Ok, Greece got the vote of confidence as the first step toward its bailout campaign. There is just one step to go, and that seems like a slam dunk. Of course, it's not too late to have a telethon fundraiser, but I guess they already thought about that one. How about lower taxes and greater tax collection? That might mean some kind of amnesty program. What I find amazing is the lack of national pride. Say what you want about Japan and its old population and grass-eater boys, its citizens didn't riot after the tsunami/earthquake and they are steady buyers of Japanese debt. I wonder where Americans are on that scale.
We aren't buyers of war bonds, and Treasury debt is bought mostly by the Fed, foreign banks/governments, and institutions. I think it's a matter of trust in the government, right? If we believed in the wars, if we believed in the intentions of government, if we thought there wasn't some kind of plan to radically change the country, I bet more people would step up to the plate. So, Greece probably gets the money, and there is a sigh of relief. I finally heard a number on what the economic risks are for allowing Greece to default. Interviewing Jeremy Zirin, Chief U.S. Equity Strategist at UBS, on the Fox Business Network yesterday I was told a default would cause $500.0 billion in economic damage.
I also had a chance to interview Richard Hunt, President of the Consumer Bankers Association, and asked why commercial banks have over $9.2 trillion in deposits but only $7.2 trillion in loans. Mr. Hunt says there is no demand. I really have a hard time coming to grips with that, but it goes back to Americans believing in the system, everything from government to banks. He made great points, including the fact there is nobody ready to run the new Consumer Protection Agency that was so highly touted and starts operations next month. It's all a mess, muck and mire. Check out the show each day at 2:00 PM EST/11:00 AM PST.
Speaking of Muck and Mire
The Administration is like a mad scientist that keeps going back to the drawing board, building on flawed assumptions and even worse results. But, the main reason for this is because the drawing board and goals of these experiments isn't economic prosperity; rather it's all about trying to buy votes. This is the biggest problem with the Administration, from day one it has been all about reelection through short-term gains or the illusion of short-term gains. Nowhere is this more obvious than in the housing market, where flawed programs have made things worse, much worse. They aren't done yet.
Government meddling in housing doesn't stop despite the disastrous results endured thus far. The latest bailout is the Emergency Homeowners Loan Program that will provide loans to people making less than $75,000 or 120% of area median wage for a household of four persons. If your income is down 15% during the Great Recession, or you are unemployed or underemployed, you might be about to get $50,000 toward mortgage payments over a two year period or less. These are zero interest loans forgivable after five years of principal reduction. Here's the deal:
> Must be at least three months delinquent on mortgage payments
> Must have received notification of intention to foreclose
> There is reasonable likelihood of being able to resume repayments of first mortgage obligation within 2 years
> Must be principal residence and single family home
If you have household income of $100,000 and have done everything to stay current on your mortgage then you are a sucker in this Brave New World. If you have household income less than $75,000 and have struggled to stay current on your mortgage then you're a sucker. Sure, it might mess up your credit score, but who could resist $50,000 and up to two years of breathing room? Of course, many people that will take the government up on this offer felt the same about their adjustable rate mortgage. Back then, a couple of years of ultralow monthly payments bought enough time to get a raise or maybe flip the house.
I get the idea of buying time out of desperation, but there is a difference between buying time out of convenience and buying time out of desperation. When you buy time out of convenience it's going to cost you so much more in the long-run. For sure this is going to cost taxpayers a ton of money as the program comes with a $1.0 billion price tag, and a lot of the money will never be repaid. Many people can't afford the home they're living in and are bound to a short sell or to simply abandoning the home. Many people that were planning on bailing and taking a hit are now going to sit in the home a couple years longer, but that home will be foreclosed one day.
If the housing market were allowed to freefall in the first place it would have found the same bottom it's destined to find anyway, but at least the recovery could have begun already. It's actually crueler to drag this thing out for all the people that have fought so hard to hold onto their homes and meet their obligations than it is to allow the housing market to correct to a point where value is fair and attractive. This latest gimmick is purely political. The EHLP will cover 31 states and Puerto Rico because they were not covered by the Hardest Hit Fund. This comes just in time for campaign season, but not for those trying to make gut-wrenching financial and moral decisions.
The Hardest Hit Fund has rung up a total of $8.517 billion: http://www.treasury.gov/initiatives/financial-stability/housing-programs/hhf/Pages/default.aspx.
The HAMP program has resulted in 670,000 in permanent mortgage modifications out of 1.5 million trials. A conservative estimate has each modification costing U.S. taxpayers $20,000 each.
From Greece to the Fed, Wall Street will be looking and listening for anything that sounds like accommodation will continue in some form or another. The FOMC gatherings have happened under better economic tides and the communiqué has been one of extreme caution, almost fear. But this Fed is so into marketing and messaging they must find ways to take victory laps to justify past actions. I don't think there will be surprises, but you never know. They aren't going to panic, but they better be worried, and we should feel that.
If they insist on the "transitory" stuff I think the market pulls back. Perhaps they are thinking transitory the way historians think of eras.