The Clover Helix
www.thecloverhelix.blogspot.com
Friday, October 30, 2009
This was just released onto the wire tonight and it is utterly disgusting. Select the link below to Bloomberg News. Representative Mel Watt has been bought and paid for by the banking interests (three of his top campaign contributors are Bank of America, Wachovia, and the American Bankers Association).
If this doesn't convince you to move your money to a credit union or to begin banking at home, nothing will.
Federal Reserve Policy Audit Legislation ‘Gutted,’ Paul Says
November 23, 2009 UPDATE: FED rage boils over on Capitol Hill
Friday, October 30, 2009
The Fallacy of Economic Stimulus: The Most Efficient mode for Economic Destruction
The Clover Helix
www.thecloverhelix.blogspot.com
Friday, October 30, 2009
In today's hard economic times it's difficult to accept what the national media and the government want you to believe about the nation's economy, and impossible if you have ever studied Austrian Economics.
Currently there is a brewing controversy over the effectiveness of the Federal government's "Cash for Clunkers" program (see here). The current author supports the view of the government's opponents on this issue. Clearly, the government has become very sensitive to the issue of their effectiveness. Furthermore, the Federal government issued a report today claiming that the economic stimulus package saved or created 640,000 domestic jobs at a cost of $150 billion dollars. This government-issued report was intended to demonstrate the effectiveness of the government's economic stimulus program (see here).
What is not emphasized is that this amounts to $234,375 for every job created or saved, not including the interest on the money borrowed or the inflation that this new money will inevitably create for the rest of the country. The average American wage is $41,334. Think about that a moment. The free market, if left alone, would have recovered and provided 3,630,000 people with jobs for a year in the productive portion of the economy using the same money! However, these jobs are now permanently lost through this "stimulus" and instead we are left with 640,000 mostly government-sector (non-productive) jobs. The government doesn't consider this future job destruction because their loss is never actually seen by the public, but they can be accounted for.
How so? The $150 billion must be repaid, and in the words of late economist Henry Hazlitt "public works means taxes", and if the government can't pay through taxes it will do it through inflation (monetary debasement). Either policy destroys public-sector productivity and job growth because every dollar collected by the government is another dollar not invested in job growth. Therefore $150 billion of future taxes is worth 3,630,000 private sector yearly incomes lost over the duration of repayment, and that's not counting the interest or the inflation which cost us even more job growth. In essence, for every new stimulus job created, 5.6 productive future year-long incomes are wiped out. How long can the nation continue in this way?
Even more ominously, the government intends to spend another $637 billion of borrowed money to create or save new jobs over the next year or so. Simply put, we can't borrow our way to prosperity and our United States, like Rome and Athens, is going to learn this lesson the hard way.
www.thecloverhelix.blogspot.com
Friday, October 30, 2009
In today's hard economic times it's difficult to accept what the national media and the government want you to believe about the nation's economy, and impossible if you have ever studied Austrian Economics.
Currently there is a brewing controversy over the effectiveness of the Federal government's "Cash for Clunkers" program (see here). The current author supports the view of the government's opponents on this issue. Clearly, the government has become very sensitive to the issue of their effectiveness. Furthermore, the Federal government issued a report today claiming that the economic stimulus package saved or created 640,000 domestic jobs at a cost of $150 billion dollars. This government-issued report was intended to demonstrate the effectiveness of the government's economic stimulus program (see here).
What is not emphasized is that this amounts to $234,375 for every job created or saved, not including the interest on the money borrowed or the inflation that this new money will inevitably create for the rest of the country. The average American wage is $41,334. Think about that a moment. The free market, if left alone, would have recovered and provided 3,630,000 people with jobs for a year in the productive portion of the economy using the same money! However, these jobs are now permanently lost through this "stimulus" and instead we are left with 640,000 mostly government-sector (non-productive) jobs. The government doesn't consider this future job destruction because their loss is never actually seen by the public, but they can be accounted for.
