First the answer to your question…..

Question: Should I refinance?

Answer: Sure.

It is without a doubt the question I am asked the most these days. I have been so lazy with these articles and my blog in general, so I want to lead with this because I answer this question again and again and even though every situation is different, the conversations are so often the same.

Today is December 29, 2008, which means this will only be posted for a few days, so you should feel free to visit the blog at www.plugandplague.com which will have it in relative terms, forever. I have to get something out because I am spending an inordinate amount of time answering the above question over and over so more people than are asking must be wondering. Posting this out there in the nebulous world of interwebland might lead to someone getting their hands on something that helps them understand what’s at stake, and lead to an internal answer of what to do next.

Plus, it is a little bit of venting for me.

The question of whether to refinance is on everyone’s minds. To borrow a phrase I have been responding to people with, the answer is that in many cases, the answer is yes, but it is much less a “should I?” question than it is a “can I?” question.

Without beating a dead-horse, it is true that lending restrictions are harder. Of course they are harder. This is the converse energy of the over-permissive lending mindset that permeated the industry before-hand. And let’s please stop laying it all at the doors of the sub-prime lending industry. It’s all the same industry you moronic talking heads! The reason all banks are suffering is explained in the next column, but the short answer is that they all played, so they all got burned.

This is an across-the-board, spend-as-you-please culture that today reaps what it has sown. Businesses, households, governments and organizations of all types learned to live beyond their means through the use and misuse of credit. Deficit spending has been the operating mode of those that consider themselves “fiscally conservative” so let’s call it what it is….the chickens coming home to roost.

Getting back to the question, should you refinance?

Yes, if you can, you might very well should.

Rates are in fact at the lowest level of the past 50 years. That is a fact.

It is also a fact that this is the basic scenario for the described best rate:

1. A loan amount that represents no more than 80% of the house’s PRESENT value.
2. No additional monies taken out, loans paid off or consolidated, otherwise, the total loan amount must now represent no more than 70% of the house’s PRESENT value.

3. No additional liens on property.

4. Credit scores indicating a middle score (out of three) of all borrowers of 740 or better.

5. Debt-to-income ratios not to exceed 38% including monthly obligations and housing costs.

6. Assets to be sufficient to cover any needed closing costs, the set up of new escrow accounts, and reserves leftover to pay all monthly costs for at least 6 months.

There are actually more conditions, but if we can get through the first 6, we are golden and can probably handle the rest. So for now, let’s not even worry about things like unexpected escrow requirements for future property tax bills that will be administered and controlled by the closing title company…that sort of thing.

Instead let’s start with the top of the list. The real mystery in this market is what is your home worth today? On a national average, about 15% less than it was this month last year. I won’t bore you with why that is a happy-face number, but it is also a national number, so it isn’t necessarily that bad everywhere. The highest to rise had the furthest to fall, so they propel those numbers more and exaggerate the final tally, but the news is not good pretty much everywhere, and what gets lost in the numbers is the volume.

Volume is the essential ingredient, not price. Prices might fall ten, fifteen or twenty percent from the time a person bought a home recently, but even at the right price, buyers have an over-abundance of supply, and that causes more and more foreclosures, short sales, and the like, and all of those numbers count too. It is folly to think they are talking about everyone around you, but not yourself when you start talking about the value of homes.

People are still not aware of the facts because they don’t get a statement like they do with their other assets that gives its current value and potential loss in value. Just as people don’t like to hear about other investments going south, no one wants to see the result in their home value either. This is an ugly cycle, but at the risk of being overly depressing, at least it isn’t as bad as the stock market, which has lost 35% of its year-to-year value, far worse than the price drop in real estate over a similar period, but not receiving nearly the equivalent attention.

It’s okay. I want you to understand that the down tone of this column is necessary. And the next one after this will make this column seem bright in comparison. Sorry. It is necessary.

Don’t worry though….the one AFTER the next one will describe how to fix the problem. All of it.

But back to the refinance issue.

The real issue is this. Yes…rates are low. Yes…there are lenders lending, but only in circumstances that mean they risk nothing and make money, which means that for those folks that can reliably fall within the guidelines, the streets are paved with gold.

To find out, it costs you the price of an appraisal. Previous values mean nothing.
Banks now make us chose off of a pre-approved list, so you sort of need to know what lender you plan to work with, to make sure you work with someone off of their list. Oddly, you need to get the appraisal back before you lock most loans for fear the lock will be invalidated if you don’t meet the value requirements, so the lender that is priced the best at the time you order the appraisal, might be priced poorly when you get it back.

It happens.

All manner of nonsense happens now. To say that the $700 billion bailout has failed to work is a massive understatement since EVERY person in the industry will agree that the landslide on lending difficulty has gotten worse and worse without let-up. They don’t do it by folding their tent and not taking loans, but by risk assessment and general risk aversion. Again, they do the loans that make them money and offer the lowest amount of risk, which are sad to say, very few.
So….should you refinance…..probably.

Can you? I don’t know. It should cost about $300 to find out.

I realize the financial cost is only part of the issue, and it is always easy for me to do the metrics for someone, (i.e. – what it ACTUALLY costs to refinance, how much you save a month, what impact starting over with your interest payments means, etc. )

The best way to start is with a reliable appraisal because it is the document that says you can or you can’t move forward from here, and if so, here’s how.
The other factor is harder to quantify….just as people don’t want to open their 401K statements to see how bad it is, a lot of people don’t want to know their present home value. I can certainly understand that, so perhaps that’s the question that needs to be asked first. If you can stomach whatever answer you get, again is, it costs $300 to find out.

Next column will answer some of the questions this one presented, namely, how in the hell did we get here. Following that will be how to get out of here. My own perfect plan ladies and gentleman.

Sorry for my dreary tone. But for me, this has become a very dreary business. I have never been busier, and never had less business. As unfair as it seems to have to have this conversation via article/blog, it is the same one I have every day, multiple times a day, and I want to get it out there.

More soon, and best wishes to all of us for a much better 2009.

Lee Diamond

lee@bigshouldersrealty.com

773-255-6347

Sometimes as I walk through a house with my clients, I see a little ethereal transparent cash register hovering above me which helps me keep track of the cost of bringing the house up to snuff.

Gut the bathroom…start over completely….$16,000….cha-ching

Is that asbestos?….probably safe asbestos clean-up…hmmm…..wow uh…$15,000?….cha-ching

Hmmm…that roof looks…..uh…missing…..$12,000….cha-ching.

It can easily get beyond the asking price of the home and I realize quickly that no amount of money would be well spent as it might exceed the end-value by an infinite degree. Sad as it is, the only wise thing to do at a certain point in many cases is knock it down and start over. In their own right, these buildings may be irreplaceable in their architectural uniqueness, their historical significance, but the commodity value of these properties is the consideration by which value is judged, and to that end, you can’t justify the cost, much less get a loan to do it.

More often than not, it is worse than that though. There is no architectural uniqueness. There is no history. There is nothing but the wasting of money on poor-quality work that was probably the result of would-be developers watching one-too-many HGTV flipping shows, or poorly constructed monstrosities built by “professionals” that will do the world a favor by being obliterated.

