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Will China Cause America’s Next Financial Crisis?

Michael Redbourn — Tue, 30 Jun 2009 14:48:55 +0000

China and US Try to Make Trade Progress to Save Global Economy …

dgriffith401.wordpress.com12/16/11

“The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” he was quoted as saying by the official Xinhua news …

How The U.S. Is Quickly Becoming A Third World Country (Part 1 …

seekingalpha.com11/22/11

… 3rd world status. Economic data indicate a harsh reality that obviates mainstream political debate. The evidence suggests that, without fundamental reforms, the U.S. will become a post industrial neo-3rd-world country by 2032. … According to the Economic Policy Institute, the U.S. trade deficit with China alone caused a loss of 2.8 million U.S. jobs since 2001. Falling Real Wages and Household Incomes. Workers earning more dollars are actually poorer in terms of …

Major financial crises have occurred many times in the United States, and the one in 1929 wasn’t the first, and the present one won’t be the last.

The earliest one on record was in 1792, and there were several crises in the 19th century and also in the 1980′s

In short, recession cycles should be understood to be a normal part of living in a world of inexact balances, one in which there is an attempt to balance supply and demand.

The present world-wide economic crisis, which was caused by the United States wasn’t simply a result of unexpectedly large losses in subprime mortgages or because many of those loans were securitized in complex bonds.

In retrospect, it would seem that the major contributor to the collapse, was what are known as repurchase agreements, which are commonly known as repos.

A repo is a form of short-term borrowing for dealers in government securities. The dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day.

For the party selling the security, and agreeing to repurchase it in the future it is a repo, and for the party on the other end of the transaction, the one who is buying the security and agreeing to sell in the future, it is a reverse repurchase agreement.

Repos are classified as a money-market instrument and they are usually used to raise short-term capital and the Fed uses repos to manage the aggregate reserves of the banking system.

The size of the repo market continually varies so it’s impossible to state its actual size, but it’s generally thought to hover around the $10 trillion mark at any given time.

Banks rely heavily on repro loans, and what caused the collapse of Bear Stearns and Lehman Brothers, was that the repo market panicked because of rising doubts about subprime securities, and loans suddenly became more expensive, or totally unavailable.

So What Can Be Done?

The Obama administration has a plan to protect the country and the world from the next financial crisis, and it can basically be divided into three parts.

1) Stiffer Capital Requirements

Some banks and other financial institutions would be considered too important to fail, because their collapse would pose a threat to the country’s financial stability.

Citigroup, Bank of America, Goldman Sachs and similar institutions would I imagine, be on the government’s most protected species list.

The companies on the list would face stiffer capital requirements in the form of shareholders’ investment, with the idea being that greater capital would provide a larger buffer against losses and a crises.

It might be of interest to note however, that at the time of writing that none of America’s biggest banks are any longer in the top three world-wide.

The top three banks in the world by market capitalization are;

1) Industrial and Commercial Bank of China
2) China Construction Bank
3) Bank of China

Citibank and Bank of America are not even on the list of the top twenty.

Two Canadian banks, Royal Bank of Canada (RY) and Toronto-Dominion Bank (TD) have recently made it to the list.

Australia also has two banks listed, and in addition to the Chinese banks, the importance of emerging markets is confirmed by the presence of Itau Unibanco Banco Multiplo (ITU) and Banco Bradesco (BBD).

The problem with the administration’s protected species plan, is that the very largest financial institutions in America, would effectively become protected and pampered wards of the state and they would most likely squeeze out the smallest ones and lenders would compensate by raising their interest rates or by only lending to the safest borrowers.

2) The Policing Of Unethical Lending Practices

The administration foresees the creation of a Consumer Financial Protection Agency that would police what appear to be unethical lending practices, and ensure that loan documents for mortgages, auto loans and other types of consumer credit are comprehensible.

* The Securities and Exchange Commission would still retain power over the stock markets.

3) Changing The Rules

Financial firms that issue securitized bonds such as bundles of mortgages, auto loans and other credits, would be required to hold 5% of the bonds themselves, the thinking being that this would cause sellers to examine loans more carefully.

In early 2007, when the problems of subprime mortgages and repos first emerged, few if any regulators foresaw the coming meltdown, so the question needs to be asked, “should we trust government regulators instead of bankers, traders and money managers?”.

