ml-implode.com reports that according to the CBO, social security will run out money much sooner than projected even last year due to reduced payroll tax receipts:
“Last year, the CBO figured the surplus would be $80 billion this year and next, rising from those levels before falling to zero in about ten years. The most recent projections are for a slim $16 billion surplus this year and just $3 billion next year but, given the rosy predictions that usually come out of Washington, a deficit is certainly within the realm of possibilities.
This is bad. We were supposed to have until 2012 that Social Security would still be in a “surplus” — meaning more SS taxes were being taken in than outlays. Thus, Social Security would be contributing to the government’s general operating revenue until that time (the Social Security money taken in is not segregated in any way — it is just “tracked” through the holding of Treasury Securities).
Apparently, that “lucky” state of affairs is all but over — now the fund will have to start selling off its trillion or so of accumulated Treasuries, contributing to the overall funding problem of the Federal Government, at the worst possible time.
The US is bankrupt, folks. Its time to acknowledge it and deal with it.”
Rex Nutting at Dow Jones reports:
“Home values in 20 major U.S. cities fell at the fastest rate on record in January and are now down a record 19% in the 12 months ending in January.
The Case-Shiller index tracks repeat sales on the same properties over time, but it closely tracks only 20 cities, not the whole country.
A similar index from the Federal Housing Finance Agency released last week found prices rose 1.7% in January, the first increase in a year. The FHFA index tracks the whole country, but relies on data from Fannie Mae and Freddie Mac, so it missed most of purchases financed by subprime loans earlier in the decade.”
It’s beginning to be clear that we can have much less faith in the government’s data releases.
The McKinsey Quarterly reports on the importance of growing household incomes to facilitate reducing the abnormal debt level (see chart below) without such drastic reductions in consumption.
“In short, the importance of income growth is difficult to overstate. With it, households can simultaneously reduce their debt burden, rebuild savings, and boost consumption. But without significant income gains, deleveraging could undermine consumption and the global economy for years to come. One implication: policy choices that favor productivity and employment growthâ€”critical determinants of income growthâ€”will make deleveraging less painful. Efficiency breakthroughs in sectors, such as health care and government, that employ large numbers of peopleâ€”but that have not enjoyed productivity revolutions similar to those experienced in industries like retailing and wholesalingâ€”would make a dramatic difference.”
The problem is that in the current outlook there is not much opportunity for income growth for thenext 2 or 3 years.Â So… with the consumer’s new need to save, consumption is cliff diving.
A friend, call him “Kit”, works in Northern Louisiana building cabinets.Â He bids as a subcontractor on new housing, as well as remodeling projects.Â He told us today:
“I just don’t understand it.Â I haven’t seen it this bad since 1987. I just don’t understand it!Â I talked to my friends at the banks. They say they are willing to lend money.Â Interest rates are low.Â Building supply prices are low.Â But nobody is doing anything.Â It’s weird.Â I’m startin’ to worry.”
This time the low oil prices have crimped a big source of tax revenue for the state, but states like Louisiana usually don’t grow as fast in good times, or fall as hard as other areas in the nation in bad times.Â But now, the housing collapse is beginning to be felt there too. Zero Hedge shows a report from Deutsche Bank that projects various MSA’s home price declines.Â According to this report, the New Orleans area is due for about 27% additional fall in home prices before reaching bottom.Â We wanted to tell Kit the worst is over, but it’s not.Â The truth is even if the interest rate for buying homes is zero, the expectation is that prices will fall.Â Until that expectation changes, home sales and home building will be slow in the Bayou state.
In a piece designed to contrast money center banks with regional banks, Institutional risk offers their opinion on the Fed’s thinking:
“No wonder that Fed Chairman Bernanke and Treasury Secretary Tim Geithner persist in their idiotic position that toxic subprime assets have true “values” of 80% of par. As we told the clients of IRA’s institutional advisory service earlier this week:
“Based on our projections and channel checks, we think that maybe the Fed staff got it wrong and put down the likely loss rate instead of the fanciful LT recovery rate embraced by Bernanke, Geithner and Summers. Truth is, the LT recovery or “Loss Given Default” (LGD) rate experience of 20-30% (which are the LT LGD rates used by Moody’s, S&P for internal loss rate projections) are holding true in this cycle as in previous economic downturns and may actually be optimistic compared with the actual realized loss.”
With most of the RES and CRE collateral we see in the channel trading in the 30s, it is only a matter of time before the markets force Bernanke, Geithner and Summers to abandon their desire to subsidize the large, insolvent banks and finally embrace liquidation. “
FT published its “exclusive interview” with President Obama today.Â The interview of the “much like FDR” portrays the President as one who, in comparison to his predecessors, “conveys a degree of pragmatism” and “modulated phrasing” and who has a good chance to succeed in uniting the world at “the most important world economic gathering in decades”:
“Many believe that the G20 summit will prove a vacuous waste of time and that the world economy will continue to be sucked into the recessionary vortex. Mr Obama, however, projects a Zen-like calm towards the emergencies that he faces. If his rescue operations fail to arrest the tide, history may show him to have been too unfazed. If things started to stabilise and improve, Mr Obama could be hailed as the new FDR.”