Whichever the case, in my experience, a disproportionate number of these homes are foreclosures, REOs (Real Estate Owned), short-sales, etc. If I go out with clients to see 10 properties based on price point, type and area, anywhere from 3 to 6 of them will be REOs or short sales these days. Almost invariably they will be the worst properties we see on that day. It is nearly without fail. Why is this?

It is because the decision makers at the financial institution are looking at the internal math to price this house. If I may offer a piece of advice I often give to my clients….

Nobody gives a shit about your math.

Banks seem to be the least-knowledgeable about their property’s value and they are more interested in covering as much of the existing debt as they can, regardless of whether that number is insanely disproportionate to the real value of the property. In other words, they are the worst judge of their own assets. They do not want to realize how bad a bath they have taken no matter how overwhelming the evidence. This is why we see 300 days on the market. Ten, fifteen price drops, all that nonsense. Consistent efforts by over-extended servicing lenders to reduce commissions paid on the sale, and to get as close to their debt obligations as possible are abundant in their examples. This is what those that had the money before knew how to do….cut costs, pinch pennies, etc. and it isn’t helping. You can’t worry about cutting costs of water in the midst of the fire. You just need it. But these are the guiding forces of these bloated bodies that have successfully been absolved of their crimes and absorbed into behemoths that if others were too big to fail, the size of the financial institutions the government has helped create should scare the shit out of you. If that doesn’t, the cost of financial transactions in the future sure will.

A soundly run organization would do with its real estate holdings from mortgage foreclosures what it does with more calculable assets, such as paper. Namely, one determines whether it stays in the portfolio or not. If not, the soundly run organization succumbs to the reality of its worth and pays a professional to aid in its sale for that amount. If it feels that it has the wherewithal to suffer through a downturn in order to allow the asset to return to value, (as they are suggesting the American people should do by shouldering the bail out), it attends to their asset….in the case of housing assets, it means one repairs it….rents it out….waits it out.

They don’t do this. They seek the cheapest commissioning agents to sell it who put in turn minimum effort into selling, not even bother to grant access to see the property, return calls. They let the property slowly rot away as small problems become huge ones, until it becomes a property that can never be returned to normal without an astronomical investment that will not be returned.

It therefore pains me when I have otherwise knowledgeable people and friends express particular interest in these homes as if this is where the bargains are. The foreclosure market is the new flipping market and it is very bad news. I realize that the bargains are out there, but it is like scuba diving for chum in a section of ocean churning with sharks. Why would you want to do that? There are perfectly lovely homes in less duress to choose from that are pressured by these homes to conform to a realistic value. I can honestly not believe some of the low prices I am seeing on conventional sales, so for buyers that can buy without the burden of selling out of a tough recent purchase, it is amazing how great the options are for non-duress properties.

It is my opinion that the next big backfire will be the foreclosure marketplace tha t is developing, and tis can only grow as more people get further behind the eight and government acts in the worst possible way to worsen the struggle.

I find all of this perfectly analogous to the mess we find ourselves in with the $700 Billion bailout plan and the sudden realization by our economic leaders that unlike what they said weeks ago, things are in dire straits. This is a land where “fundamentally sound” two weeks later means INORDINATELY FUCKED.

Let’s call it what it is…..Fuckedonomics.

The passage and proposal of the bailout shouldn’t really surprise us. The leaders of this plan are members of the system that they regulate. Would you trust the Chairman of Exxon to govern our energy policy?

That is what we have with Henry Paulson, the architect of the $700 billion bail-out. He is the Treasury Secretary, but he is also the former CEO of Goldman Sachs with a net worth of over $700 million according to Forbes magazine in 2006. His plan was summarized on a completely tone-deaf three-page letter to include the specific recommendations that the government would grant the Federal Reserve and the U.S. Treasury expanded powers and $700 billion to:

1. buy non-performing assets in the housing equity derivatives markets. This is another way of saying the loans that are failing or failed

2. they need unfettered control of this. This is another way of saying no oversight.

3. They needed all the money. And right now.

It quickly became the assertion of the President and an alarmingly large number of people in both major parties that this was the only possible course of action and it had to be immediate. It is pretty amazing isn’t it? They’ve been guiding the ship for so long, and they’ve been telling us how it is great, ok, not as bad as it looks, pretty good actually, not that bad, bearable, fundamentally sound, and now, it is economic Armageddon unless you do what we say.

And right now.

Makes sense. They’re the experts. People like Paulson. People Like Ben Bernanke. You see he is an expert. He is a studied academic in the ways of Milton Friedman, the flow of free markets, and most specifically, the Great Depression. Who better to be in charge at a time like this?

“Hey I know all about the Great Depression….Look, I’ll show you.”

Uh.

Thanks.

Let’s not forget Christopher Cox. While I certainly find McCain’s ignorant call to fire Cox hysterical, (given his constant stance even further to the side of deregulation than Cox), I would still agree that Cox is a complete cancer to our economy.

(By the way, he does not serve at the pleasure of the President. He was nominated by the President, approved by Congress, and is the head of an independent regulatory body that can’t be fired by the President.)

Plus Bush has Cox’s back…..for now. This is what President Bush said about him when he nominated him to be head of the SEC three years ago:

“As a champion of the free enterprise system in Congress, Chris Cox knows that a free economy is built on trust. In the years ahead, Chris will vigorously enforce the rules and laws that guarantee honesty and transparency in our markets and corporate boardrooms. He will be an outstanding leader of the SEC.

Today the American economy is the envy of the world. Our economy is growing faster than that of any other industrialized country. We have added over 3.5 million new jobs during the last two years. The unemployment rate is down to 5.2 percent. More Americans are working today than ever before, small businesses are flourishing, families are taking home more of what they earn. To maintain the confidence that is the cornerstone of our economic system, we must ensure the honesty of American business, and the integrity of the capital markets and stock exchanges. Investors must have confidence that the information they use to make their investment decisions is fair and accurate.”

Since then, Cox has denied additional funding offered to him by Congress to fight corruption and aid in enforcement, refused new powers to regulate as offered by Congress saying instead that Congress had already “struck a perfect balance” with existing laws. He enacted a self-regulation system for investment banks that he recently admitted was key in the failure of the SEC to properly oversee and prevent the failure of Bears Sterns. In fact, he called his plan “fundamentally flawed from the beginning.” Thanks for owning up to it though.

Just to show you how serious he is, he has called a stop to this practice, now that all of the major investment banks are extinct. In his first year in his position, he allowed the five major investment banks, Bears Stearns, Goldman Sachs, Morgan Stanley, Lehman Brothers and Merrill Lynch to increase their risk holdings ratio from 10 to 1 to 40 to 1.

That turned out well too. Then they instituted “mark to market” accounting rules which required them to account for Currently the only two former investment banks that are not extinct or absorbed have recently applied to be banks since they are about to be regulated like banks anyways.

See, I know I have been sounding like a grumpy Gus for some time, but it isn’t as if things haven’t been heading in a profound and deliberate trajectory in a hand basket to all but the most oblivious or unaffected. Now that enough noise has been made about the doom that will befall us if we didn’t pass this bill, it has passed.

And it was a terrible, horrible, awful idea.

The problem is we are taking advice from the people that caused this mess. They are the believers in the free markets. They are the champions of small government and obscure accounting and self-serving tax cuts and deficit spending and deregulation, until it fails.