Due to their past failings, it would seem that we shouldn’t.

The dangers of overregulation should generally not be ignored or minimalized, but especially so in the U.S. whose economy is anchored on risk-taking and expansion.

We don’t yet know exactly what will cause the next financial crisis in the U.S. but its roots are already clearly foreseeable.

By 2019, the U.S. federal debt is expected to be $11 trillion and right now, the Chinese, who are presently supporting the U.S. economy are already preparing a retreat from the dollar.

China has now called for the creation of a new currency to eventually replace the dollar as the world’s standard, and is proposing, if not demanding, a sweeping overhaul of global finance that truly reflects the developing nations’ growing unhappiness with America’s role in the world economy.

If China decides to pull the plug, which is increasingly likely, we will soon understand what caused America’s upcoming financial collapse, but many will say that they didn’t see it coming.

Are Low Interest Rates The Same As Tax Cuts?

Michael Redbourn — Sun, 10 May 2009 20:54:06 +0000

Supply-Side Economics | The CERF Blog

www.clucerf.org1/10/12

As early as the 1950s, Mundell proposed an economic policy program of tight monetary policy to stabilize the value of the currency and low tax rates to stimulate economic activity. During the late … The Reagan Scenario included a sharp drop in inflation, a recession in 1982 due to tight monetary policy, passage of the Kemp Roth tax cuts and an economic boom starting in 1983. … Inflation and interest rates are much lower and tax rates are lower as well. While a high …

The hidden dangers of low interest rates | David Cay Johnston

blogs.reuters.com1/10/12

Low rates also come at a cost, cutting income to older Americans and to pension funds. This forces retirees to eat into principal, may put more pressure on welfare programs for the elderly, and … If rates return to, say, 6.64 percent, the level they were in 2000, one year's interest costs would equal the individual income taxes for all of 2011 plus the first few weeks of 2012. Last week , rates took a step in that direction. The yield on the 10-year bond, a benchmark for other …

President Obama’s recent claim to homeowners, that refinancing their mortgage loans at a lower rate, equates to a tax cut, doesn’t ring true for many tax experts.

Obama said at a recent press conference that the housing plan his administration had launched, had “already contributed to a spike in the number of homeowners who are refinancing their mortgages, which is the equivalent of another tax cut. The main message we want to send today is that there are 7 to 9 million people across the country who right now could be taking advantage of lower mortgage rates and that is money in their pocket”.

What Obama failed to mention however is that unlike the housing boom that led to the current financial crisis, this time, only borrowers with strong credit ratings and stable jobs will be able to save money if they refinance.

Obama’s announcement caused many tax analysts, including Gil Charney, who is an analyst for The Tax Institute at H&R Block to shout “foul”;

“While there could be overall savings by refinancing and lower monthly payments, there also could be reduced tax benefits as less interest is paid. Also refinancing could extend the period before the mortgage is fully paid off, so this might not be desirable for someone who wants to be mortgage-free. Therefore, someone about to make a financial decision should take their complete financial picture into account, not just their tax situation”.

In fairness to Obama, some analysts like Mark Steber, who is vice president of tax resources at Jackson Hewitt Tax Service did express a more supportive viewpoint, “While generally there is no tax advantage to refinancing at a lower rate, an individual can save on the total out of pocket costs each year over the life of the loan. Though a tax bill will actually increase after refinancing, the increase in taxes may be less than half of the total difference in interest paid, so the taxpayer may save more money than their taxes increase, therefore resulting in net savings”.

Some Good News About Mortgages

Michael Redbourn — Wed, 06 May 2009 08:47:39 +0000

The Federal Reserve noted in a survey of loan officers that was released on Monday, May 6, that demand for prime mortgages rose in the first quarter for the first time since early 2007, and this was in spite of the fact that many banks tightened their requirements for home loans.

The increase in demand comes as 30-year mortgage rates fell to an average 4.78% last week.

Other details of the survey state that, about one half of U.S. banks tightened their lending standards on prime mortgages, which is up from about 45% from that given in a survey that was released in early February.

65% of banks reported having tightened their standards on non-traditional mortgages, such as adjustable-rate loans with multiple payment options, up from 50% in the last survey, and nearly 60% of banks said they tightened their requirement on credit card loans in the past three months.

The Fed’s survey was based on responses from fifty three domestic banks and twenty three foreign banks.

Additional good news was also reported by the National Association of Realtors which announced that its Pending Home Sales Index showed that pending sales of existing homes climbed upward in March, making two consecutive months of increases.

The NAR attributed a rise of 3.2% in signed contracts to “a flood of first-time home-buyers taking advantage of excellent mortgage interest rates”.

The House of Representatives Backs Credit-Card Measures

Michael Redbourn — Sun, 03 May 2009 16:57:47 +0000

The U.S. House of Representatives passed by a vote of 357-70 today, a so-called ‘credit-card bill of rights’ bill, following the adding of a provision that will require banks to apply consumers’ payments to balances with the highest interest rates first.

Uncollected credit card debt rose to 8.82% in February, and that’s the highest amount registered by Moody’s Investors Service Inc. since it began keeping records twenty years ago.

The legislation will also require credit-card companies to give forty-five days notice before increasing rates, and require statements to be mailed at least twenty-one days before the payment due date, and the provision will take effect ninety days after the measure is signed into law.

The House bill imposes broader restrictions than those enacted by the Federal Reserve in December, leading House Speaker Nancy Pelosi to say, “Very soon this will be the law of the land, and consumers will benefit. The House action today will give the legislation momentum heading into the Senate, and with a Democratic president who will sign final legislation there is little doubt it will get support needed in both chambers”.

The senior Republican on the House Financial Services Committee, Spencer Bachus, voiced concern however saying, “Too many restrictions will lead lenders, such as Bank of America Corp. and Citigroup Inc., to pull back on credit in the midst of a severe economic decline. Credit cards play a crucial role in the life of ordinary Americans. Any legislation affecting credit-card practices is going to have a profound effect. There are a great number of people whose rates will go up”.

Edward Yinglingm, who is the President and Chief Executive Officer of the American Bankers Association said in a statement, “It is vitally important to maintain access to credit at this difficult economic time. This is especially true for credit cards, which serve as a driver of economic activity and are relied on by consumers and small businesses as way to bridge short-term financial gaps”.

Two New Plans Announced To Help Homebuyers

Michael Redbourn — Wed, 29 Apr 2009 10:08:16 +0000

The Obama administration just announced two new programs, that it’s hoped will help homebuyers who are experiencing problems paying their mortgages.

The first program, which should be up and running within a month is intended to help borrowers that have second mortgages stay out of foreclosure, and it will make cash amounts up to $12,000 available to servicers, investors and borrowers who modify loan terms, and a government spokesperson said that as many as a two million participants in the mortgage-modification program may be eligible for the second-lien assistance.

An example of how the plan would work, would be borrower who had a $250,000 interest only, first mortgage and was paying 6% interest. If the housing expenses were equal to 40% of the borrowers income, then the government would pay $2,625 per year, for five years in order to reduce the payments. Moreover, if that same borrower also had a $43,942 second mortgage and was paying 8.6% interest, then the government might, and I say “might”, pay one half of the $2,336 annual cost for five years.

The government’s second plan, is intended to renew interest in the Hope for Homeowners program, which until now has attracted very little enthusiasm from either borrowers or lenders. The program is primarily aimed at borrowers who owe more on their mortgages than their homes are worth, and to make the plan more attractive, the government will now provide a $2,500 incentive fee to loan servicers, and also require them to consider the plan when reworking a mortgage.

Overall reaction to the plans seems favorable, with Laurie Goodman who is an analyst at the Amherst Securities Group LP saying, “The new measures may ease mortgage investors’ concerns that the biggest banks and servicers would be tempted to rework too many loans under the program, in order to bolster their home- equity portfolios. Certainly, it appears that the Treasury has listened to first-lien investors and the announcement goes a very long way toward addressing their objections”.

Treasury Secretary Timothy Geithner said in a statement, “Ensuring that responsible homeowners can afford to stay in their homes is critical to stabilizing the housing market, which is in turn critical to stabilizing our financial system”.

Home Prices Higher In February Than In January

Michael Redbourn — Fri, 24 Apr 2009 07:24:28 +0000

The gain in U.S. house prices of .7% in February is the first consecutive monthly gain in two years, and is interpreted by some, but not all experts, as a sign that an end to the real estate slump might sight.

