Fannie and Freddie Didn’t Do It!

Posted on May 19, 2015 by Popular Economics Weekly

Financial FAQs

As if further confirmation was needed that Fannie Mae and Freddie Mac were not even a minor cause of the housing bubble and consequent bust, the latest judgment against Nomura Securities for selling fraudulent mortgages to Fannie and Freddie should be icing on the cake; settlements that now total more than $14 billion in fines for almost all the major banks and lending institutions.

The charge is old. Critics, (mainly those caught selling fraudulent loans to Fannie and Freddie) have long maintained that the GSE’s encouraged too many people to buy homes by offering all manner of payment assistance, and even guaranteeing subprime mortgages from the likes of Countrywide Financial (that was subsequently bought by Bank of America).

A U.S. judge on Monday ruled that two more large financial entities, including Nomura Holdings Inc., made false statements in selling mortgage-backed securities to Fannie Mae and Freddie Mac ahead of the 2008 financial crisis.

U.S. District Judge Denise Cote in Manhattan ruled for the Federal Housing Finance Agency, the conservator for Fannie Mae and Freddie Mac, in a ruling that could allow the U.S. regulator to recover around $450 million.

This is one more example of how almost all of the major financial institutions jumped on the bandwagon that encouraged the housing bubble—lending money to both qualified and unqualified borrowers and then misrepresenting their quality to the main guarantors of US housing finance.

Cote, who presided over a non-jury trial, said the FHFA was entitled to judgment against Nomura and the Royal Bank of Scotland Plc, which underwrote some of the $2 billion in mortgage-backed securities, in light of misstatements they made in offering documents.

Such originators were the real problem. Nomura Securities is just one of a growing list of mortgage lenders that have had to settle fraud charges that the loans submitted to Fannie and Freddie weren’t the quality loans they had certified—16 at last count totaling more than $14 billion in fines, as we said. Their loans had not in fact conformed or even followed Fannie and Freddie’s qualification standards, including verification of income and even whether they held real jobs, when they sought their guarantee insurance.

The result was the demonization of the GSEs as undercapitalized and incapable of fulfilling their mandate to make housing more affordable to Main Street Americans. I have been writing about the resistance of US Treasury—and maybe White House—to any recapitalization of Fannie and Freddie’s corporations to cushion them from another such housing downturn, corporations that were set up in the 1930s and 40s respectively to encourage home owning.

And in successfully fulfilling their mandate, they were a major factor in creating middle class Americans’ wealth, much of which was destroyed during the Great Recession. FDR’s Home Loan Corporation came to the rescue during the Great Depression, and we should be doing the same for housing in order to aid our recovery from the Great Recession.

Then why does Treasury, and even the White House oppose recapitalizing them, in spite of their now record-breaking profits? Because Treasury seems to believe there is a better alternative. However, that is yet to be seen and the GSEs are guaranteeing more than 60 percent of originations these days, while making the Treasury literally $$billions.

The Federal Housing and Finance Authority has just issued an update on their plans to ‘reform’ the GSEs. It is a proposal to form a Common Securitizing Platform (CSP) to replace competing Fannie Mae and Freddie Mac platforms that securitize its mortgage pools.

“The objectives in developing a Single Security are to establish a single, liquid market for the mortgage-backed securities issued by both Enterprises that are backed by fixed-rate loans and to maintain the liquidity of this market over time,” says the FHFA. “Achievement of those objectives would enhance the liquidity of the TBA market and further FHFA’s statutory obligation to ensure the liquidity of the nation’s housing finance markets.”

The question then is what comes next? The Treasury says their overall objective of not recapitalizing Fannie and Freddie is to induce private originators to guarantee a larger majority of mortgages. So will Banks and other private loan originators then step up to the plate and issue pools that can be either purchased or guaranteed by the CSP, which up to now they have been reluctant to do, without the GSEs’ guarantee?