Then they are very much in favor of the socialization of the risk they begot. They also want to make sure it returns to the free market, because operating it through the government, well, you know, that’s socialilsm.

It is idiotic to think that we can then rely on these same free market forces to propel us into a time of unbridled lending. All of the attempts to do so by the monetary leaders of the country have had the effect of trying to push water through a broken pipe. While the money flowed into the companies with earlier attempts, it never flowed out because the system was already broken, so it just got washed away through the broken pipe, never coming out the other end in the form of new loans.

Do you remember the economic stimulus checks? Neither does the economy! $150 billion went out the same type of broken pipe just in time to give us the worst back-to-school numbers EVER. Great job. This was another great Paulson idea by the way.

Similarly, trying to give banks a chance to lend again by socializing their debt is more money through the same broken pipe. Why doesn’t it flow to the other side, so the value of the principal balances on the corresponding mortgages are reduced? There is not a single reason that anyone should believe that banks will begin to unfreeze these markets, because there is no condition for them to do so, just as there hasn’t been for any of the earlier opportunities given to the various banks. One attempt was to allow securities firms to trade at the same desk and rates as normal member banks. It didn’t spur new lending because it was cash used as liquidity, reserves, to stem other losses, to cover obligations they couldn’t not meet, until of course, they didn’t meet them.

Then they allowed the trade-in of mortgage backed-securities against Treasury debt. This was no small consideration, rather it was unbelievable access to give Financial Institutions the ability to unload this albatross bad paper once the market place had essentially evaporated in exchange for highly valued Treasury bonds. Again, this was to incentivize lending, and it was only three short months ago. The money went out the same broken pipe.

Lending rules have only gotten tighter. Lending has only gotten harder. Banks don’t trust each other anymore, so the rates they charge one another have risen rapidly and will be passed to the consumer. Now that there are fewer banks, with greater reach and size, the opportunity to fight this will be severely curtailed.

The latest plan is again to unfreeze the markets, and again it relies on tired economic policies of Reagan era failed thinking. A person can be brilliant, and also be wrong. That’s why all of these people went to Harvard and Princeton and whatnot. They are scholars in wrong thinking. It is easy for someone to be brilliant in the realm of self-interest, and that is the agenda of the modern administration, as it has been for the era of the modern Conservative.

It is important to note I am referring to the modern Conservative. The Reagan Republicans and onward. The Neo-con mindset, not a real Conservative, which I capitalize with respect. These are not true Republicans, and true Republicans should be mad that their party is controlled by a mindset antithetical to their roots. Do you really think Roosevelt would be a Republican in today’s Republican party? He railed against the politics of greed and corruption. Close your eyes and try to imagine Republican in the modern era saying

“…the money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of that restoration lies in the extent to which we apply social values more noble than mere monetary profit.”

Not even remotely possible.

How about Lincoln? Do you think he would be a Neo-Con? He fought a fucking war to preserve the Union and he’s going to be a member of a party that constantly pleads for state’s rights? Or that he would be interested in eliminating affirmative action, or restricting immigration or opposing equal rights after issuing the Emancipation Proclamation? For those that don’t know their history, back then, a Radical Republican was one that criticized Lincoln for moving to slowly to abolish slavery. Hardly the vision we get of the “Radical” right we have today.

Anyway, back on track….the idea that we would let the folks that steered us this far, take us to the next step under the premise that this, finally will unfreeze the markets, and everyone will start lending again is the basic premise of this masterpiece. Again it is without a requirement that they do so, which is purely trackable. The government currently tracks Lender’s lending habits in lower economic census tracts in their footprint through the Community Reinvestment Act, so it is no less possible to require them to lend with the money they are able to save with this giant bail out.

It is important to remember that this is again, money borrowed from the reserves of the Social Security in the first year of the baby boomer’s retirement. Good thing that it happened for them before Republicans had successfully convinced the world to trade in the security of company pensions to be free to invest in the free market.

Just so you don’t think I am without ideas on how to fix it, here are some logical things that could be done, some of which is moot since the bill is law, and now with ridiculous additional costs for unbelievably unrelated matters. Still, here it goes. My Dear Obama list as it were:

1. The government should not refuse asset or equity participation, it should insist on it. The idea against this is preposterous. That being that the risk and debt should be public, but the profits should be private. Puh-leese. These companies should be taken over by the government and run to compete with existing businesses. By no means should the likes of Paulson and Bernanke try to refuse an opportunity to return the squandered billions to the treasury and repay our debts. An example of a system like this would be Kiwi Bank in New Zealand, which is state run, and has been awarded repeatedly as an excellent bank, one that turns a profit for the government, and keeps the free market banks in New Zealand’s rates lower to stay competitive with the government backed entity. Don’t think it could work? Despite how much people bitch and moan about the Postal Service, can you imagine the cost of regular mail delivery if you had to work through a private courier like DHL, UPS, FedEx? Some things are best done through a governments’ inherent backing and size. If they aren’t well run, it is again, up to us to change it. Warren Buffet and the mega financiers of our time are seeing the opportunities out there, but they are getting their ownership stakes for their bailout, and we the public, should do the same. Clearly the argument that these failed institutions can do a better job than the government will is flat and dumb.

2. Release the notion of banks doing the right thing as a part of your thinking. It doesn’t work. You must insist on it. So it becomes, “you can have money to lend at this unique rate, but you must prove that you are lending with this money”. Simple oversight that the powers do not want to exert because it intrudes on the free markets. Hey buddy….$700 billion is not a free market. The lending rules simply do not allow for most of the people that need to refinance to do a damn thing, since there isn’t a large market of borrowers with great credit, income and assets that haven’t already taken care of themselves to the degree that the market can assist them. If you don’t make them lend, they won’t, to any but the most well-heeled borrowers, further worsening the asset allocation in this country.

3. Reconciliation should be system through. You can’t absolve folks at the top of the value chain without passing through the value depreciation to the bottom, but that is exactly what they are doing. The idea is that while financial institutions are able to unload this debt and a percentage on the dollar, that is where it stops….the mortgage values stay the same, even though the debt has been written down. Unbelievable.

4. Repeal the Glass-Steagall Repeal. In a nutshell, this is a depression era law that required a financial institution to decide whether it would be a form of a commercial bank or investment bank and could not be both. In the repeal of Glass-Steagall, the massive entities that were spawned became increasingly deregulated and profit driven. The fact that they could package garbage loans as triple-A rated debt is the end result of thinking that diversification and less oversight would insulate the public from risk, though admittedly, it has worked out great so far for Citigroup, USB, etc. We are going in the exact opposite direction right now.

5. Massive incentives for first-time buyers. This is something that could cost far less than the $150 billion economic stimulus garbage, and go a long way to returning a marketplace to an overstocked housing market. A dollar per dollar match for borrowers down payments would encourage a marketplace, return values to better levels faster than anything currently proposed, and set up return of equity to those frozen in their homes and their loans.

6. Relax the LTV restrictions on non-cash out 30 year fixed refinances. The simplest plan is to allow a lender or broker to make no more than 1 point in yield, and allow all borrowers that qualify to standards employed when they got the loan in the first place to refinance into a single 30 year fixed, no points, fully escrowed mortgage. Values determined at over 80% would have appropriate mortgage insurance issued like FHA mortgage insurance at .50% coverage, and indefinite. To the degree that they wouldn’t qualify off of standards that applied when they got the home in the first place, it was one they couldn’t afford. What can you do? You have to let them go, but they have to go. This fix cannot be designed to help people live beyond their means, but it must help them live within them.

