Richard Mendales

The Costs of Not Fixing a Broken Financial System

One way of limiting the "too big to fail" problem has received too little mention: reviving the Glass-Steagall wall between commercial and investment banking. The separation made sense because the two businesses are basically different--commercial banking should involve limited risk investments in small to medium-sized business, while investment banking involves deals of larger size and risk. The absence of major problems with commercial banks, with a few exceptions such as Continental, during the period of Glass-Steagall separation, helps show the effectiveness of the system.

Another Friday, Another Bank Failure: Casualty #33 and More on Stress Tests

You're being unfair to the SEC. The SEC has nothing to do with banking regulation, and does not even have jurisdiction over securities issued by national banks. It certainly has no say in decisions by the Treasury and the Fed.

World War III: U.S. vs. China?

The reason why the Great Depression ended with World War II has less to do with the occurrence of the war than the fact that the U.S. engaged in massive deficit spending on a scale unprecedented during the 1930s, and employed 16 million people in the process. There is no reason why that can be done in a completely peaceful way; we have over $2 trillion in infrastructure that has fallen into bad repair over the last 30 years. There is no necessary conflict with China--last time I looked, they were lending us more than the rest of the world combined.

Rescuing Frannie

All of this is rather ironic. Fannie Mae was established by Congress in 1938 to create a secondary mortgage market at a time when banks, which had been failing in droves during the Great Depression, were reluctant to make new loans; the objective of the new entity was to encourage banks and thrifts to make housing loans, knowing that there would be a market for them. In 1968, the original Fannie Mae was split into two entities--Ginnie Mae, which stayed a government entity, and today's Fannie Mae, which was privatized. The primary reason for privatization at that time was to take Fannie Mae's loan exposure off the government balance sheet, which was bashing against limits on the national debt because of the costs of the Vietnam War. What goes around...

U.S. Household Debt: A Frightening Picture

It shouldn't be all that surprising. Median real incomes have declined pretty steadily in the U.S. since 1973, and so people are trying to keep up both by working longer hours and by borrowing. This is particularly true in education, where the cost of educating your kids has gone up far faster than the overall CPI, and in health care, where we not only have the well-recognized problem of the uninsured, but an increasing problem with people who are uninsured. Empirical studies have shown that over the last 10 years or more, more than half of personal bankruptcy cases have been filed because of health care emergencies. The real crisis is not one of profligate borrowing, but of unavoidable expenses growing faster than median incomes.

Ted Forstmann Thinks We're All Going to Hell

Actually, he's right. Even if you didn't know about "subprime" mortgages, Fannie Mae and Freddie Mac were accepting mortgages that would have been considered "subprime" a few years before, representing loans to mortgagors with no equity at all. The FHA was insuring those loans, despite studies indicating that the default rate on loans with no owner equity is near 100%. It's now asking for comments on a change in its regulations that would restore a requirement that a mortgagor have some equity. The problem, therefore, is that many mortgages not considered subprime, and the securities using them for cash flow, are likely to default.

22-Year-High Jump in Unemployment Hits Stocks and Dollar

The US unemployment rate is actually understated, since it doesn't include "discouraged" workers who are not actively seeking work, nor underemployed workers who are working part-time or for significantly less than earnings in previous jobs. It also fails to take in people who are working "off the books" to avoid taxes--a number that has probably risen given the current level of consumer distress. Given these factors, it is next to impossible to compute what the rate of unemployment really is.

Considering Disaster

I'm not sure the crisis is over yet. The problem is that there are other shoes left to drop. As Gordon noted above, auto receivables are vulnerable, and so, increasingly, is commercial real estate. What worries me is that the Fed may already have fired all the ammunition it has.

Thursday's Market 'Melt-Up'

We have not yet seen a genuine bear market, but if recent moves by regulators do create an unwarranted euphoria in the markets, the next serious problem to emerge could create just that.

Why New Oil Price Highs?

It's not just the decline in the dollar that's at fault--it's partly fear that the dollar will begin to spiral downward out of control, which could happen if we continue to run huge deficits and to print money. If some producers begin quoting prices in euros, the result could be panic. It's the risk of this spiral that tends to drive commodity prices up.