And if the Treasury dissolves the GSEs, as it says it ultimately intends in order to put, “private capital at risk ahead of taxpayers,” can private issuers of said mortgage-backed-securities be the guarantors, without substantially raising their fees and profit margins, which will raise interest rates, as well? There was a reason Fannie and Freddie conforming mortgage rates were so affordable. They had lower capitalization requirements, in part because of the superior quality of their mortgage underwriting standards, and consequent low delinquency rates.

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Graph: Calculated Risk

Then who will enforce the very successful underwriting standards now required by Fannie and Freddie that has brought down the default rates close to historical standards? It is the real issue that was exposed in the lawsuits. Who will police the banks and private mortgage originators that the record shows will evade those standards when it suits them?

Harlan Green © 2015

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2015 Housing Construction Will Surge

Posted on May 13, 2015 by Popular Economics Weekly

The Mortgage Corner

We believe housing construction is about to bloom this spring, due to growing employment. For starters, an additional 45,000 construction jobs were added to nonfarm payrolls in April. This is even though construction spending to date has been flat, according to the Commerce Department. The U.S. Census Bureau of the Department of Commerce announced that construction spending during March 2015 was estimated at a seasonally adjusted annual rate of $966.6 billion, 0.6 percent below the revised February estimate of $972.9 billion. But the March figure is 2.0 percent above the March 2014 estimate of $947.3 billion.

And sales of new single-family houses in March 2015 were at a seasonally adjusted annual rate of 481,000, according to estimates by the U.S. Census Bureau and the Department of Housing and Urban Development, which is slow because of winter weather, but it is still 19.4 percent above last year’s March 2014 estimate of 403,000.

And, housing units authorized by building permits in March were at a seasonally adjusted annual rate of 1,039,000, 5.7 percent below the revised February rate of 1,102,000, but is 2.9 percent above the March 2014 estimate of 1,010,000, signaling more construction ahead. And the single-family component is up 4.4 percent from February, which is double the multi-family component. Single family construction employs many more workers per unit.

This is while overall employment could be returning to pre-recession levels, as we said last week. The U.S. churned out 223,000 new jobs in April, and the unemployment rate slid to 5.4 percent from 5.5 percent, which means the US economy’s deep freeze was temporary. It was a short hibernation, in a word, but we are still not out of the Great Recession woods, as we said last week.

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Graph: Marketwatch

The Small Business Optimism Index also increased 1.7 points from March to 96.9, reports the NFIB, with the employment component especially strong. Small business does 50 percent of all hiring, so this is another sign of a healthy jobs market. Twenty-seven percent of all owners reported job openings they could not fill in the current period, up 3 points from March. And a net 11 percent plan to create new jobs, up 1 point and a solid reading.

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Graph: Calculated Risk

Lastly, the Labor Department’s most recent JOLTS report showed 5 million job openings, and a higher Quits rate, meaning more workers were able to quit their current job to find a better position. Quits are up 14 percent year-over-year. These are voluntary separations, as we said (see light blue columns at bottom of graph for trend for “quits”), and the number of job openings are up 19 percent YoY, which is another sign of a robust jobs market.

The bottom line is housing construction should begin to expand in the spring and summer. This will ultimately relieve the problem of lack of inventory, and should help first time homebuyers by relieving price pressures that have been increasing as housing stocks have declined.

Harlan Green © 2015

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Repubs Anti-Science Agenda Endangers US

Posted on May 7, 2015 by Popular Economics Weekly

Financial FAQs

Last week, the House Science, Space, and Technology Committee, headed by Texas Republican Lamar Smith, approved a bill that would slash at least three hundred million dollars from NASA’s earth-science budget, says the New Yorker’s Elizabeth Colbert. “Earth science, of course, includes climate science,” Representative Eddie Bernice Johnson, a Texas Democrat who is also on the committee, noted. (Smith said that the White House’s NASA budget request favored the earth sciences “at the expense of the other science divisions and human and robotic space exploration.”)

This is just the Republican’s latest effort to cut more funding from those government agencies that provide climate data to help us predict all kinds of natural disasters, such as hurricanes and tornadoes. Have they forgotten Hurricanes Sandy, or Katrina, or the record number of tornadoes that have hit the Midwest and South? House Republicans are now passing bills that are dangerous to everyone’s health, in a word.

