SocraticGadfly: 7/8/07 - 7/15/07

July 13, 2007

More subprime worries: Is it time to talk recession?

First, the dollar continues to sink against other currencies as the Guardian notes.:
Wall Street's financial institutions and pension funds are thought to be heavily exposed to possible losses in collateralised debt obligations (CDOs) - packages of debt including mortgages owed by American households that are bought and sold in the financial markets.

When the Canadian dollar is trading nearly one-for-one with the U.S. dollar (the “loonie” at nearly 96 cents earlier this week) how can you not worry about our economy?

And, the mere fact that this story is gaining more traction in the international press indicates its seriousness.

Meanwhile, the “holdout effect” may keep the spiral going downward as well according to one economist. The details:
Sal Guatieri, economist at BMO Capital Markets, said the troubles in housing will continue to drag on the overall economy.

“The US housing correction shows no sign of stabilizing,” Guatieri said.

“Foreclosure rates are at all-time highs, with many subprime borrowers throwing in the towel. Continued moderate home price deflation, though helping affordability, is also discouraging buyers from taking the plunge.”

Market Watch, meanwhile uses “Moby-Dick” language to describe its concern:
Standard & Poor’s just drove a huge harpoon into the heart of the mortgage credit bubble, and it's going to take a long time to clean up the mess once the beast finally dies. …

But the bigger news is that S&P isn't going along with the charade anymore. S&P said it would change its methodology for rating hundreds of billions of dollars in residential-mortgage-backed securities. And it would review its ratings on hundreds of billions of dollars in the more complex collateralized debt obligations based on those subprime loans.

A lot of debt will be downgraded to junk status. A lot of that debt will have to be sold at fire-sale prices. A lot of pension funds and hedge funds that once thrived on the high returns they could get from investing in subprime junk will now lose a lot of money.

S&P’s announcement is a death warrant for the subprime industry. No longer will mortgage brokers be able to help buyers lie their way into a home. Fewer stressed homeowners will be able to refinance their mortgage, thus extending and exacerbating the housing bust.

“We do not foresee the poor performance abating,” S&P said.

And, I’m far from the only blogger to wonder, “Where was S&P two or three years ago?” as Business Week reports.

Homebuiders’ stocks reflect the ongoing concern, continuing to stumble and continuing to get stronger “sell” recommendations.

So, is it time to wonder about a possible recession? I say, “yes.” I’ll give you 1-in-3 odds we are in a recession within 12 months, and 1-in-2 odds we are by Jan. 1, 2009.

July 12, 2007

This guy is a Republican? A Southern Republican?

Florida Gov. Charlie Crist, by executive order, is giving the Sunshine State auto emissions standards as tough as California’s carbon dioxide standards that are under court attack.
The orders call for emission of greenhouse gases in Florida to be cut by more than 25 percent over the next 18 years and by 80 percent by 2050.

One order copies California requirements to reduce the amount of carbon-dioxide cars release into the atmosphere, which automakers are challenging in court.

"We cannot afford to ignore this issue any longer," Crist said of the impact of carbon emissions on global climate change.

If a Democrat is elected president in 2008, watch out for Crist in 2012.

Bush self-delusionally opted for surge despite CIA pessimism

Last November, CIA Director Michael Hayden threw a bucket of cold-water reality in the face of Bush’s delusional “Churchillian victory” in Iraq. The details:
Early on the morning of Nov. 13, 2006, members of the bipartisan Iraq Study Group gathered around a dark wooden conference table in the windowless Roosevelt Room of the White House.

For more than an hour, they listened to President Bush give what one panel member called a “Churchillian” vision of “victory” in Iraq and defend the country's prime minister, Nouri al-Maliki. “A constitutional order is emerging,” he said.

