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80% of mortgages backed by FHA, which is low on funds

Tuesday, September 22nd, 2009 | Economics | Permalink | No Comments |

The Money Times - Rising foreclosures to drop FHA’s reserves below mandated level:

Battered by the slump in the housing market, Federal Housing Administration (FHA) said Friday that its reserves will fall below the congressionally mandated level for the first time in its 75-year-old history. Battered by the slump in the housing market, Federal Housing Administration (FHA) said Friday that its reserves will fall below the congressionally mandated level for the first time in its 75-year-old history. Despite falling reserves, FHA Commissioner David Stevens said that the agency will not ask Congress for support to rebuild the reserves

And here’s why it matters. iTulip - Mission Accomplished – Part I: Wrecking of the world’s greatest economy:

If we told readers in 2005 when we warned about the housing bubble that GSEs Fannie Mae and Freddie Mac were to be nationalized within three years, we’d have been called alarmist. But the Wall Street Journal reported on Tuesday that this year 80% of all mortgages were purchased in the secondary market by the FHA, versus 20% in 2006. What the chart above says to me is that some day down the road we may find a large segment of our banking industry has been nationalized much as we have for all intents and purposes nationalized the mortgage banking industry.

Think about what the virtual nationalization of mortgage debt means. It means that 80% of home sales that are occurring today would not occur except for the government’s guarantee of mortgage credit. We have for all intents and purposes a nationalized housing market here in the U.S. And who is backing the mortgage debt? Not investors in mortgage-backed securities in Europe and Asia. In fact, the Treasury is busy buying back Agency debt from them, the bonds issued by the GSEs, with Treasury bonds. You can see the net decline in purchases in agency debt and the corresponding rise in net purchases of Treasury bonds in the data.

Tags: eric janszen, mortgage mess

Low interest rates are bad for pension funds

Monday, August 31st, 2009 | Economics | Permalink | No Comments |

iTulip.com - Corporate Pension Fund shortfalls weigh on recovery:

Corporate pension funding shortfalls are a major operating cash flow problem for the corporations that experience shortfalls because by law corporations must finance pension funds to 100% over time. Pension fund shortfalls were problematic for most companies even before the financial crisis. Post crisis, the number of pension funds that are not 100% or better funded has increased from 67.6% in FY 2008 to 92.7% in FY 2009 ending in June. The median funded level is a mere 46%.

The pension funding shortfalls crisis initially appeared between 2002 to 2003 from a combination of falling stock prices and interest rates. The combination turned thousands of previously fully funded pension plans into underfunded plans.

An environment of low interest rates and low stock prices is a double whammy for pension funding because the net present value of liabilities increases as the net present value of assets falls. As bad as the 2002 to 2003 period was for pension funds, the current crisis is nearly three times worse from a returns perspective, with no letup in sight.

That’s not the worst of it. According to the same source 81% of private medical pensions are underfunded with 65% containing no assets at all.

Tags: eric janszen, pensions

2009 stimulus spending by country as a percent of GDP

Friday, August 7th, 2009 | Economics | Permalink | 2 Comments |

This really shows that this is a global slowdown, not just something specific to the U.S., though the U.S. meltdown is having secondary effects due to the sheer size of our economy.

That chart is from Eric Janzen’s latest piece, Debate: Are China’s stock and property markets dual bubbles that are about to pop? (subscription required). He’s not convinced they’re quite about to pop, but that they probably are at or near the top.

In summary:

The Fed will not raise interest rates to protect the dollar or before unemployment falls for six months or more, regardless of cost-push and supply crash inflation.

The dollar will rise in flight to safety response by global investors when China’s dual stock and property bubbles collapse in Q4 2009.

China is about where Japan was in late 1989 and the U.S. in early 2000, near the top of both stock market and housing bubbles, or at least close enough for the adventurous gambler to short it.

So China has its problems, too. That’s good only in the sense that the best thing going for the U.S. is that other countries may be more screwed up than us, which would allow us to preserve our position as the world’s reserve currency. It’s bad in that a crash in China could have unsettling results on the now-fragile U.S. economy.

Tags: china, eric janszen, porkulus

Eric Janszen on America’s broken financial trust

Monday, July 27th, 2009 | Economics | Permalink | No Comments |

Janszen:

The American system was completely unique. It leveraged U.S. global economic and military hegemony and the trust of European and Asian investors in U.S. institutions built up over generations.

To finance the technology bubble we sold them technology stocks of companies like Enron whose accounts were certified by U.S. accounting firms.

Then to finance the housing bubble we sold the Europeans securitized debt products rated as safe by U.S. ratings agencies. The Asians had wised up and didn’t play.

The trust is gone and must be rebuilt. That will take time. Now private foreign investors are reluctant even to buy Treasury bonds. We cannot make a bubble out of Treasury bonds.

Tags: eric janszen

Eric Janszen gives the economic gloom and doom, take it or leave it

Wednesday, April 8th, 2009 | Economics | Permalink | 1 Comment |

One of my financial gurus is Eric Janszen of itulip.com. As an introduction and an aid to understanding what’s in the interview below, FIRE is Janszen’s acronym for Finance, Insurance, and Real Estate. His contention is that over the past three decades the American industrial economy has transformed into a FIRE economy, not the “information” economy that most people have been talking about for the past dozen years.

Santa Fe Reporter - Economy on FIRE and in debt:

Can you put today’s economic situation in a historical perspective? Is there any parallel?

More than one-quarter of all homes have negative equity in the US. That’s a bad problem. But there’s a worse problem developing.

I refer to the American housing market as “the big slum.” A slum is where the market value has fallen below the replacement value. It doesn’t make sense to fix anything. You don’t fix it, you just let it go to hell. There’s no way to get your money back.

It’s not that popular to be negative when things appear to be going well. I get interviewed more by the European and Asian press than the US press. It’s part of the culture, that we don’t really like people who are skeptical, who ask questions like, “How can you grow an economy that requires $5 of debt growth to create $1 of GDP growth?”

Another thing you’ll see reported all the time is that this is the highest rise in new jobless claims since 1982. The implication is this is like the early 80s recession, except in some ways worse.

What’s not reported is every recession was induced on purpose by the Fed, in order to cool down the economy. This recession was not created by the Fed. The implications of that are lost on a lot of people: They are absolutely not in control.

I get calls from members of Congress asking me what I think she should do. They don’t really want to hear the answer. I think the ultimate problem is having to write down trillions of dollars of bad debts for their campaign contributors. There’s hardly any other rational explanation.

We lectured the Japanese not to do what we’re doing right now.

Japan started out where we were, in terms of public debt, back in 1992. They were at about 60 percent of gross debt to GDP. Now they’re at 159 percent—a notch above Zimbabwe, just below Jamaica. None of that spending improved their sustainability as an economy. All they did was move the debt from private to public accounts over 20 years through the stimulus programs.

This is what our rocket scientists are planning for us. There can’t be enough output to pay the principal and the interest on all this debt.