It is becoming more obvious why the Republican Party have been so anti-science; in fact anti-all scientific research. It enables them to deny any reality that will decrease the profits of their supporters, such as the Koch Brothers with a net worth of $100 billion, no matter the danger to the environment. They have been denying climate change of any kind in order not to have to put CO2 scrubbers on their power plants that emit so much heat.

Representative Johnson tried to get the cuts eliminated from the bill, but her proposed amendment was rejected. Defunding NASA’s earth-science program takes willed ignorance one giant leap further, says Colbert. It means that not only will climate studies be ignored; but weather data won’t be collected that helps to predict the increasing number of natural disasters.

It takes Republicans’ efforts to dumb down their electorate to a whole new level. Their intentions were first apparent when Wisconsin’s Tea Party Governor Scott Walker recently proposed turning the University of Wisconsin into a trade school, after the Republican-led legislature banned collective bargaining of school teachers, in an effort to dumb down their public educational system.

His latest salvo was directed at the University of Wisconsin. He proposed not only to cut its budget, but proposed downsizing its mission from that of higher education to supply more workers, whoever they might be. Walker’s new budget proposal would slash $300 million from the University of Wisconsin system over the next two years. That’s a 13 percent reduction in state funding.

The vote on the NASA bill came just a week after the same House committee approved major funding cuts to the National Science Foundation’s geosciences program, as well as cuts to Department of Energy programs that support research into new energy sources. As Michael Hiltzik, a columnist for the Los Angeles Times, noted, the committee is “living down to our worst expectations.”

This willful ignorance of anything scientific endangers much more than our health and worsening environment. It endangers all scientific research—solely in order to protect the profits of their wealthiest supporters.

The practical implications of the proposed cuts are certainly disturbing. (It’s going to be hard for D.O.E. to find new energy sources if it isn’t even looking for them.) But perhaps even more distressing is the mindset that led to them. The “I’m not a scientist” line that all Republican candidates to date have espoused is basically a declaration of willed ignorance, said Colbert.

It highlights the dangers that such an agenda presents not only to scientific research, but to the health and well being of all Americans.

Harlan Green © 2015

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Baltimore and the Lessons of Inequality

Posted on May 2, 2015 by Popular Economics Weekly

Financial FAQs

David Brook’s most recent New York Times Oped talks about the dissolution of social bonds in Baltimore neighborhoods. “Even in poorest Baltimore, there once were informal rules of behavior governing how cops interacted with citizens,” he says in quoting The Wire Producer David Simon, an awarding winning TV series of life in a Baltimore ghetto: “…that’s happened across many social spheres…in schools, families and among neighbors. Individuals are left without the norms that middle-class people take for granted.”

The problem is there is no longer a majority of the middle class, which has been decimated most recently by the busted housing bubble, but over a much longer period by the loss of those jobs dominating the post WWII economy that migrated overseas and blighted cities and even suburbs as a consequence.

And without a substantial middle class, those middle class norms will no longer regulate social behavior. The result of no accepted social norms is social chaos, as we have been seeing in the riots, hence the bullying tactics of police against those most affected by the loss of jobs and educational opportunities in trying to restore a semblance of order, the poorest among us.

In fact, the Baltimore riots are the result of an economic system that can only be described as broken, where the bullies win, everyone else loses. We are living the result of economic and political policies that have created the greatest income inequality since 1929 and the Great Depression. Yet no one, including David Brooks, wants to face that fact.

Thomas Piketty’s Capital in the Twenty-First Century, described the result of such inequality in earlier centuries, such as Europe’s pre-WWI Belle Epoque era, where inherited wealth was the main path to upward mobility, and Oligarchies ruled.

The U.S. path to such inequality was the concerted push of Big Business and Wall Street to weaken labor laws and trade treaties that allowed American businesses to both automate the workplace and move many jobs overseas, well documented by Jacob S. Hacker and Paul Pierson’s Winner Take All Politics, How Washington Made the Rich Richer—and Turned Its Back on the Middle Class. Those jobs, the core of middle class incomes of the 1960s and 70s, went to foreign lands where costs were cheaper and labor laws nonexistent. The result since then has been stagnant or shrinking household incomes for everyone but the top income brackets that rely on capital gains and stock options, or gaming the financial system.