The February prices were still 6.5% lower than a year earlier and were pretty much in line with estimates, and also a recent statement by Federal Reserve Vice Chairman Donald Kohn, “As demand firms, and once inventories of houses, and a broad range of goods are brought into line with sales, economic activity should begin to stabilize,”

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased by 5.3% last week and a National Association of Realtors report notes that home sales rose by 5.1% in February.

The number of Americans that signed contracts to buy previously owned homes rose by 2.1% in February, which was led by a 14.5% jump in the Midwest, and a 10.6% increase in the Northeast.

The California and Florida metropolitan areas led the U.S. in foreclosures in the first quarter of this year, and Bruce Norris, who is a principal with the Norris Group said, “Whatever damage has been done in California is only going to get worse because there is a glut of homes owned by lenders that aren’t yet on the market. These homes are like a shadow inventory that is likely to drag down prices further when they come onto the market”.

Norris’s comments are supported by comments on the National Association of Realtors website which states, “U.S. home prices probably will fall 5.1% this year to $188,500, less than the 9.3% plunge in 2008, according to the real estate group. Home resales probably will rise 1% to 4.96 million after a 13% drop last year”.

Bill To Limit Credit Card Increases To Be Advanced

Michael Redbourn — Tue, 21 Apr 2009 09:46:05 +0000

Although the Federal Reserve finalized new regulations that will limit various credit-card rate increases last December, the rules won’t come into effect until July 2010, and there is now mounting pressure to implement the regulations at a much earlier date.

Not surprisingly, the banking industry says that both the White House and Congress should wait for the Fed’s new rules to take effect before taking any additional action, and Edward Yingling, who is president of the American Bankers Association, said last Sunday, “The banking industry understands the concerns about credit cards, but the administration should fully recognize the impact of the Federal Reserve Board regulation, which is one of the strongest consumer protection regulations ever adopted. As we go forward we need to be careful about piling on rules that very much may have the impact of restraining the availability of credit”.

Democratic lawmakers have already begun advancing legislation that would limit certain credit card fees and other practices and Larry Summers, who is scheduled to meet with the heads of several of the largest U.S. credit card issuers at the White House on Thursday, recently said on NBC’s ‘Meet the Press’, “The president is going to be very focused, in a very near term, on a whole set of issues having to do with credit-card abuses”, and then added, “their abuses include charging consumers extraordinarily high rates that they wouldn’t have paid if they knew what they were getting themselves into”.

Summers’s comments were also underlined by White House spokeswoman Jen Psaki who said, “Addressing abuse in the credit card industry and standing up for consumers is a priority for the president and his economic team, and we look forward to working with Congress on these issues”.

Whereas banks claim that market conditions and changes in borrowers’ credit scores necessitated the increases, consumer advocates want new legislation that would not only limit rate increases on existing balances, but would also require credit card companies to provide more information on their rates, and they are particularly critical of banks that raised interest rates whilst receiving federal bailout funds.

Number Of Foreclosures Fell In January

Michael Redbourn — Fri, 13 Feb 2009 10:09:00 +0000

More than 270,000 home-buyers received a foreclosure related notice in January and that number would have been considerably higher if not for various attempts by both the government and the buyers to delay the process.

Aiding the slowdown was a deal that Florida Gov. Charlie Crist cut with lenders in that State which resulted in them agreeing to a forty five day delay in new foreclosure petitions.

Additional help also came from Fannie Mae and Freddie Mac that agreed to suspend their foreclosure sales during the winter holidays.

The January figure was 10% lower than the December one but still 18% higher than a year ago and more than two million American home-buyers faced foreclosure proceedings last year.

A recent report shows that almost 67,000 properties were repossessed by lenders in January 2009 compared with 45,000 repossessed properties in January 2008.

Nevada, California, Arizona and Florida had the nation’s highest foreclosure rates with one in every seventy six homes receiving a foreclosure notice in Nevada and one in one hundred and seventy three in California with Merced Ca showing a horrifying one in every fifty nine people getting notices.

The Obama administration is expected to back a push in Congress that would allow bankruptcy judges to alter the terms of primary home loans, and earlier this week, Obama said that it “makes no sense that judges are not allowed to do so”.

However the mortgage industry as a whole is against the change and argues that it this very prohibition that allows lenders to charge lower rates.