Bankrupting the Common People

A quote from a 1924 edition of the American Bankers Association Journal sums up what is happening:

"When, through the process of law, the common people lose their homes, they will become more docile and more easily governed through the strong arm of government applied by a central power of wealth under leading financiers. These truths are well known among our principal men who are now engaged in forming imperialism to govern the world. By dividing the voter through the political party system, we can get them to expend their energies in fighting for questions of no importance."

According to Catherine Austin Fitts, "The Fed Did Indeed Cause the Housing Bubble:"

(Former Chairman of the Federal Reserve) Alan Greenspan is a liar. The Federal Reserve and its long standing partner, the U.S. Treasury, engineered the housing bubble, including the fraudulent inducement of America as part of a financial coup d’etat. Our bankruptcy was not an accident. It was engineered at the highest levels...

In Mr. Greenspan's article, “The Fed Didn’t Cause the Housing Bubble,” on the Wall Street Journal's opinion page, he attributes the housing bubble to lower interest rates between 2002 and 2005. That’s amazing to me.

My company served as lead financial advisor to the Federal Housing Administration between 1994 and 1997. I watched both the Administration and the Federal Reserve aggressively implement the policies that engineered the housing bubble. These are described at my website and in my online book, Dillon Read & the Aristocracy of Stock Profits.

One story, for example, is the following:

“In 1995, a senior Clinton Administration official shared with me the Administration’s targets for Fannie Mae and Freddie Mac mortgage volumes in low- and moderate-income communities. We had recently reviewed the Administration’s plans to increase government mortgage guarantees— most of these mortgages would also be pooled and sold as securities to investors. Even in 1995, I could see that these plans would create unserviceable debt loads in communities struggling with the falling incomes expected from globalization. Homeowners would default on mortgages while losses on mortgage-backed securities would drain retirement savings from 401(k)s and pension plans. Taxpayers would ultimately be hit with a large bill ... but insiders would make a bundle. I looked at the official and said that the Administration was planning on issuing more mortgages than there were houses or residents. 'Shut up, this is none of your business,' the official snapped back.”

Catherine Austin Fitts is a former Assistant Secretary of Housing - Federal Housing Commissioner, Bush I administration.

Predatory Lending: A Decade of Warnings as Congress and the Fed Fiddled
Washington was warned as long as a decade ago by bank regulators, consumer advocates, and a handful of lawmakers that these high-cost loans represented a systemic risk to the economy, yet Congress, the White House, and the Federal Reserve all dithered while the subprime disaster spread.
Billion Dollar Bailout Banks Financed the Subprime Industry and America’s Economic Meltdown
The top subprime lenders whose practices are largely blamed for triggering the global economic meltdown were owned or bankrolled by banks now collecting billions of dollars in bailout money—including several that have paid huge fines to settle predatory lending charges. These big institutions were not only unwitting victims of an unforeseen financial collapse, as they have sometimes portrayed themselves, but enablers that bankrolled the type of lending that has threatened the financial system.
Lenders Pushed Appraisers to Inflate Home Values--and Then the Bubble Burst
Before real estate prices began to plummet in 2006, some sounded the alarm on fraudulent appraisals and lender pressure, but few listened to the warnings, least of all Congress, industry regulators, and the Justice Department. David Callahan, a founder of the public policy think tank Demos, was one of the first people to study inflated appraisals and lender pressure. In 2005, Callahan wrote a paper describing the financial incentives for lenders and appraisers to pursue inflated appraisals. The goal of lenders, brokers, real estate agents and developers was to ensure that a home loan closed without a problem, Callahan said. All those people exert pressure on appraisers to inflate values.

Foreclosure Filings in U.S. Reach Record 1.5 Million

July 17, 2009

Bloomberg - U.S. foreclosure filings hit a record in the first half, a sign that job losses and falling property prices deepened the housing recession, according to RealtyTrac Inc.

More than 1.5 million properties received a default or auction notice or were seized by banks in the six months through June, the Irvine, California-based seller of default data said today in a statement. That’s a 15 percent increase from the year earlier. One in 84 U.S. households received a filing.

“People are losing their jobs, seeing their income go down and are underwater on their mortgage,” Richard Green, director of the Lusk Center for Real Estate at the University of Southern California in Los Angeles, said in an interview. “It’s a toxic combination.”

Home prices in 20 major U.S. metropolitan areas dropped 18.1 percent in April from a year earlier, according to the S&P/Case-Shiller index. The unemployment rate rose to 9.5 percent in June, the highest since 1983, bringing the total number of lost jobs to about 6.5 million since the recession started in December 2007, the Labor Department said.