The epidemic of police killings of African American males is just the result. It is plain for all to see, whether in Ferguson, where the best blue collar jobs now belong to law enforcement with the closing of several auto factories, and the police force is more than 80 percent white, wherever poverty has become endemic. "It’s a shortage of everything," said Shermale Humphrey, a 21-year-old who joined the protests in a recent LA Times article. "It’s a shortage of jobs. Of African Americans on the police force and in government. Of people not being able to get a good education."

It is a bully mentality that has permeated our government, as well, where education spending has been cut drastically, which hurt the Ferguson school system, in particular. One reason why many families moved to these suburbs in the first place was a decent school system, better than in downtown St. Louis. However, two north county districts — including the one where Michael Brown graduated from high school in May — have lost their state accreditation in recent years. The district Ferguson shares with a neighboring town remains accredited but scores low on state tests.

Since 2000, the median household income in Ferguson has fallen by 30 percent when adjusted for inflation, to about $36,000, said the LA Times. In the census tract where Michael Brown lived, median income is less than $27,000. Just half of the adults work, yet benefits such as food stamps have been cut drastically.

All of these cutbacks in government spending in particular, and not just due to the Great Recession, has weakened our own economy considerably and delayed a full recovery from the Great Recession. Measures such as TARP and ARRA that saved many banks and stimulated economic growth until 2010, were terminated when anti-government conservatives took over Congress and did everything they could to lower taxes on the wealthiest, starving government programs of funding necessary to revive economic growth.

Ferguson and now the Baltimore riots exemplify what has happened to the lower economic classes. For U.S. economic growth has gradually declined since the 1980s, in particular, when maximum income tax brackets first declined from 70 to 40 percent, and the policies of those who intone ‘Government is the Problem’ have eroded the rights and wealth of the majority of Americans.

Whether it is instituting right to work laws in those states that have lowered incomes by blocking collective bargaining and discouraging union organizing, or unlimited campaign financing that enhances the power of corporations, or restricting Obamacare in those states that won’t set up their own exchanges for the poorest, these policies have weakened our own economic system, so much so that social chaos has resulted.

That is why such middle class values that are based in large part on financial stability are no longer the norm. The huge transfer of wealth that began in the 1980s, and the wholesale deregulation of industries that accompanied the transfer, has allowed U.S. corporations to hire and fire as they please, generating record profits, without passing on some of the benefits to their employees. It has destroyed the middle class and all it stood for.

Harlan Green © 2015

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March New-Home Sales A Dud

Posted on April 25, 2015 by Popular Economics Weekly

“Sales of new single-family houses in March 2015 were at a seasonally adjusted annual rate of 481,000, according to estimates released jointly today by the U.S. Census Bureau and the Department of Housing and Urban Development. This is 11.4 percent below the revised February rate of 543,000, but is 19.4 percent above the March 2014 estimate of 403,000.”

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Graph: Calculated Risk

The March result was a disappointment, mainly in the south, where sales fell 15.8 percent. And because builders continue to build—housing starts are close to the million unit mark again—housing inventories are rising and prices are falling. The supply of new homes rose to 5.3 months, while the median price fell to 1.5 percent to $277,400. Year-on-year, the median price to down 1.7 percent while sales are up 19.4 percent, a discrepancy that points to price discounting by builders, says Calculated Risk.

What is behind the up and down gyration in sales? Winter is still with us, for one thing. And many of the southern and Midwest states are being pounded by tornadoes, as well as torrential rains. Lower oil prices could also be hurting an area heavily dependent on the oil and gas industries.

We will know next week if job creation will resume from February’s low numbers, and so consumer confidence remains high. Mortgage activity is high, highest level in years, what with interest rates still at record lows. (The 10-year Treasury yield is back down to 1.91 percent, and Eurozone bonds now have negative interest rates, meaning banks have to pay their clients to borrow money, because there is so little demand for loans.)

