Barofsky: We Are Headed for a Cliff Because of Housing

Posted on September 19, 2012 by Neil Garfield

Editor’s Note: Hera research conducted an interview with Neil Barofsky that I think should be  read in its entirety but here the the parts that I thought were important. The After Words are from Hera.

After Words

According to Neil Barofsky, another financial crisis is all but inevitable and the cost will be even higher than the 2008 financial crisis. Based on the way that the TARP and HAMP programs were implemented, and on the watering down of the Dodd-Frank bill, it appears that big banks are calling the shots in Washington D.C. The Dodd-Frank bill left risk concentrated in a few large institutions while doing nothing to remove perverse incentives that encourage risk taking while shielding bank executives from accountability. Neither of the two main U.S. political parties or presidential candidates are willing to break up “too big to fail” banks, despite the gravity of the problem. The assumption that another financial crisis can be prevented when the causes of the 2008 crisis remain in place, or have become worse, is unrealistic. In the mean time, what Mr. Barofsky describes as a “parade of scandals” involving highly unethical and likely criminal behavior is set to continue unabated. Although the timing and specific areas of risk are not yet known, there is no doubt that U.S. taxpayers will be stuck with another multi-trillion dollar bill when the next crisis hits.

*Post courtesy of Hera Research. Hera Research focuses on value investing in natural resources based on original geopolitical, macroeconomic and financial market analysis related to global supply and demand and competition for natural resources

Excerpts from Interview:

HR: Did the TARP help to restore confidence in U.S. institutions and financial markets?

Neil Barofsky: Yes, but it was intended and required by Congress to do much more than that and Treasury said that it was going to deploy the money into banks to increase lending, which it never did.

HR: Were the initial goals of the TARP realistic?

Neil Barofsky: First, if the goals were unachievable, Treasury officials should never have promised to undertake them as part of the bargain. Second, even if the goals were not entirely achievable, it would have been worth trying. Treasury officials didn’t even try to meet the goals.

HR: Can you give a specific example?

Neil Barofsky: The justification for putting money into banks was that it was going to increase lending. Having used that justification, there was an obligation, in my view, to take policy steps to achieve that goal, but Treasury officials didn’t even try to do it. The way it was implemented, there were no conditions or incentives to increase lending.

HR: What policy steps could the U.S. Department of the Treasury have taken to help the economy?

Neil Barofsky: There are all sorts of things that Treasury could have done. For example, they could have reduced the dividend rate—the amount of money that the banks had to pay in exchange for being bailed out—for lending over a baseline, which would have decreased the bank’s obligations. Or, they could have insisted on greater transparency so that banks had to disclose what they were doing with the funds. Treasury chose not to do any of these things.

HR: Weren’t there other housing programs like the Home Affordable Modification Program (HAMP)?

Neil Barofsky: Yes, but there were choices made to help the balance sheets of struggling banks rather than homeowners. The HAMP program was a massive failure but it wasn’t preordained. It was the result of choices made by Treasury officials.

HR: What could have been done differently in the HAMP?

Neil Barofsky: HAMP was deeply flawed with conflicts of interest baked into the program. The management of the program was outsourced to the mortgage servicers, which were thoroughly unprepared and ill equipped. The program encouraged servicers to extend out trial modifications. It was supposed to be a three month period but it often turned into more than a year. The servicers, because they could accumulate late fees for each month during the trial period, were incentivized to string the trial periods out then pull the rug out from under the homeowner, putting them into foreclosure, without granting a permanent mortgage modification. The servicers could make more money doing that then by doing mortgage modifications. If they had done permanent mortgage modifications, the banks couldn’t have kept the late fees.

HR: Are you saying that the program encouraged banks to extract as much cash as possible from homeowners before foreclosing on them anyway?

Neil Barofsky: Yes. The mortgage servicers exploited the conflicts of interest that were in the program, and blatantly broke the rules, and Treasury did nothing.

HR: When you were serving as Inspector General for TARP, you issued a report indicating that government commitments totaled $23.7 trillion. What was that about?

Neil Barofsky: $23.7 trillion was simply the sum of the maximum commitments for all the financial programs related to the financial crisis. The number was misconstrued as a liability but the government never stood to lose that much. For example, the government guarantee of money market funds was a multi-trillion dollar commitment. Of course, not all of that money could have been lost because it would have required every fund to go to zero. The government guaranteed commercial paper but, again, for that commitment to have been wiped out, every company would have had to have defaulted. But the numbers were very important in terms of transparency. All of the data were provided by the agencies responsible for the various programs, so the $23.7 trillion number was simple arithmetic. It was important to understand the scope of the extraordinary actions that were being taken.

HR: What are the potential future losses that the U.S. government—that taxpayers—might have to absorb?

Neil Barofsky: The real issue is the potential for another financial crisis because we haven’t fixed the core problems of our financial system. We still have banks that are “too big to fail.” Standard & Poor’s estimated last year that the up-front cost of another crisis, including bailing out the biggest banks yet again, would be roughly 1/3 of the U.S. gross domestic product (GDP) or about $5 trillion. The resulting problems will be even bigger.

HR: What were the problems resulting from the 2008 financial crisis?

