Brookings tries to explain away subprime worries and cheats

Cutting some evidentiary corners, and looking past the CDO valuation issue for the most part, is an easy way of doing that. Take this bit of playing with the facts:

[A]mong all U.S. residential mortgage originations, subprime loans altogether comprised a cumulative total of under 13 percent from 1994 through 2005, though they rose to 19 percent in the year 2004 and 21 percent in 2005, according to the Mortgage Bankers’ Association (MBA). This means at least 87 percent of residential mortgages as of mid-2007 were not subprime loans, according to the MBA’s delinquency studies.

So, the study simply ignores 2006 and early 2007 data on subprime loans, despite the sudden increase in the percent of loans being subprime ones in 2004-05.

Brookings also claims the problem is confined to subprimes, when the number of defaults in the loan class above them, Alt-A, has also been increasing.

And, it claims there is no credit crisis even while admitting that CDOs and other mortgage securitizations have risk that it says, in not so many words, wasn’t priced to market.

The Brookings report is either ignorant or willful on the economic issue that lending institutions don’t know how many of these instruments could go bad, therefore don’t know how much money they’ll have to tie up to account for them.

It also has nothing unfavorable to say about Fed rate cuts.

The only thing I found myself in agreement with was no bailout for borrowers. On the other hand, it didn’t say anything against a bailout for lenders.

In other words, it sounds like it was written by two Wall Street bulls with connections to financial institutions.

Trinity toll road: A pig wearing lipstick

A newly-made environmentalist acquaintance, whom I shall allow to remain anonymous, said the Trinity Park in Dallas was the lipstick on the lips of the Trinity Toll Road pig.

He agreed that the 1998 issue had been sold as a park.

OK, establishment Dallas, you won.

You still lied.

Religious Right hypocrisy watch: Robertson endorses Rudy

Pat Robertson’s endorsement of Rudy Giuliani says two things, basically.
1. The Religious Right is ultimately about power, not political issues.

2. James Dobson’s threat of a third-party candidacy is thin soup; Texas Gov. Rick Perry’s endorsement of Rudy a couple of weeks back pretty much put paid on that notion; this is, in essence, the final nail. (It’s worth noting that Sam Brownback today endorsed McCain while specifically saying the GOP wouldn’t select a pro-choice candidate. Say it all you want, Sam, it doesn’t make it true.)

Congress should approve new war powers bill

I agree with George Will, surprisingly, on a major Congressional bill.

Will says the best way to prevent war with Iran is for Congress to approve Rep. Walter Jones’ Congressional War Powers Resolution. Yes, it’s shocking to agree with Will, but he’s got some very good points

Congress can, however, put the Constitution's bridle back on the presidency. Congress can end unfettered executive war-making by deciding to. That might not require, but would be facilitated by, enacting the Constitutional War Powers Resolution. Introduced last week by Rep. Walter B. Jones, a North Carolina Republican, it technically amends but essentially would supplant the existing War Powers Resolution, which has been a nullity ever since it was passed in 1973 over President Richard Nixon's veto.

Mr. Jones' measure is designed to ensure that deciding to go to war is, as the Founders insisted it be, a "collective judgment." It would prohibit presidents from initiating military actions except to repel or retaliate for sudden attacks on America or American troops abroad, or to protect and evacuate U.S. citizens abroad. It would provide for expedited judicial review to enforce compliance with the resolution and would permit the use of federal funds only for military actions taken in compliance with the resolution.

It reflects conclusions reached by the War Powers Initiative of the Constitution Project. That nonpartisan organization's 2005 study notes that Congress' appropriation power enables Congress to stop the use of force by cutting off its funding. That check is augmented by the Antideficiency Act, which prohibits any expenditure or obligation of funds not appropriated by Congress, and by legislation that criminalizes violations of the act.

At the same time, he says a Congressional failure to act would “merit its own marginalization.’ If this bill is being pushed by a Republican, and can be sold as a claim-back of legislative powers from the executive, maybe it has an outside shot of getting a veto-proof majority. I won’t hold my breath over that, but, it’s worth a shot.