Defaults by subprime borrowers with poor credit histories spurred the housing recession and spread to prime borrowers as home prices and sales declined. The Mortgage Bankers Association said May 28 that prime fixed-rate home loans to the most creditworthy borrowers accounted for 29 percent of new foreclosures in the first quarter, the biggest share of any type of loan.

One in eight Americans is now late on a payment or already in foreclosure, the Washington-based mortgage group said...

A Rising Tide of Social Misery

July 16, 2009

WSWS - Contrary to Obama administration and media claims about the recession “easing,” millions of working people in America are losing their jobs, earnings and health care benefits at an accelerating pace.

While executives at Goldman Sachs, JPMorgan Chase and other financial giants prepare to pay themselves billions of dollars this year in salaries and bonuses, life has continued to become more and more difficult for a broad layer of the population.

The New York Times pointed out on Wednesday that in California and a number of other states, “one out of every five people who would like to be working full time is not now doing so.”

The official jobless rate of 9.5 percent excludes both those who have stopped looking for jobs because local conditions are so bleak and those obliged to accept part-time employment.

If these unemployed and underemployed were included, the real jobless rate in the country’s most populous state, California, for example, would be 20.3 percent, according to the Times. In Oregon it would be 23.5 percent, in Michigan and Rhode Island, 21.5 percent, and in South Carolina, 20.5 percent. The figure would be just below 20 percent in Tennessee, Nevada and a number of “states that have relied heavily on manufacturing and housing.”

Given that the Bureau of Labor Statistics’ national jobless rate is skewed, for political reasons, to minimize the actual conditions, various analysts step in and attempt to come up with a “real unemployment” number.

The Center for Labor Market Studies at Boston’s Northeastern University places the current jobless rate at 18.2 percent, higher than the official figure on the eve of World War II. John Williams of Shadow Government Statistics puts the “Alternative Unemployment” rate at 20.6 percent. Other analysts calculate an “Effective Unemployment” figure of 18.7 percent. Whatever the precise number, the army of unemployed is large and swelling. A great many lives have already been devastated.

David Rosenberg, chief economist at the investment firm Gluskin Sheff in Toronto and former chief North American economist at Merrill Lynch, argues: “The official ranks of the unemployed have doubled during this recession to 14 million, and if you take into account all forms of labour market slack, the unofficial number is bordering on 30 million, another record.”

The figures on job losses in the current slump are staggering. Since the start of the recession in December 2007, the US economy has lost a total of 6.5 million jobs. In fact, the economy presently has fewer jobs than it did in May 2000. The Economic Policy Institute points out that “the entire growth in jobs over the last nine years has been wiped out,” while the labor force has actually expanded by 12.5 million workers.

According to economist Rosenberg, “We have lost a record 9 million full-time jobs this [business] cycle, more than triple what is normal in the context of a post-WWII recession, with over 2 million pushed onto part-time work.” He notes that three-quarters of those laid off over the past year were let go on a permanent, not a temporary basis, and that a record 53 percent of those currently out of work were displaced for good.

Rosenberg estimates that more than four million jobs in financial services, residential construction, durable goods manufacturing, wholesale-retail and leisure-hospitality “are not going to come back.” The destruction of millions of better-paying, full-time jobs has enormous implications for the living standards of working families.

Job openings in the US have dropped by 42 percent since the end of 2007, so that in June 2009 there were some six unemployed looking for every job. As a result, the percentage of the jobless out of work for more than six months increased by nearly 70 percent from June 2008 to June 2009 (17.1 to 29 percent).

Since employers, who can afford to pick and choose, are generally taking experience over youth, and workers over 55 are holding on to their jobs for dear life, the official unemployment rate for young people has jumped to 15.2 percent for 20-24 year olds (a 49 percent increase in 12 months!) and 24 percent for 16-19 year olds. For African-Americans 16 to 19, the jobless rate is currently 38 percent.

As serious as they are, the jobless figures are only part of the story. Public and private employers across the country are taking advantage of the recession to cut wages, hours (through “unpaid leave,” “furloughs” and other means) and benefits, impoverishing many of those still employed.
The average work week fell to 33 hours in June, the lowest since data was collected in 1964, and 48 minutes shorter than when the recession began. The combined decline in jobs and hours in June was the equivalent of a loss of some 800,000 jobs.

Business Week notes that “Cuts in pay and hours are rippling throughout the economy in businesses large and small and industries from mining to retail.” A survey commissioned by the Economist in June found 5 percent of respondents had already taken a furlough in 2009 and 13 percent had taken a pay cut.

Mortimer Zuckerman in the July 14 Wall Street Journal commented: “Full-time workers are being downgraded to part time as businesses slash labor costs to remain above water, and factories are operating at only 65% of capacity.” Average weekly earnings fell to $611.49 in June, from $613.34 in May...

On July 7 the American Bankers Association reported delinquencies on consumer debt rose to record levels, as customers had difficulty paying for everything from credit cards to automobiles. The percentage of borrowers at least 30 days late paying a balance is the highest since the association began keeping records in 1974.

ABA Chief Economist James Chessen stated bluntly, “The number one driver of delinquencies is job loss. When people lose their jobs, they can’t pay their bills. Delinquencies won’t improve until companies start hiring again.”

Public outrage at the present situation is growing. It is not uncommon to hear the rich, the “filthy” bankers, being denounced in work places and neighborhoods. Many workers—abandoned by the unions to their fate, lied to and cheated by the Democrats—have been stunned by the rapidity of the crisis. The Economist, a little nervously, refers to “The quiet Americans,” who are “proving stoical in the face of pay cuts and compulsory unpaid leave.” Later the magazine adds, “for the moment.”

Whatever the initial problems and hesitations of the population, the raging economic crisis will destabilize American political and social life, and radicalize vast numbers of people. It is inevitably creating the conditions for a showdown between working people, the vast majority, and the corporate aristocracy. Building an independent political movement of the working class based on a socialist and internationalist program to offer a progressive way out of the crisis is the most pressing task.

Unemployment Worse With Stimulus Than Without

July 7, 2009

Matt Cover - The White House never predicted that unemployment would rise above nine percent regardless of whether Congress spent the nearly $800 billion in so-called economic stimulus spending it recommended...

True Unemployment Rate Already at 20%

July 6, 2009

MSN Money - Really, how hard is it to find a job? Was June's horrid numbers, in which 467,000 people lost their jobs compared to 345,000 in May, a one-time fluke? Or does it mean that all those Wall Street economists who believe the economic recovery is starting are dead wrong?

Not to scare you, but the situation is actually worse than it seems. Over the years, the government has changed the way it counts the unemployed. An example of this is the criticized Birth-Death Model which was added in 2000. The model is designed to account for the birth and death of businesses and the resultant lag in survey data. Unfortunately, the model doesn't work that well during economic contractions (like we have now) and consistently overstates the number of jobs being created each month.

John Williams of Shadow Government Statistics specializes in removing these questionable tweaks to the government's statistical data to better align current numbers with the methodology used to gather historical data. After reviewing the data, Williams believes that "the June jobs loss likely exceeded 700,000." David Rosenberg of Gluskin Sheff notes that the fall in the number of hours worked in June (to a record low of 33 per week) is equivalent to a loss of more than 800,000 jobs.

There are similar issues with the way the unemployment rate is measured. The headline rate only jumped from 9.4% to 9.5% because of a drop in the number of people in the workforce. The more inclusive "U-6" measure of unemployment, which includes discouraged workers, jumped from 16.4% to 16.5%.

But even this doesn't adequately capture the situation on the ground: Back in the Clinton Administration, the definition of discouraged worker was changed to only include those that had given up looking for work because there were no jobs to be had within the last year. By adding these folks back in, William's SGS-Alternate Unemployment Measure rose to a jaw-dropping 20.6%. Separately, the Center for Labor Market Studies in Boston puts U.S. unemployment at 18.2%.

Any way you cut the numbers, the situation is very bad. According to David Rosenberg, one-in-three among the unemployed have been looking for a job for more than six months and still can't find one.

This brings us to another issue: expiring unemployment benefits. Continuing unemployment claims fell 53,000 to 6.7 million last week, but Deutsche Bank's chief U.S. economist Joseph LaVorgna wonders how much of this decline is due people exhausting their standard 26-week benefit. He says: "We are concerned about what will happen when a significant share of out-of-work individuals' benefits completely expire, because this could lead consumer spending to re-weaken, hence jeopardizing a fragile recovery."

Unless the economy starts getting traction here in the third quarter, we could face a situation where people find that they have no job and no unemployment benefits. For these people, 2009 will feel an awful lot like 1932. As a result, spending cuts will be deep and dramatic.

The ongoing job losses will continue to weigh on the retail sector -- which was one of the best performing groups coming out of the March low. I've added short positions in Target, Macy's, and Office Depot to my portfolio. Besides penny-pinching consumers, retailers face a federal minimum wage increase as well as a tough back-to-school and holiday shopping season.

Unemployment Rate at 26-Year High; Jobless Rate at 9.5 Percent

July 2, 2009

Associated Press - Employers cut a larger-than-expected 467,000 jobs in June, driving the unemployment rate up to a 26-year high of 9.5 percent, suggesting that the economy's road to recovery will be bumpy. However, the rise in the unemployment rate from 9.4 percent in May wasn't as sharp as the expected 9.6 percent. Still, many economists predict the jobless rate will hit 10 percent this year, and keep rising into next year, before falling back.

All told, 14.7 million people were unemployed in June.

If laid-off workers who have given up looking for new jobs or have settled for part-time work are included, the unemployment rate would have been 16.5 percent in June, the highest on records dating to 1994.

Hunger, Poverty on the Rise in Chicago Area

July 1, 2009

World Socialist Web Site - The effects of the economic crisis on working people in Illinois have been devastating. Those who are particularly vulnerable--the unemployed, the under-employed, the elderly and the disabled--are in desperate need. As unemployment rises and the state of Illinois experiences yet another budget crisis, a growing number of working people are falling into poverty.

The Heartland Alliance recently released its 2009 reports on poverty in the Chicago area and in the state of Illinois. The reports directly correlate the swelling ranks of poor in the region with the recent spike in unemployment.

The Heartland Alliance's Illinois report found that poverty was worsening in many areas in the state even before the current economic crisis officially began, rising in 58 of 102 counties. In 2007, nearly 12 percent of Illinois residents, or 1.5 million people, were living in poverty.

The reports note that since the current US Census statistics are from 2007, before the economic crisis began, they do not accurately reflect economic realities. According to the 2007 Census data, in the years between 2000 and 2007 median household incomes in the area fell dramatically, with declines ranging from $5,000 to $11,000.

Since 2007, an estimated 405,000 Illinois residents have become poor, and two million more risk falling into poverty. Additionally, 160,000 have become extremely poor. In 2009, the federal government's definition of poor for a family of four is an income of less than $22,050. A family of four that is extremely poor has an income less than $11,025.

In February 2009, Chicago's unemployment rate reached 9.7 percent, with unemployment claims in Chicago increasing nearly 30 percent from 2008. It is estimated that 253,000 more Chicago residents have become poor since 2007, bringing Chicago's impoverished population to 11.3 percent.

The number of Chicago-area elderly people entering the workforce increased by almost 15 percent between 2000 and 2007. This number will continue rise as a result of the financial industry's profit-taking from retirement fund investments, among other factors. As corporations seek to protect profits by slashing pensions and benefits, the incomes of the elderly are quickly drained to cover housing costs, food costs and medical expenses no longer covered by health insurance.

The Heartland Alliance report estimates that 87,000 children in Chicago have become poor since 2007. Last year, the situation was already dire. In 2008 over 10,600 Chicago Public School students were homeless, an increase of 35 percent over five years.

The Chicago Tribune recently reported that 84 percent of the 405,000 Chicago public school students receive free or subsidized meals at school. It concluded that 342,000 are not receiving free or subsidized meals during this year’s summer break...

Gloomy U.S. Consumers Clip Housing Recovery Hopes

June 30, 2009

Reuters - Billionaire investor George Soros added to the cautionary tone, saying fears of inflation would drive up borrowing costs and choke off growth once financial markets recover. "As markets revive, fear of inflation will drive up interest rates, which will choke off recovery," he said at a breakfast hosted by the Wall Street Journal...

One in Four Mortgage Defaults Are “Strategic”

June 25, 2009

The Economist - House prices in America have fallen so far that as many as one in five households have mortgage debt greater than the value of their homes. In a few states, borrowers are not liable for the shortfall between an unpaid loan and the resale value of the home it is secured upon. Even where borrowers are on the hook, lenders often find it too costly to pursue unpaid debts. So some homeowners may be tempted to default and escape the burden of negative equity.

How widespread is this practice? New research based on a survey of 1,000 homeowners suggests that one in four mortgage defaults are “strategic”—by people who could meet their payments but who choose not to. The main drivers of strategic default are the scale of negative equity, and moral and social considerations. Few would opt to renege on their mortgage if the equity gap were below 10% of their home’s value, the authors find, partly because of the costs of moving. But one in six would bail out if loans were underwater by a half.

Four-fifths think strategic default is wrong. Those in the unethical minority are four times more likely to renege on loans (allowing for other influences) when their negative equity reaches $50,000. But morality has its price. When the equity gap reaches $100,000, “immoral” homeowners are only twice as keen to walk away from their debts as “moral” ones. People under 35 or over 65 are less likely to believe that default is wrong. So are the well-educated.

Anger about bail-outs of banks or carmakers does not weaken the moral barrier to default. But people who live in neighbourhoods where home repossessions are frequent are more likely to welsh on loans. Homeowners who know someone who has defaulted strategically are 82% more likely to say they would do so, too.

The likelihood of strategic default rises more quickly once the rate of local home foreclosures reaches a critical level. That hints at a vicious cycle of foreclosures that both depress home prices and weaken the social and economic barriers to further defaults. To break the cycle, policymakers need to address the problem of negative equity, not just unaffordable interest payments.