How so? The $150 billion must be repaid, and in the words of late economist Henry Hazlitt "public works means taxes", and if the government can't pay through taxes it will do it through inflation (monetary debasement). Either policy destroys public-sector productivity and job growth because every dollar collected by the government is another dollar not invested in job growth. Therefore $150 billion of future taxes is worth 3,630,000 private sector yearly incomes lost over the duration of repayment, and that's not counting the interest or the inflation which cost us even more job growth. In essence, for every new stimulus job created, 5.6 productive future year-long incomes are wiped out. How long can the nation continue in this way?
Even more ominously, the government intends to spend another $637 billion of borrowed money to create or save new jobs over the next year or so. Simply put, we can't borrow our way to prosperity and our United States, like Rome and Athens, is going to learn this lesson the hard way.
Tuesday, October 20, 2009
Blaming the victim: Were over-extended, low-income Americans responsible for the subprime debacle ?
The Clover Helix
October 20, 2009
www.thecloverhelix.blogspot.com
Three years after the economy began unwinding the American real estate bubble and the associated subprime mortgage financial mess, data now shows that faulting low-income borrowers for the crisis is inappropriate and misguided. Rather, it seems that that the onus falls on housing speculators, lending institutions, the United States Federal Reserve Bank (FED), and large Wall Street securities firms who were privy to the risks but nonetheless marched their unwitting investment clients into the storm anyway.
To understand these issues (and why the common hard-working American is innocent of this crisis), we must understand what a subprime mortgage is. Essentially, mortgage-backed securities are loans issued to borrowers that are secured by real estate. Also, these loans are used to finance the purchase a of home or property, though sometimes these loans are used for "pulling out" equity (value of the home minus the loans against it) without having to sell the real estate. An equity line-of-credit is a common example of this. The down-payment made by the home-owner provides the lender with a buffer should property value fluctuations drop the home value below the loan amount (negative equity). Furthermore, the down-payment invests the borrower in the mortgage. It is common for lenders to also require the purchase of mortgage insurance to defray the risks should the property enter negative equity and go into default. When an appropriate down-payment is provided by a borrower possessing good credit-worthiness who also possesses the ability to repay the terms of the loan, the lender is able to issue a loan to the borrower. This loan can then be pooled with other mortgages and sold on the secondary market to investors who are looking for "prime" or "A" paper debt securities. Two of the largest secondary market purchasers of mortgage paper are the Federal National Mortgage Corporation (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) better known as Fannie Mae and Freddie Mac, respectively. The secondary market can then either play the role of investor or they may package these mortgage pools into debt securities (bonds) that can be sold to private and public investors across the world.
Prime loans have been commonly issued by lenders for the purchase of real estate for many years. Interest rates are usually determined via market forces (though the Federal Reserve's [FED] price fixing of interest rates distorts this reality) and default risk is adjusted through the duration of repayment (term), interest rate, and loan-to-value (LTV) ratio (generally 80-90%). A short-term, low-LTV prime loan is considered the safest mortgage loan of all and commands a low interest rate, whereas a thirty-year prime loan with a higher LTV commands a much higher interest rate. It's a simple risk vs. return reciprocity.
In 1968, the United States Government chartered the Government National Mortgage Association (GNMA), better known as Ginnie Mae, a government-owned company. Ginnie Mae was originally founded to provide an investor market for mortgages issued to low-income home buyers with marginal credit histories, and small down payments (typical LTV is about 97%). Strict limits on maximum loan amounts and by disallowing investment properties eliminated many would-be speculators from their mortgage portfolio. Furthermore, Ginnie Mae loans are insured by the U.S. Federal Government against default making them virtually risk-free mortgage securities for investors. GNMA also purchases the famous "dollar-down" Veteran's Administration (VA) loans used by military personnel. Because of these government loan guarantees and the strict lending guidelines, Ginnie Mae mortgages receive an A or prime paper rating despite the increased default risk posed by the borrowers.
Ginnie Mae provides the loan programs that many in the financial news has mis-classified as "subprime" due to their tenuous employment or credit-problems. That these loans represent speculator-free prime paper assets is documented in the paragraph above, but this fact is gratuitously overlooked by the media. That Ginnie Mae borrows aren't the cause of the financial crisis is demonstrated by the following two graphs. The first graph shows the value of $10,000 invested in Ginnie Mae bonds over the past five years (interest payments excluded). We can see that Ginnie Mae investors were tarred and feathered (wrongly) from 2005 through 2008 by feverish selling of Ginnie Mae mortgage-backed securities in an attempt to divest from the mortgage debacle. However as the late 2008 financial crisis unfolded, Ginnie Mae mortgage-backed securities were reassessed by investors as safe-haven investments and Ginnie Mae securities recovered their losses and now trade at a premium, handsomely rewarding patient investors.
