Thursday, April 28, 2016

Did the Fed Want the Houses Back for Wall Street?

 This article was first published by me on Talkmarkets:

The Fed wanted the houses back for Wall Street. It is hard to prove, but could be the truth. We see that the banks made money on toxic loans in the housing bubble, and then on loans to high powered investors on Wall Street, to buy houses that became available when the toxic loans failed. The conclusion for me is as follows:

1. Wall Street first made money on granting dubious mortgages, which had default risk, but the risk was mispriced.

2. This mispriced risk caused investors who were deceived, to grant more money for lending, and house prices soared due to easy money demand.

3. Then with the help of the Fed, Wall Street crashed the prices of subprime properties in mid 2007, knowing they could not be sustained once securitization was destroyed. Securitization was destroyed when the investors realized that they had been fooled.

4. When there were no more buyers for commercial paper from shadow banks, the off balance sheet SIVS had to transfer the bad loans onto the balance sheets of the TBTF banks. Credit was impaired to the rest of the real estate market, including to HELOCS in 2008.

5. The Fed could have immediately started to use base money buy the bad loans that the SIVs placed upon the TBTF banks. But the Fed did not do so. It waited until the house prices crashed! That is premeditated destruction, a liquidation, in my view. Yes, the law was not yet put into place regarding the use of excess reserves, but it could have been. HR 1424 providing for excess reserves, was introduced into the House of Representatives on 3/9/2007, and the subprime crash took place in the summer following. These Fed and government people could have known what was going to happen and what was needed before the initial subprime crash.

6. This price destruction allowed the Street itself to come in and buy the houses low and drive the prices up, in most cases, past where they were at the height of the bubble.

If all this was premeditated from the beginning, that could turn out to be the greatest financial conspiracy in the history of the world! Keep reading.

The argument could be made, in defense of the Fed, that it did not preplan the destruction of the housing market and did not intend for Wall Street to take the houses. And it certainly is difficult to prove that the Fed preplanned the taking of houses simply because it mispriced risk. It could be that the Fed determined that the crash from mispriced risk could have been manageable. I look upon it as a more dark circumstance, simply because of the presence of HR 1424. It is difficult to explain the existence of a plan to buy bad paper prior to there being very much bad paper. 

I believe the market monetarists are right when they said Ben Bernanke had the tools but didn't use them. In point number 5 above I said the Fed could have started immediately buying the bad loans off the books of the banks that were put there by the failure of the SIVS. SIVS should be considered a criminal concoction when used to hide financial fraud.

Anyway, Kevin Erdmann posted this to an article by Scott Sumner showing MM ideas are started to be appreciated more. Kevin said:
Expectations caused the housing bust. Read the S&P report at the end of the post. This was basically the first round of downgrades in mid 2007. Even then, they were perplexed because borrower characteristics had no explanatory power on the early defaults. The first downgrades were made because they forecasted that home prices would decline at epic unprecedented rates, even though home prices at the time had just begun to falter.
But everyone was so convinced that it was a credit bubble, they assumed that the reason underwriting wasn’t predictive was because it was so fraudulent. That is simply not credible. And the Fed’s response to these downgrades was basically to announce that we should definitely expect home prices to collapse and that they wouldn’t do a think to stabilize it. In fact they were worried about inflation (much like sept. 2008 a year later). To this day Bernanke talks about how they figured home prices were due for a drop...
Expectations caused the housing bust.
I think the Kevin got this right in seeing that the credit agencies were downgrading credit early on, as if they knew that the risk models they were using were not going to work out.
Yes, there was bad underwriting, lots of it, but not all underwriting was bad. I responded to Kevin in this way:
...securitization froze up. So, you can’t say there was no credit crisis. There was a destruction of the commercial paper market as the chart here shows.
Still, the Fed did nothing for over a year and then jobs were lost in non bubble areas. So there is truth the the MM claim for sure. But to say there was no credit crisis when securitization ended, drying up access to credit, is kind of wrong.
And I responded to Kevin here too:
I have no doubt Wall Street wanted the houses back, Kevin. They had MERS all set up, and they had a plan from the beginning, IMO, to get the houses back. They knew securitization would not last forever. They knew it was based upon mispriced risk. They just had to work out the process of fleecing America. It was a process, and probably the Fed forecasted lower home values because that was part of the process too.
I agree with the Market Monetarists that there should have been attempts to keep prices stable on the part of the Fed. The Fed should have been buying those bad bonds at the very beginning of the downgrades, so that banks could continue to lend, even if they imposed a tightening of credit standards. Nations tighten and loosen credit standards without destroying their housing markets. But Bernanke didn't do that.  Had he done that, Wall Street could not have received such great deals on houses. And the banks would not have been paid like they were for foreclosing. What a sweet deal for the elite that was!