7. We need to be out of Iraq. $10 billion is a lot of money to spend every month on a war whose supporters say we are winning. They define winning as staying in a country that 80% of its inhabitants want us out of while a similar percentage of Americans want us out of. It is indefinable what we are actually accomplishing, so winning seems to be a parable for “dying a little less” while we piss away money that don’t have, further erode our position in the world and continue to enrich and defend the indefensible war profiteers at the expense of all.

8. Enforce monopoly laws. Instead of engineering these takeovers of giant corporations by even more-giant corporations, let’s get back to the idea of nationally owned companies for nationally fronted dollars and let these companies compete with the banking equivalent of the Post Office.

9. Vote. It is literally, the least you can do.

10. Finally, don’t vote for the morons that put us here. Even if they can field dress a moose and avoid a direct question like they are covered in sweet crude.

It is a crazy world, to be sure. It is almost too much to comment on, and certainly too much for one article, so this rant will be continued over days on my blog at www.plugandplague.com.

In the interim since I wrote last, the world has changed significantly. Personally, the world changed for the better when our daughter Zoe was born last week. She is so fantastic. Pictures and updates are available on Zoe and Jackson’s blog at http://www.jacksonsdailyupdates.blogspot.com/.

Thanks all….

To get emails when I post updates to the blog, send an email to lee@bigshouldersrealty.com with

“SUBSCRIBE”

in the subject line.

I will be continuing this rant there shortly, but if I don’t get this out now, I never will.

The next (and last of the season!) Chicago Neighborhood Bike Tour is on Sunday October 26 at Jefferson Park, 4822 N Long, Chicago, IL at 1:00 PM. Stay tuned for details.

Details and older tours are availabe at:

http://www.bigshouldersrealty.com/things/tours.php

_________________

PS – Please encourage everyone to stop using sentences with “Wall Street” and “Main Street” for Pete’s sakes. More annoying than air quotes.

This is it. I am finally able to say I have a blog. Whopee!

Well I’m excited anyway. I am in debt to Chris Jobson at Joinks! for making it happen along with all of the awesome work he does on the Big Shoulders and Replica Republic websites. Chris. You rule.

A little underwhelming to be the 400 billionth blog I suppose, but the nature of the blog is purely populist and ideas are free to travel so I think it is an exciting opportunity. I can add my voice to the global discussion. Years ago, my sister and I published our own photocopied zines that we sent around or brought to shows. The importance of that activity in my development and mindset is second to nothing. I am supportive of the small ways we can communicate our viewpoint to the larger world, though it is indeed analogous to screaming into the wind. Small voices change the world and so, if this blog were to have a goal it would be very simple;

To change the world.

Since that is a relatively simple goal, I believe this blog should have further goals.
Therefore, the blog will be useful in things that I want to change about myself. Improvements I would like to make in how I live and operate and one goal is to write more and thus I am also hoping this blog will lead to more writing on my part. I have been writing but in different ways than in my past. Much of my writing goes into my monthly article, or content for the Big Shoulders website. One of the problems with a monthly article has always been the gravity of that single article against such a large array of news. This gravity being entirely self-derived since I am doing this as an amateur and don’t make anything from it and it reaches such a small group. Still, every month it grows, so somehow the word gets around. Once in a while someone un-subscribes, or criticizes my viewpoints in what might be considered (it isn’t by me) a business communiqué, or signs up someone else without their permission, leading to misunderstandings, anger, and the like, but for the most part, it has been better received than I would have thought. It serves to act as a connection to many I would maybe not otherwise engage with very regularly. It has lead to many pleasant conversations, and some strained ones. It has lead to new introductions, new ideas and new challenges. I have some folks that email me all manner of challenging questions and whose response often invigorate me and renew my effort in writing. They force me to look at my viewpoints and defend them, or adjust them as I learn where I err.

I should mention I err a lot. This is because I am a total mess. I mean a real serious disorganized mess. It is often hard to categorize my thoughts, so my articles can ramble, but that is nothing compared to the mess that is all the mail lists I have to try to keep organized, who gets what, but not something else….it is a challenge I have not risen to.

If I erred a lot before, it is worth noting that the immediacy of the bloguverse might offer me incentive to write more but the clear downside is the largely unedited nature of it. I know that I can be a horrible writer, a worse editor, an insanely bad speller and the sum total is about to become one with the fuzzy infinite online vastness that is the blogosphere. I would like to apologize for all fans of the English language as it currently exists for errors prior and forthcoming.
As for what you would read here, it is largely free form. My forte is amateur economic and political critique. In the past I have written for music magazines, my own publications, a variety of contributions over the years, and finally a monthly financial, mortgage, real-estate, political commentary column that I self-publish. Thrilling, I know. Hopefully the blog will allow me to feel the freedom of writing about more topics since the general area of the economy at large, politics at large, the real estate and mortgage market at large are to be succinct, terribly bleak. You can’t write honestly about any of those without sounding bleak if you are being honest.

So if I am writing about the above, yes, it may be bleak, because the news is. Perhaps this blog will offer more opportunity for topics I am also interested in beyond political/economic/fiscal stuff. Maybe there is space to share more about my life as Realtor or my life as Mortgage Banker and broker, or my life as a father or as a husband or a musician or a cyclist or a fan of old stuff, etc. We’ll have to see. I’ll know when I get there I guess.

Up front, I will say this:

I write this from my personal point of view, and my views are fully unfiltered and true as I see them. I don’t change my story because I am worried about the impact of writing something, so in all cases, I present my full and honest opinion on subjects I choose to tackle. I am not an expert. I am an anti-expert. I think the experts are the folks that got us into the mess we find ourselves in, so I embrace the notion that I don’t know what I am talking about.

Given that, I hope you enjoy my blog.

I have hundreds of pieces in various forms on subjects ranging from music to cycling, but for old material I decided to only post the articles from Financial Wire, which are largely critique and comment on politics, the economy and the real estate and mortgage world.

Anyway, I am off to have a daughter with the misses…..see you soon.

Feel free to write any time. lee@bigshouldersrealty.com

Be well all…..Lee Diamond

It is kind of flattering that I have heard from several of you after taking a month off of writing. I have no idea how many people read this, and how it gets around, or if it does, but it is nice to know that some of you think enough of this column to ask where it went. It didn’t go anywhere, but I did take a month off.

Up until the last week in August, I had every intention of getting out an article for August. Chaney, Jackson and I took a family vacation to Wisconsin and Minnesota during the first week in August, and of course that was the perfect excuse….I was taking a month off.

In truth, the amount of things I commit to eventually have the functional effect of being too much. There are rewards in all of the things I commit to and I do get to most of them, but there is a tax on the mind and body, though I might deny it to others, the truth is known to me, and my wife. So the column was on hiatus for a month, allowing a bit more sleep, which I figure I might as well enjoy for the next two weeks before baby Zoe shows up.