The second graph shows the value of $10,000 invested in the market-weighted total U.S. bond market, which includes Fannie Mae and Freddie Mac securities. A comparison of these two graphs shows the out-performance of Ginnie Mae securities relative to the overall bond market. From this we can conclude that Ginnie Mae borrowers were not the source of the so-called toxic assets that were so vehemently decried by politicians and economists on news networks and on major financial websites. If so, the markets would reflect this in the pricing of Ginnie Mae securities.
So if Ginnie Mae's borrowers aren't the source of the toxic assets, then who were these subprime borrowers and what constitutes a subprime mortgage? A subprime mortgage is a loan issued by a private lender to a borrower who presents a greater-than-average risk of loan default or even risk of loss of investor capital. These risks include not securing mortgage insurance against the loan, accepting very high LTV ratios, qualifying borrowers who don't demonstrate strong ability to comply with the lender's terms or possess good credit worthiness, and/or borrowers who don't intend to occupy the property. The risks associated with these subprime loans is commensurately higher, and in some cases these loans are assigned as "A-" or lower paper. The highest risk loans carry the stigma of "junk" status. Securities backed by these loans trade at significant discounts to their prime paper counterparts and carry higher interest rates due to their higher risk.
Historically, subprime mortgages were issued to borrowers who had suffered bankruptcy (or some other credit-catastrophe) but could afford to make a large down-payment and had a reliable revenue stream, or had good credit but had little down-payment. However, during the recent housing bubble, subprime mortgages were used by housing speculators to purchase unoccupied properties for little or no money down with the goal of eventually "flipping" the property at a profit to another buyer (usually another speculator). Because the FED had lowered interest rates to historic lows, subprime paper became relatively cheap and lending institutions began issuing subprime loans en masse. Eventually, subprime paper traded nearly at parity with prime paper. Prime loans were more difficult for good borrowers to obtain than subprime loans were, and the banks were happy to sell it to them so long as the secondary market was available to buy up all the subprime paper.
If lenders were issuing so much subprime paper and the secondary market was happy to accept these loans, then what would be the problem if the investors suffered for taking on this risk? The issue is that investors were unaware that they were buying much, if any, subprime paper. How so? Bond-rating institutions and financial securities dealers had reasoned that the speculative frenzy that existed during the bubble had permanently increased housing values at such a rate that making low/no down payment loans to subprime borrowers had made them a low risk investment because real estate prices were rising so fast that immediate positive equity was built into the security. Therefore, subprime loans were reasoned to be as safe as prime loans as long as prices rose and were sold to investors as "A" paper. This creates an obvious moral hazard and in this way the nation's toxic assets were born and distributed to the balance sheets of private investors, banks, and retirement funds across the world. Of course when the housing market stagnated and then began to fall, the speculators dumped their houses back on the market or let them go into foreclosure, bringing the whole Ponzi scheme to a dreadful end. Because many of these mortgages were not covered by mortgage insurance (as many of these loans were uninsurable) bond-holders were exposed to all of the losses. Banks, retirement funds, and individuals who owned large, highly leveraged mortgage portfolios were wiped out. Institutional bankers who created the moral hazard were bailed-out at taxpayers expense.
Had investors been aware that the mortgage securities they owned contained significant amounts of these toxic assets they would have objected to this financial fraud and would demanded appropriate repricing of these securities and jail time for account executives who fraudulently sold them. Today, many of these investment bank executives are receiving multi-million dollar performance bonuses. However, if the secondary market had not been unwittingly buying the subprime paper, there may have been no subprime debacle at all.