I maintain that some local markets could have crashed, but possibly not nationwide, like they did, had the Fed acted sooner.

Just think about it readers. In most places in the USA, those bubble prices have been exceeded by wealthy people buying up the real estate that was once owned by regular people with mortgages! One could say that is highly suspicious and simply wrong. Again, it looks like Wall Street waited for a good deal that the Fed helped to create. And the Fed just abandoned the poorer and middle class in a way that appears malicious and predatory. After being subject to predatory lending, these people were subject to predatory liquidation! 

The credit expansion during the housing bubble was built upon mispriced risk. Eventually, the risk was shown to be not only mispriced, but mistrusted by investors who brought the securitization process to an abrupt halt. And yet there turned out to be plenty of credit remaining in the system to give credit lines to well known investor groups to go in and buy houses on a massive scale once they cratered in price.
It is very clear to me that the Fed wanted the houses back for Wall Street even if it cannot be proven beyond a reasonable doubt.

Sunday, April 24, 2016

Federal Reserve Mandates Slow Growth. So Fed Must Finance American Infrastructure

 This article was first published by me on Talkmarkets:

My hope is that you follow this article closely, if you are interested in Federal Reserve matters, because we have uncovered more proof that the Fed will not allow a booming economy, period. So, knowing this we need to take Ellen Brown's article and Bernanke's quotes towards the end of this article seriously, because without sufficient taxation from a booming economy, we will need other means of financing the nation's crumbling infrastructure problem or it will not be financed.

Ellen Brown, a contributor to Talkmarkets, recently covered Congress' efforts to use the Federal Reserve to fund the highway bill. In this instance the Congress actually tapped dividends that the Fed pays to member banks.

But there is an even more ambitious way to use the Fed, interest free. Now that the Congress has tapped the Fed there is no reason why the Fed cannot help out America in this time of infrastructure need. The need is widespread, with bridges crumbling, with airports not measuring up to international quality, and with roads and city streets failing to be repaired in a timely fashion.

The Fed alone issues base money, and the banks issue loans based upon the amount of base money in the system. The banks create the money supply but cannot do so without base money. Currently, we are all aware of the massive amounts of base money sitting as excess bank reserves at the Fed. The banks could loan that money out some 2.4 trillion dollars times 10, to get roughly 24 trillion dollars additional money supply into the system.

The Fed fears that the banks could lend so much of the reserves out that the practice would cause inflation or that in an inflationary scenario, the Fed could not raise rates sufficiently enough to stop the outflow of lending by the banks! So, before I continue, this is what I have been writing about, that the Fed predisposes low rates.

 A researcher at the Minneapolis Fed said this:

Banks in the United States have the potential to increase liquidity suddenly and significantly—from $12 trillion to $36 trillion in currency and easily accessed deposits—and could thereby cause sudden inflation. This is possible because the nation’s fractional banking system allows banks to convert excess reserves held at the Federal Reserve into bank loans at about a 10-to-1 ratio. Banks might engage in such conversion if they believe other banks are about to do so, in a manner similar to a bank run that generates a self-fulfilling prophecy.
The author, Fed consultant Christopher Phelan, goes on to say that the Fed pays interest on reserves totalling about 2.4 Trillion dollars, in order to prevent lending that could increase the money supply by 24 trillion dollars.

The author goes on to say that the base money, or monetary base, or also called high powered money, is now at 4 trillion dollars, with excess reserves making up 60 percent of that total. Base money could be used start a bank run, to draw reserves out of the Fed, creating a bank run on the Fed itself!