In his FT opinion piece on March 26, Alan Greenspan writes of the need for a better cushion against risk.Â Naked Capitalism accuses Greenspan of both disengeuousness and errors of fact in his piece.Â Yet, Greenspan’s estimates for new capital needed at the money center banks are interesting and except at RGE Monitor, have received little attention:
“I believe that recent risk spreads suggest that markets require perhaps 13 or 14 per cent capital (up from 10 per cent) before US banks are likely to lend freely again.
Analysis of the US consolidated bank balance sheet suggests a potential loss of at least $1,000bn out of the more than $12,000bn of US commercial bank assets at original book value.
Through the end of 2008, approximately $500bn had been written off, leaving an additional $500bn yet to be recognised. But funding the latter $500bn will not be enough to foster normal lending if investors in the liabilities of banks require, as I suspect, an additional 3-4 percentage points of cushion in their equity capital-to-asset ratios. The overall need appears to be north of $850bn. Some is being replenished by increased bank cash flow. A turnround of global equity prices could deliver a far larger part of those needs. Still, a deep hole must be filled, probably with sovereign US Treasury credits.”
Given his assertion that 13-14% equity is required and even with the current program of raiding AIG (make that taxpayer) assets to fund the banks, Greenspan, conservatively estimates a need for $850B.Â This level of capital will need congressional approval as we don’t believe the Geithner gansters can fund it by the shenanigan pipeline.Â Greenspan’s estimate is also with writedowns as they are now.Â Greenspan makes no mention of it, but obviously his estimate is before the coming commercial mortgage and credit card tsunami, or any further writedowns in existing assets necessitated by the Geithner plan.Â Another item he ignores is the possibility of having to bring shaddow assets back onto the banks’ balance sheets. If this is required, even more capital will be required.
In a guest post at Naked capitalism, Tyler Durden, publisher of Zero Hedge, builds on his breaking story thatÂ AIG sold securities (unwinding large portfolios of CDS’s) at ridiculously low prices to the money center banks so the banks could make those much ballyhooed assertions of profits in JanuaryÂ and February which sparked a rally in bank stocks.Â Approximately $1 to 2 billion per bank was made on these shenanigans.Â This conspiracy is clearly undertaken with the full knowledge of the Obama Administration.Â If this is confirmed by other sources, there should be resignations and prosecutions over this…
Businessinsider.com recently wrote about the New York Post article documenting Citigroup and Bank of America’s recent purchase of Alt-A and ARM mortgage backed securities in anticipation of the public/private partnerships bidding to buy similar assets from such banks:
“This raises serious questions about how the banks are using TARP funds. Instead of stimulating the economy by making new loans, B of A and Citi seem to be spending money to buy up old loans. That’s probably a betÂ that the Geithner plan will create renewed demand for MBS.”
Mike Whitney at Global Research assumes the worst – that the banks are betting they will get a higher price when the Geithner plan is implemented:
“Thus begins the next taxpayer-subsidized feeding frenzy featuring all the usual suspects. The race is on to vacuum up as much toxic mortgage paper as possible so it can be dumped on Uncle Sam at a hefty profit. Nice. These are the same miscreants the Obama administration is so dead-set on rescuing. It’s crazy to try to help people who use the cover of a financial crisis to fatten their own bottom line. It’s better to let them sink from their own bad bets.
How is it that industry rep Geithner couldn’t see that his latest round of corporate welfare would create incentives for the bank scoundrels to game the system again? Naturally, if the government goes into the business of buying crap-loans from teetering financial institutions, the speculators and snake oil salesmen will follow. And so they have. Citi and B of A are just the first to respond to Geithner’s pigwhistle. Next will be the hedgies and the Private Equity porkers, all nuzzling up to the Treasury’s burgeoning feedbin hoping to sink their teeth into whatever tasty nuggets bob to the top of the trough.”
Regardless of their deeper motivations, there is another, simpler message in the bank’s recent actions to buy these assets – The banks simply believe them to be cheap.Â What is the take away for the PIMCO’s, Blackrocks’s and the others bellying up to the Treasury’s free money feedbin? The banks are telling them they will have to pay more than what the banks just paid…likely a price closer to the price the banks are carrying similar assets on their books.Â Are they worth what the banks will be asking for them because they have special cheap financing from the government on a non-recourse basis?Â One might say “yes” due to the special financing. But wait not so fast!Â The banks have special financing too.Â What if the banks bought a few extra of these type of assets just so they could sell those (and only those) back to the partnerships?Â This does nothing really for the bank’s balance sheets, but … it would provide some example transactions that Geithner and company could point to so that the program could be called a success.
So…after Pandit and other bank executives blatantly manipulated their stock price by commenting about how they “made money” in January and February, now they start backpeddling.Â Here’s a sheepish Jamie Dimon of JP Morgan with Erin Burnett (about minute 6:40) on CNBC after the Bank Oligopoly’s meeting with the president to plan future cheer leading activities: