17 Banks since January 1, 2009 does not make a situation where you can claim banks are failing left and right. The fact is yes, there are more banks closing. But the closure of banks is more often a reflection of an FDIC insured bank not meting minimum standards. And in some cases as was the one the closed in Georgia a few weeks back, it was a case of the FDIC declaring that the bank "might" get into trouble due to a preponderance of CRA loans on its books.
It is certainly a faster clip than 2004 or 2007 4 and 3 respectively. But it isn't even remotely close to the failure rates of banks during the start of the Depression. It isn't the same as when FDR took office on March 4, 1933 and immediately declared a Bank Holiday to prevent dozens of banks failing every day. Nor is it even as bad as the Savings & Loan collapse.
The fact is the vast majority of FDIC insured state and local banks are fine and are in no need of even potential bailouts. The N.A. banks are shaky in so far as they are more exposed to the average national trend in real estate and commercial activity due to the very fact they are N.A. banks. As far as cash flows go there isn't much of an issue except when you get to the N.A. banks and the now non-existent investment charter banks. In fact, the shaky nature of the N.A. banks is almost directly a result of them snapping up the investment banks at bargain basement prices.
The issue is that the N.A. banks bought up their main rivals for commercial level banking at a really cheap price. But they didn't suspect the degree to which the mortgage backed securities were no longer fungible so the paper sheet balance was much worse than they suspected it would be.
Monday, March 16, 2009
Banking Crisis?
Sunday, March 15, 2009
Printing Money
The Bank of England is deciding to simply "print" money in an effort to create positive cash flows across the United Kingdom's economy. This is usually not a good thing for governments with debts of substantial proportions. Examples of recent failures of this policy are cases like Argentina or for that matter any of the former Soviet governments shortly before their collapses where they literally turned on the printing presses in order to keep their collapsing systems running. Is China soon to feel a sting?
China CAN print as much Yuan as it wants. For that matter they still make their coins out of aluminum and their bank notes are still cheap ink on a paper that might as well be rice paper. The reason why they can do that is because their currency is still about as convertible as the Soviet Ruble was. The "independent" banks and commercial markets do not control the money supply inside China, the government does. If they say a Yuan is worth 1:1 with the US Dollar then it does.
They can do this because their central banking system enjoys the side benefits of having a closed communist consumer market dependent upon what the government declares the prices of goods and services to be & the fact that they can make such a determination because they convert the profits from selling consumer goods abroad into government securities of the nations they trade with. Meaning, while their economy may have a worthless currency, it remains wholly stable because the Chinese government holds the national government debts of most of its trading partners in a majority status.
As long as China can get the government securities of other nations, it can afford the policy of simply printing its own currency as it wishes. The Premiere of China bitterly noted however the fatal flaw in this system. Now that we are not buying as much consumer goods from China, they are unable to buy as much government debt in the form of Treasury Bills. Further, the T-Bills that they could buy are potentially now becoming upside down investments if held to maturity. That means that suddenly China as a government cannot simply print money to fuel its growth without also risking a deflation in purchasing power of their domestic currency.
As long as they had a physical good to sell and a means to convert the payments for those goods into securities that would return more interest than the effect of continually printing money for their domestic markets, they were fine. Now they are stuck holding a paper mountain of debt that could crush them because we are considering "printing" money as Western Governments seek to force their own domestic credit markets into life again.
The important point is that we won't be backing our printing by the debt paper of a greater economy. We are just going to print the stuff. If China stops buying our government debt, then what they currently hold will become meaningless as far as it being able to allow them to simply print their own domestic funds. If they do keep buying, and we do print money ala Bank of England, they run a substantial risk that their past purchases will turn to upside down investments and their current and future purchases will not allow them to simply print money to enable a monetizing of their own domestic goods and services.
Either way, China's government leaders are bad because whatever they do means a downturn in their projections and also means the fueling of China's growth with cheap domestic currency is at an end.
Monday, March 9, 2009
Military bases and where Local Federal Grants Come Into Play
The unintended negative consequences of military bases as far as economics goes is pretty well documented. In most- but not all- places that have gone through the BRAC process and have then been decommissioned the local economies tend to perform better overall after only a couple of years. For example in my city we have a base closing in about 18 months after having been emplaced for nearly 75 years. The projections as to what the economy will do as a result of not having the military base anymore is that we should see a doubling of economic activity in the immediate area around the base. Further the base will now pay property and sales taxes- something which it hasn't paid for in many years.
And there are other examples in my state as bases have been closed or realigned. Warrner Robbins AFB for example was realigned and the city went into conniptions when it happened. Yet the reduction of base activity has ironically- though not unexpectedly lead to the first economic improvement for the city since the base popped up during World War II.
The perception is that military bases have scads of civilian contractors running about and getting paid to do things for the military so that the military can use its manpower for actual mission and training. The reality however is that unless it is a base like Dobbins AFB in Marietta, Georgia where the facility is actually a shared site with Lockheed-Martin's aircraft assembly plant, there isn't much local employment derived from on base activity. The reality is that while there is some service industry benefits to a local economy- for example the strings of fast food places and bars that abut many military bases, there is little transfer of wealth from the actual cost of the financing of the base to the outlaying economy that the base occupies.
As far as military base distributions you can just look at a military installations map if you want to to see my point. For example in all of New England you have two military installations, Brunswick in Maine and New London Connecticut. In New York you have a single Army base. Then you have Otis AFb in Massachusetts and McGuire in New Jersey. As Senator John Kerry pointed out, Congress and the BRAC process have set up a situation where most military installations now reside in the South and in the West. He found it to be political in that about the only places we now have military bases are those in "red states" or places where the congressional district in an otherwise blue state happens to be red.
To be clear, the BRAC process has largely removed politics from the decision on whether a military base should be maintained or established as well as when they should be shut down. It is also interesting to see that one of the standards by which the determination is made is "community commitment" to the base under review. Often one of the grounds for decommissioning of a base is the determination that the political leaders of a district support a base being maintained or not.
When Moody AFB, Robbins AFB, and Athens Naval Logistics & Supply School facilities were placed under the last round of BRAC, Moody and Robbins were determined to have political leadership support as well as community support. Athen's political leaders did not want their base and the left wing political advocate and activist groups in Athens also did not support the base. In keeping with Senator Kerry's thoughts on the red vs blue placement, Moody and Robbins AFBS happen to be in staunchly red districts. Athens happens to be a blue district in a sea of red.
As far as the South being a beneficiary of having more of the 110 Federal Prisons you are correct 56 of them happen to be in the South with 54 spread across the rest of the country. However the number of Federal Prisoners in total is somewhere north of 200,000 people. That isn't much of an offset, and is even less of an offset when you consider federal prisoners are still considered to be residents of their last state while not incarcerated. Meaning Federal Prisoners don't cant when it comes to determining Congressional representatives allocation by Census.
Before BRAC, Congress members did fight tooth and nails for bases in their districts because given Cold War realities, many voters thought having a military presence in their district was good insurance. I always thought it was kinda a stupid conclusion for people to come to given that ICBM's look at military bases as targets to hit. But there was some justification especially during the Reagan years that military bases were one of the few reliably funded Federal expenditures that could prop up local economies during the late 1970's and early 1980's.
With the fall of the Iron Curtain however, the need for baeses made little sense, and when people started crunching the numbers, often they realized that in an environment of reduced military spending by the Federal Government, the bases were in fact a net drag on local economies. No one in Congress wanted to have to say closing down the local White Elephant was a good idea, so they set up BRAC to let non- politicians make the determination for them. That is why you have seen less Congressional leverage being placed on maintaining bases because now a member of Congress essentially has little say on the process.
As to the differences in Federal outlays in terms of cities
http://www.census.gov/govs/www/estimate06.html
By way of example local Georgia political entities received $1,069,146,000 in direct government funding.
Delaware $64,537,000
Illinois $3,097,223,000
Maine $119,495,000
The breakdowns are interesting and you can indirectly see the funds used by the Federal Government to run Federal facilities at the local level in each state. Note however that this does not mean that that money is part of the local budgets that actually get used by local administrations. Instead for example the existence of a Federal Building will be accounted for in "general public buildings" but often the costs associated with those buildings are what the Federal Government spends to run the building. It does not indicate that the Federal Government gives the money to the local level to run the building on behalf of the Federal Government.
When you start to break out these funds from the total federal expenditure at the local level, you can determine what Federal Funds go directly towards the actual local government level. After you do this you will see that on a generalized basis cities, counties, and municipalities at the local level in the South get less direct money aid than is generally seen in the rest of the country.
Hope that helps.
Saturday, March 7, 2009
Secession a Second Time
If the South did leave the Union a second time I wonder if Kentucky & Missouri would be retained by force again? For that matter I wonder if Oklahoma, Arizona and New Mexico would be forced back under Union control as well.
Then again it might also allow Virginia to reclaim West Virginia.
All that aside, the South has the weapons this time- whereas the North doesn't have the huge military districts and permanent encampments that the South has. And for what it is worth, the military is held in generally higher esteem than it enjoys in the North East or West coast. Look at it this way- if the Confederacy ever attempted to leave agin, it could shut down the petrochemical supplies for most of the North East in minutes. The South now has modern industrial facilities and factories that simply have no equal in the Northeast or Midwest. Plus we have the Marines, Kings Bay, and Norfolk and even the B2 base in Georgia.
In military terms, unless the Union was willing to launch ICBMs from the overflight country and risk a response from the Trident submarines in the Atlantic as well as the air carrier fleet, there is very little potential that the Union could force a Confederacy to return by conventional military forces.
As to why the CSA might not just be Whistling Dixie in a Graveyard? The cultural differences that get aped and laughed at by the Hollywood film industry & the general disdain that people in the Northeast and Midwest have for someone from the South as a stereotype wouldn't be the issue. The grounds for secession would this time be due to the fact that the South is generally more conservative and less amenable to socialism. The impacts on the South due to acts taken by the Federal government still tend to be as considered as the actions taken towards a red headed step child. Meaning aside from military spending- which the rest of the country doesn't want in its own backyard- the South gets perennially shafted in terms of net outcomes of federal programs. We tend to pave our own roads. Build our own factories. And simply find alternate means of making do without depending on often vanishing Federal funds.
The issue of Southern Governors not accepting the Federal loans intended for unemployment insurance is just one of these examples of the difference between the South and the rest of the country. They aren't declining the aid because the cannot use it. Rather they are declining it because in the fine print, after the Federal aid runs out, the states agree to maintain the newly established levels of payments in perpetuity. Southern Governors know how the Monty Shuffle is played and understand that if history is anything to go by, the Fed will live up to its perpetually unfunded mandates to the South.
The stereotype of hick-seed rednecks driving pickup trucks with ten shotguns in a window and two brain cells is laughed at by the rest of the country as being presumably true. Larry the Cable Guy is nationally popular because the rest of the country thinks people in the South really are that way. But like a Joel Chandler Harris story, all is not what it seems. People in the South laugh at the stereotype because they know it isn't true and is indeed a vast underestimate of the abilities and intelligence of people in the South.
There is a limit to how much anyone will put up with before people start voicing opposition to a government. But in an odd twist, despite being underserved by the Federal Government, I suspect that the South would fight tooth and nail if required to keep the Federal Government in existence. I would expect that if there were to be a secession for a second time, places like the Four Corners, California, or even places like Michigan would be those to reach the end of their fuse first in terms of seeing Washington D.C. as a solution provider instead of an obstacle to be removed by force.
Community Recovery Banks & Not Selling Derivatives.
Not directly. They could and usually did sell the mortgages to either Freddie or Fannie. It is highly unusual for even a local community bank to hold the mortgage paper of loans they provided for even a few days. I checked in to this recently and was told that standard policy in my bank, as well as their local competitors is to close on a mortgage and then almost immediately sell the mortgage paper to Fannie or Freddie. Even now despite all the problems both corporations have. In my case I required the mortgage to not only be initiated by the bank but also held by the bank and not sold to Freddie. As my banker said such a circumstance is highly unusual. Despite being a CRA bank, and the bank clearing over 40,000 mortgages a year, the mortgage department consists of three people who do the paperwork and a single agent at each branch. Meaning less than 20 people are the mortgage department of my CRA qualified/compliant bank.
How many mortgages does the bank hold directly? According to my agent somewhere under 1000. But my bank sure is healthy.
The CRA banks cannot sell their own bundles or create mortage back derivatives. Absolutely true. But the standard industry practice for all small/mid cap banks writing loans is to simply sell the paper to an institution that can. In the case of CRA lending institutions the only market they are allowed to sell to is either Freddie or Fannie.
Saying that CRA banks/lending institutions cannot directly participate in the derivative markets and securities is a bit disingenuous because although true on face value, it neatly overlooks the reality that they were the institutions that were selling to Freddie and Fannie. Of course CRA banks can say "We didn't sell or create derivatives!" because they didn't.
What they aren't making plain to he people of the United States is that they SOLD it to Fannie and Freddie. So obviously since Fannie and Freddie made the bundles that included CRA mortgages, it is now the fault of Fannie and Freddie. Instead of realizing it is the consequence of a progressive social policy law that shirked common business standards of credit, and overlooking the fact that the nation's two quasi-independent mortgage clearinghouses were fully aware of the plausibility of insolvency by including the CRA loans, people are happy to say its the fault of the investment banks in Wall Street .
I have heard this argument before. Except usually it is the one advocated by people who want to legalize drugs. Except when they make the argument that the end users aren't responsible for the negatives of drug economics. They a;ways say that the violence and negative costs of drugs lie almost exclusively with the manufacturers.
With the CRA banks taking the position of the drug producers and the former investment banks of Wall Street taking the roll of the junkie who just got some bad smack, I have to wonder why people are so eager to blame the investment banks in this case. They were fed an adulterated cut of drug, and the people who created the drug are getting away with it because it is simply implausible to any progressive liberal that a social program that tinkers with market economies could cause any harm at all.
Mortgage Loan Causality
The point which is being overlooked by those who find neither fault with the government creating a Community Reinvestment Act or the banks that agreed to do the loans on terms that often were based not on a person's ability to pay but instead upon their ability to be defined as a minority of some sort < race/gender/national origin/disability> is that while only 20% of them went bad, that 20% was bundled in resellings of the mortgages.
Consider in conforming loans, the default rate was less than 3%. Of those in the purview of the governmental program 20 % failed.
So when you had a 20% failure rate embedded in bundles of mortgages, suddenly instead of the normal default rate of only 3%, the holders of these securities began finding out that the default rates were maybe as high as 10%. In the mortgage security business your profit margins are razor thin. Normally 2%. Which is fine when you look at the cost of borrowing money at the time. But in the last 18 months, not only were these bundles seen to be seriously overvalued but also they represented additional costs in terms of what happens when a loan defaults. In markets heavily served by CRA loans, the number of foreclosures contributed directly to the decline in real estate values. People who had jumbos or ARMs suddenly couldn't sell their properties before the balloon payment came due or the mortgage interest rate expanded.
For the holders of mortgage bundles or derivatives based upon bundled mortgages, the decline in values in markets further depressed the value of their holdings. As more defaults and foreclosures happened, the valuation of mortgage securities declined. Meaning even if a mortgage bundle had no CRA mortgages within it, the market for existing real estate as it declined inherently made the bundles less valuable.
So anyone who says the mortgage loan practices of the federally backed home ownership programs, or the clearinghouses of Freddie and Fannie, or the fact that the community reinvestment act loans has nothing to do with the collapse nationwide of the mortgages and home lending business cycle is smoking something funny.
Are there other things that have contributed to the current recession? Yes. But considering the slice of the economy represented by the housing industry, when that industry gets hit with the negative effects of a government policy, the fall out will be massive.
By way of example. What if the Congress had initiated a "everyone gets car financing" plan? Suddenly lenders and auto dealers would be chomping at the bit to participate in the government's policy plan. But eventually, a lot of people would have car loans they cannot afford. The holders of those loans now find that they cannot turn them into secure assets that can be commoditized. Which then gets further compounded by the fact that now lots of people are having their cars repossessed. And a lot of other people who normally could get a car can't even get the financing. At that point you would have the big 3 coughing and wheezing.
Thing is the collapse of the housing market hit the financial sector so completely that it dried up any credit for day to day normal activity. So you have seen it transfer over into consumer credit markets. You have seen it trickle over into durable goods purchases. You have seen it cause a situation where automobiles cannot be purchased by average consumers.
This whole collapse was the fault of Bush not vetoing the measure. Even though he opposed the bill's expansion. It is also his fault in that he did not use the Federal Reserve board and the SEC to adequately investigate the degree of holdings the nation's top banks had in securitized commodities backed by mortgage derivatives. He could have stopped this 18 months ago. He didn't.
And it isn't as if he didn't realize the tidal wave was coming because even the people on the internet knew something was up.
The CRA compliant banks are coming out fine because most are local, small and sold the actual mortgages to Freddie and Fannie who in turn sold them to the investment banks and derivatives brokerages. To say that the CRA banks are "fine & dandy" avoids the reality that they already took the origination fee and didn't hold the paper anymore- often within a day of each closing. The evidence is that the government policy, served and implemented by small local banks became a poison which turned the investment banking industry on its head.
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