Monday, July 6, 2009

Stimulus 2.0: Revenge of the Debt

A little sluggish after the long weekend, so do not expect much! What is kind of funny is with all the news out there that I would term "meaningful" little if any of it is getting any air time and none of it is having an impact on the markets.

Banks Prefer Foreclosure to Loan Modification
Interesting article by Mathew Padilla at the OC Register concerning banks opting for foreclosures rather than loan mods that may lower loan principle:
White also found that servicers rarely “forgave” any principal, interest or fees owed. Instead, servicers preferred to foreclose and suffer huge losses. “That is not rational behavior,” the professor said.
Maybe, but lenders fear forgiving a lot of debt will encourage more people to default. And principal reductions mean recognizing a loss without gaining control of the collateral — in other words, running the risk a borrower will redefault and the ultimate loss be even greater if home prices continue to decline.

Here again we see that it is psychology, not logic that is running the show.

Banks are terrified that once they really start reworking mortgages that everyone will pour out of the woodwork to get their own loan changed. Perhaps many would even resort to self imposed economic hardship to get a leg up on a new mortgage.

This also highlights another problem facing the banks going forward: many are still trying to run out the clock and hope home prices rebound to save their skin. Easy money from the FED in the form of multiple assistance programs have allowed many banks to stay alive when in fact they are all done. We are never going to have resolution to these issues as long as the process fails to reach it's natural endpoint.

Stimulus 2.0: Revenge of the Debt
I often have poked a few barbs at the economist Paul Krugman. I just cannot help but target Keynesians of all sorts, and Mr. Krugman is the King of the Lot. While I certainly have major differences of opinion with Krugman on all things economic, what really gets me going about his work is his blatant partisanship. Krugman is famous for defending democrat policies even when they are opposed to his own thinking. Today brings an example of such twisted logic.

All the talk over the weekend has been about a second round of stimulus. Stimulus 2.0 will be bigger, and better than the earlier version which so far has failed to make much of anything happen.

But wait! Stimulus 1.0 was not a failure, it just has yet to make its way through the system! No policy by Obama can be said to fail. With the delay in effect so clear, the next best step to to pump more into the system by the 2.0 version, just in case. Or that is about the best I can translate this Krugman missive:
Bruce Bartlett misstates the problem
He says:
"The problem is that the Obama administration was much too optimistic about how quickly stimulus spending would affect the economy. Christina Romer, chair of the Council of Economic Advisers, and Jared Bernstein, chief economist to vice president Joe Biden, forecast in January that the stimulus would reduce unemployment almost immediately."

Um, that’s totally false. Did Bartlett even look at the Bernstein-Romer paper? Here’s the key graph:

The predicted impact from the stimulus is indicated by the difference between these two curves. We’re now at the very beginning of 2009Q3; they predicted that the unemployment rate right now would be only a fraction of a percent lower now than it would otherwise be. The impact wasn’t supposed to be really noticeable until late this year, and wasn’t supposed to peak until late 2010.

The problem, in other words, is not that the stimulus is working more slowly than expected; it was never expected to do very much this soon. The problem, instead, is that the hole the stimulus needs to fill is much bigger than predicted. That — coupled with the fact that yes, stimulus takes time to work — is the reason for a second round, ASAP.

Roll that one around. First the program is working just fine, almost in line with predictions, but of course more is needed.

Joe Weisenthal over at Clusterstock has a question for the stimulus hounds that I myself have asked many times:
A Question For Fans Of A Second Stimulus
The official line out of The White House is that it's still "premature" to start talking about a second stimulus, but nobody's listening. Everyone's talking about it.

So, here's an honest question for the likes of Paul Krugman, J. Bradford Delong, and other big advocates of a huge fiscal expansion.

Is there any amount of stimulus that would be too big? And how can we know when the cost of the stimulus outweighs the benefits?
In other words, when would you consider the stimulus to be not worth it?

Stimulus advocates must at least accept that there's such a thing as a too-big stimulus. We don't hear anyone going around advocating, say, $5 trillion in new spending, even though technically speaking that would create a lot of demand and economic activity. So what is the cap, and how do we know? Inquiring minds want to know

Seems to be an easy enough question.

If 1 trillion in spending can only slice off about .5% of the unemployment rate, 5 Trillion may make a dent to the tune of 2.5%! Exciting, huh? To get to "full employment" you are looking at around 10-14 Trillion in spending. Is that a manageable number? Is it not? We do not know, and the stimulus callers are silent on the question.

Of course Mish Shedlock is not so easily fooled by such clowns, and he savages Mr. Krugman's stimulus calls here. Small excerpt:
There is a price to be paid for reckless expansion of credit and we are paying the price now. All artificial stimulus does is prolong the agony. The greater the stimulus, the greater the period of future agony, just as happened in Japan. Ironically Keynesian and Monetarist clowns shouted for more stimulus all the way, and they are doing so again now.


Deflation Explained so Even I Understand It
The Automatic Earth co-writer Stoneleigh offers up a thoughtful piece concerning deflation that is well worth your time. Heck, even I could wrap my mind around a deflation definition after reading the article. I can agree with all the points made in the presentation, it is how the government will respond to the exact course of events that Stoneleigh describes that we differ. Deflation callers seem to think the US government (through the FED and Treasury along with a very nervous Congress looking to get re-elected) will just sit by and allow such a debt deflation to happen when there are viable (in their minds) alternatives. Considering how oblivious the US population is to all things economic, they may just think they can pull it off. Time will tell.

Anyways, please consider the full article here.

Have a good night.


GawainsGhost said...

Well, I can understand why banks don't want to lower principal. Let's say a house costs $100,000. The bank loans a buyer that amount to purchase a home. Then prices fall, and the best price you could get on an open market is $80,000.

Should the bank now say, oh, well, the house is only worth $80,000 now, so we'll just lower the principal on the loan?

No. The bank did not loan the buyer $80,000. It loaned him $100,000. Why should the bank take a 20% loss because the buyer cannot now sell the house for what he paid for it? It's not the bank's fault. The buyer knew what he was doing when he took out the loan and bought the house.

Of course, the legal fees and other expenses, including realtor fees for the resale, incurred in foreclosure will most likely exceed the $20,000 loss, even if the house sells for $80,000 or more. But that's not the point.

It's a matter of principle, not principal. The buyer borrowed $100,000, therefore that's what he owes. It's that simple.

Howbeit, Krugman is a pompous partisan idiot.

That was an interesting article by Stoneleigh on deflation. And he's exactly right.

getyourselfconnected said...

I think Stoneleigh is a "she" but yes, very persuasive piece. I stick by my guns that "deflation: it wont happen here" Bernanke will make good on his word.

I also agree, while the banks were reckless in thier lending, it was not as if they were shopping these loans, people wanted them. Time to live with your choices.