Problem is, though, this goes back to my takeoff on an old cliché.

That cliché says that Congress contains 535 Secretaries of State. True, but it often contains zero Secretaries of Defense when push comes to shove.

What Will doesn’t mention is that the original War Powers Act is a nullity in part because Congress has never invoked it. If Jones’ new legislation has a similar enabling mechanism, it will become just as much a nullity until and unless Congress is willing to take full legislative responsibility for war-making decisions: both in restraining, or supporting, executive decisions, and accepting its part in responsibility for the results.

Update: The original War Powers Resolution has similar, if less explicit, language, on military actions without a declaration of war:

(c) The constitutional powers of the President as Commander-in-Chief to introduce United States Armed Forces into hostilities, or into situations where imminent involvement in hostilities is clearly indicated by the circumstances, are exercised only pursuant to (1) a declaration of war, (2) specific statutory authorization, or (3) a national emergency created by attack upon the United States, its territories or possessions, or its armed forces." (My emphasis.)

The "evacuation of U.S. Citizens" is added in Jones' bill.

At the same time, it has a "funding limitation" paragraph not in the original:

(c) Funding Limitation- Unless one of the numbered paragraphs of subsection (b) applies, after the expiration of the period specified in that subsection (including any extension of that period in accordance with that subsection), funds appropriated or otherwise made available under any law may not be obligated or expended to continue the involvement of the Armed Forces in the hostilities. This subsection does not, however, prohibit the use of funds to remove the Armed Forces from hostilities.

So, that's actually a strengthening of the original WPA.

Rather than a one-shot Petraeus "surge" report, in the absence of a declared war, we'd have the requirement for regular executive updates in exchange for continued funding.

Here’s Jones’ bill; here’s the original War Powers Resolution.

Bernanke a Street suck-up just like Greenspan

Jim Jubak points out that Big Ben, like the Greenspan God before him, is simply trying to shuffle one market catastrophe down the road to the next one. You thought balloon-note home mortgages were bad; that’s nothing compared to the balloon notes the Fed has floated Wall Street for more than a decade, starting with Countrywide’s crack-up, through the dot-com bust and on to today, Jubak says:

Over the last 20 years, first under Alan Greenspan and then Ben Bernanke, the Federal Reserve has taught Wall Street to expect a reward for bad behavior.

* Build a hedge fund on a mathematical model and a prayer, as Long-Term Capital Management did — borrowing $129 billion on just $4.7 billion in assets — and the Federal Reserve will organize a bailout.

* Bid dot-com stocks to the sky — as Wall Street analysts did with ever-higher target prices on Amazon.com (AMZN, news, msgs) and others — and the Federal Reserve will cut interest rates to 1% and keep them there.

* Put the money from that rescue to work to build skyscrapers of structured debt — until a collapse in the market for mortgages turns even low-risk AAA-rated debt spiraling to junk bond prices — and the Federal Reserve will cut interest rates.

Bernanke's Fed first cut rates in a panic by a half a percentage point in September, but the latest cut — a quarter-point on Oct. 31 — was in direct response to Wall Street.

Jon Markman says the Fed is, in essence, trying to delay a recession until after the November 2008 presidential election.
The old Fram oil filter commercial said, “You can pay me a little bit now, or a whole lot later.” Well, the next president’s going to have to do a lot of paying, and that’s another reason why I don’t get Democratic candidates not talking more about the economy. One of them could be having to lead a pretty big clean-up.

$100/barrel oil? Maybe it isn’t so laughable after all

From my newspaper op-ed column for this week:

Just a few months ago, oil baron and corporate raider T. Boone Pickens was talking about the possibility of oil prices hitting $100 a barrel by the end of this year.

At the time, to the degree his comment got any notice or reaction at all, it tended to be laughter, even derision, especially from “establishment” energy types like the major oil companies, Daniel Yergin and his Cambridge Energy Research Associates, and so forth.