The author then goes into game theory as to why the banks have not already raced to get their lending out into the real economy. He says:

On the question at hand, of excess reserves and liquidity, Bassetto and I consider a central bank that commits to pay a given nominal interest rate on excess reserves, but where banks are free to convert these excess reserves to loans at any time.1 Within this setting, we consider two scenarios: In the first, households, firms and banks all expect inflation to be low. In this scenario, the interest rate offered by the Fed is sufficiently high relative to the interest rate banks could get by loaning out their excess reserves to induce the banks to leave the excess reserves at the Fed.
In the second scenario, households, firms and banks all expect inflation to be high. Given this expectation, households and firms will be willing to pay higher interest rates to banks for loans since they expect to pay back in cheaper dollars. In this situation, the Fed’s interest rate on excess reserves is no longer high enough to induce banks to leave their reserves at the Fed, and when banks convert their excess reserves to loans, they create extra liquidity that generates higher inflation. Thus, the expectation of higher inflation induces the reality of higher inflation.
Phelan then states that the Federal Reserve must consider the scenario where inflation is expected, and will not necessarily be able to raise interest rates high enough to insure banks won't lend.

So, basically, the Fed doesn't want banks to lend too much and the multiplier is not fully realized because the Fed will not be able to raise interest rates when the time comes to fight inflation! 

Phelan says:

Couldn’t the Fed, in the face of an increase in inflation expectations, simply increase the interest rate it pays on reserves to a level sufficient to induce banks not to convert their excess reserves to loans? Not necessarily, either because the Fed can’t move quickly enough or because it faces political constraints on how high it can raise interest on reserves. Is the Fed really unlimited on the discretionary payments it can make to private banks? If banks think at some point the Fed won’t match the interest rate offered by firms and households, then this self-fulfilling prophesy of inflation expectations applies. 
So, since taxation will not be sufficient in a slow growth economy to fix infrastructure, I believe that the Fed must, must use base money to fund infrastructure. After all, this would be interest free, not a gift, but rather a right of government to use its created money interest free! Seems like a no brainer right?

Well, the Fed would say there is no control over spending by congress if interest is not charged. Yet, it is not like government is not obligated to pay back the base money. Of course the government is obligated to pay back the base money. It is just interest free. The Fed just likes interest bearing devices and has been shown to want to create gold out of debt.

But even Bernanke has said that base money could be used in infrastructure efforts. Scott  Sumner quotes Bernanke regarding the creation of base money to fund government projects:

Here is a possible solution. Suppose, continuing our example, that the Fed creates $100 billion in new money to finance the Congress’s fiscal programs. As the Treasury spends the money, it flows into the banking system, resulting in $100 billion in new bank reserves. On current arrangements, the Fed would have to pay interest on those new reserves; the increase in the Fed’s payments would be $100 billion times the interest rate on bank reserves paid by the Fed (IOR). As Kocherlakota pointed out, if IOR is close to the rate on Treasury bills, there would be little or no immediate cost saving associated with money creation, relative to debt issuance.
However, let’s imagine that, when the MFFP is announced, the Fed also levies a new, permanent charge on banks—not based on reserves held, but on something else, like total liabilities—sufficient to reclaim the extra interest payments associated with the extra $100 billion in reserves. In other words, the increase in interest paid by the Fed, $100 billion * IOR, is just offset by the new levy, leaving net payments to banks unchanged. (The aggregate levy would remain at $100 billion * IOR in subsequent periods, adjusting with changes in IOR.) Although the net income of banks would be unchanged, this device would make explicit and immediate the cheaper financing of the fiscal program associated with money creation.
Sumner says there are other ideas like upping the inflation target or NGDP targeting, but remember, the Fed says it can't raise rates in an inflationary environment so it is locked into slow growth. Maybe Bernanke's idea is one whose time has come, as base money must find its way into the banking system once it is created.

The base money would just take a detour through funding projects where the money is deposited by the project managers into the banking system. Let's face it, there just won't be a big enough boom to repair our nation without base money financing, and it should be interest free.

Saturday, April 23, 2016

Fed Great Depression and Great Recession Liquidations Go Unexplained

 This article was first published by me on Talkmarkets:

Andrew Mellon made a statement that is in dispute as to its origin. It was found in the writings of Herbert Hoover. While many say it was not a legitimate expression of Andrew Mellon's opinions, I believe it was the expression of Hoover's understanding of the Federal Reserve Bank and that it applies to our times as well.

