate net fiscal NPL costs of 6 per cent, 7.2 per cent and 8.7 per cent of GDP respectively in 2019 – substantial, but not catastrophic.

There is no necessary reason why existing NPLs, even including bad loans arising from the 2009-2010 monetary stimulus, should threaten the viability of the system. In short, the calculated bet of letting NPLs shrivel through time and growth can safely be placed one more time.

But this bet absolutely cannot be placed a third time.

The above scenarios only work if the financial system generates no net new NPLs in 2011-2019 beyond the banks’ own ability to provision and write down.

China has been playing games with its debt by shuffling it around to different vehicles, and has done so since the 1990's.  Twice China has shuffled its debt to different vehicles, and now the money is expecting to be paid out.  China has a major problem: there is a global recession and many of its hardest cash holdings are in the US real estate market, via investing in Freddie and Fannie.  The crony capitalist system, a form of national socialism, has allowed those in favor with the regime to build businesses, default on those loans when the businesses collapse and have that passed into debt vehicles approved of by the government.  Any similarity to the passing on of bad housing debt via federally approved vehicles is purely intentional.

Plus for all the phenomenal growth rate China reports, the conservative estimate of having 30% of their economy underwritten by these loan vehicles, in other words 60% of their GDP depending on NPL loan swaps to different vehicles, is conservative because China under-reports the NPLs and over-estimates its growth.  Market based estimates go up to 50% of the economy underwritten by NPL loan vehicles picking up the temporary tab for the bills of past failures.  Those bills are coming due, US housing investments are tanking and China is in a bind.

So how are things going here?  Well the FDIC Select Peer Group and Report Date for 30 JUN 2009 sees some disturbing trends on 06 and 06A:

Real Estate Loans in the non-accrual and 90+ days past due is up to 2.31% from 1.29% in 2008.

Commercial real estate is up to 0.11% in the same category, up from 0.01% in 2008.

Construction and land development up to 5.23% from 2.16% in 2008.

1-4 family homes 4.10% up from 1.89% in 2008.

Other construction and land development 5.45% up from 1.95% in 2008.

The longer trends on these are going from EOY to mid-Year cycle so that there is only 6 months between 2007 and 2008, but still interesting to note them (06/30/2009, 06/30/2008, 12/31/2007, 12/31/2006), again all for the NPL (non-accrual plus 90+ days past due):

Real Estate  2.31%  1.29%  1.76%  0.90%  0.57%

Commercial 0.11%  0.01%  0.03%  0.00%  N/A

Const.         5.23%  2.16%  3.57%  1.05%  0.24%

1-4 Family    4.10%  1.89%  3.05%  1.34%  N/A

Other           5.45%  1.95%  3.44%  1.18%  N/A

We are just now getting the repercussions of the tanking of the real estate market in the NPL arena for housing.  Construction can be seen as a leading indicator as it feels the pinch first when housing starts are put on hold or canceled, thus causing a rippling into that part of the industry.  The last two interesting, indicating a cyclic market, but one that is increasing in its NPL area.  All of this while the mortgage market is only slowly seeing its rates go up for the same category:

Non-Farm Mort/Residential  1.66%  0.81%  1.20%  0.61%

The category I'm not showing is the 30-89 days past due, which shows that some of the influence is from those loans, no doubt, slipping into the other categories or just having a delinquent set of payees who can get payments in but late on a continual basis.  On 06A we get the final Gross line item for all loans and leases for the 06 section, and below that, in the totals, we get the full percent of all loans and leases past due including non-accrual for the entire banking industry that is overseen by the FDIC:

%Total P/D LN/LS    3.78%  2.45%  3.30%  2.20%  1.17%

This is a pretty good proxy stand-in for National NPL status, and the trendline from EOY 2006 to MID 2009 is up in all categories thus reflected in the total which is up by over double.  Of particular note is that the 'housing crisis' starting by EOY 2007 had lessened, somewhat, by MID-2008, and this was reflected in all P/D loans in all categories.  Thus the MID 2008 to MID 2009 jump is due to the intervening months as the market had been digesting the problems by EOY 2007.  The multiple 'crises' times between those two reporting periods changed what had been an up and down, choppy trendline (in other words still increasing but with rapid market changes) to one that now flattens out to increasing at a much higher rate.  If all the 'necessary' things to 'stabilize' the market had, indeed, actually stabilized the market, each of these trends would have flattened with minimal increase from the previous year.  Even with the undigested loans in the market, those were being addressed by changing in lending practices and crunching those loans out of the system.  This did cause some massive losses in big banks and all the money poured into those should have stabilized the market, but didn't do that.