Neil Barofsky: When you look at the fiscal impact of the 2008 crisis, you have to look at it not only in terms of lost tax revenues and increased government debt, but also in terms of the loss of household wealth. People who became unemployed suffered tremendous losses and the government’s social benefit costs expanded accordingly. One of the reasons we had the debt ceiling debate last year, when the U.S. credit rating was downgraded, and why we are facing a fiscal cliff ahead is the legacy of the 2008 crisis.

We have a lot less dry powder to deal with a new crisis and we almost certainly will have one.

HR: Why do you expect another financial crisis?

Neil Barofsky: It just comes down to incentives. A normally functioning free market disciplines businesses. The presumption of bailout for “too big to fail” institutions changes the incentives of a normally functioning free market. In a free market, if an institution loads up on risky assets with too little capital standing behind them, it will be punished by the market. Institutions will refuse to lend them money without extracting a significant penalty. Counterparties will be wary of doing business with companies that have too much risk and too little capital. Allowing “too big to fail” institutions to exist removes that discipline. The presumption is that the government will stand in and make the obligations whole even if the bank blows up. That basic perversion of the free market incentivizes additional risk.

HR: Are “too big to fail” banks taking more risks today than they did before?

Neil Barofsky: Bailouts give bank executives an incentive to max out short term profits and get huge bonuses, because if the bank blows up, taxpayers will pick up the tab. The presumption of bailout increases systemic risk by taking away the incentives of creditors and counterparties to do their jobs by imposing market discipline and by incentivizing banks to act in ways that make a bailout more likely to occur.

HR: Is it just a matter of the size of banking institutions?

Neil Barofsky: The big banks are 20-25% bigger now than they were before the crisis. The “too big to fail” banks are also too big to manage effectively. They’ve become Frankenstein monsters. Even the most gifted executives can’t manage all of the risks, which increases the likelihood of a future bailout.

HR: Since bank executives are accountable to their shareholders, won’t they regulate themselves?

Neil Barofsky: The big banks are not just “too big to fail,” they’re ‘too big to jail.’ We’ve seen zero criminal cases arising out of the financial crisis. The reality is that these large institutions can’t be threatened with indictment because if they were taken down by criminal charges, they would bring the entire financial system down with them. There is a similar danger with respect to their top executives, so they won’t be indited in a federal criminal case almost no matter what they do. The presumption of bailout thus removes for the executives the disincentive in pushing the ethical envelope. If people know they won’t be held accountable, that too will encourage more risk taking in the drive towards profits.

HR: So, it’s just a matter of time before there’s another crisis?

Neil Barofsky: Yes. The same incentives that led to the 2008 crisis are still in place today and in many ways the situation is worse. We have a financial system that concentrates risk in just a handful of large institutions, incentivizes them to take risks, guarantees that they will never be allowed to fail and ensures that the executives will never be held accountable for their actions. We shouldn’t be surprised when there’s another massive financial crisis and another massive bailout. It would be naïve to expect a different result.

HR: Didn’t the Dodd-Frank bill fix the financial system?

Neil Barofsky: Nothing has been done to remove the presumption of bailout, which is as damaging as the actual bailout. Perception becomes reality. It’s perception that ensures that counterparties and creditors will not perform proper due diligence and it’s perception that encourages them to continue doing business with firms that have too much risk and inadequate capital. It’s perception of bailout that drives executives to take more and more risk. Nothing has been done to address this. The initial policy response by Treasury Secretaries Paulson and Geithner, and by Federal Reserve Chairman Bernanke, was to consolidate the industry further, which has only made the problems worse.

HR: The Dodd-Frank bill contains 2,300 pages of new regulations. Isn’t that enough?

Neil Barofsky: There are tools within Dodd-Frank that could help regulators, but we need to go beyond it. The parade of recent scandals and the fact that big banks are pushing the ethical and judicial envelopes further than ever before makes it clear that Dodd-Frank has done nothing, from a regulatory standpoint, to prevent highly unethical and likely criminal behavior.

HR: Is the Dodd-Frank bill a failure?

Neil Barofsky: The whole point of Dodd-Frank was to end the era of “too big to fail” banks. It’s fairly obvious that it hasn’t done that. In that sense, it has been a failure. Dodd-Frank probably has been helpful in the short term because it increased capital ratios, although not nearly enough. If we ever get over the counter (OTC) derivatives under control, that would be a good thing and Dodd-Frank takes some initial steps in that direction. I think that the Consumer Financial Protection Bureau is a good thing.

Nonetheless, the financial system is largely in the hands of the same executives, who have become more powerful, while the banks themselves are bigger and more dangerous to the economy than before.

HR: How are OTC derivatives related to the risk of a new financial crisis?

Neil Barofsky: Credit default swaps (CDS) were specifically what brought down AIG, and synthetic CDOs, which are entirely dependent on derivatives contracts, contributed significantly to the financial crisis. When you look at the mind numbing notional values of OTC derivatives, which are in the hundreds of trillions, the taxpayer is basically standing behind the institutions participating in these very opaque and, potentially, very dangerous markets. OTC derivatives could be where the risks come from in the next financial crisis.

HR: Can anything be done to prevent another financial crisis?

Neil Barofsky: We have to get beyond having institutions, any one of which can bring down the financial system. For example, Wells Fargo alone does 1/3rd of all mortgage originations. Nothing can ever happen to Wells Fargo because it could bring down the entire economy. We need to break up the “too big to fail” banks. We have to make them small enough to fail so that the free market can take over again.

HR: Does the political will exist to break up the largest banks?

Neil Barofsky: The center of neither party is committed to breaking up “too big to fail” banks. Of course, pretending that Dodd-Frank solved all our problems, as some Democrats do, or simply saying that big banks won’t be bailed out again, as some Republicans have suggested, is unrealistic. Congress needs to proactively break up the “too big to fail” banks through legislation. Whether that’s through a modified form of Glass-Steagall, size or liability caps, leverage caps or remarkably higher capital ratios, all of which are good ideas, we need to take on the largest banks.

HR: Do you think the U.S. presidential election will change anything?

Neil Barofsky: No. There’s very little daylight between Romney and Obama on the crucial issue of “too big to fail” banks. Romney recently said, basically, that he thinks big banks are great and the Obama Administration fought against efforts to break up “too big to fail” banks in the Dodd-Frank bill. Geithner, serving the Obama White House, lobbied against the Brown-Kaufman Act, which would have broken up the “too big to fail” banks.

HR: What will it take for U.S. lawmakers to finally take on the largest banks?

Neil Barofsky: Some candidates have made reforms like reinstating Glass-Steagall part of their campaigns but the size and power of the largest banks in terms of lobbying campaign contributions is incredible. It may well take another financial crisis before we deal with this.

HR: Thank you for your time today.

Neil Barofsky: It was my pleasure.

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , , , | 3 Comments »

Politics Diverting Us From the Real Issues

Posted on September 19, 2012 by Neil Garfield

“The bottom line is that conservatives don’t conserve anything. They have their hand deeper into the public purse than anyone else. Liberals don’t liberate anyone either, providing the tools to prospects for progress and prosperity. The terms should not be used because nobody means what they say.” Neil F Garfield livinglies.me

Editor’s Comment: Romney’s latest gaffe is only a mistake in terms of him having said it, not that that he didn’t mean it. To set the record straight the 47% pay payroll taxes that the rich don’t pay, have incomes under $50,000 per year, and one third of them are seniors and disabled with incomes lower than $20,000 per year getting Social Security and similar benefits that they paid for when they were working. But isn’t really the problem.

The problem is that what Romney gave voice to was a feeling amongst the elite Democrats and Republicans who look at the bottom economic half of the country with disdain. Although they are working, paying Social Security and Unemployment taxes most of these people are treated as though they are trash to be taken out and cleaned somehow. Those taxes amount to over 12% of their income whereas the income from wealth, escape those taxes altogether.

And THAT is the reason it is so easy for banks to manipulate politicians, law enforcement and regulators into doing nothing about the cancer growing on our society — fake mortgages, fake foreclosures, fake evictions, and fake income and assets reported for the banks. Some of the media are picking up on the fact that the stolen money from investors is not being recognized as taxable income, which it is, and that the IRS isn’t pursuing hundreds of billions of income taxes that are due from the Banks. Talk about getting a free ride.

Today’s conference call (7 PM EDT) with members will touch on this along with the usual report on what is getting traction and what tactics and strategies might be used to confront the banks who are faking ownership of the loans when they neither loaned the money nor purchased the loan with money.

My take on the political landscape is this: I speak with people from the so-called far right political spectrum to the far left political spectrum. I speak to members of fringe groups too.

The overwhelming consensus amongst all of them from one end to the other is that government is corrupt, banks are corrupt and that our society is in the wrong hands mostly without candidates who will speak to these issues. We need a new crop of politicians who are no so encumbered with loyalties to the bank oligopoly because at some time, the ticking time bomb is going to blow. I speak of economic meltdown, caused by fabricated transactions and assets that our counted as part of our national wealth and GDP.

If you ask people specific questions about what is fair, just, moral, ethical and legal nearly all of them respond with the same answers. So why are we a divided nation? Why to we listen to sound bites instead of forcing the candidates to speak to us about our issues, about our stress and anxiety — whether we will have a roof over our heads, whether we will have food on the table, whether our children will be educated well enough so that they can fill the jobs that are ready to be filled. Right now there are 3 million such jobs.

You would think that someone would want to do something about it. Obama tried to put through a bill to do something about that but he didn’t push hard enough. Republicans scoffed at it because of their allegiance to the super rich whose boatloads of money are floating nearly all the republicans and many of the democrats in local, state and Federal elections.

But we can’t blame one or even a group of politicians if we, the Boss, as the voters who control who governs us, don’t do our job and get educated about issues, educated about candidates and exercise our absolute right to vote in the elections.

The current crop of incumbents doesn’t worry about our reaction because we don’t have any reaction tot heir stupid policies, bills and laws. We are a nation of apathy where vote turnout has been going lower and lower. The reason is the same as the unemployment situation. The figures would be worse if we added those back who simply gave up. Don’t give up your vote. Use it and mean it!

Filed under: bubble, CDO, CORRUPTION, currency, Eviction, foreclosure, GTC | Honor, Investor, Mortgage, securities fraud | Tagged: , , , , , , , , , , , | 21 Comments »

The Rain in Spain May Start Falling Here

Posted on May 14, 2012 by Neil Garfield

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Editor’s Comment:

It is typical politics. You know the problem and the cause but you do nothing about the cause. You don’t fix it because you view your job in government as justifying the perks you get from private companies rather than reason the government even exists — to provide for the protection and welfare of the citizens of that society. It seems that the government of each country has become an entity itself with an allegiance but to itself leaving the people with no government at all.

