Archive for October, 2010

RateWatch 14 Oct – Dear Harry Reid, et al.

Markets: Flat.  Dead, absolute, flat.  No movement.  We’re in the middle of a trading channel and we cannot move higher or lower.  That sticks us at about 4.25 – 4.5% on standard 30-year notes, depending on several factors.

Analysis: Unemployment claims data in today showed mixed results.  New claims were up, continuing claims were down.  The inflation data came in much higher than was expected, but nobody believes that data any more, so markets didn’t react to that.  There was a bond auction as well, and it stank, but nobody cared about the, either.  Nobody cares about anything until the Fed decides what it’s going to do about another round of “quantitative easing” (that’s marketspeak for “the Fed buying up government debt”).  It’s inflationary, which is bad for bonds, but it also reduces the risk of DEflation, which is also bad for bonds.  Right now, markets are focused on the Fed and on this foreclosure moratorium.  Herewith, an open letter to Senate Majority Leader Harry Reid, and his cohorts, on that subject:

Dear Mr. Reid:

I see that you have called for a moratorium on foreclosures across the nation.  While I clearly understand your desire to protect the homes of the Senators and Congressmen that are inevitably going to be chucked out on their ears this fall, I want to suggest that such a moratorium is a bad idea.

No, strike that.  I want to tell you that calling for such a moratorium shows that, as we have long suspected, you have half the intelligence of a hatful of lice.

A foreclosure is the remedy of last resort for a bank.  In most cases, this bank has sent hundreds of thousands of dollars out there on behalf of a homeowner, on the promise that the homeowner will pay the bank back.  When the homeowner does not, the lender has no other recourse other than to foreclose.

Now, it is true that in 23 states in our great nation, foreclosures are undertaken judicially; that is, the lender has to prove to the court that it has the legal right to foreclose, upon which the court lifts that automatic stay of foreclosure and allows the lender to seize the house.  It is also true that in many cases (but by no means even a large minority) the banks fudged the proof by having someone state that he had seen the documents proving the aforementioned right to foreclose, when no such thing had actually happened.  This is perjury.  The banks are being punished right now, even as we speak, by having mortgage notes invalidated in such cases, giving the homes in question to the individuals living there outright.

Perhaps this is justice.  The banks violated the law.  But the individuals that are now getting their homes given to them violated the contract under which the home loan was made.  Search all you want, and you will not find a single case in which the homeowner was sent into foreclosure despite having made all his payments.  The homeowner was derelict.  he violated a contract.  He will not, nonetheless, be punished for it.  In Nevada, perhaps, that is called justice.

Leaving that aside, in the other 37 states the lender hasn’t made even a technical violation of the law, but you’re calling for them to be unable to foreclose there anyway.  I know this is likely to get you votes from the deadbeat class, and maybe that’s the only reason you’re calling for it.  But I want to point out a couple of things that you probably missed, not having had to actually hold a job for three decades or so.

One is that there are a lot of people out there that need to get out of their houses so that housing stock can get back to producing returns.  Those people were going to be levered out through foreclosure, quite often.  Pass a moratorium, and those houses can sit there on the banks’ books as non-performing assets until their walls fall in.  This is a bad time to have stuff like that happen.  If there’s a moratorium on foreclosures, how many people are just going to stop paying those mortgages altogether?  That’s also going to be really good for the tottery financial industry.

But the second thing is worse.  If banks have only one recourse in a mortgage default, and you take that recourse away, what will banks do?  They will stop lending money.  Why would they?  What can they possibly gain from it?  The mortgage market is already in the ICU from all the other crap you guys have been throwing at it, and this would further reduce the already pitifully small number of people that can qualify for a mortgage in the first place.  Surely, SURELY, you can see this.  Your state’s unemployment rate is already well above the national average, and why is that?  Because of all the people there that used to be part of the homebuilding and homebuying industry that are now out going door-to-door selling vacuum cleaners.  What you’re suggesting will make that problem WORSE.

Since there’s nobody on your staff, apparently, that is able to understand this, you’ll just have to trust me.  Or trust the White House.  Nobody there has ever had a real job, either, but even THEY have this figured out.

We out here on the front lines of the market have only one request.  LEAVE US ALONE.  The sooner you do that, the faster things will get moving in the right direction again.

Or, you know, just wait a couple weeks, then you can make whatever decisions you want, and we won’t care.  We’ll see if Sharron Angle has a better grasp of third-grade economics.  Maybe you can get a new job selling vacuum cleaners.  You’re obviously a hell of a salesman.



Open Letter to Nobel Economists

Dear Nobel Labor Economists:

Thank you for taking a moment to read my post.  It’s not nearly as incredibly erudite as the stuff you say, but that’s not surprising, because I got a C in Econ 101 while traveling through the collegiate experience toward my incredibly marketable degree in Classics with an emphasis on Roman History.  I did have three minors, though, and one of them was in uber-fashionable English, so, you know.  I probably have really good stuff to say, or at least the ability to say it in an intelligible manner.