Later that morning, around the same conference table, CIA Director Michael V. Hayden painted a starkly different picture for members of the study group. Hayden said “the inability of the government to govern seems irreversible,” adding that he could not “point to any milestone or checkpoint where we can turn this thing around,” according to written records of his briefing and the recollections of six participants. …

According to the written record and others in the room, Hayden at one point likened the situation in Iraq to a marathon. He said there comes a point in each race when the runner knows he can complete the challenge. But Hayden said he could see no such point in Iraq's future.

To me, this only further underscores the delusionary state of Bush’s mind on Iraq, combined with his dry-drunk stubbornness on the issue. It’s a deplorable combination that has been, and continues to be, deadly.

July 11, 2007

Pakistan in 1,000 words or less

Ted Rall’s latest column another home run, a great snapshot of the contradictions of both the country and President Pervez Musharraf. The president walks a tightrope, and in doing so (though this is outside the purview of Rall’s column), induces contradictions, if not outright schizophrenia, from Bush, who alternates between pushing him too hard, treating him like a toady, and treating him with kid gloves.
Pakistan is a military dictatorship with a wild, freewheeling press, ruled by an antidemocratic despot who respects many democratic institutions. A graduate of a Catholic high school and a Presbyterian college, General Pervez Musharraf came to power by allying himself with radical Islamist political parties who convinced him to invite Afghanistan's Taliban militia into Pakistan to fight India. Most Pakistanis are secular and favor modernization, yet watch their nation's Talibanization in passive silence.

If your head is spinning, congrats — you're Pakistani for 1000 words.

Musharraf is playing a dangerous game, balancing the hopes and fears of educated liberals to the left against radical Muslim clerics on the right. Most leaders who deploy a strategy of reverse triangulation end up with no support at all. Because Musharraf has transformed the Pakistani political system into the personification of his policies, Pakistan itself could follow suit.

The biggest clash in Pakistani society, however, is common to the Third World: a widening gap between the lives of a few well-off individuals and millions of everyone elses. Frustrated at the toll that the dismal condition of Pakistani highways took on its bus lines, South Korea's Daewoo conglomerate decided to spend $375 million to build its own. The privatized six-lane toll road of immaculate asphalt allows elite motorists to zip through the impoverished wasteland separating Islamabad and the Punjabi capital of Lahore in a mere four hours. If you're Jamal Schmo, it costs 12 hours and the occasional broken axle.

The thing is, he is probably, faults and all, close to our best alternative to lead Pakistan at this time. Benazir Bhutto, though having new-found popularity in Pakistan, probably still has the virus of corruption in her bloodstream.

And, it was actually Bhutto who first opened the door to the Taliban in Afghanistan, before her second deposition.

Anyway, as far as Musharraf, the attempt to depose Chief Justice Iftikhar Muhammad Chaudhry has been his biggest mistake to date. Up until that point, more American policy leaders could probably turn a halfway blind eye to him, but he has now taken bending Pakistan’s constitution too far.

But, again, options in Pakistan aren’t the best.

July 10, 2007

All-Star Game observation

I didn’t think any patriotic-type song could be butchered worse than “The Star-Spangled Banner.” However, in the seventh inning stretch at The All-Star Game, this Paula Cole proved me wrong with her rendition of “God Bless America.” I hit the mute in 10 seconds flat.

Surgeon General: BushCo muzzled me on sex ed

In one sense, is the complaint by former Surgeon General Richard Carmona much more than a blip on the pandering radar screen? And, given the “faith-based” push for abstinence-only sex education programs by this administration (faith that teenagers will remain abstinent after such a course?) combined with the anti-gay record of the man nominated to be his successor, Dr. James Holsinger Jr., it’s not at all surprising. Nor is his complaint about how politicized his position has become.
For example, he said he wasn't allowed to make a speech at the Special Olympics because it was viewed as benefiting a political opponent. However, he said was asked to speak at events designed to benefit Republican lawmakers.

“The reality is that the nation's doctor has been marginalized and relegated to a position with no independent budget, and with supervisors who are political appointees with partisan agendas,” said Carmona, who served from 2002 to 2006.