The actions of the FED alongside major financial firms such as insurer AIG, Goldman Sachs, Bear-Stearns, and the rest is questionable at best, criminal (even treasonous) at worst. For discussions of their roles in this worldwide securities fraud, watch videos and articles by Matt Taibbi (here) at Rolling Stone and market commentator Max Keiser (part 1 and part 2). One thing we can be assured of is that it wasn't America's hard-working home buyers who brought this catastrophe upon us, but rather the investment banks, central planners, and the speculators who should bear the brunt of these losses.
October 20, 2009
www.thecloverhelix.blogspot.com
Three years after the economy began unwinding the American real estate bubble and the associated subprime mortgage financial mess, data now shows that faulting low-income borrowers for the crisis is inappropriate and misguided. Rather, it seems that that the onus falls on housing speculators, lending institutions, the United States Federal Reserve Bank (FED), and large Wall Street securities firms who were privy to the risks but nonetheless marched their unwitting investment clients into the storm anyway.
To understand these issues (and why the common hard-working American is innocent of this crisis), we must understand what a subprime mortgage is. Essentially, mortgage-backed securities are loans issued to borrowers that are secured by real estate. Also, these loans are used to finance the purchase a of home or property, though sometimes these loans are used for "pulling out" equity (value of the home minus the loans against it) without having to sell the real estate. An equity line-of-credit is a common example of this. The down-payment made by the home-owner provides the lender with a buffer should property value fluctuations drop the home value below the loan amount (negative equity). Furthermore, the down-payment invests the borrower in the mortgage. It is common for lenders to also require the purchase of mortgage insurance to defray the risks should the property enter negative equity and go into default. When an appropriate down-payment is provided by a borrower possessing good credit-worthiness who also possesses the ability to repay the terms of the loan, the lender is able to issue a loan to the borrower. This loan can then be pooled with other mortgages and sold on the secondary market to investors who are looking for "prime" or "A" paper debt securities. Two of the largest secondary market purchasers of mortgage paper are the Federal National Mortgage Corporation (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) better known as Fannie Mae and Freddie Mac, respectively. The secondary market can then either play the role of investor or they may package these mortgage pools into debt securities (bonds) that can be sold to private and public investors across the world.
Prime loans have been commonly issued by lenders for the purchase of real estate for many years. Interest rates are usually determined via market forces (though the Federal Reserve's [FED] price fixing of interest rates distorts this reality) and default risk is adjusted through the duration of repayment (term), interest rate, and loan-to-value (LTV) ratio (generally 80-90%). A short-term, low-LTV prime loan is considered the safest mortgage loan of all and commands a low interest rate, whereas a thirty-year prime loan with a higher LTV commands a much higher interest rate. It's a simple risk vs. return reciprocity.
In 1968, the United States Government chartered the Government National Mortgage Association (GNMA), better known as Ginnie Mae, a government-owned company. Ginnie Mae was originally founded to provide an investor market for mortgages issued to low-income home buyers with marginal credit histories, and small down payments (typical LTV is about 97%). Strict limits on maximum loan amounts and by disallowing investment properties eliminated many would-be speculators from their mortgage portfolio. Furthermore, Ginnie Mae loans are insured by the U.S. Federal Government against default making them virtually risk-free mortgage securities for investors. GNMA also purchases the famous "dollar-down" Veteran's Administration (VA) loans used by military personnel. Because of these government loan guarantees and the strict lending guidelines, Ginnie Mae mortgages receive an A or prime paper rating despite the increased default risk posed by the borrowers.
Ginnie Mae provides the loan programs that many in the financial news has mis-classified as "subprime" due to their tenuous employment or credit-problems. That these loans represent speculator-free prime paper assets is documented in the paragraph above, but this fact is gratuitously overlooked by the media. That Ginnie Mae borrows aren't the cause of the financial crisis is demonstrated by the following two graphs. The first graph shows the value of $10,000 invested in Ginnie Mae bonds over the past five years (interest payments excluded). We can see that Ginnie Mae investors were tarred and feathered (wrongly) from 2005 through 2008 by feverish selling of Ginnie Mae mortgage-backed securities in an attempt to divest from the mortgage debacle. However as the late 2008 financial crisis unfolded, Ginnie Mae mortgage-backed securities were reassessed by investors as safe-haven investments and Ginnie Mae securities recovered their losses and now trade at a premium, handsomely rewarding patient investors.