I had to write you because there’s a super-awesome-castic article today about a speech by a newly-minted Nobel Prize-winning Labor Economist, in which he chides American banks for being “dysfunctional”, because they’re not lending money to small businesses so they can make payroll, which means, apparently, not as much payroll as there could be.  Payroll, I believe (and remember the English minor, so I’m probably right), is a euphemism for “workers”, so translating this into English (ibid) we get “it’s the banks that are keeping people unemployed.”

First off, there’s the whole “dysfunctional” thing.  I live in Lehi, UT, USA, so probably someone delegated to the faculty of Northwestern University the task of regulating English definitions without my hearing about it (Heaven knows regular Americans abdicated that role eons ago) (or is it aeons?) (no, WordPress gives me a red squiggly under that, so it has to be the first one) (but then, WordPress gives me a red squiggly under “WordPress”, too, so…) (but not, fascinatingly, under “squiggly”), but I thought that the word “dysfunctional” meant “broken”, or some synonym thereof.  I can assure you that bank shareholders think that banks are anything but dysfunctional.  In fact, they’re recording record profits.  They’re functioning at a level of perfect efficiency unseen since the days of JP Morgan.  So Mr. Esteemed Nobel Labor Economist, I do not think that word means what you think it means.  But I’m not Norwegian, neither am I Inigo Montoya, so I probably ought to defer.

Second, I think you might be confusing desirability of output with functionality.  See, being just a “payroll” myself, I don’t get to see the economy from the lofty position occupied by those that have won prizes named for dead Norwegians, but from down here in the muck, here’s the view:

We’re making an apple pie.

We have an apple cutter, and sugar and cinnamon, and a pie tin, and some apples.

The apple cutter is sharp, and in the peak of condition.

The sugar is the finest cane, and the cinnamon is from Malabar, shipped in this week and ground on the premises.

The apples are from off the ground several weeks ago.

The pie tastes like cow dung.

This, I see from your comments, means that the apple cutter is dysfunctional.  Without wishing to draw the ire of so esteemed a notable as yourself, might I suggest that perhaps the output of the cutter has more to do with the quality of the apples than with the functionality of the implement itself?  No?  Oh.  Well, sorry, then.  Can I just finish the post, because I really have worked hard to come up with enough to say that this post will not be embarrassing to English minors everywhere?  Thanks.

To make plain the analogy, then, the banks are the cutter and the apples are the government policies that make the economy taste like cow dung.  Oh.  You got that?  Great.  I didn’t know how much of that sort of English-department poetic-device explication they taught there in the Econ wing, but okay.  To incorporate yet another department, here’s the math, in a nutshell, for the banks: lending money is risky.  Lending money to small businesses is, statistically speaking, a lot more like lighting it on fire than it is like preserving it.  The money itself was originally borrowed from the Fed at something south of 1%.  Practically everything in the world generates a better return than that.  Practically everything in the world is less risky than investing in a small business.  Therefore banks, needing only minuscule returns to exceed their costs of borrowing, are doing practically everything in the world other than lending to small businesses.

Now, I know that this isn’t your job.  You do say, point blank, that “Economics is not a predictive science.”  This was also confusing to me, because I thought that Economics was ENTIRELY a predictive science, and that it has no function whatever other than to make predictions about things.  The fact that most people that work for a living, and those that think for a living, and those that are just living, and the majority of people no longer living, think that economists like your esteemed self are worthless steaming piles of cow dung, figuratively speaking, is that you are always WRONG about what the effect of your economic policies is going to be.  Like, laughably, ridiculously, insanely and hilariously wrong.

I want to suggest, in light of this, that you could revise and extend your remarks of yesterday.  You could put in stuff about how the banks are performing in a manner simple to predict by all the rest of us, and that this should have been anticipated by Ben Bernanke, and Tim Geithner, although not by the thousands of policy wonks on Capitol Hill, who are, after all, economists, and therefore engaged in non-predictive thinking.  You could amend your comment about government regulators not having sparked lending by keeping interest rates low to read “government regulators have not sparked borrowing by keeping interest rates low”, because, as you would have been able to tell if you had been in the classics department (apparently ancient history and archaeology IS a predictive science) instead of the economics college, LENDING is sparked by HIGH interest rates.  BORROWING is sparked – or it should be – by LOW interest rates.  And indeed, demand for borrowing has been sparked.  Being on the front lines of that, as it were, as both a small businessman and a representative of a lender, I can tell you that there’s huge demand for capital out here.  But there is no incentive to lend it, because the Fed has money so cheap banks can get it faster than a K-Street prostitute.

Banks will start lending again, Mr. Nobel Labor Economist, when the cost to them of their capital is high enough that they need to get a serious return on their money to be able to repay it.  This is a prediction, since you pointedly refused to make one, and implied that you don’t even know how.  It might even be useful to make such predictions, so as to give the Congress and the Fed some idea of what to do, because as you may have noticed (or would this come under the purview of the Journalism Department?), they’re flailing about in the dark like a blindfolded three-year-old with a pinata.

I realize now, however, that that would eliminate the chance of winning a Nobel Prize in Economics.  So you’d have to settle for Literature.  But that’s still pretty good.


Chris Jones, Payroll