George Selgin of CATO said regarding the quote:
The famous Mellon “statement” is itself a caricature, made up after the fact by Hoover himself. There is actually no direct evidence that Mellon favored all-out “liquidation.” As an ex-officio member of the FRB, he supported rate cuts. For details see the abstract at 
The statement as found in Hoover's writings that Hoover attributed to Andrew Mellon was as follows:

 “…liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”

I would not be so obsessed with Mellon's view or what I think can be attributed to Mellon even if the quote is made up by Hoover, except that Bernanke presided over another liquidation in 2008. Mellon and Bernanke appear to be on the same liquidation team, though separated by about 76 years!  People have to realize that Mellon, unlike current Secretaries of the Treasury, was a member of the Federal Reserve and that Hoover was speaking his mind about the Federal Reserve in quoting or making up the Mellon quote.

My pesky persistence at Scott Sumner's blog regarding this subject caused me to ask the question: “If Bernanke was such a student of the Great Depression, why didn’t he intervene earlier?” To this, Don Geddis, a Stanford grad and Market monetarist responded on the Money Illusion blog:

This is one of your most insightful questions. It may be one of the biggest macro mysteries of the last decade. The truth is, nobody (except perhaps for Bernanke himself) knows the answer to this question.
Bernanke not only understood the Great Depression, he also understood how a central bank could fix (or prevent) it. In 1999, as an academic, he wrote a paper analyzing the Japanese “lost decade”, and sharply criticizing the Japan central bank for not taking the appropriate monetary policy steps to correct the economy. And listing a large number of specific steps they could take. If there was anyone who you would wish to be chair of the US Federal Reserve in 2008, Bernanke seemed like he should be the guy.
And then, in 2008, when he actually was chair, Chairman Bernanke did not in fact act according to the monetary policy advice of 1999 Bernanke the Academic. Nobody knows why.
There are lots of theories and speculation. Fed chair is not a dictatorship; he still would need to convince the other (perhaps much more ignorant) Fed governors. There’s also a lot of politics in Washington, perhaps concern that “radical action”, if unsupported by the elected officials, would have a danger of impacting the Fed’s “independence”. There’s talk of the “FedBorg”, where the organization seems to somehow assimilate everyone who enters it, and they begin acting just like everyone else who has been there, regardless of their prior history.
But the truth is, nobody really knows. On this blog, we generally believe that 1999 Bernanke was correct, understood the causes of demand recessions, and knew the fixes. But 2008 Bernanke did not implement that advice. The million-(trillion?-) dollar, unanswered, question is: why not? We don’t know.    
Geddis, went on to say the following in response to my statement that the Fed has to be held accountable, at least in the analysis, for what it has done to America:

Scott Sumner agrees with you. It’s a national tragedy that the there is no official way to evaluate the Fed’s performance. The key sentence: “The Fed does not currently evaluate whether its past decisions were wise, even in retrospect.” Forget about holding the Fed to some goal imposed from the outside. The Fed isn’t even willing to state its own goals, by which it would be willing to be held accountable.
Clearly, Democracy is incompatible with this refusal by the Fed to reveal why it acted the way it did in the great liquidation of 2008. Citizens have the right to understand this subject!

It is interesting to note that Mellon was rehabilitated, known as a man who pushed for lower interest rates, and better monetary policy, to help deliver the nation from the Great Depression. Truth is, Bernanke's image was rehabilitated the same way, as he used monetary policy not seen since the Great Depression to prevent the Great Recession from becoming the Great Depression. Bernanke was looked upon as a hero.

Only problem is, both of these men gave a glimpse into the inner workings of the Federal Reserve Bank, and it isn't a pretty picture. They liquidated before restoring. They didn't have to liquidate, at all. They could have limited the damage of the credit crises they faced by simply coming to the aid of the markets much sooner.

Bernanke was constrained from acting on steps he felt would be superior to the Japanese lost decade, but instead he allowed another liquidation. That is troubling. It appears that, unless it explains itself, the Fed was not acting in the national interest in the 1930's nor in the 2000's. Geddis said the Fed won't  explain itself.

I believe that the Fed was engaged in a conspiracy at Basel 2, adopting mispriced risk and off balance sheet banking to allow that risk to be hidden. Then Bernanke presided over a liquidation that "corrected" the exuberance of the markets and caused a massive transfer of wealth from the middle classes to the wealthy. Now, I don't speak for the Market Monetarists, but clearly they expose this as a possible scenario, though they would try to explain in through more benign means.

I lived through all this in Reno and Las Vegas. I saw marriages dissolved, pets abandoned, people committing suicide and destruction of houses by those who felt betrayed by this purging of the rottenness. I saw it all. And I see an underclass of the perpetually unemployed totaling millions of people, many who have no hope and have had no hope for financial success for years after 2008.

