Tuesday, March 23, 2010

Worth a Read Tuesday

The middle of the week is reserved for the boxing training time so not much chance to post. I read some great stories during the day that are worth a look.

Worth a Read Tuesday
A few posts ago I was discussing the FED looking to remove any banking reserves and what that would mean. That lead to a far reaching discussion across another site (Kid Dynamite) and I learned quite a bit.

Mish steps in and tackles the same story today:
Bernanke Wants to End Bank Reserves Completely: Does it Matter? What Chaos Will Result
Key point from Mish:
Q1: What in the world is Bernanke thinking?
A1: That elimination of reserve requirements simply matches what banks are already doing. Moreover, a formal policy shift eliminates a bunch of accounting paperwork that started in 1994 when Greenspan authorized sweeps.
Why makes banks go through all these sweep charades given the result before and after is effectively a policy of "no reserves" anyway? Viewed that way, (and at the risk people will take this sentence completely out of context) Bernanke's proposal makes perfect sense.

Q2: If there were no minimum reserve requirements, what kind of chaos would that lead to in our financial system?
A2: Exactly the kind of banking chaos we have already seen! Nothing has changed. Expect more chaos because it is coming.
Well there you go!
Greenspan said last week reserves must grow by 40% and others say they do not matter. Economics is a real science.

All that's wrong with the political/banking system can be summed up by the following headline:
Jon Corzine Joins MF Global As Chairman And CEO, Stock Surges Ridiculously
Well, at least he did not return to Goldman Sachs.

The much hyped HAMP mortgage program has underperformed and a great guest post over at Calculated Risk has one example of the non effort most are going through to qualify for a free, I mean better mortgage:
HAMP Applicants Tanned and Juiced
One months spending by an applicant included:
• visits to the tanning salon
• the nail spa
• some kind of gourmet produce market (have you seen the price of arugula?)
• various liquor stores
• A DirecTV bill that must involve some serious premium programming or pay-per-view events (or both?).
• And over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Behavior, Sears, Staples, and Footlocker.
The consumer is never dead!
Another example of the joke being played on us all.

Jesse's Cafe Americain links to a post covering the way I think about default and hyperinflation:
Watch the Bond Market, not Bank Lending or Velocity
Key point:
The deflationists have it backwards. As we've illustrated, severe deflation is what leads to hyperinflation. Debt crisis' go hand in hand with currency crises. In fact, if we had an increase in bank lending, consumption and velocity, we'd be assured we wouldn't have hyperinflation. We'd end up with rising price inflation for certain, but not hyperinflation. Hyperinflation has never occurred at a time of strong or growing demand.

Are we not in deflation right now?

The soon to be newest FED head had this to add to all you fools thinking a rate hike was coming as soon as this year:
The Fed's New Vice Chairman Janet Yellen Implies No Fed Rate Hike Until 2013
Now Yellen did not say "no hike until 2013" but here criteria for a rate hike make one impossible for a long time.

Have a good night.


Dave in Denver said...

Janet Yellen's appointment to the FOMC and vice chairmanship of the Fed is the next piece in the puzzle that will lead to all out currency/credit inflation and then hyper price inflation.

Anonymous said...

"Are we not in deflation right now?"

Deflation ceased about 6 months ago and we now have (very mild) inflation:


Gotta admit, the fed has thus far threaded the needle between deflation & hyperinflation. We shall see how long that lasts.

getyourselfconnected said...

Seeing that inflation runs about 3-5% higher than reported when I see 0-1% that is deflationary to me. Wage deflation (about to get worse due to health care) has been the most glaring.

Yellen on board speaks volumes about how things will be handled.

GawainsGhost said...

I don't think it matters who is in charge of the Fed at this point. The problem we are dealing with is an ideology.

Yves Smith writes about this in Econned. People, economists in particular, put their belief in a model or a theory, then become blind to the flaws in that model or theory. When nature or the economy, reality, does not conform to the predictions made by the model or theory, they think there's something wrong with nature or the economy, not the model or theory. So it is with Keynesians, and so it is with mortgage brokers.