Mortgage applications increased 2.3 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending April 17, 2015.  The Market Composite Index, a measure of mortgage loan application volume, increased 2.3 percent on a seasonally adjusted basis from one week earlier.  The seasonally adjusted Purchase Index increased 5 percent from one week earlier to its highest level since June 2013.  The unadjusted Purchase Index increased 6 percent compared with the previous week and was 16 percent higher than the same week one year ago.

“Purchase applications increased for the fourth time in five weeks as we proceed further into the spring home buying season. Despite mortgage rates below four percent, refinance activity increased less than one percent from the previous week,” said Mike Fratantoni, MBA’s Chief Economist.  

The fact that purchase mortgage applications now comprise 44 percent of all applications, the highest in years, as we said, means the Fed’s policy of keeping interest rates as low as possible until household incomes begin to rise again is the right policy to kick start the housing market, and bring in those first time homebuyers who have been renting until know.

It also means some overbuilding of new homes is necessary to build up housing inventories for sale, and thus keep home prices in the affordable range.

Harlan Green © 2015

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March Existing-Home Sales Spike

Posted on April 23, 2015 by Popular Economics Weekly

The Mortgage Corner

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, increased 6.1 percent to a seasonally adjusted annual rate of 5.19 million in March from 4.89 million in February—the highest annual rate since September 2013 (also 5.19 million), said the National Association of Realtors report.

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Graph: Calculated Risk

Sales have increased year-over-year for six consecutive months and are now 10.4 percent above a year ago, the highest annual increase since August 2013 (10.7 percent). This seems to corroborate yesterday’s Fannie Mae’s Economic & Strategic Research Group report that said economic activity was suppressed in the first quarter due largely to the West Coast port disruptions and difficult weather patterns across the Northeast, “but the economy is expected to gain momentum throughout the spring and reach previously anticipated levels by year-end.”

Total housing inventory at the end of March climbed 5.3 percent to 2.00 million existing homes available for sale, and is now 2.0 percent above a year ago (1.96 million). Unsold inventory is at a 4.6-month supply at the current sales pace, much too low for sustainable sales.

NAR Chief economist Lawrence Yun said, “The modest rise in housing supply at the end of the month despite the strong growth in sales is a welcoming sign. (But) For sales to build upon their current pace, homeowners will increasingly need to be confident in their ability to sell their home while having enough time and choices to upgrade or downsize. More listings and new home construction are still needed to tame price growth and provide more opportunity for first-time buyers to enter the market.”

Prices are still rising, in other words, because of the lack of inventory. The FHFA just reported homes being purchased with conforming loans saw prices rise 5.4 percent in March. This is while new-home construction is still below par, with March starts up just 926,000, vs. the 1 to 1.2 million starts needed to increase inventories, and 2 million units annual rate at the height of the housing bubble.

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Graph: Econoday

An even better indicator of future housing growth was the Mortgage Bankers Association weekly activity report. The Refinance Index increased 1 percent from the previous week, reports Calculated Risk. The seasonally adjusted Purchase Index increased 5 percent from one week earlier to its highest level since June 2013. The unadjusted Purchase Index increased 6 percent compared with the previous week and was 16 percent higher than the same week one year ago.

“Purchase applications increased for the fourth time in five weeks as we proceed further into the spring home buying season. Despite mortgage rates below four percent, refinance activity increased less than one percent from the previous week,” said Mike Fratantoni, MBA’s Chief Economist.

All of the above is significant evidence that the buying season should pick up after winter doldrums, as it has in past years. How much remains to be seen. Consumers also have to come out of their winter doldrums.

Harlan Green © 2015

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Fannie Says Better Growth For Rest of 2015

Posted on April 21, 2015 by Popular Economics Weekly

Popular Economics Weekly

“Economic activity was suppressed in the first quarter due largely to the West Coast port disruptions and difficult weather patterns across the Northeast, but the economy is expected to gain momentum throughout the spring and reach previously anticipated levels by year-end,” said a just released Fannie Mae’s Economic & Strategic Research Group report.