I suggest that the rottenness was the market destruction itself, a great evil inflicted upon the people. Until I get a better explanation I continue to stick to that view. Just remember, bankers never forget their business. Central bankers never forget their patterns, and we just need to know more about that. When you have Will Rogers making fun of the term "restoring confidence" in the 1930's, and we see the term on CNBC over and over soon after the present Great Recession crisis, we can be assured that bankers never forget, though we as a nation continue to operate in the dark, with just a few glimpses of sunlight.

I hope I provided that to you, thanks mostly to the Market Monetarists.

For Further Reading:

Fed Premeditated Mispricing Of Risk In Housing, Oil, Junk Bonds And Other Markets 

LIBOR Destroyed Subprime. But The Fed Deepened The Great Recession

Larry Summers 100 Dollar Bill Ban And Westfalia Lost

Proof The Federal Reserve Was Responsible For The Housing Bubble And Crash 





Tuesday, April 19, 2016

My Fast Food Gripes and Praises. Links to Healthy Eating

 This little article was first published to my personal blog at Talkmarkets:

At my age I probably should not eat too much fast food. I try not to. I run my dogs and try to stay healthy. But going into fast food restaurants has definitely been an eye opener lately. I have a few gripes and praises. This is not an exhaustive study, as I included only 10 franchises. For example, I don't cover Five Guys or Smashburger, both tasty but pretty rich.

I didn't cover a nice fast food franchise, Chick fil A which will finally locate in Las Vegas. The founder, Mr Cathy, passed on and had a thing against Nevada because of gambling. Las Vegas is a regular place, except for the strip. Well, that is unless you have taken Abilify, which makes some people gamble uncontrollably. I kid you not. 

Do not think that fast food restaurants are all bad. In fact, you can bust your diet at formal restaurants even faster than at fast food restaurants because of large portions. You can get a little portion control at the fast food restaurant and pick healthy choices too.

So, here are the 10 places for my gripes and praises:

1. The soda machine at Jack in the Box is really cool, with lots of flavors and lots of diet soda flavors, as well as flavored waters and other healthy alternatives. Kudos to Jack in the Box for the soda machine and for being one of the first fast food places to offer a full breakfast menu 24/7. There are a few healthy choices at the restaurant though not many.

2. McDonald's, I have concluded, has two things saving it. Breakfast and coffee are saving McDonald's. McDonald's has the best sausage, and that is crucial. McDonald's has the best coffee among fast food joints, and that is crucial. The hash browns taste like industrial cleaner.

The biscuits at the most popular fast food franchise are so salty and they also lack fluffiness. You just can't have biscuits that lack fluffiness. Maybe I got a bad one. They need to cook the scrambled eggs a little longer. I am not a fan of shiny eggs. That could be a personal preference. At least McDonald's has a few breakfast items served throughout the day.

3. In-N-Out has the crunchiest burger out there. It literally has no competition. It is fresh, and really good. Business Insider did a taste test for burgers, putting Shake Shake first and In-N-Out second. But they guy took them home. You have to eat an In-N-Out burger quickly to take advantage of the fresh crispiness of the ingredients. He blew it. 

4.  Shake Shack has a great tasting patty in the burger. I tried one in the new and beautiful Downtown Mall in Summerlin, Nevada (close to Las Vegas). But it is way overpriced, and I dislike limp burgers. The limpest burgers definitely come from Shake Shack and Dairy Queen. Caramelize your buns, people! Truth is, you can haul Shake Shack around and it would still taste pretty good because of the meat but the burger will stay limp. Once a burger is limp it is forever limp. 

5. Dairy Queen has nice deserts. Otherwise it has no reason to exist. Limp burgers with unspectacular beef makes DQ a poor choice, unless you want desert. 'Nuff said.

6. Burger King has the best hot dog. Business Insider concluded that and so did I when I tried them. They have the classic and the chili dogs. You need to ask for them right off the grill, and not settle for the excess they microwave. Don't be settlers if you want this really great, inexpensive hot dog. Burger King has healthy choices as well and flame broiled meat is just better, be it for burgers or for hot dogs.

7. Taco Bell must be the King of Salt. I don't know if others just conceal their salt better and it is just my opinion, of course. Nutritional guides are provided upon request at most fast food restaurants if you want to pursue the subject more deeply.