And the average man in the streets of Boston or Barcelona cannot be fooled or confused any longer. Hollande in France was elected precisely because the people wanted a change that would align the government with the people, by the people and for the people. The point is not whether the people are right or wrong. The point is that we would rather make our own mistakes than let politicians make them for us in order to line their own pockets with gold.

Understating foreclosures and evictions, over stating recovery of the housing Market, lying about economic prospects is simply not covering it any more. The fact is that housing prices have dropped to all time lows and are continuing to drop. The fact is that we would rather kick people out of their homes on fraudulent pretenses and pay for homeless sheltering than keep people in their homes. We have a government that is more concerned with the profits of banks than the feeding and housing of its population. 

When will it end? Maybe never. But if it changes it will be the result of an outraged populace and like so many times before in history, the new aristocracy will have learned nothing from history. The cycle repeats.

Spain Underplaying Bank Losses Faces Ireland Fate

By Yalman Onaran

Spain is underestimating potential losses by its banks, ignoring the cost of souring residential mortgages, as it seeks to avoid an international rescue like the one Ireland needed to shore up its financial system.

The government has asked lenders to increase provisions for bad debt by 54 billion euros ($70 billion) to 166 billion euros. That’s enough to cover losses of about 50 percent on loans to property developers and construction firms, according to the Bank of Spain. There wouldn’t be anything left for defaults on more than 1.4 trillion euros of home loans and corporate debt. Taking those into account, banks would need to increase provisions by as much as five times what the government says, or 270 billion euros, according to estimates by the Centre for European Policy Studies, a Brussels-based research group. Plugging that hole would increase Spain’s public debt by almost 50 percent or force it to seek a bailout, following in the footsteps of Ireland, Greece and Portugal.

“How can you only talk about one type of real estate lending when more and more loans are going bad everywhere in the economy?” said Patrick Lee, a London-based analyst covering Spanish banks for Royal Bank of Canada. “Ireland managed to turn its situation around after recognizing losses much more aggressively and thus needed a bailout. I don’t see how Spain can do it without outside support.”

Double-Dip Recession

Spain, which yesterday took over Bankia SA, the nation’s third-largest lender, is mired in a double-dip recession that has driven unemployment above 24 percent and government borrowing costs to the highest level since the country adopted the euro. Investors are concerned that the Mediterranean nation, Europe’s fifth-largest economy with a banking system six times bigger than Ireland’s, may be too big to save.

In both countries, loans to real estate developers proved most toxic. Ireland funded a so-called bad bank to take much of that debt off lenders’ books, forcing writedowns of 58 percent. The government also required banks to raise capital to cover what was left behind, assuming expected losses of 7 percent for residential mortgages, 15 percent on the debt of small companies and 4 percent on that of larger corporations.

Spain’s banks face bigger risks than the government has acknowledged, even with lower default rates than Ireland experienced. If losses reach 5 percent of mortgages held by Spanish lenders, 8 percent of loans to small companies, 1.5 percent of those to larger firms and half the debt to developers, the cost will be about 250 billion euros. That’s three times the 86 billion euros Irish domestic banks bailed out by their government have lost as real estate prices tumbled.

Bankia Loans

Moody’s Investors Service, a credit-ratings firm, said it expects Spanish bank losses of as much as 306 billion euros. The Centre for European Policy Studies said the figure could be as high as 380 billion euros.

At the Bankia group, the lender formed in 2010 from a merger of seven savings banks, about half the 38 billion euros of real estate development loans held at the end of last year were classified as “doubtful” or at risk of becoming so, according to the company’s annual report. Bad loans across the Valencia-based group, which has the biggest Spanish asset base, reached 8.7 percent in December, and the firm renegotiated almost 10 billion euros of assets in 2011, about 5 percent of its loan book, to prevent them from defaulting.

The government, which came to power in December, announced yesterday that it will take control of Bankia with a 45 percent stake by converting 4.5 billion euros of preferred shares into ordinary stock. The central bank said the lender needs to present a stronger cleanup plan and “consider the contribution of public funds” to help with that.

Rajoy Measures

The Bank of Spain has lost its prestige for failing to supervise banks sufficiently, said Josep Duran i Lleida, leader of Catalan party Convergencia i Unio, which often backs Prime Minister Mariano Rajoy’s government. Governor Miguel Angel Fernandez Ordonez doesn’t need to resign at this point because his term expires in July, Duran said.

Rajoy has shied away from using public funds to shore up the banks, after his predecessor injected 15 billion euros into the financial system. He softened his position earlier this week following a report by the International Monetary Fund that said the country needs to clean up the balance sheets of “weak institutions quickly and adequately” and may need to use government funds to do so.

“The last thing I want to do is lend public money, as has been done in the past, but if it were necessary to get the credit to save the Spanish banking system, I wouldn’t renounce that,” Rajoy told radio station Onda Cero on May 7.

Santander, BBVA

Rajoy said he would announce new measures to bolster confidence in the banking system tomorrow, without giving details. He might ask banks to boost provisions by 30 billion euros, said a person with knowledge of the situation who asked not to be identified because the decision hadn’t been announced.