Plus I have been sanding her room like a madman whenever I have a moment to do so. The previous inhabitants were children raised by wolves and the madness that they conducted in the home is always evident in the staggering damage they left behind. They attacked these walls, floors, doors, windows and ceiling with what appears to be a combination of a mace, a compass, a lot of stickers, glitter, an industrial orange peeler, paint, magic marker, a drill and so forth, so it takes quite a lot of time to clean up the otherwise beautiful pine paneling.

So there’s that…

The other item preventing my waxing poetic on the state of our nation and our economy is that the news changes so quickly as to make my points redundant. Even now as I type, I have a new email asking me about all of this and what it means for everyone. Imagine trying to keep pace with all of the misdeeds and misdirection of the Bush administration….well this is their financial team we are talking about. It is a mess beyond the messiest mess you have ever seen. Worse than a pre-school spaghetti dinner….bad people….really bad. I am only human. I have actually been percolating for some time, so this could get wordy…..

The basic fact is that the government bailed out Fannie Mae and Freddie Mac. Why? They were “too big to fail”, and yet, they were failing. As the biggest entities in the mortgage business, they inevitably have suffered great losses as the industry has faltered so badly. The fact that less loans of theirs fail than comparable pools is because they had what is considered the strictest lending process. The fact that even those loans are failing is because they too lost sight of their responsibilities to borrowers and bondholders because it was overshadowed by their allegiance to their stock price and shareholders. As banks asked for less and less documentation, making more and more decisions on credit score alone, and even volunteering to void needs for income and asset verification, Fannie and Freddie inevitably offered more and more stated findings, requiring less documentation, fewer appraisals, and more of the madness that is still filtering through the rocks.

This takeover happened directly following forceful statements that it would not happen by the regulators responsible for this action. They denied the need for intervention at every rumor and report that these companies were not well run or under-capitalized to the degree of the potential need. They denied that they would use the powers they asked Congress for and received last month. I didn’t catch CSPAN, so here is a somewhat rhetorical and imaginary interchange that may have gone on during those hearings…

”So basically Congress, what we’re saying to you is that we’d like the right to do so, but you know, we’re not going to like, do it”. Yes we are.

“OK, so if we give you the power, you won’t use it unless it is absolutely necessary. By the way, I am winking now. Can you see me winking? Is this thing on?” Gee…I hope he got that…

So, shocking as it was, they took over the companies on Sunday. They informed their top management they were on their way out, and Monday, the market opened to a huge rally at this monumental news. It is important to note that in tossing all of the executives under the bus for mismanaging things, the whole operation is now being governed by the regulators responsible for the oversight of these companies in the first place. It is hard to lay it all on the feet of anyone, but for millions of dollars, the CEOs and a few others will walk away and fall on their swords. Don’t feel bad for them either. These are new executives who were put in by both companies’ boards of directors on the throes of previous incidents causing the ouster of the previous executive team. In all cases, their departure was and will be very handsome indeed.

Clearly, the buck stops elsewhere, and not where responsibility would normally set it. The Federal Reserve, Treasury Department, the Federal Housing Finance Agency, Congress and the President all worked together to put together the latest economic stimulus package, part of which gave them the authority to take Fannie and Freddie over, which they needed, despite the fact that both companies were created by the government for the express purpose of creating a more far-reaching system for home lending.

Both companies are considered Government Sponsored Entities. They have charters to create opportunities for home lending, which is for many, the embodiment of the American Dream. They achieve this by giving banks the money to lend in reverse of their lending. Their bond making and selling ability is what provides the liquidity that allows lenders to make fresh loans.

In other words, the banks lend the money, and Fannie and Freddie buy the loans from the bank, even though they will likely employ the bank to continue to service the loan, collect the money, pay the taxes, etc. In total, the numbers are brain-hurting. They own or insure over 45% of all residential mortgages in the country to the tune of over $5.3 trillion.

Unbelievably, the takeover doesn’t really change anything. The existence of the secondary mortgage market is what enables there to be such broad based home lending. The benchmark 30 year fixed mortgage only exists because of these companies’ publicly issued bonds, so the priority was to maintain that market place. The market place is one in which banks front the money, sell the loan to the GSEs who pay the banks back the money they fronted plus their fees for services rendered and ongoing services. The mortgage is packaged with other mortgages, turned into bond issues, and put on the open market in the form of mortgage backed securities, and in the mortgage debt world, Fannie and Freddie debt is the cream.

In theory, they offer the best proof of ability to pay since they write the rule books on how lending is derived. The strength of the sale of their debt is the direct determining factor of where rates are, and in theory, we should have been at rates far lower than we have been for over a year. The reason that rates haven’t fallen to levels comparable to their current bond price range at other times in the recent past when the same issues hit those levels is because of the huge drop in volume. Mortgage backed securities were down over 80%in volume from their trading this period a year ago.

Then on Thursday September 4, 2008, PIMCO triggered this whole craziness by issuing a statement that they would no longer buy mortgage backed securities. This from perhaps the largest buyer of bonds in the world and the manager of the Total Return fund, the world’s largest bond fund, is the word of God. Therefore on Friday September 5, 2008, foreign governments and major hedge funds were dumping bonds and shares. Freddie was forced to pay exorbitant rates for short term borrowing which was the final sign that the companies had finally lost investor confidence. The decision was all but made when the executives of Fannie and Freddie were summoned before James Lockhart, head of the Federal Housing Finance Agency, Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson. A lovely get together in which the companies’ executives were informed they were being dismissed in the near term. By the time the government stepped in, PIMCO had changed its tune, and suddenly was buying mortgage backed securities all weekend despite its proclamation that initiated the sell-off that formulated the governments plan in the first place.

This is status quo I suppose in an era where Bill Gates and Warren Buffet are the apparent populist voices of our time, but it reeks. The latest advice on the future fate of Fannie and Freddie from the business sector “experts” is basically to let the free market correct their behavior. Yeah. Great job so far. Usually when you hear this sort of rhetoric, and in this case especially, the undying allegiance to free markets is from those that actually seek to further their ownership of these markets which are never really free at all.

Further evidencing their party’s thinking, Governor Palin has vowed to make the companies smaller and make sure they return to the private sector. It is so disheartening to live in a time in which once a problem emerges, the side that benefits from the current state of affairs uses it as an opportunity to take even more. That is exactly what this type of thinking results in.
Energy crisis? Let’s drill in protected lands. Let’s expand nuclear power. Let’s increase ethanol subsidies.

Giant bigger-than-a-hedge-fund bail-out? Let’s let the free market work!

What do you think the auto industry is thinking right now? The losses endured by Fannie and Freddie over the last four quarters are nothing compared to the losses at GM or Ford. Inevitably, the airline industry, and every beleaguered industry that has been mismanaged or poorly run or achieved a critical mass that is crushing them to death will have their hands out too. The real smart ones will get in line now before it becomes obvious how little the government can do to bail out everyone that needs it.

We have a mentality that we have to protect these entities at all costs, and the human costs are indeed dire, but the government couldn’t be expected to subsidize the telegraph industry just because they employed a lot of people. Times change and companies only cry about the effect of lost jobs when it is obvious that the pain will finally reach the executive suite. The auto industry fought tougher fuel standards for years until it became what people wanted, and now they are falling over themselves to get in front of the issue.

If you were to believe television and marketers and the spin artists, you would think that BP, Mobil, Dow Chemical, DuPont and Waste Management are the greenest, earth friendliest companies out there, just as the wind mills grace the background of a John McCain commercial. The sick thing is the number of people that buy this spoon fed slop.

Getting back to the issue of the mortgage giants’ fall, it is indeed quite flip to say that it was the wrong thing to do entirely. By the time they acted, it was the best available option. Fannie and Freddie were in fact, too big to fail without systemic collapse. Doing nothing would lead to an extraordinary constriction of available credit. Banks reliant on their own ability to securitize these loans would pay a considerable sum to market them, and then fight to attract turned-off investors. The result would be out –of-control lending problems beyond what we have already. Nobody but the most gilded of borrowers would ever get a loan, and rates would be significantly higher than what we know today. The flip side is the bail-out will have a cost far in excess of the low-ball $25 billion figure that is being floated right now and it will need to be borne by every tax payer in the United States.
It should also be borne by the banks in a similar write down of assets against this debt, but that’s crazy talk in this world. That’s like regulators regulating instead of deregulating or something.

The real problem is this myopic look at matters like this was the only solution, and that it was done at the right time, and that nothing could have been done sooner, or that anything will get any better as a result of it. If Paulson, Bernanke, Lockhart and their crew had parachuted into the situation and acted as they did, they indeed would be worthy of praise and good thinking, but they’ve been here during the run-up, the crash, the burn and everything. The existing rules governing banks, brokers, GSEs, and a host of other regulated companies and industries are quite adequate to prevent a system wide collapse, and even problems far less severe, but the failure is in the utter lack of enforcement. Not enforcing laws encourages lawlessness, and so it goes.

The total shake out of the housing crisis and the collapse of Fannie, Freddie, Bear Stearns, Indymac, and a host of other companies which at least theoretically have boards of directors, and oversight and regulators and rules and laws to guide their continued existence, will certainly dwarf the $300 billion price tag on taxpayers that the Savings and Loan debacle had. Clearly, it isn’t likely to harm any of the key figures in a long term fashion considering that the Republican nominee for President of the United States was one of the five Senators in the Keating Five and was rebuked by the Senate for his role in the affair.

The idea that you can return these entities to let the free market do their work at fixing it is akin to, I dunno….giving the Republicans another shot at fixing this enormous mess we have.

There is a solution, but it is the opposite of the proposed idea of letting the free markets control these entities and that is to do the exact opposite. Nationalize the companies. And yes, I am serious.

First of all, with the full faith and credit of the United States, the debt has backing. The direction that bond issues for conforming loans were headed is to the same place that jumbo loans are already at, namely, without a market place. The rates for jumbo loans are so high because they eat up so much capital of banks that have to portfolio them, and therefore ensure high returns at the front end with higher rates. The result would have been a further deepening of the housing problems we are already immersed in. The short term effect is lower mortgage borrowing costs, but all the while credit standards continue to tighten.

I admit that there is one real problem with nationalizing the biggest players in the secondary mortgage market, which is that at the moment, the leaders of this country are inept and only promote other inept members of their ilk to run the components of government. So you need to do two things really….nationalize the companies and change our country’s leaders. It is seriously our only possible hope.

Many say that the government can’t possibly act in this role, but the Federal Housing Administration is already in the home loan business. The failure of sub-prime and low-doc lending has renewed use of the FHA loans, and the government is already in the business of operating a secondary market, managing risk, writing loans, and more importantly, offering a payment option for the funding of the loans that ultimately fail in the form of borrower paid insurance. The notion that we don’t want to grow government or let the federal government get too big is the private sector code term for letting businesses do whatever they want, operate recklessly and against the public interest, and receive government assistance at their time of failure. In truth, the free markets only believe in free markets when they are on the receiving end. When things go awry, they are big fans of the welfare state as long as it is corporate welfare.

The government is already in control of the entities, and it is only a matter of a few weeks before there is an opportunity to replace a government that has made a monumental mess of everything, so that the positions that are responsible for oversight are watchful. So that regulators are not in the business of deregulating. So big business does not help create energy and environmental plans. So that there aren’t more and more unenforced laws. So that the incompetent are not steering the ship. Appointments are a critical factor in changing the modus operandi of our elected representatives.

It is really the right time to change the world. Why? Because it is much worse than you think out here. The louder that people say everything is fine, the same lies only serve to deafen those that might hear things and change them. When you consider the state of affairs, remember that all the takeover of Fannie and Freddie did was serve the present system of mortgage markets. The government is putting taxpayer money on the line with the notion that it will eventually heal itself. It does nothing to loosen lending standards, and that is where the failure is. Lenders are refusing to lend. Credit standards continue to tighten. They don’t want to do loans, and therefore they do not. The purchase of these mortgage backed securities is accompanied by tough talk about never getting into our present predicament again, so no one is able to get out of loans that they can’t make work.

Further, none of the loans have been written down to reflect the lowered value of the collateral. This is SOP for responsible accounting, but the lenders’ idea is that while the collateral has lost value, the intent is to press for payment. The problem is the number of people that can’t hack it anymore has gotten to the point where it is a true crisis, and the lack of a responsible reaction to it is worsening daily. The future is that as more people realize they owe more than they own, more and more of them will just say “fuck it” and walk away. You have an entire quasi-generation of homeowners that are frozen in their home because of their equity position. Many of them will be able to live through this and recover to a positive equity position, but many will feel the pain of this sales market if they are forced to move, or the desire to move is so great that they must.

This isn’t a normal business cycle. You need to let go of that notion. The problem with people saying things are fundamentally strong, or that it is a shallow recession, or that we aren’t even in a recession is that the curve is not a gentle bell shaped gradient….it is a vertical leap. By the time you figure out where you are, you are in worse trouble than you can handle.

The lower borrowing costs will likely help out a bit in the short term because in addition to lower payments, it is a strong market for buyers. I am already seeing prices that seem unbelievably low compared to what I saw so recently. Many people are able to afford more since the price has been under pressure for going on three years. The problem is that in addition to tighter lending, there is way too much inventory, and the desire to make diamonds out of this mess has everyone looking for the next big thing, namely foreclosures, which is just the next big disaster on the horizon. That’s a column for a different day though…

The other reason we need action now is that our economy is weaker than it is perceived to be because we use terrible data to measure it. On Friday September 5, 2008, we also saw markets react very badly to the latest jobs report. Despite very low expectations, job losses were worse than expected with 84,000 jobs lost in August which is the 8th straight month of declines. This occurred as the need continued to grow with another 250,000 people entering the workforce in the same period. The most damaging number however was the headline grabber….a new Jobless rate – 6.1% last seen in September 2003.

The bad news is that this number isn’t even close to the accurate number, and it has people thinking “it isn’t as bad as 1978, 1983, 1929….” If you calculate totals as they did in those days, things are very bad indeed. Our jobless number does not count a variety of classes that would have been counted in similar time frames and during previous recessions, or during the Great Depression.
Here are some folks not part of the unemployed:

“Discouraged workers” – those looking for work for longer than their benefits eligibility….once you lose your eligibility, you are also no longer considered unemployed. A lovely double whammy….well we can’t help you anymore, but congratulations, you are no longer unemployed.