I just know everything I eat at Taco Bell tastes massively salty. I may as well splurge on saltiness and get the tasty Enchirito, which is not on the menu but will be made for you at most Taco Bell locations. But anyone wanting to limit salt would do well to be careful at all fast food places, including Taco Bell.

I found a recipe online for the Enchirito. It is a copycat recipe and may not reflect the Taco Bell recipe. But for shoots and giggles let's just assume it does. Well, it uses an entire teaspoon of salt. That translates to about 2300 mgs of salt! Wow.

The USDA recommends no more than 2300 mg's of sodium per day. Since salt is made up of 40 percent sodium, you can eat 2.5 times the amount of sodium in the form of salt. The recommended intake of salt, then, is around 5750 grams per day. Since one Enchirito has 2300 mgs of salt, one can see that it doesn't take too much Taco Bell food to bust through the USDA recommendation.

So, 2.5 Enchiritos complete your salt intake for an entire day. Wow, again.

8. Del Taco has about 750 mgs of salt for the tasty rollers. That isn't too bad, but if you go for steak and potato you will have about a teaspoon of salt. So, while Del Taco is good ( I really like the original in Barstow, Ca.), it has salt, but maybe not so much as Taco Bell. I am just going by taste. 

9. El Pollo Loco is probably the healthiest fast food place, in my view. And there are healthy selections according to a diet website. The restaurant costs a little more than some, but there are 5 dollar deals.

10. Last but not least is Wendy's. The company has quite a few items deemed healthy by Dr Gourmet. Wendy's has chili and salads, not bad for fast food. The burgers are grilled as McDonald's burgers are, but they seem pretty fresh.

If you are on the road, or have a limited budget, you can destroy your diet with fast food choices, or you can be a little careful and do your research, and eat more healthy while experiencing the fast food world. Study the links I provided and others on the net, to determine healthy options for any fast food restaurant.

Sunday, April 17, 2016

Clouds Ahead for Real Estate Worldwide, But It Is a Mixed Bag

 This article was first published by me on Talkmarkets:

There are clouds ahead for real estate worldwide, while it remains a mixed bag. As oil prices soften, it appears to most people, the Fed chairman included, that demand is slowing in the world and that oil is simply a gauge of that decline in demand.

So, while there are limited access cities, where tech and growth are strong, and economies that are rising globally, other places are dependent on exports of raw materials. They were high flyers once. They could be the first nations to see real estate price destruction. States in the USA that rely on oil production are likely to see the same unless there is a serious reversal of commodity pricing.

One of the strongest real estate markets in the world is the Australian market. It is a market that is driven by strict land use requirements, and by the export of raw materials to China. As the raw material export business slows down, strict land use keeps prices up. But now there are signs that this market is very dangerously close to implosion.

As Wolf Richter has pointed out, almost 1/2 of the mortgages in Australia are interest only. When they adjust will the occupants be able to pay a higher mortgage? Perhaps this pending real estate doom is why central banks want negative interest rates, in order to protect those with risky mortgages. And don't forget, that protects the bankers, and that is what this is all about.

It is likely that these interest only folks, if they lost their houses, could not afford to rent the very same house. Demand will plummet if these folks walk away and move in with relatives.

Canada's market is really astonishing. Jesse Colombo says that Canada's housing market is 40 percent overvalued compared to the value of the US market in 2005!  Even the IMF is waving warning flags. And Canada could contribute a hit to the US economy if it crashes, since it is the largest trading partner of the USA. Hot money bought Canada's bonds, and could be scared away, causing lending to dry up.

Australian banks do what all banks do when they fear excess froth, they pull back on lending.  Investors must now come up with 20 percent down rather than 5 percent down. The banks want air let out of the bubble. Depending on how long that process takes, it can hurt people, and it was clearly what was done by the US Federal Reserve. 

Other nations appear more stable than those relying on commodities. Many look to foreigners, like Spain has done, giving extended families of investors full residency rights for investing more than $560,855.00 in the nation. It is clear that real estate investing is becoming a global phenomenon.

For the global real estate investor, there is information available through the Global Property Guide. The company says it attempts to give people an unbiased guide to real estate and pitfalls of global investing. The company says it wants you to make money.