Spain’s two largest lenders, Banco Santander SA (SAN) and Banco Bilbao Vizcaya Argentaria SA (BBVA), earn most of their income outside the country and have assets in Latin America they can sell to raise cash if they need to bolster capital. In addition to Bankia, there are more than a dozen regional banks that are almost exclusively domestic and have few assets outside the country to sell to help plug losses.

In investor presentations, the Bank of Spain has said provisions for bad debt would cover losses of between 53 percent and 80 percent on loans for land, housing under construction and finished developments. An additional 30 billion euros would increase coverage to 56 percent of such loans, leaving nothing to absorb losses on 650 billion euros of home mortgages held by Spanish banks or 800 billion euros of company loans.

Housing Bubble

“Spain is constantly playing catch-up, so it’s always several steps behind,” said Nicholas Spiro, managing director of Spiro Sovereign Strategy, a consulting firm in London specializing in sovereign-credit risk. “They should have gone down the Irish route, bit the bullet and taken on the losses. Every time they announce a small new measure, the goal posts have already moved because of deterioration in the economy.”

Without aggressive writedowns, Spanish banks can’t access market funding and the government can’t convince investors its lenders can survive a contracting economy, said Benjamin Hesse, who manages five financial-stock funds at Fidelity Investments in Boston, which has $1.6 trillion under management.

Spanish banks have “a 1.7 trillion-euro loan book, one of the world’s largest, and they haven’t even started marking it,” Hesse said. “The housing bubble was twice the size of the U.S. in terms of peak prices versus 1990 prices. It’s huge. And there’s no way out for Spain.”

Irish Losses

House prices in Spain more than doubled in a decade and have dropped 30 percent since the first quarter of 2008. U.S. homes, which also doubled in value, have lost 35 percent. Ireland’s have fallen 49 percent after quadrupling.

Ireland injected 63 billion euros into its banks to recapitalize them after shifting property-development loans to the National Asset Management Agency, or NAMA, and requiring other writedowns. That forced the country to seek 68 billion euros in financial aid from the European Union and the IMF.

The losses of bailed-out domestic banks in Ireland have reached 21 percent of their total loans. Spanish banks have reserved for 6 percent of their lending books.

“The upfront loss recognition Ireland forced on the banks helped build confidence,” said Edward Parker, London-based head of European sovereign-credit analysis at Fitch Ratings. “In contrast, Spain has had a constant trickle of bad news about its banks, which doesn’t instill confidence.”

Mortgage Defaults

Spain’s home-loan defaults were 2.7 percent in December, according to the Spanish mortgage association. Home prices are propped up and default rates underreported because banks don’t want to recognize losses, according to Borja Mateo, author of “The Truth About the Spanish Real Estate Market.” Developers are still building new houses around the country, even with 2 million vacant homes.

Ireland’s mortgage-default rate was about 7 percent in 2010, before the government pushed for writedowns, with an additional 5 percent being restructured, according to the Central Bank of Ireland. A year later, overdue and restructured home loans reached 18 percent. At the typical 40 percent recovery rate, Irish banks stand to lose 11 percent of their mortgage portfolios, more than the 7 percent assumed by the central bank in its stress tests. That has led to concern the government may need to inject more capital into the lenders.

‘The New Ireland’

Spain, like Ireland, can’t simply let its financial firms fail. Ireland tried to stick banks’ creditors with losses and was overruled by the EU, which said defaulting on senior debt would raise the specter of contagion and spook investors away from all European banks. Ireland did force subordinated bondholders to take about 15 billion euros of losses.

The EU was protecting German and French banks, among the biggest creditors to Irish lenders, said Marshall Auerback, global portfolio strategist for Madison Street Partners LLC, a Denver-based hedge fund.

“Spain will be the new Ireland,” Auerback said. “Germany is forcing once again the socialization of its banks’ losses in a periphery country and creating sovereign risk, just like it did with Ireland.”

Spanish government officials and bank executives have downplayed potential losses on home loans by pointing to the difference between U.S. and Spanish housing markets. In the U.S., a lender’s only option when a borrower defaults is to seize the house and settle for whatever it can get from a sale. The borrower owes nothing more in this system, called non- recourse lending.

‘More Pressure’

In Spain, a bank can go after other assets of the borrower, who remains on the hook for the debt no matter what the price of the house when sold. Still, the same extended liability didn’t stop the Irish from defaulting on home loans as the economy contracted, incomes fell and unemployment rose to 14 percent.

“As the economy deteriorates, the quality of assets is going to get worse,” said Daragh Quinn, an analyst at Nomura International in Madrid. “Corporate loans are probably going to be a bigger worry than mortgages, but losses will keep rising. Some of the larger banks, in particular BBVA and Santander, will be able to generate enough profits to absorb this deterioration, but other purely domestic ones could come under more pressure.”

Spain’s government has said it wants to find private-sector solutions. Among those being considered are plans to let lenders set up bad banks and to sell toxic assets to outside investors.

Correlation Risk

Those proposals won’t work because third-party investors would require bigger discounts on real estate assets than banks will be willing to offer, RBC’s Lee said.

Spanish banks face another risk, beyond souring loans: They have been buying government bonds in recent months. Holdings of Spanish sovereign debt by lenders based in the country jumped 32 percent to 231 billion euros in the four months ended in February, data from Spain’s treasury show.