Haven’t sought a job in the last 4 weeks? Not unemployed, even though there were 1.6 million people the government counts in this category known as “Marginally Attached”, which is over 20% higher than these numbers a year ago.
Then there is “part time for economic reasons” which are the folks that would like to have full time work, but they are only able to secure a part time job….again….not counter. That would be 5.6 million according to government statistics.

If you add the Marginally Attached, Part Time for Economic Reasons and Discouraged Workers, as they would have been in the era before the Bush presidency, it would be around 10.6%. Measuring against past eras, it has not been this high since the great depression in an era with similar calculations.
Another group not counted is independent contractors, which is literally the definition of a real estate agent, many contract mortgage underwriters, many construction trade laborers, and a host of others who may also be out of work, but aren’t considered to be. I have had at least 8 jobs where I was considered an independent contractor, and during each of these points in my life, including now, I would not even be considered in the workforce calculations. These numbers are not tracked by the government, so it is hard to estimate how it would affect the real unemployment data.

More than interest rates, jobs drive the housing market, and until we fix this, we won’t fix the mess.

We also haven’t by any means seen the end of the problems with banks. Washington Mutual is replacing their CEO after losing over 90% of their stock value in the last year. Lehman Brothers is thought to be a takeover target one day, receiving a boost in share value, only to find the suitor disinterested after looking into the possibility and having 35% of its value gone in one day. A good rule of thumb is to disbelieve any statement they make about their financial help since it is routinely proven false by the end of the weekend. Get real nervous when banks start talking about their manageable problems in the commercial lending side, as this is what they initially said about their residential holdings and their amount of sub-prime borrowing.

The stock losses for major financial institutions and the number of bank closings, failures, and problems has already made the financial pits look like the floor of a slaughterhouse, and the day is early. We also have yet to really see the fall-out from the Equity line and second loan market bottom, or the change in status beyond the poor underwriting, low doc products, etc. Further, revolving credit debt is at an all time high, and the time to pay on all that debt eventually comes. Many of those will default and the banks will be forced to deal with even more write-downs. This isn’t imaginary, it is reality. FDIC monitoring creates a list of problem banks, which has 117 banks listed in the report from Q2 2008, up from 90 in Q1 2008, a 30% increase in a single quarter. Can’t wait to see the new figures.
Loans that are late by at least 90 days, delinquent, or in default reached a figure of 20% (counting all debt) of all loans according to the latest FDIC figures. TWENTY FREAKING PERCENT! How much of that will be recoverable? The banks are the last to see the decline in value. As I have said many times before, the homes that are in foreclosure are often the worst priced listings I see in my day-to-day functioning as a Realtor and it is fundamentally because the lenders refuse to believe they have to write-down each individual debt.

At the same time, banks now have to deal with a flood of maturing debt that will cost them considerably. As an example, there is a record $871 billion of bonds backed by the likes of Wachovia and Lehman Brothers maturing by the end of next year. Many are being forced to pay a stiff premium when comparing the margins promised against treasury yields based on their current pricing. This is similar to the Adjustable Rate Mortgage problems that are occurring for consumers, but it is at the top level of lending, and could lead to a further tightening in an environment where lenders do NOT want to lend. That is the bottom line. The mortgage bond may be priced attractively, but volume is down over 80% in a year due to the lack of confidence people have in the process, the product, and the collateral and borrowers pooled together in these securities.

Throwing the littlest guy in the room under the bus is so-cliché, you would think they would try something else, but why stop doing what works? Just as the Federal government will toss a few CEOs under the boss, banks are throwing the “mortgage broker” as a whole under that bus at the moment in painting brokers as the lynch pin in the process of the mortgage mess. The mortgage broker is the littlest player in the game, and therefore the most obvious target. The latest in this effort would perhaps be the recent lawsuit of ResCap, a division of GMAC against a dozen mortgage brokers for brokering bad loans. This is akin to R. J. Reynolds suing the corner liquor shop owner because he sold their cigarettes.

In all mortgage broker relationships I am aware of, lenders do the underwriting, review the documents, see the tax returns and the like. In cases where they didn’t ask to see those documents, it is their product that allowed the borrower to seek the credit. Any isolated incident may show that a broker may be guilty of terrible mistakes and misdeeds in any number of cases, but just as the broker brokered the deal, the borrower took the money, as did the lender, as did the secondary market purchaser, as did the bond issuers, as did the bond insurers, and the investors that bought all this mess. It was all spurred of the same greed to profit on the housing industry when it was touted as the last silver lining of a gloomy economy. So quickly we forget.

By the way, one other bit of news you may have missed also happened this past Friday.

Federal Regulators also took over Silver State Bank, which was run by John McCain’s son, Andrew McCain. Ahhh….leadership……experience…family.

I say, no more years.

It was just last month that I wrote a column about my general optimism. It may seem odd this time to warn against trends that seem eerily similar to those that lead in one case to stagflation (stagnant growth in the midst of inflation) and in another case to the Great Depression, THE global financial calamity of modern times. I am still optimistic, but my optimism is about our future progress and ability to correct our mistakes. It starts with recognition of the task ahead, and that is only possible with a full understanding of where we are. It is about being hopeful that we are reaching a point where we seem to have the tools to deal with these problems, and perhaps soon the leadership to create some action.

In saying this, I am quite certain that our immediate financial future is very troubling. I am further certain that IF we don’t change policies that lead us here, we are in woeful shape and could indeed be headed for a major global financial meltdown. I have been thinking a lot about our policies and direction and the troubling parallels that exist in American history. None of them are good.

The most recent end of the world as we know it occurred on Friday July 11, 2008. This was the day they said the world would end, Fannie and Freddie would be put in receivership over the weekend, the general practice of buying property and lending money for the property would be forever changed, the planets would no longer function in correct accordance with orbits and so forth. Of course Monday came, and people bought houses, locked loans, did home inspections, and life pretty much continued.

Lost in all the panic regarding Fannie Mae and Freddie Mac, the most recent tabloid financial, were some very troubling numbers regarding inflation that also came out on Friday the 11th. Import prices rose 20.5%, the most on record since they began charting this factor back in 1982. The University of Michigan consumer sentiment report contained a nugget that suggested that consumers predict an annual inflation rate of 5%, over double what it is today. Further, evidence from the July 15, 2008 CPI Report (Consumer Price Index) shows inflation rising at a pace higher than we’ve had in 26 years.

And along comes Ben Bernanke to announce to us that inflation is a problem.

If I had to draw an analogy it would be this.

A man spots a pack of matches lying in the middle of the street. Recognizing that this potentially dangerous item is just lying there, where any youngster could come along and play with it, potentially causing themselves or others harm, he leaps into action.

He grabs the matches so they are out of the reach of any stray children. Spying an old wooden shed adjacent to City Hall and the local children’s hospital, he places it in the middle of the wooden floor and surrounds it with furniture, which he douses with gasoline, and leaves the building. Then just to make sure no one would harm themselves by playing with those matches he grabs his trusty flamethrower and torches the shed from across the street.

As the fire leaps to City Hall and the Children’s Hospital, he calmly sips the last of his coffee, and walks purposefully over to a nearby convenience store where he buys a WHOLE CASE of Natural Spring Water.

With heroism and fortitude, he calmly, but decidedly, walks back to the scene of the shed only to find that indeed, the fire has spread a little bit to the adjacent schools, homes, businesses, and what not.