Remember that guy I told you about last week? The idiot realtor who made an offer, had it accepted, and after the seller had prepared the addendum, the day they buyer was supposed to come in and sign the final paper work and bring the earnest money, he called and asked if he could roll over the closing costs (because the lender recommended it). I told him no, that was not part of the agreed upon contract, it is not in the addendum, and the only way he could do that was to cancel the offer and start over.

Well, he brought the contract, the addendum and the earnest money to our office later that day, and we sent it to the title company.

Today, a week later, he called and said he wanted to roll over the closing costs. This after the contract is in escrow. (My mother gave him a piece of her mind, by the way.) He brought over an amendment to the contract, so we sent it to the seller, and two minutes later--two minutes--the asset manager responded, cancel the escrow account, withdraw the offer, put the house back on the market, and take any and all offers. Which is exactly what I told this idiot was going to happen, but he wouldn't listen to me.

Now, I've gotten several calls from numerous realtors on this particular house, but I had told them it was pending contract. So I called them all and told them it was back on the market. At least two said they would be bringing in offers tomorrow. Okay.

Meanwhile, the idiot emailed a new offer with the rolled over closing costs. (I can tell you exactly how the asset manager will respond to this too. By raising the sales price. As it is, this offer results in a lower net to the seller, because now he has to pay a higher commission but gets the same price as before. No way the seller accepts that deal.)

But I'm going to wait before I submit the idiot's offer, let the other realtors have a chance to bring theirs in. Then submit them all at once. That way we immediately move into a multiple offer, highest-and-best situation, and the buyer who makes the highest bid, which won't be this idiot's buyer, gets the house. (And I get a higher commission.)

See how that works? This guy, his mind is locked on the idea that rolling over closing costs saves his buyer money, and he will not listen to reason. The end result will be this. The idiot is going to find out that he wasted a lot of time, work, money, and gas on this deal, and is not getting paid. He had a deal in escrow that would have paid him 3%, and he screwed it up. Now he's getting nothing, his buyer isn't getting the house, and the lender isn't getting the interest. Losers all around.

It's the same with most economists, as Yves Smith shows brilliantly. Their minds are locked on flawed theories. Of course the greater danger with economists is that instead of only three people--realtor, buyer, lender--losing out, the entire nation and indeed the world loses out, as long as we listen to them instead of those who actually know what they're doing.

Anonymous said...

"getyourselfconnected said...
Anon, Seeing that inflation runs about 3-5% higher than reported when I see 0-1% that is deflationary to me."

Well, thats fine & all. Just understand, under your interpretation, we have been having deflation on and off since 1991.

Meanwhile, back here in the real world....

GawainsGhost said...

I highly recommend reading the below from the Big Picture.


Ritholtz is exactly right. And the more I think about this whole roll over closing costs thing, the more disgusted I get.

No. 1: It's a rip-off of the buyer, who is taking out a loan in excess of the value of the house. In other words, moving in with negative equity. As a buyer's agent, I would strenuously advise against that.

No. 2: It's a rip-off of the seller, who is paying a commission on a higher price than he's accepting for the house. In other words, it results in less net to the seller. As a seller's agent, I would strenuously advise against that.

In this business, the name of the game is highest or most acceptable net to seller. It's also about most equitable deal to buyer. It's not about ripping off clients to increase commissions.

It would be a gross neglicence of my fiduciary responsibility to my client, whether as a buyer's or a seller's agent, to not strongly counsel against any deal involving rolling over closing costs. It's unethical, and it's bad business, for me to give bad advice just so I can earn a few hundred extra dollars in commission.

But this looks to be standard operating procedure these days, among realtors and lenders. I consider it fraudulent, deceitful and a disgraceful dereliction of duty.

I could say the same about the rating agencies, by the way, who stamped Triple-A on the worst securities, solely for the purpose of short-term profit at the expense of long-term value.

Welcome to the new normal.

getyourselfconnected said...

That is a good one. The closing cost roll over issue you have explained holds many facets to to what went wrong.

Should have a post up in a bit.