Well, I’ll bet that, after a $20/bbl rise in oil prices in less than two months, nobody’s laughing now.

In terms of inflation, oil prices are now up to where they were in 1979, during the second oil embargo, the Iranian-originated embargo after the overthrow of the Shah of Iran. Gasoline prices at the pump are approaching their late-summer 2005 post-hurricane peak.
But, we haven’t had the same hurricane destructiveness of Gulf of Mexico production as caused by Hurricanes Katrina and Rita two years ago. And, nobody’s embargoing oil production, unlike 1979-80.

So, what’s causing the problem?

Part of it is recent world geopolitical instability. Oil producers wonder if Dick Cheney’s sabers rattling about Iran, or Turkey’s similar stance about the Kurdish portion of Iraq, are real.

However, those worries reflect a deeper problem. World oil supply is straining so hard to keep pace with demand that even small disruptions in output somewhere are feared to have potentially major consequences.

Some people may wonder, “Where’s Saudi Arabia in all this?”

Well, the Saudis have made noise the last couple of years about being ready to pick up any slack in the system, any time, but what if that’s just hot air?

What if Saudi production is at its peak and can’t go up any more?

Years ago, that idea, like Pickens’ prediction, would have been laughed at. Some people still laugh at it.

But, the idea of Peak Oil, like $100/bbl oil, just may not be laughable after all.

The basic concept is that oil, like coal, gold and other extracted minerals, is not a readily renewable resource. Ergo, world production will someday pump out half of the oil that is extractable. This will be less than 50 percent of total oil in the world; drops in wellhead and oilfield pressure, and other geological considerations, mean that 100 percent of the oil is never recovered from any field.

The idea first arose in relation to U.S. oil production in the 1950s. Shell Oil geologist M. King Hubbert started wondering when U.S. oil production would peak. In a 1956 paper, he said that period would be sometime between the late 1960s and early 1970s.

In the early 1970s, it became clear that U.S. production peaked in 1970, and Hubbert was hailed as an oilfield prophet.

The next idea was obvious: extend the specific analytical tools and techniques he applied to U.S. production to world production.

Hubbert did, and came up with the late 1990s. However, that clearly didn’t happen.
Unfortunately, people like the aforementioned Yergin used that fact to pooh-pooh Hubbert’s prediction in particular and the idea of a looming oil peak in general as ridiculous.

In hindsight, it instead appears that the 1973-74 and 1979-80 oil embargos, combined with separate 1979-80 Organization of Petroleum Exporting Countries price hikes, increased U.S. conservation so much as to reset the peak.
Peak Oil naysayers claim that technological improvements in conventional oilfield drilling, such as horizontal drilling, and production of nonconventional oil such as that in Canada’s oil sands, will push the peak back even further. However, Hubbert had factored in technological, exploration site and production improvements as part of his analytical tools.

Is a worldwide peak near?

I’d say it can’t be too far off. OPEC member Indonesia is now, despite the name of OPEC, an oil importer, for example. Another example: The United Kingdom has seen its North Sea reserves decline so rapidly that it is, again, an oil importer, and because of its amount of use, went from hitting its production export to becoming a net importer in just six years. Mexico, due to increasing demand and an apparent peak in its production, is seeing its exports decline by 10 percent a year and could be a net importer in not too many more years.

Dallas petroleum geologist Jeff Brown, with his Export-Land Model, has done extensive research modeling on the double whammy of major oil producers having exploding internal demand even as their production peaks.

And, Peak Oil is different from global warming.

First, with exceptions for faster temperature change in polar reasons, the effects of global warming will equalize around the world.

Not so with Peak Oil. Different countries have different oil dependencies and we are No. 1.

In other words, a country like Afghanistan or Zimbabwe, with little automotive traffic and little jet travel, has little distance to “fall” from its peak oil usage. We, on the other hand, are near, if not at, the edge of an oil consumption Grand Canyon — a precipice that could be more catastrophic than global warming fallout.

For more on Peak Oil, visit the group blog The Oil Drum at www.theoildrum.com.