So we are left at MID 2009 with NPLs going up towards 4%.

This is before all the 'stimulus' money gets into the pipeline, which is causing headaches on loans and lending as the projects that are being done do not address the structural problems of the market.

Additionally the Community Re-investment Act is getting re-upped, which is a major cause of the increasing home prices over time, due to easy money lending practices to those who can't afford such loans.  That is causing structural debt problems in the market that need more than just cash infusion in them, and need a change in the regulations to allow normal repayment expectations to hold sway and get the federal 'help' in lending out of the system.  Additionally the banks should be the ones to judge the ability of those credit vehicles that gather up such losses and put them on the market.  As both Democrats and Republicans have voted to approve past revisions of the CRA to achieve these policies, there is no 'party' to whine about as being at fault: they are both idiots in this area.

Finally some of the instability is reflected in TARP, itself, with funds going unaccounted for and the market not knowing how the public will react to that.  As the Federal Reserve pushed that vehicle forward, and Timothy Geithner was a prime mover at the end of the Bush Administration and continues on in the Obama Administration, his role in this is not to be underestimated, particularly in the lead-up to the 'necessary' bailouts.

So, if you really and truly believe that all the spending will actually make the government solvent AND help out the entire market for NPLs, then you need to address the structural components leading up to this problem, which has been in large part from the federal side, with crony lending institutions (FHA, Freddie and Fannie) plus willing (or coerced) banks facilitating these policies which date back to the Carter Administration and were puffed up during the Clinton Administration and Bush Administration.  That is a bi-partisan problem and pissing about it being 'Bush's Fault' ignores the long standing structural problems both parties have willingly introduced into the lending arena.  All of those extra regulations to 'help' people have now changed the path of the entire economy, and throwing good money after bad is putting us into a nasty position of not being able to have all that lovely outgo be covered by tax income.  That then gets you inflation, as the Federal Reserve puts money into the system to cover those debts, thus reducing the value of the dollars currently held.  And supporters must then address the economic growth problem in the US, as small businesses are not hiring people due to the instability in the market introduced by the federal government and more regulations and not letting the rule of law put companies into bankruptcy for restructuring, and those external holders of our debt that have a huge insolvent debt load that needs some hard cash income to try and keep their economy afloat.

Which is China.

If you cry, bitch and moan about Halliburton and its evility, then where is the crying, bitching and moaning about AIG, Merrill Lynch, Bank of America, GM, Chrysler, etc. that are holding this country hostage with federal help?  If you complain about the petty overcharges by Halliburton, then why are you not complaining about the huge rip-off that is going on with these companies and the billions in TARP that are not being accounted for?  Would it not be better to have these large companies go through bankruptcy restructuring, which they would all do, have their debt and valuation properly assessed and then get on with life as smaller, leaner companies that would then open up the market to new entrants?  Or do you really like the idea that companies deemed 'too big to fail' can hold our Nation hostage via willing politicians willing to put these huge corporations on the dole and then run them as efficiently as the federal government can, which is at the post office level of things?

I am more than willing to let the rule of law run its course with these companies.

'Cash for Clunkers' was a nice one month sugar rush, but now the auto market is seeing less in the way of purchases as people decided to buy early and not try to get the best possible deal on a car later.  Thus you are not getting a long term upturn in the market, but a short to mid length down turn that is happening during a recession.  Thus making the recession worse.  It is that same sort of 'do something for the sake of doing something without a plan' that is causing this problem.  Extending loans to those who can't pay them back means more failed loans, not increased prosperity.  Increased prosperity means more and better paying jobs and a competitive job market, not one with artificial price supports in it at the low end which places a barrier to entry for first time job holders in place because of the cost of hiring them.  This is not getting people to work, allowing them to make a living for themselves, no matter how marginal, and making the entire cost of business much, much higher and encouraging businesses to lay off people at the low end.  Which we now have during a recession with the latest minimum wage jump.

This economy is being run into the ground by politicians who think that we can regulate our way to nirvana, and willing followers who believe that everything in life should be regulated.

That is not a description of freedom, but one of tyranny.

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