That increases the correlation of risk between banks and the government. If Spain rescues its lenders, the public debt increases, threatening the sovereign’s solvency. When Greece restructured its debt, swapping bonds at a 50 percent discount, Greek banks lost billions of euros and had to be recapitalized by the state, which had to borrow more from the EU to do so.

In a scenario where Spain is forced to restructure its debt, even a 20 percent discount could spell almost 50 billion euros of additional losses for the country’s banks.

“Spain will have to turn to the EU for funds to solve its banking problem,” said Madison Street’s Auerback. “But there’s little money left after the other bailouts, so what will Spain get? That’s what worries everybody.”

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Revenue Sharing? How About Revenue Withholding?

Posted on August 30, 2010 by Neil Garfield
It is time to bring back true general revenue sharing — temporarily — to stimulate the economy. Hundreds of articles in political science and public policy journals have studied past efforts, and analyzed the concept of fiscal federalism, without establishing general revenue sharing as a fundamental pillar of Keynesian stabilization policies. This lapse is understandable: most of these articles were written before the current economic crisis, the most serious since the Great Depression. — Schiller
In the absence of revenue sharing and in the context of a reality with dark implications, I can foresee state and municipal governments finding creative ways to divert revenue that would otherwise go to the federal government and retaining it at the local level.  It sounds like a radical move and it probably contains some highly controversial elements. The fact remains, as Schiller points out, that we are not getting the results we need when we need it. We are not getting the action we need where we need it. Time has run out. In order to restore services, jobs and encourage liquidity in the capital markets, state and local governments are going to need to reach for innovative solutions, including like Wall Street did, issuing their own currency. Local government support of local community banks and credit unions together with existing agencies that already have numerous powers that have rarely if ever been used is the only option left to avoid an economic catastrophe that seems to be obvious to most citizens but completely obscured in Beltway analysis and decision-making. — Garfield
EDITOR’S COMMENT:  In the article below this world-famous economist whose analysis has been proven to be accurate and useful looking at trends that extend over 100 years, is sounding an alarm. Will anyone listen? This economist has proven the obvious: housing prices have a direct index relationship with median income. If people are making less money they must seek less expensive housing. We have an overbuilt housing market fueled by a delusional artificial infusion of fake liquidity. Neither the sale of existing homes nor the sale of new homes is going to have any positive effect on the economy for the foreseeable future. The only solution, as Schiller points out, is to cut through all the red tape and instantaneously put as many people to work creating actual products and projects that add value to our society. Each day we wait we get closer to the edge of a cliff that most of us at least fear is present, but which policy makers are ignoring at our peril.
The stability of our society and the prospects for our economy are the stakes in this gamble. The people making the decisions and the people who influence those making decisions do not believe they will be affected by a  negative outcome either way. I don’t think that they are correct. But whether I am right or wrong, the fact appears to be that our decision-makers appear largely derived from a group of people whose analysis is based on theoretical long-term models rather than the current emergency.
August 28, 2010

The Case for Reviving Revenue Sharing

By ROBERT J. SHILLER

PROTRACTED unemployment is eating away at millions of people. And the economy’s failure to create enough jobs for them is part of a vicious circle that could keep turning for years to come.

In my last column, I called for big, temporary government programs aimed directly at putting people back to work. But how might we best accomplish this? The clock is ticking, and we don’t have time to create new national organizations to employ people. Instead, the most efficient approach is to use existing organizations for specific ideas and projects.

State and local governments as well as nonprofit and other organizations need to be mainstays in this effort. We need to enlist their help — without telling them exactly what to do. As for a framework, think of the general revenue sharing program adopted by Congress in 1972.

In his 1971 State of the Union message, President Richard M. Nixon advocated general revenue sharing to offset the tendency for power to be concentrated in Washington. Give local governments the money and “put the power to spend it where the people are,” he said.

Support for the idea was not confined to Republicans. A leading Democrat, Senator Hubert H. Humphrey, supported it in 1972, saying that federal taxes were more progressive than state and local ones and that federal money could be spent more effectively by people with local knowledge than by “some agency head in Washington.”

General revenue sharing came under attack in the Reagan years, and Congress ended it in 1987, arguing that by breaking the link between taxation and local needs, it encouraged higher taxes.

We are in a different time now. State and local governments are in severe fiscal trouble, and their constitutions often prevent deficit spending. In these circumstances, the federal government, which does not face such constraints, needs to raise revenue for them.

Legislation providing the states with $26 billion, which President Obama signed into law this month, took an important step in this direction. It did not create true general revenue sharing, because it tied the funds to specific needs — mostly hiring teachers and paying for Medicaid. But it did free states to use other resources as they saw fit.

It is time to bring back true general revenue sharing — temporarily — to stimulate the economy. Hundreds of articles in political science and public policy journals have studied past efforts, and analyzed the concept of fiscal federalism, without establishing general revenue sharing as a fundamental pillar of Keynesian stabilization policies. This lapse is understandable: most of these articles were written before the current economic crisis, the most serious since the Great Depression.

The need for a Keynesian revenue-sharing program is clear. After Congress approved stimulus legislation in 2009, Lawrence H. Summers, head of the National Economic Council, said that “it’s harder to spend $300 billion within a year on quality projects than you might think.” And no wonder the task was tough: decision makers in Washington were removed from local needs.