I find the articles to be very interesting, and could be an aid to RE investors. Certainly, there is always risk in real estate investing because most of the time it is not a liquid investment. There are bubbly exceptions to that rule. But you may not want to be in those markets unless you are a riverboat gambler.

Just remember that investors come and go. They can sour on a nation. The Japanese were heavily into Los Angeles real estate in the 1990's. Once Japan imploded financially, those investors disappeared and prices stopped their large gains. The same could happen with China, so you have to understand many factors before pulling the trigger, in my opinion.

A nation could be favored today and shunned like a overripe banana tomorrow. The Global Property Guide tracks virtually all nations, looking for "rising" economies. I am not in a position to recommend the website, but as I say, it seems to be a great introduction to real estate in many nations.

And the site addresses lower risk and higher risk, that could lead to higher yields. This article gives some ideas on where to go to assess risk. 

I was reading an article about Las Vegas real estate today, where risk has pulled many back from building certain types of properties. Regular apartments for rent are booming, especially close to the new Ikea store in Southwest Las Vegas. But upscale condominiums are no longer worth the risk to build.  That is why Lorne Polger believes investors will seek out his condos, some on the strip and some off the strip in the Southwest, simply because they aren't building anything like them anymore.

Polger and his partner are selling upscale condos for $250 per square foot, saying that to build them today would require a price of $400 per square foot! The bubble created excess, that could be the bargain of a lifetime. But that excess is not being constructed anymore.

Of course, the behavior of the Millennials will have a lot to do with the kind of housing that will be built and invested in going forward. And certainly, where we are in the debt super cycle, if it really exists, could have a large impact on real estate investing.

Tuesday, April 12, 2016

Draghi and Germany Have a Secret Plan to Save the Eurozone

This article was first published by me on Talkmarkets:

Draghi of the ECB, and Germany must have a secret plan to save the Eurozone. One cannot make sense of their actions without contemplating this plan.

After all, Germany introduced a plan to weigh bonds, with bondholders potentially taking a haircut before bailout money can be approved for periphery banks. On the surface that would seem to indicate that Germany and the central bank are seeking to weaken bond prices in the weaker nations and destroy the Eurozone. This is causing a flight to safety, with German bonds being the primary beneficiary. See articles regarding this plan here and here. The chart is a bit out of date but trust me, yields are even lower after a short bump, and are going to go negative even on the long term bond:

Main Economic Indicators - complete database", Main Economic Indicators (database), (Accessed on date)
Copyright, 2014, OECD. Reprinted with permission.

So, yields are even closer to negative now. Draghi is buying German bonds, making the scarcity of these bonds that are already in massive demand even more scarce. That will push yields down even more.

So, what is going on? Surely Germany and the ECB do not want the Eurozone to fall apart. I believe that there is a plan, and that secret plan is the goal to fund Germany through getting people to buy German bonds for safety, even if they have to pay the ECB and ultimately the German government for those bonds.

So, why would Germany and the ECB want to weaken the periphery? Well, it is all about discipline. The Germans want two things, 1. they want discipline in the periphery (formerly known as PIIGS), and they want the ability to bail out nations with a large war chest of cash derived from getting people to pay them to hold their bonds!

Germany must appear to be at least as safe, and probably more safe than the United States. With growth stumbling in Germany, that is becoming hard to do. Yet converting Treasury bonds into Euros can mean a loss for investors. They may as well hold German bunds, at negative rates. Why not? Return of capital is becoming crucial to these bond buyers.

I wrote about Kocherlakota's plan to bring bond yields to negative, and using the windfall for massive government spending and stimulus. That must be the plan of the Eurozone and Germany right now. Germany does not want to be as weak as the weakest link. It wants to be iron strong, and maybe that will translate to stimulus although one cannot be sure when speaking about Germany.Regarding Kocherlakota, I said this:

