29 June 2009

I come to praise Ben Bernanke

With all the opprobrium being dumped on the hapless Federal Reserve chairman, a little balance is in order. Ben Bernanke is not some evil spirited monster, salivating at ways to nationalize the economy, or enable world domination. I fully believe he is honestly trying to prevent economic catastrophe by the best means he knows of.

Neither do I believe that Ben is a mental midget. Not only does he have PhDs, but many of the studies he has written show a deep intellect and sharp mental processes.

I don’t even blame the Fed chairman for the financial crisis and recession. For that matter, I don’t really blame Alan Greenspan either. I think a quote from the CalculatedRisk blog sums it up nicely.

It is one thing to have different views from those of the Fed Chair on particular decisions that have been made-- I certainly have plenty of areas of disagreement of my own. But it is another matter to question Bernanke's intellect or personal integrity. As someone who's known him for 25 years, I would place him above 99.9% of those recently in power in Washington on the integrity dimension, not to mention IQ. His actions over the past two years have been guided by one and only one motive, that being to minimize the harm caused to ordinary people by the financial turmoil. Whether you agree or disagree with all the steps he's taken, let's start with an understanding that that's been his overriding goal.
Of course, this doesn’t mean I am in agreement with the chief US central banker on much (although his suggestions that congress reign in spending are welcome). To a great extent I see the leaders of the Federal Reserve in much the same light as the technocrats who tried to steer the Soviet economy. I am sure that many Soviet officials were true believers, and many of them were highly educated, but that still didn’t make their belief in communism as the solution to economic problems correct.

Likewise, US central bankers (and treasury officials) may well believe that stimulus and loose credit are good for the economy, but that doesn’t negate the fact that they are only succeeding in making the recession worse, and saddling future generations with even larger debt loads. The solution to the economic mess requires a purging of bad debt, and a return to savings. Unfortunately, these are the very things that policy makers are trying their level best to avoid. It’s akin to a heroin addict taking more narcotics when the start to feel the pangs of withdrawal. It may help you feel a bit better in the short term, but it is no solution the underlying problem.

That said, the vilification of Ben Bernanke, or other economic officials, is counter-productive in the larger debates over policy. Casting aspersions on the motives, or integrity, of the people you disagree with merely serves to undermine your own arguments. Let’s just admit that it’s possible Ben Bernanke really is a nice person, trying to do good for his countrymen. Then we can engage in a real debate over the efficacy of the policy measures being taken (or the very existence of the Federal Reserve itself).

19 June 2009

Iron Ore Producer Drops Prices 28.2%

Here is yet another example of the budding deflationary process at work. And yet there are people still scared of inflation? From where I'm sitting, prices just keep dropping. Sure, we've had a bit of a bounce with the summer bear market rally, but the signs that prices will just keep falling when this rally fades just keep growing.

Vale SA, the world’s largest iron- ore producer, said it agreed to cut
prices for the steelmaking raw material for ArcelorMittal by 28.2 percent

Of course, don't forget to check out my classic in-depth podcast on the case for deflation.

18 June 2009

Another Bubble in the Making - FHA Backed Loans

It looks as if another bubble is being teed up, this time in Federal Housing Administration (FHA) insured loans. The government’s eagerness to pick up the slack in mortgage lending will almost certainly saddle tax-payers with massive losses in the not too-distant future.

One has to wonder just how the government can feel that insuring loans with extremely low fees is good business when the private won’t touch them (at least not with the cut-rate insurance prices FHA charges)? The massive expansion in FHA backed loans is nothing more than another misguided government effort to stimulate the economy, and prevent a further deterioration in asset values. Unfortunately, such efforts only serve to prolong and deepen the depression by blowing still more bubbles, which inevitably lead to more defaults and foreclosures.

Already we are seeing defaults in FHA backed loans spike, with a tripling in the number of so-called “instant” defaults, where not a single payment is ever made on the mortgage. Far from leading the mortgage industry to a new era of prudent lending and risk management, FHA is doing its best to take on as much risk as possible, and plug the holes left by the loss sub-prime lending.

The simple fact is that US housing is still vastly over-priced, and things aren’t going to turn around until either incomes start increasing or prices fall to the point where housing is once again affordable.

Record-high demand for government- backed home loans is overtaxing the Federal Housing Administration and may weaken the integrity of Ginnie Mae mortgage bonds, a U.S. inspector general said.

The freeze in the mortgage markets has driven FHA’s market share to 63 percent this year, from 24 percent in the fiscal year ended Sept. 30, Donohue told a House Financial Services Committee panel on Oversight and Investigations.

The volume of single-family mortgage loans insured by FHA, which is overseen by HUD, more than tripled to $180 billion in 2008, he said.

With the surge in new loans, however, comes a new threat. Many borrowers are defaulting as quickly as they take out the loans. In the past year alone, the number of borrowers who failed to make more than a single payment before defaulting on FHA-backed mortgages has nearly tripled, far outpacing the agency's overall growth in new loans, according to a Washington Post analysis of federal data.

More than 9,200 of the loans insured by the FHA in the past two years have gone into default after no or only one payment, according to the Post analysis. The pace of these instant defaults has tripled in one year. By last fall, more than two dozen FHA home loans on average were defaulting this way every day, seven days a week.