Martin Shubik, a professor of mathematical institutional economics at Yale, has proposed creating a “Federal Employment Reserve Authority,” a permanent agency that would do extensive research and maintain a detailed list of ready-to-go public works projects should a recession come. That’s a great idea, but we do not have such an agency now, and, if we did, it might still suffer from a Washington bias.

Now, local governments are laying off a wide variety of employees, including teachers, police officers and social workers. So why don’t we embrace general revenue sharing? Unfortunately, when faced with a need for stimulus, members of Congress seem to prefer to start their own projects, for which they are likely to get more credit from voters. Local governments, meanwhile, which are more likely to know where spending is really needed, remain in deep trouble.

It’s time for the public to assert loftier expectations. We need to respect existing government bureaus and organizations for their ideas, and get down to the business of financing important jobs temporarily, and on a huge scale. This will avert more layoffs, and perhaps give cities and states time to recover to the point they can pay local employees from local revenue.

When the administration of Franklin D. Roosevelt began its vast job creation program in 1933, it had to accept certain practical realities, which limited the immediate stimulus that could be provided. Foremost among them was that the government had to work largely within the framework of existing organizations — whether state and local governments, the military or nonprofit groups — which provided much of the economy’s infrastructure.

Economic stimulus is not a matter of turning on the money spigot, as some economists are wont to describe it. It is about getting the widespread cooperation of dispersed organizations to provide jobs, at least for as long as the economy is weak.

When the Roosevelt administration and Congress created the Civilian Conservation Corps in 1933, it was done within the framework of the Army. There seemed to be no other organization that could move hundreds of thousands of young men into wilderness encampments where they could work on conservation efforts. But the Roosevelt C.C.C. placed no more than a half-million people in jobs. We need to reach further than that.

Labor unions, which represent workers who naturally fear displacement by people in new jobs, might seem to be an obstacle. But unions do have an idealistic base, and working union members have sons and daughters and friends and relatives who are unemployed. The unions need to be consulted if new jobs are to be created in a relatively nonthreatening way. In a savvy move, President Roosevelt made a union leader the head of the C.C.C.

The concept of general revenue sharing can also be extended to the nation’s nonprofits, including charities and foundations. The government has long given support to such organizations, but usually in the form of narrow grants. But broader general revenue grants could be made in times like these.

Millions of people need jobs, and there are organizations that could help put them to work. It’s time to move forward.

Robert J. Shiller is professor of economics and finance at Yale and co-founder and chief economist of MacroMarkets LLC.

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Capitalism and Environmental Policy: Ultimate Reality Show

Posted on April 19, 2008 by Neil Garfield

The clear mandate of future administrations is to bring the truth and reality home. Economic growth, as measured by the super pundit economists, has neither been truthful nor helpful in the real world of the life of the average American citizen. Countries all over the world have in one form or another realized that “the pursuit of happiness was fundamental to the founding of this Country and adopted by people as a global imperative.

The tendency of humans to allow themselves to overindulge and to stray from our own dignity and holiness is nowhere more apparent than in our stewardship of the Earth — Al Gore’s moral imperative in an “Inconvenient Truth.” For the last 250 years mankind has embarked on an experiment to use the world and control its resources in manner that strikes down our dignity and deprives us of access to holiness. 

Despite the cost to our current health and happiness, we continue to rely on “economic indicators” to tell us we are happy and content when we are not. It is neither truthful nor real to tell someone that employment conditions are good when they have dropped out of the marketplace in despair, or taken a job far below their potential or have recently been fired, only to be told that they lack skills and education  to perform in the new marketplace. For them a decline in unemployment figures or jobless claims is meaningless and reinforces their isolation, unhappiness and depression in a society that is supposedly founded on hope.

Despite our desire to see our children grow up to be productive good citizens we continue to value monetary transactions that economists use to measure economic activity without reference to the contribution  made by a good parent who successfully instills morality, good sense, and motivation in her/his children. It may not be PC to say it, but the lack of educational motivation of students, teachers, administrators and government can be traced in part to the fact that as a society, we treat a good mother as an underground activity that doesn’t matter and isn’t measured in our reporting of economic/societal activity. So we end up with under-educated children who resort to bullying rather than reason. 

And most importantly, despite the obvious costs to our health and the current condition of our planet in peril, we continue to consume things we don’t need or want or need, spend money we don’t have, and from all this “activity” produce an effluent of indifference to civil liberties, loss of species (including our own), and worship of “money” in lieu of worship of a higher  power or source that could give context to the meaning of our lives. Affluence has become Effluence for most people.

Government’s job is to catch up with people who are unhappy, and yes even bitter about the the stonewalling of government caused by money reaching into the halls of congress and state legislatures.

We can give up and let them have their way, leaving future generations to deal with the disastrous consequences of mortgage meltdown, war, drug overdoses with even worse side effects and doubtful benefit, distrust, environmental costs that are piling up without even abated much less reduced, and huge deficits caused by the deficiencies in our policies that have been funded and controlled by corporate America.

Or we can mobilize the population, elect responsible officials, and with zero tolerance, insist on a paradigm shift in our life styles, government, and perception of the world This is what the following article is about. I recommend it and the book.  

Book Examines Clash of Capitalism and the Environment

Contact: Dave DeFusco, Director of Communications, 203-436-4842

April 1, 2008

New Haven, Conn. —The environment will continue to deteriorate so long as capitalism continues to be the modern world’s economic engine, argues Gus Speth, dean of the Yale School of Forestry & Environmental Studies, in his new book, The Bridge at the Edge of the World: Capitalism, the Environment, and Crossing from Crisis to Sustainability.

Seeing an “emerging environmental tragedy of unprecedented proportions,” Speth says the book’s aim is to describe a non-socialist alternative to capitalism. That alternative includes moving to a post-growth society and environmentally honest prices, curbing consumerism with a new ethic of sufficiency, rolling back growing corporate control of American political life, and addressing the enormous economic insecurity of the average person.

“My point of departure is the momentous environmental challenge we face,” Speth says. “But today’s environmental reality is linked powerfully with other realities, including growing social inequality and neglect and the erosion of democratic governance and popular control.” Speth examines how these seemingly separate areas of public concern are intertwined and calls upon citizens to mobilize spiritual and political resources for transformative change on all three fronts. Donald Kennedy, editor-in-chief of Science, calls Speth’s book, “A powerful and ambitious attempt to characterize the changed strategies that environmental organizations need to adopt to become more effective. This book challenges many things that would seem to have political immunity of a sort—among others, corporate capitalism, the environmental movement itself and the forces of globalization.”

Co-founder of the Natural Resources Defense Council and the World Resources Institute and former White House advisor, Speth has been called “the ultimate insider” by TIME magazine. But now, faced with evidence of galloping degradation of the planet, Speth has concluded that “all in all, today’s environmentalism has not been succeeding.” He calls on environmentalists to “step outside the system and develop a deeper critique of what is going on.”

Speth argues that aggregate economic growth is no longer improving the lives of most Americans and suggests that in some ways it is making individuals worse off—environmentally, socially and psychologically. “It is said that growth is good—so good that it is worth all the costs, that somehow we’ll be better off,” says Speth, “We are substituting economic growth and more consumption for dealing with the real issues—for doing things that would truly make us better off.”

The book calls for measures that provide for universal health care and alleviate the devastating effects of mental illness; guarantee good, well-paying jobs and increase employee satisfaction, minimize layoffs and job insecurity and provide for adequate retirement incomes; introduce more family-friendly policies at work, including flextime and easy access to quality child care; and provide individuals with more leisure time for connecting with their families, communities and nature.

“My hope is that all Americans who care about the environment will come to embrace these measures—these hallmarks of a caring community and a good society—as necessary to moving us beyond money to sustainability and community,” he says. “Sustaining people, sustaining nature—they are just one cause, inseparable.”

Speth writes that Gross Domestic Product (GDP), the dollar value of all goods and services produced by the economy, is a poor gauge of human well-being or welfare. The book cites studies showing that throughout the entire period following World War II, as incomes skyrocketed in the United States and other advanced economies, reported life satisfaction and happiness levels stagnated or even declined slightly.

Speth says that these studies suggest the need for a radical rethinking and reordering of society’s priorities. Obsession with consumption and GDP growth has now causes more harm—to the environment, social fabric and world security—than good.

It took all of history, Speth notes, to build the $7 trillion world economy of 1950; today, economic activity grows by that amount every decade. At current rates of growth, the world economy will double in size in less than two decades. “Society is facing the possibility of an enormous increase in environmental deterioration, just when we need to move strongly in the opposite direction.”

The Bridge at the Edge of the World: Capitalism, the Environment, and Crossing from Crisis to Sustainability is published by Yale University Press (yalebooks.com). See the Bridge at the Edge of the World website for more information.

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DO NOT Walk Away From Your Home: Pretty Good Advice

Posted on April 16, 2008 by Neil Garfield

DO NOT Walk Away From Your Home

Submitted by Harry on Thu, 02/21/2008 – 01:38.

There are a lot of people out there that are in such dire financial
straits that when it comes to their home they might feel the best thing is to just walk away. After having been served with a foreclosure action from their lender (and having reached a stage of helplessness) often homeowners simply pack up and move out. In my opinion this is never the best idea. In fact it might be the worst idea.

To begin, by moving out you will find that your legal obligations do not end. You’re still liable for taxes – a debt you do not pay nor owe to the lender but rather pay to your local government. If and when the house is in fact foreclosed upon, the general rule is that all taxes will be paid by the bank – even back taxes. However in this environment, an environment in which lenders are going out of business, don’t assume that even an action for  foreclosure that has been initiated will be competed. Lenders are in some limited cases walking away. What’s more if they do you could be left with fines and violations for having left your property abandoned. Everything from failing to mow your lawn to garbage that collects in your driveway. Take the case of Emily Trowel moved out in 2002 and then found that the bank never in fact followed through Now she not only has thousands in fines and violations against her but they want to throw her in jail!

What should you do? First, assume nothing. The normal procedures and the normal events are subject to tremendous pressure from the volume of defaults. This is not a normal time. Second, if you are in foreclosure action make sure that you remain in your home and treat it as if you still owned it until the judgment of foreclosure is final. Had Emily Trowel simply stayed in her home she would now own it mortgage free. If you lender folds, or fails to foreclose, you may be the beneficiary of a wind fall. Second, remember that’s it’s only too late to do anything when the foreclosure judgment has been entered. You can always cure your default right up and until the day of the final judgment.

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