Relax, Dr. Carmona. At least you weren’t asked to do medical opposition research during the 2004 campaign. Or maybe you were? Did you have anything to do with the Kerry botox and suntan brouhahas?

Meanwhile, GOP flackery goes through the motions more and more every day.
Responding, the White House said Carmona was given the authority and had the obligation to be the leading voice for the health of all Americans.

“It’s disappointing to us if he failed to use his position to the fullest extent in advocating for policies he thought were in the best interests of the nation,” said Deputy Press Secretary Tony Fratto. “We believe Dr. Carmona received the support necessary to carry out his mission.”

My question: Do guys like Tony Fratto really believe what they say? Are they true believers or the brainwashed? Or are they just bullshitters trying not to laugh up their sleeves during press conferences?

And, question No. 2: Will our Democratic Senators be sure to hold the line and File 13 Holsinger's nomination?

Rick Noriega looking official to seek nomination to oppose Cornyn

Texas State Rep. Rick Noriega will announce Thursday, June 12, that he is forming an exploratory committee to consider seeking the Democratic nomination for U.S. Senate against John Cornyn. The announcement will be on the south side of the Texas Capitol in Austin at 11 a.m., at the Heroes of the Alamo monument.

From Noriega’s press release:
Rick Noriega, 49, was first elected to the Texas House of Representatives in 1999. He has served on key committees throughout his tenure. This past session, he was a member of the Appropriations Committee and Budget and Oversight Chair for the Defense Affairs and State-Federal Relations Committee.

A 26-year veteran of our country’s armed forces, Noriega spent most of 2005 running training facilities in Afghanistan as part of the Texas National Guard. He missed the 2005 legislative session because of the assignment, and his wife Melissa served in his legislative seat during his absence.

Noriega also ran a National Guard border-security operation in Laredo, and Houston Mayor Bill White had him manage the housing of Hurricane Katrina evacuees at the George R. Brown Convention Center.

John Cornyn, the incumbent, is the least popular member of the Senate who faces reelection in 2008. The latest USA Survey poll, released June 19, 2007, showed that only 42 percent of Texans approve of the way Cornyn is handling his job, with 43 percent disapproving.

In other words, Noreiga, who has a solidly liberal record, has Cornyn “covered” on both the military/“war on terror” and the immigration/border issues, and a better option for Democrats to back than Mikal Watts. From what I know of Watts, I don’t think he would be the worst candidate in the world by any means, but Noreiga has legislative experience, and the two big “neutralizers” I mentioned above.

And, what Bush has done already ISN’T grave?

I simply do not get Barack Obama’s justification for opposing Bush or Cheney impeachment Last week, he said:
“I think you reserve impeachment for grave, grave breaches, and intentional breaches of the president's authority,”

And illegal wiretaps, lying the country into war, possible obstruction of justice with Libby’s commutation, and blatantly politicized district attorney firings aren’t “grave, grave breaches”?

Credit card debt jumps; another reflection of housing problem?

Credit card debt went up 10 percent in May; it appears to be another sign of the housing bubble, namely the rise in mortgage rates.
David Wyss, chief economist at Standard & Poor's in New York, said some of the surge in credit card debt reflects the fact that it is getting harder to get home equity loans with banks tightening up on standards and home values not soaring as they did during the housing boom.

“We think that people who had been refinancing their credit card debt into home equity loans are finding that harder to do now,” Wyss said.

Democrats can play this issue right, in the freewheeling, “what, me regulate?” BushCo environment, if a call for new federal oversight and “clarity of mortgage” issues are made part of the 2008 platform.

If this isn’t grounds for a Congressional perjury charge against Gonzo, what is?

As this Newsweek/Washington Post article spells out, Alberto V-05 clearly perjured himself before Congress. The details:
As he sought to renew the USA Patriot Act two years ago, Attorney General Alberto R. Gonzales assured lawmakers that the FBI had not abused its potent new terrorism-fighting powers. "There has not been one verified case of civil liberties abuse," Gonzales told senators on April 27, 2005.