Is this a repeat of 2014, when growth surged for the rest of the year? It is what happened in 2014, due to last year’s deep freeze. In fact, it should be a repeat, as consumers aren’t spending much in Q1, the weather is as bad—whether blizzard, flood, or drought in the west—and Congress may be as gridlocked in ideological warfare as ever, and is therefore unable to do more harm to growth that it has in the past.

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Graph: Trading Economics

We started out 2014 with a negative GDP growth rate of minus -2.1 percent. But it jumped to 4.6 and 5 percent in Q2 and Q3, such was the pent up demand from those very good jobs numbers. Just in the last 12 months 3.1 million jobs have been created, and consumers are in an almost ebullient mood. But consumers have to stop saving so much of their increased earnings, if that is to happen.

Fannie believes there’s also another ingredient to boost growth. An improved housing market as incomes improve and interest rates stay near record lows. “Our forecast calls for an increase in economic growth to 2.9 percent for 2015, which is a slight downward adjustment from our prior forecast but solid improvement nonetheless,” said Fannie Mae Chief Economist Doug Duncan

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Graph: Econoday

Stronger retail sales gave an indication of the future. Sales of goods and services in March rebounded 0.9 percent after dropping 0.5 percent in February. The market consensus for March was for a 1.1 percent boost. Excluding autos, sales gained 0.4 percent, following no change in February. Expectations were for a 0.6 percent increase. Gasoline sales dipped 0.6 percent after a 2.3 percent increase in February. Excluding both autos and gasoline, sales rebounded 0.5 percent after declining 0.3 percent in February.

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Graph: Econoday

However, the Conference Board’s Index of Leading Indicators is not so optimistic about future growth. Its 12 components predicted slower growth over the next 6 months. “In the negative column are building permits which, Thursday’s disappointing housing starts report, fell sharply,” said Econoday.” This is a reminder that housing, despite some hopeful signs, has yet to boost economic growth. And declines in the factory workweek and for factory orders are reminders that the manufacturing sector, due in part to weak exports (and strong dollar), may now be pulling down economic growth.”

Let’s hope Fannie Mae is right. “Although we are beginning this year at a more modest pace compared to the above-trend numbers seen at mid-year 2014,” says the report, “the country’s aggregate income has benefitted from the improving labor market, which, combined with low gasoline prices, should help drive higher auto sales and overall consumer spending throughout 2015.”

So it may just be the gloom of winter’s cold that has been holding back economic growth in Q1, especially housing, and that more buyers will enter the housing market this selling season.

Harlan Green © 2015

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Germany’s Failed Austerity Policies

Posted on April 17, 2015 by Popular Economics Weekly

Financial FAQs

One would think by now the debate has been resolved on which economic model created the better recovery for this Great Recession or Lessor Depression, as P Krugman has called it. But no, Germany’s Finance Minister Wolfgang Schauble keeps pounding the drum for his, and the eurozone’s failed austerity policies.

And this is happening with a new Hitler looming on Europe’s border who is taking advantage of their weakness and threatening to repeat its history.

“The financial crisis broke out seven years ago and led many countries into an economic and debt crisis,” said Schauble recently. “A pervasive set of myths — that the European response to the crisis has been ineffective at best, or even counterproductive — is simply not accurate. There is strong evidence that Europe is indeed on the right track in addressing the impact, and, most importantly, the causes of the crisis.”

Really? One has only to compare Europe to U.S. economic growth since the Great Recession. The U.S. response by the Federal Reserve was to do everything possible to stimulate demand by keeping interest rates as low as possible, as long as possible, to pump more money into the system, rather than hoard it.

It is not even a matter of degree, but orders of magnitude. The U.S. has grown as much as 5 percent in a quarter, whereas Europe has grown no more than 0.3 percent since 2012. (Does Schauble even bother to look at economic data?)

One thinks that most economists should have learned from the 1930’s Great Depression, Roosevelt’s New Deal, etc., etc., that it takes a very active and proactive government to bring back the fallen ‘animal spirits’, as JM Keynes called the loss of confidence that kept consumers in the 1930s’ economy from completely recovering, until WWII government spending brought back fully employed economies.

But no, Schauble, has turned Keynes on his head in maintaining that it is the loss of investors’ confidence, not that of public consumers, which powers 70 percent of economic growth these days. He seems to have absolutely no concept of the meaning of aggregate demand, another Keynesian concept that spells out exactly what drives economic growth.

I.e. investors lose confidence in investing when the demand for their products and services declines, as it did drastically during the past two depressions. It is a basic misunderstanding of how economies work. Consumers ran out of money to spend, due in large part to the record income inequality that happened in 1929, and again in 2008.

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Graph: Mother Jones

When almost all wealth flows to the top, the wealthiest enact policies to prevent it from being redistributed downward to those that spend it, where it would encourage and strengthen a recovery.

Then money is hoarded, rather than spent, as is still happening worldwide (particularly in Germany with the largest budget surplus in the developed world). That’s why economic growth has resumed in the U.S., but not in Europe, Which is currently teetering on the edge of its third recession since 2008.

But isn’t Putin’s Russia threatening war, even a nuclear war, if Europe doesn’t cave in to its demands? That is a wakeup call for Europeans to throw out their austerity policies, if they want to build the strength to oppose him. Europe is fractured because of their poorly functioning economies. Otherwise history is about to repeat itself. Only instead of a Hitler, we have a Putin.

Harlan Green © 2015

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Expanding Social Security – Decreasing Inequality

Posted on April 16, 2015 by Popular Economics Weekly

Popular Economics Weekly

What, you say? We should expand, not shrink, social security benefits in the face of horrendous budget deficits of late? Elizabeth Warren put into the Senate Budget proposal for 2015 an amendment to protect social security, and even increase its benefits, when conservative pundits and pols have been chanting for years that it would drive the federal budget into bankruptcy. (Her amendment was defeated by the Republican majority, of course.)

And now potential Republican candidates such as Chris Christie are finding other ways to downsize social security, when social security isn’t the problem, and when record income inequality is getting worse during the recovery, not better.

No, what has driven the budget deficits have been concerted efforts by Republicans since R Reagan to cut maximum tax rates from 70 percent to the current 35 percent, while cutting government programs that would boost growth and productivity, such as public infrastructure spending, education, and even Research and Development.

All have proven records of increasing productivity—from our national freeway system, to DARPA’s funding of the Internet. Republicans have even gone so far as to cause a downgrade of sovereign treasury debt from its historic AAA rating by shutting down the government briefly in 2012.

Warren’s recent effort was the product of a long progressive campaign that preceded her election. Pundits, such as the Huffington Post and the New York Times’ Paul Krugman have been pushing for the expansion of retirement benefits for years. In the past decade, left-of-center policy wonks became increasingly worried about retirement security for Americans. Corporate pension plans—many of which offered decent and secure retirement payments—were going the way of the dinosaurs. In 1980, about 40 percent of private-sector workers received such pension payouts; by 2006, that number had dropped to 15 percent.

In general, many retirement plans had shifted to private 401(k) accounts, and these often were woefully inadequate for supporting retirees in a climate of stagnating wages and scant savings. And the recent Wall Street collapse ravaged pensions and personal investments, illustrating that 401(k)s were a shaky foundation for retirement. Progressives and retirement policy wonks began looking for another option. The obvious answer was expanding Social Security.

In March 2012, the AFL-CIO called for “changing the terms of debate by focusing on the crisis of retirement security.” Over the next year and a half, progressives policy shops and activists answered the call to arms. In April 2013, the New America Foundation, a progressive think tank, published a plan to expand benefits. “Our main purpose in doing that was to move the goal posts,” says Michael Lind, a cofounder of the New America Foundation. Around the same time, two Democratic senators, Tom Harkin of Iowa and Mark Begich of Alaska, introduced bills to expand benefits.

Yet in November 2013, the Washington Post editorial board slammed the expansion push as “liberalism gone awry.” It noted that “even the rich have finite resources; government can only go to that well so many times…Unchecked entitlement spending for the elderly crowds out spending” on young Americans and other priorities,” said the Post.

This is utter supidity. The Washington Post is now defending the rich? What “finite” resources we have created have all gone to the wealthiest since the end of the Great Recession. They garnered 90 percent of the income to be precise, while the 90 percent’s income bracket actually declined, mainly because wages and salaries have declined while the financial markets rallied for investors.

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Graph: Seeking Alpha

The result has been anemic growth for the past 2 decades, far below historic growth rates. “In the last two decades, like in the case of many other developed nations, its growth rates have been decreasing,” said Trading Economics. “If in the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level.”

That’s what happens when all income gains go to the top income brackets, and actual laws prevent wage and salary earners from even bargaining for more, such as Wisconsin’s banning of collective bargaining for its public employees that include teachers and health care workers.

There is good reason to expand social security benefits. There just has to be the political will to pay for it, and given the gains of those who can most afford to, we should be worrying more about growing the economy than a budget deficit that is the result of decades of anti-growth policies.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

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Mortgage Delinquencies Close to Pre-Recession Lows.

Posted on April 7, 2015 by Popular Economics Weekly

The Mortgage Corner

Calculated Risk reports Black Knight Financial Services (BKFS) released their Mortgage Monitor report for February on Monday. According to BKFS, 5.36 percent of mortgages were delinquent in February, down from 5.56 percent in January. BKFS reported that 1.58 percent of mortgages were in the foreclosure process, down from 2.22 percent in February 2014. This is approaching historical lows for delinquencies, and should mean a very good year for housing.

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Graph: Calculated Risk

February’s delinquency rate, while still 17 percent above the pre-crisis norm of 4.6 percent, was down 49 percent from its January 2010 peak of 10.6 percent. And at 1.58 percent, the foreclosure rate remained 175 percent above precrisis norms, but was still down 63 percent from its October 2011 peak, reports Black Knight.

This breaks down as:

· 1,646,000 properties less than 90 days past due, but not in foreclosure.

· 1,067,000 properties that are 90 or more days delinquent, but not in foreclosure.

· 800,000 loans in foreclosure process.

It also means last week’s jump in Pending Home Sales was no fluke, as lower delinquency rates mean more homes with positive equity are increasing housing inventories. The National Association of Realtors Pending Sales Index is at its highest level since June 2013 (109.4), has increased year-over-year for six consecutive months and is above 100 – considered an average level of activity – for the 10th consecutive month.

So what will happen in 2015? Mortgage applications have also jumped, particularly purchase applications, as we said last week. “There was a broad based increase in mortgage applications last week (April 1) relative to the week prior. The increase in purchase volume was led by a nearly 6 percent increase in both conventional and government markets, perhaps signaling that households are finally ready to begin the home-buying season,” said Lynn Fisher, MBA’s Vice President of Research and Economics.

But that is largely because of still record low interest rates. The Fed wants to begin to raise interest rates sometime this year, but growth has slowed recently, due to the another severe winter, and a soaring dollar value that hurts exports. So the latest words from the Fed Governors are that low interest rates should be around for a while longer.

New York Fed Governor William Dudley said as much recently. “…as Chair Yellen remarked in her most recent press conference, removal of “patient” from the statement does not indicate that we will be “impatient” to begin to normalize monetary policy.  Rather, the timing of normalization will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated.”

The housing market will have a very good year, according to Core Logic’s 2015 housing forecast. “The U.S. economy is poised to grow by close to 3 percent in 2015, generating a 3- to 3.5-million-person gain in employment,” said Core Logic chief economist Frank Nothaft. “This job growth, coupled with very low mortgage interest rates and some easing in credit access, is expected to propel both owner-occupant and rental housing activity this year. This heightened level of housing demand should translate to the best home sales market in eight years.”

Let us hope the Fed remains patient for first-time homebuyers that require affordable loan rates, in particular, and are just now entering the housing market.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Posted in Consumers, Economy, Housing, housing market, Weekly Financial News | Tagged , , , , , , | Leave a comment