The second graph shows the value of $10,000 invested in the market-weighted total U.S. bond market, which includes Fannie Mae and Freddie Mac securities. A comparison of these two graphs shows the out-performance of Ginnie Mae securities relative to the overall bond market. From this we can conclude that Ginnie Mae borrowers were not the source of the so-called toxic assets that were so vehemently decried by politicians and economists on news networks and on major financial websites. If so, the markets would reflect this in the pricing of Ginnie Mae securities.
So if Ginnie Mae's borrowers aren't the source of the toxic assets, then who were these subprime borrowers and what constitutes a subprime mortgage? A subprime mortgage is a loan issued by a private lender to a borrower who presents a greater-than-average risk of loan default or even risk of loss of investor capital. These risks include not securing mortgage insurance against the loan, accepting very high LTV ratios, qualifying borrowers who don't demonstrate strong ability to comply with the lender's terms or possess good credit worthiness, and/or borrowers who don't intend to occupy the property. The risks associated with these subprime loans is commensurately higher, and in some cases these loans are assigned as "A-" or lower paper. The highest risk loans carry the stigma of "junk" status. Securities backed by these loans trade at significant discounts to their prime paper counterparts and carry higher interest rates due to their higher risk.
Historically, subprime mortgages were issued to borrowers who had suffered bankruptcy (or some other credit-catastrophe) but could afford to make a large down-payment and had a reliable revenue stream, or had good credit but had little down-payment. However, during the recent housing bubble, subprime mortgages were used by housing speculators to purchase unoccupied properties for little or no money down with the goal of eventually "flipping" the property at a profit to another buyer (usually another speculator). Because the FED had lowered interest rates to historic lows, subprime paper became relatively cheap and lending institutions began issuing subprime loans en masse. Eventually, subprime paper traded nearly at parity with prime paper. Prime loans were more difficult for good borrowers to obtain than subprime loans were, and the banks were happy to sell it to them so long as the secondary market was available to buy up all the subprime paper.
If lenders were issuing so much subprime paper and the secondary market was happy to accept these loans, then what would be the problem if the investors suffered for taking on this risk? The issue is that investors were unaware that they were buying much, if any, subprime paper. How so? Bond-rating institutions and financial securities dealers had reasoned that the speculative frenzy that existed during the bubble had permanently increased housing values at such a rate that making low/no down payment loans to subprime borrowers had made them a low risk investment because real estate prices were rising so fast that immediate positive equity was built into the security. Therefore, subprime loans were reasoned to be as safe as prime loans as long as prices rose and were sold to investors as "A" paper. This creates an obvious moral hazard and in this way the nation's toxic assets were born and distributed to the balance sheets of private investors, banks, and retirement funds across the world. Of course when the housing market stagnated and then began to fall, the speculators dumped their houses back on the market or let them go into foreclosure, bringing the whole Ponzi scheme to a dreadful end. Because many of these mortgages were not covered by mortgage insurance (as many of these loans were uninsurable) bond-holders were exposed to all of the losses. Banks, retirement funds, and individuals who owned large, highly leveraged mortgage portfolios were wiped out. Institutional bankers who created the moral hazard were bailed-out at taxpayers expense.
Had investors been aware that the mortgage securities they owned contained significant amounts of these toxic assets they would have objected to this financial fraud and would demanded appropriate repricing of these securities and jail time for account executives who fraudulently sold them. Today, many of these investment bank executives are receiving multi-million dollar performance bonuses. However, if the secondary market had not been unwittingly buying the subprime paper, there may have been no subprime debacle at all.
The actions of the FED alongside major financial firms such as insurer AIG, Goldman Sachs, Bear-Stearns, and the rest is questionable at best, criminal (even treasonous) at worst. For discussions of their roles in this worldwide securities fraud, watch videos and articles by Matt Taibbi (here) at Rolling Stone and market commentator Max Keiser (part 1 and part 2). One thing we can be assured of is that it wasn't America's hard-working home buyers who brought this catastrophe upon us, but rather the investment banks, central planners, and the speculators who should bear the brunt of these losses.
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