Making Housing Sane Again, an editorial published in the Wall Street Journal, January 9, 2017

Making Housing Sane Again, an editorial published in the Wall Street Journal, January 9, 2017

Making Housing Sane Again

If you think most equity investors have been in an ebullient mood since Election Day, consider the euphoric owners of Fannie Mae and Freddie Mac. With both stocks soaring more than 130% since Nov. 8, Fan and Fred shareholders are ready to do the Juju on That Beat in the middle of Wall Street. The Trump Administration needs to shut down this block party before it gets out of hand.

The cause for revelry is the expectation that Treasury secretary nominee Steve Mnuchin is going to revive the Beltway model of public risk and private reward. When the Senate Finance Committee hosts his confirmation hearing, likely soon after Inauguration Day, lawmakers should extract a promise that he won’t.

Fan and Fred’s owners feasted for decades on implied taxpayer guarantee before the housing crisis. Since everyone knew the two government-created mortgage giants would receive federal help in a crisis, they were able to run enormous risks and still borrow cheaply as they came to own or guarantee $5 trillion of mortgage paper. When the housing market went south, taxpayers had to stage a rescue in 2008 and poured nearly $190 billion into the toxic twins.

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Government Payday Choke Hold, published in the Wall Street Journal, December 29, 2016

Government Payday Choke Hold, published in the Wall Street Journal, December 29, 2016

Government Payday Choke Hold

For all the coverage of Donald Trump’s Twitter blasts against one company or another, hardly anyone notices that the Obama Administration has spent years targeting entire industries merely because the left dislikes them. Case in point is the onslaught against payday lenders, and a lawsuit presents an opportunity to expose an extralegal cross-agency campaign.

In 2013 the Justice Department launched Operation Choke Point, which involves pressuring banks to cut off financial services for payday lenders, no evidence of lawbreaking required. According to a House Oversight Committee report, the Justice Department has pumped out subpoenas under a statute that allows the government to go after outfits that commit fraud against banks, not punish banks that do legal business with legal businesses.

The operation seems to have been coordinated among several agencies. A report last year from the Federal Deposit Insurance Corp. Inspector General found that three of six FDIC regional directors thought their job description included discouraging banks from servicing payday lenders. A former director of the Atlanta office told his staff: “Any banks even remotely involved in payday should be promptly brought to my attention.”

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WHY NOT 100-YEAR U.S. TREASURY BONDS? Let’s snatch fiscal victory from the jaws of defeat By Larry Kudlow on CNBC, December 10, 2016

WHY NOT 100-YEAR U.S. TREASURY BONDS? Let’s snatch fiscal victory from the jaws of defeat By Larry Kudlow on CNBC, December 10, 2016

[CNBC contributor Larry Kudlow urges that the U.S. start issuing much longer maturities of government bonds, possibly experimenting with 50-year debt issuance, and maybe go out as long as 100 years.  Kudlow’s a smart guy with a wealth of experience and his article is well worth reading.]

If President-elect Donald Trump’s economic growth plan — slashing business and personal marginal tax rates and rolling back costly business regulations — is achieved next year, the economy could break out with 4 to 5 percent growth. And that means much higher interest rates.

This rate rise will be growth-induced, a good thing. Higher real capital returns will drive up real interest rates. And inflation will likely remain minimal, around 2 percent, with more money chasing even more goods alongside a reliably stable dollar-exchange rate.

We’re already seeing some of this with the big post-election Trump stock rally occurring alongside a largely real-interest-rate increase in bonds.

 However, looking ahead, 4 percent real growth plus 2 percent inflation could imply 6 percent bond yields in the coming years. That’s a big jump from the 2 percent average of most of the past ten years.

And what that says is the time to act is now. 

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The Puerto Rico Drama Has a Long Way to Run By Alex Pollock published by Real Clear Markets on October 24, 2016

The Puerto Rico Drama Has a Long Way to Run By Alex Pollock published by Real Clear Markets on October 24, 2016

On October 14, the outgoing Governor of Puerto Rico, Alejandro Garcia Padilla, who is not running for re-election next month, addressed the Oversight Board which is charged by Congress with addressing the disastrous finances of the insolvent government of Puerto Rico. In default on more than a billion dollars of its debt, with no prospects of repaying its debt in full, having run deficits for 15 straight years, and trapped in the U.S. dollar currency zone, the government has massively difficult problems ahead. So do its creditors and the Oversight Board.

Creation of the Oversight Board was a necessary step. Now its work has really begun. The Governor presented to it the government’s draft fiscal plan for the next ten years-the opening gambit in what will unavoidably be complex and tense negotiations. The substance and the rhetoric of the presentation are instructive.

Garcia Padilla conceded that the accumulated debt and economic problems “are the culmination of decades of misguided and unscrupulous public policies in San Juan,” a fair admission, but immediately adds that these unscrupulous public policies were also in “Wall Street and Washington.” Surely somebody else is also to blame.

“Puerto Rican children and retirees are not to blame for careless decisions made here in New York by the rating agencies”-so it’s the bond rating agencies’ fault-“or the mistaken decisions made by Congress,” such as ending tax subsidies to Puerto Rico. Of course, there are the “greedy lenders” who bought Puerto Rico’s bonds.

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Payday Lending: Will Anything Better Replace It? By Bethany Mclean published by The Atlantic on May 2016 issue

Payday Lending: Will Anything Better Replace It? By Bethany Mclean published by The Atlantic on May 2016 issue

Payday Lending: Will Anything Better Replace It?

The practice is slowly being regulated out of existence. But it’s unclear where low-income Americans will find short-term loans instead.

[The May 2016 Issue of The Atlantic includes one of the best and most honest articles on subprime lending I have seen, and I recommend it to you highly. Nearly 100 million of our fellow Americans are not able to participate more than marginally in the regulated banking system so they turn to friends or family or alternative lenders to meet their emergency financial needs. Some worry that the new Consumer Financial Protection Bureau is about to adopt regulations that will effectively shut down the short-term lenders who supply expensive and much needed loans to tens of millions of people. What is the answer to this vexing problem that is one of the most important economic and social issues facing our nation? Interestingly, the author suggests that a possible compromise might be for consumer and industry groups to compromise on a reform along the lines of the Colorado short-term lending law. Some believe that at least a partial answer may be for regulators to take steps to encourage banks and credit unions to work jointly with short-term lenders to address this urgent need. I encourage you to read the Atlantic article.]

Fringe financial services is the label sometimes applied to payday lending and its close cousins, like installment lending and auto-title lending—services that provide quick cash to credit-strapped borrowers. It’s a euphemism, sure, but one that seems to aptly convey the dubiousness of the activity and the location of the customer outside the mainstream of American life.

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With Strong Job Growth Why Is GDP Slumping? Published by HAGERBAUMER ON INTEREST RATES on April 11, 2016

With Strong Job Growth Why Is GDP Slumping? Published by HAGERBAUMER ON INTEREST RATES on April 11, 2016

[This article by Dr. Jim Hagerbaumer on interest rates and the markets is quite cogent and thoughtful and well worth reading.]

GDP growth is diving
Growth fell from 1.4% in Q4 to near zero in Q1. Yet the economy continues to add a quarter-million jobs per month. What is happening? What is the deeper perspective?Screen Shot 2016-04-18 at 11.36.07 PM

First off, good high-paying jobs have slowly been eviscerated by a series of damaging “free” trade agreements starting with NAFTA in 1995. These were negotiated in secret out of the eyes of the American public. One result is that the highly touted employment numbers have lost some of their meaning. For example, since the 2007 peak fully 1/3rd of job creation has been in restaurants and bars. Average wage $10.50 per hour.

Real income per person barely growing

From the last cycle peak, per capita real disposable income has risen only 3% or so. In other words, less than 0.4% per year. The damage during the recession has been hard to make up. The graph shows how the level of real GDP (blue line) and per capita GDP (red line) have grown this cycle. Since population has risen almost as fast as GDP, the average household is barely better off. This has been the poorest per capita peak to peak growth since the Great Depression! Eight years after the cycle peak in 1929, growth had averaged 0.1% per year. Not much different than the current cycle. Screen Shot 2016-04-18 at 11.36.14 PMWorkers took it on the chin during the recent recession. Many jobs never came back, and labor force participation is still far below peak with little in the way of recovery. Also, during the recovery savers and retirees have taken it on the chin. Lost interest income due to ZIRP and the QEs has cumulated to over $3 trillion! Looked at this way it’s surprising consumers have spent as freely as they have.

Globe is debt-constrained
The predominant reason for the poor performance is too much debt. US households are not even close to being back in the comfort zone where they were before the housing bubble took off. To get a birdseye view of the stress prevalent today, note that 40% of student loans – the exponentially growing sector of debt this time around – are in arrears. This shocking statistic is linked directly to the paucity of good jobs. For the vast majority of households, spending via credit in excess of income is constrained far more than before the crisis. Moreover, most households taking on additional debt relative to income (job losers, etc.) have little recourse if they want to maintain their lifestyle. The entire globe is debt constrained in much the same manner.

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The Next Crisis Will Come; Is Your Bank Ready? By Alex J. Pollock published by American Banker on February 25, 2016

The Next Crisis Will Come; Is Your Bank Ready? By Alex J. Pollock published by American Banker on February 25, 2016

Banks, and credit unions, too, are loudly objecting to the Financial Accounting Standards Board’s attempts to increase loan loss reserves. They have “slammed the FASB,” in The Wall Street Journal’s phrasing, for proposing this conservative idea.

What a mistake the banks are making. They ought instead to welcome the opportunity to get their loan loss reserves up to truly prudent levels, in line with the classic wisdom of the banking business — if not exactly in the fashion FASB suggests, then in some fashion.

A fundamental problem of our banking system is that cycle by cycle, it has come to rely far too much on the government. As the FDIC sticker proclaims in the lobby of every bank, the bank is “backed by the full faith and credit of the United States government.” It ought to be the goal of self-respecting banks not to need this government support, and to stand on their own. Preparing for inevitable future credit crises through bigger loan loss reserves would be a good step in the right direction.

Here is the link to the full article

Countries don’t go bankrupt? The 20th century proves otherwise by Alex Pollock, Distinguished Senior Fellow of RStreet Institute published by RStreet online on February 25, 2016

Countries don’t go bankrupt? The 20th century proves otherwise by Alex Pollock, Distinguished Senior Fellow of RStreet Institute published by RStreet online on February 25, 2016

How risky is sovereign debt?

One memorable answer, “Countries don’t go bankrupt,” is attributed to Walter Wriston, the most prominent banker of his day and the chairman of Citibank from 1967 to 1984. That is right in a narrow legal sense, since a sovereign government cannot be put into bankruptcy. But in the general sense, everybody knows it is disastrously wrong: governments can and do go broke and not pay on their debt.

The 1980s dramatically falsified the Wriston answer. A large number of governments with heavy borrowings from U.S. banks were broke and defaulting. This led to highly-placed fears that the entire American banking system might be insolvent. So Paul Volcker, then Chairman of the Federal Reserve, papered over the crisis by ordering that the banks’ books be cooked and losses postponed. When the crisis broke in 1982, Volcker is reported to have said one Friday evening, “The American banking system might not last until Monday”!

Here is the link to the full article