Not panicking, he realizes he is going to need more water. This time, really thinking things out, he gets into his Humvee, and drives the 94 feet to the convenience store where he patiently, but assertively buys 10 CASES, (can you believe it? TEN!) of Natural Spring Water, including 2 of the good ones, because he bought them out of all of the cheap stuff.

Honorably but humbly, he drives the 94 feet back to the front of the burning embers of the shed next to the ashes and charred remains of the entire town, immediately adjacent to the fireworks factory and old growth forest. He rationally but sincerely pours the 240 bottles of Natural Spring Water at the outer edges of the fire, and realizes with amazing clarity…

“I need to alert the public.”

This staggering display of poor recognition is the sort of thing that exactly did lead to the Great Depression, stagflation, and a host of ills as long as your arm. On the other hand, to have him start to point out that inflation is a real problem is at least progress. Perhaps, once the actual balance sheets are examined, it will also be determined that the Federal Reserve can really only be the “lender of last resort”, as they are intended, because in effect, it has nothing to lend. The end of that comes when the Social Security Administration actually needs the money that the Federal Reserve is spending. You know, like when all of those baby boomers start retiring….or didn’t you know that the largest owner of U.S. Treasury debt is the Social Security Agency. Yup. The Social Security Trust Fund only works because there is an excess created in taxes collected against benefits paid. This changes dramatically as the system starts this year to absorb an additional 73 million retiring boomers, or roughly a quarter of our total population.
Bernanke is responsible for a period of extremely aggressive rate lowering during an alarming rise in the price of energy, food, commodities and raw materials and against a dollar that currently is at record lows against the Euro. Since the Fed’s primary role is to safeguard against inflation and lowering rates is inherently inflationary, the chutzpah necessary to reposition his own place in history as the one warning us against inflation would normally be staggering.

(An aside: Normally the hubris of Bernanke’s latest commentary would be staggering, but this is a world where a presidential administration’s secret energy policy has lead to the highest profits ever for energy companies. As higher energy costs cuts into everyone’s budget, leading to worse and worse inflation, higher and higher unemployment, and a growing population of the most desperate, this administration’s solution is to create “energy independence” by allowing the same energy companies the right to drill in protected lands, while they ignore millions of acres of leased area they already have. This oil won’t be available to affect problems for an estimated 7 years. Further, it does nothing regarding the industry-created bottle neck due to refining and shipping capacity. Lastly, while the argument is made that the creation of a fully domestic supply is the reason for this drilling in order to better to control, it should be noted that the natural gas supply is fully domestic, and yet each year we are greeted with gas price increases that are “larger than normal”, until that is the normal. – Okay…done.)

Now, after dumping on Bernanke for a bit, as he is due, it is also important to remember that our current predicament and its possible outcomes is like any other modern disaster. It isn’t any one thing. It is a confluence of things. To that end, we should be extremely concerned if we continue to ignore the certainty of our path. The purpose of contrasting today’s problems against the Great Depression should primarily be to prevent things from further deteriorating and not doing the things that are akin to protecting the general public from matches with flamethrowers.
If the captain of the Titanic hadn’t ordered most of the lifeboats removed because he believed the ship to be impervious to all concerns, if the rivets hadn’t failed, if the sheet metal hadn’t been inadequately thin, and on and on. The point is less who is to blame, than what happened, but the purpose of finding out what happened is to prevent it from happening again in the first place, or to prevent its re-occurrence. The simpler idea is that history repeats itself and that we are doomed to repeat what we forget to remember.

Consider the major accepted causes for the Great Depression. People have written books on this stuff, so it is hard to let it all out in an article, but there are certain theories that either contribute to the result, or are blamed in totality for the darkest days in our nation’s history and an event that was literally a global financial calamity. To keep it easy, I made a checklist of at least a few of the reasons commonly cited as contributory towards the great depression:

Debt – Seen as one of the causes of the Great Depression was a cycle of growth spurred by the massive extension of credit to consumers and businesses, which created an apparent boom of short-term growth, at the cost of the debt. As the cost of the debt became too great, consumers and businesses began defaulting on the debt.

Check.

Bank failure – Banks in turn began failing as their debtors defaulted and no one could break out because while the value of goods had fallen massively, the debt had not.

Hmmm. Check.

Big Business –Franklin D. Roosevelt won the election in 1932 largely by offering American’s a New Deal. He put the blame for the Great Depression largely at the feet of ineffective governance and the excesses and unfairness of big business.

Uh. Yeah. Check.

Inequity of Wealth

Check

Decline in American Exports

Double Check (the volume may be higher with inflation and higher commodity prices, but the trade deficit is actually growing faster because of the amount of oil we import)

Reduction in purchasing goods

Check

Mismanagement of the money supply

Quadruple bypass check

On balance, this isn’t really good, is it?

OK, so let’s look at the period of 1973 to 1982 during which the United States economy was marked by a period of Stagflation. This is when growth is stagnant but prices are higher. The most notable period of Stagflation in recent history began with the oil embargo of 1973 from Middle East oil producing nations. It’s apex was marked by the Iranian revolution of 1979 and it is precisely the high unemployment rate, high energy and goods costs, weak U.S. dollar and instability in the Mideast that lead to dissatisfaction with President Carter and ushered in the “Reagan Revolution”. OK so here we go:

High energy prices.

Check

President with below 40 % approval rating

Check

Marginal growth, followed by recession.

In process.

Instability in Middle East

Check.

Government printing money and exercising price controls.

Yeah, definitely check.

Adverse supply shock (like when a commodity, say oil, has a drastic spike and causes a subsequent major change in the cost of goods across the supply chain.

Hmmmm, yeah, well, check.

Growing unemployment.

Check.

Hmmmmm.

0kay, so what is the point? The point is that the present situation is severe. It isn’t hopeless if we act with sound policies, but what would the consequences be if the wrong moves are made, or the problems are ignored? We need badly to recognize it. It is somewhat amusing listening to how “UNLIKE” the Depression or Stagflation we are today, and that is a lot of what I hear in the news. The problem is that they are taking a picture of today against the worst of the times in question, not at the steps that lead to them. No one is dumb enough (except Rush Limbaugh) to believe that the Stock Market crash is the cause of the Great Depression, as if it in and of itself was divined out of thin air. Similarly, you can’t look at the center of the wreck and say it doesn’t look like today.

Again, I end with a message of optimism, because I believe that the climate is right. People aren’t buying it anymore, and if that happens, than we can face the problems in front of us with fortitude. I believe that looking at history; it will show that FDR was right about a lot of things. His initiatives helped create a stable economy and his policies and departments forever changed America and moved the nation out of our darkest time. It seems that there are some thematically desperate similarities between today and our nation’s darkest hours, but there are some positive similarities as well, and perhaps just as FDRs New Deal helped heal America, we will get a new, New Deal soon.

In the interim…

The sun will rise tomorrow. The markets will open on Monday. The process of buying and selling homes will continue on Tuesday. Someone will qualify for a mortgage on Wednesday. Life will continue. The world’s history is always being written, but when you lack confidence in some parts, you can have confidence in others.

If you make sustainable decisions throughout, you’ve done your part, and improved your own life in concert.