Six days earlier, the FBI sent Gonzales a copy of a report that said its agents had obtained personal information that they were not entitled to have. It was one of at least half a dozen reports of legal or procedural violations that Gonzales received in the three months before he made his statement to the Senate intelligence committee, according to internal FBI documents released under the Freedom of Information Act.

Now, I can already tell you what the various reactions out of Gonzo’s mouth might be:
• “These were just procedural issues;
• “Trust me, nobody’s civil liberties were violated”
• “Mistakes were made”;

Already, DOJ spokesperson Brian Roehrkasse is seeking to “contextualize” Gonzo’s statements.

However, he and Gonzo are undercut, in the story, despite Roehrkasse’s attempt to spin that, as well:
Each of the violations cited in the reports copied to Gonzales was serious enough to require notification of the President's Intelligence Oversight Board, which helps police the government's surveillance activities. The format of each memo was similar, and none minced words.

The oversight board, staffed with intelligence experts from inside and outside government, was established to report to the attorney general and president about civil liberties abuses or intelligence lapses. But Roehrkasse said the fact that a violation is reported to the board "does not mean that a USA Patriot violation exists or that an individual's civil liberties have been abused."

Looking beyond this spin, this revelation about Gonzo’s brazenness is not a tree falling in a people-deserted forest. Instead, it topples right in the midst of multiple House and Senate attempts to obtain new White House testimony on DOJ, its warrantless wiretapping, its politically-based firings of district attorneys, Vice President Cheney’s secretiveness and more.

Will Democrats do what they need to do and prefer charges against Gonzo? Will they push back? I, for one, am not holding my breath too long at this point.

More on why I worry about the housing bubble

The number of mortgages set to reset is nowhere near peaking yet. In fact, as the chart below shows, we have an increase of 60 percent, and a full year to go, before it crests. (Click on graphic for enlarged version.)

Bursting housing bubble hits Home Depot

Home Depot expects its earnings per share this year to fall 15-18 percent from last year. It expects total retail sales to take a first-ever 1-2 percent drop.

Likely fallout? Well, HD is engaged in a massive stock buyback to lessen outside pressures. Will that be enough? If not, what’s next? Probably layoffs at Home Depot stores. Given consumer complaints about lack of service at Home Depots, though, the company could be putting itself in a vicious circle if it cuts too many employees.

And, there’s this:
And in yet one more sign of housing trouble, credit rating agency Standard & Poor’s said it's closely watching $12 billion in bonds backed by subprime mortgages, and could cut ratings because the agency does “not foresee the poor performance abating.”

In a published report on its Web site, S&P said the housing market is still struggling:

“We expect that the U.S. housing market, especially the subprime sector, will continue to decline before it improves, and home prices will continue to come under stress. Weakness in the property markets continues to exacerbate losses, with little prospect for improvement in the near term.

“Furthermore,” the report continued, “we expect losses will continue to increase, as borrowers experience rising loan payments due to the resetting terms of their adjustable-rate loans and principal amortization that occurs after the interest-only period ends for both adjustable-rate and fixed-rate loans.”

Where was S&P two years ago, though? Taking a Riviera vacation with Greenspan? Subprime defaults were already on the rise then.

July 09, 2007

How much of a worry should subprime mortgages and collateralized debt obligations be?

Maybe even more than I’ve written before.

First, according to Counterpunch, financial derivatives have 10 times the float of all publicly traded stocks combined. That’s a lot of dinero, and no matter how much the Dow is up, ultimately, the broader investment market just can’t run from that:
Noriel Roubini puts meat to these bones. In his June 27th blog, Roubini wrote:

“The fallout of this CDO mess is likely to end up into $100 billion plus of losses for banks, financial institutions, hedge funds and investors once these CDOs and subprime mortgage backed securities are marked-to-market rather than being marked-to-a-delusional — misrated-model. Thus, the Bear disaster is only the tip of the iceberg of a much bigger financial mess that will unravel in the next few months: the pile of rising subprime and nearprime delinquencies will take a toll on the toxic waste of mortgage backed securities that a rating ‘voodoo magic’ pretended to turn below-junk securities into A-rated ones.”

Meanwhile, the Bank of International Settlements is worried about how the Fed has first mishandled this situation, then hedge funds. (Are hedge funds being used to “vent” the subprime crisis just like Greenspan used housing to ‘vent” he dot-com bubble?)

Here’s just how bad the problem is:
The BIS referred to the toxic effect of the $470 billion in collateralized debt obligations (CDO), and a further $524 billion in “synthetic” CDOs which have spread through hedge funds industry. These CDOs are the loans (many sub primes) which were bundled off to Wall Street and turned into securities which are highly leveraged in hedge funds for maximum profitability. As Bear Stearns is discovering, these CDOs are like roadside bombs. …

Banks doubled the amount of CDOs outstanding in the past two years to $2.6 trillion, including a record $769 billion sold last year, according to J.P. Morgan.

And, just because Wall Street is doing fine, that doesn’t mean the economy is so great, in case you’re wondering how it can be looking at 14,000 in the face of all that debt:
The current rise in stock prices does not indicate a healthy economy. It simply proves that the market is awash in cheap credit resulting from the Fed's increases in the money supply. Consumer spending is a better indicator of the real state of the economy than stocks. When consumer spending drops off; it is a sign of overcapacity, which is deflationary.

Here’s the bottom line:
The underlying problem is not simply the Fed's reckless increases to the money supply, but the growing “wealth gap” which is undermining solid economic growth. If wages don't keep pace with productivity; the middle class loses its ability to buy consumer items and the economy slows.

The reason that hasn’t happened yet in the US is because of the extraordinary opportunities to expand personal debt. The Fed's low interest rates have created a culture of borrowing which has convinced many people that debt equals wealth. It's not.

On mortgage refinancing, the purchasing of second homes as investments, etc., that confusion of wealth and debt is now coming home to roost.

And, if that’s not enough to wake you up:
The rise in housing prices has created the illusion of prosperity but, in truth, we are only selling houses to each other and are not making anything that the rest of the world wants. The $11 trillion dollars that was pumped into the real estate market is probably the greatest waste of capital investment in the nations' history.

Harsh words, but at least a fair-sized grain of truth behind them. This reminds me of Paul Kennedy’s book “The Rise and Fall of the Great Powers.” Somewhat for the Netherlands, and definitely for Great Britain, Kennedy states the move from manufacturing and industry to a focus on financial services was a key part of the decline of these great powers.

Caveat emptor.

July 08, 2007

Live Earth thoughts

Was it “carbon-neutral”? No, but it wasn’t promised to be.

(That said, how non carbon-neutral was it? The different venues, in total, went through more carbon than 3,000 Britons in a year.
Its total carbon footprint, including the artists and spectators’ travel and energy consumption, was likely to have been at least 31,500 tonnes, according to John Buckley of _ more than 3,000 times the average Briton’s annual footprint. One viewer of BBC2’s Newsnight wrote online, “Would you hold a hog roast to promote vegetarianism?”

If we, to use a phrase conservatives like to throw around, want an event like this to pass the smell test of a cost-benefit analysis, I think Americans have to be reminded of the costs of global warming in words of the old Fram commercials (for those of you old enough to remember):

“You can pay me a little bit now or a whole lot later.”

Or, as Gore said: “You are Live Earth.”

Can we get someone to be just a little more open to the idea of treating this issue seriously now? Can we get an elected official, whether local, state or federal, to do that? That’s the biggie. As for getting someone we know to think and act more environmentally, two things:

One is that this is word-of-mouth marketing. The other, to paraphrase what Robert Redford said, is that environmental activism needs to be about what we can do rather than what we can’t.

That said, I don’t know whether I felt “that old” or “young again” hearing a band like UB40. I liked some of the short film clips a lot, some somewhat, and felt that some were little more than video equivalents of Adbusters magazine.

That’s my .02.