It is clear that former Fed president, Narayana Kocherlakota, wants government to spend a lot of money through the use of negative nominal rates on Fed funds rate. This is different than negative IOR. He realizes, as I have noted in past articles, that there is massive demand for treasury bonds, and that more could be issued than are issued now. Projects could be financed by this issuance. Only problem is we aren't quite negative here in the USA, yet. Negative bonds could be a bad idea.
That is why Kocherlakota wants more government spending, to force the creation of more treasury bonds. That would help drive long bond yields up, which would be more normal, but at what cost? There could be unintended consequences. He switched from being a libertarian to some Keynesian and Monetarist ideals, especially with regard to fiscal spending. He and his Freshwater school was embarrassed when inflation did not go crazy as QE was implemented.
But Kocherlakota and some central bankers seem to want the big money paying government. It would seem that negative IOR is not enough for them. They are way more ambitious than that. Negative IOR would help but would not be a massive windfall for governments, but negative bond rates would be a massive windfall.
The German proposals and Draghi's moves make no sense unless this Kocherlakota-like plan is the plan for the Eurozone as well. While the chart above does not show it, but the Bloomberg article I linked to does, there was a surge in mid 2015 for German bond yields. That indicates weakness in the world of the Eurozone when strength is based upon how low you could go. But yields are moving lower again, as Germany seeks to exert its power, even if the rates become negative.

There is always a risk that investors could sell the German bonds, but rising yields on German bonds would likely destroy the Eurozone, if this negative yield goal is the plan to save it! I am sure that idea is not lost on investors. 

It is funny that raising rates is considered a show of strength on the part of the central bank in the USA, while lowering rates is considered a show of strength by the ECB in the Eurozone. Forgive me if I don't get it. You probably all do, but don't worry, I will figure it out someday!

Kocherlakota believes that bond yields would go up if more bonds were issued in the USA. Well, that could be true except that the supply of the bonds is way lower than the demand and the banks have bet on low rates. Same for the Eurozone. I think they all have a secret plan for permanently negative rates, a tax on investors to keep their money safe. This could be the extortion scheme of the millennium!


Sunday, April 3, 2016

Clearing Up Negative Interest Rate Confusion. Kocherlakota Weighs In

This article was first published by me on Talkmarkets:

With all the talk of negative interest rates, we have to determine why they are considered so important. They are obviously very important to bankers, economists and central bankers. This article is not an attempt to encourage these folks because of the danger of cashless regulations once a negative regime is put into place. But looking into motives becomes quite helpful to see where central banks are going with all this since they do not consult with us. I call the plunge into minor negativity the Office Space scheme. The dangers of too much reliance on negative rates will be shown.

There are three categories of negative rates. As you read articles this breakdown is helpful since the authors don't always make clear which they are speaking to:

1. Minor negative rates on bank reserves that would not cause a run on the banks.
2. Major negative rates on bank reserves that could cause a run on the banks.
3. Negative treasury bond rates that could slow down the economy.
Minor negative rates on reserves , are less than the costs incurred if banks stored their own money. Major negative rates  would almost certainly require banks to pass the rates onto retail customer accounts or pull their money out of the central banks.

And even passing costs onto retail customers may not cause bank runs, if the customers perceive the rates are not too deeply negative and if the convenience trumps the negative interest. It is risky to assume these retail versions of negative rates are in the minor category. Maybe, maybe not. 

The Fed and central banks are not too worried about the minor rates, which are less a cost to banks than paying the cost of storing money. Stephen Williamson, New Monetarist Fed VP, has said negative rates in Switzerland seem like no big concern. So, these would be the result of central banks charging banks to store money at the central bank.

The concept of negative IOR is no big deal to New Monetarists, but is central to the economic school known as Market Monetarism which wants banks to lend more to each other, avoiding paying negative IOR. As Scott Sumner has said, negative IOR is always expansionary and should be considered. Others think it is ineffective. 

But as Williamson hints at, minor negative rates, while technically breaking the zero lower bound, don't really do so because the cost to banks is still less than the cost of storing the money. But going too low in a major way would certainly destroy the zero lower bound causing banks to consider more drastic measures. Remember, I are not talking about the Fed Funds Rate, which has seen real, not nominal negative rates in the past. I are talking about negative interest on reserves (IOR).

So, I am reminded that central banks really only need minor negative rates often times no more than negative point one percent, not major negative rates, in order to alleviate the cost of government debt. If they can collect just a little bit of money, it is way better than paying it out to the banks, because it means a lot of money will be passed on to the treasuries of the nations. Nations will be paid to borrow. So, for example, the Bank of Japan, the BOJ, charges banks a small, minor negative rate on reserves, in order to pass money to the most indebted government in the world, Japan.

Now, if governments and central banks are careful, they could use some of this money to stimulate the economy, as the private sector in Japan appears to be comatose. That is true for Europe as well. In a downturn, it could be true for the United States as well. But the point is, this money from government spending would stimulate the private sector and could be a good thing.

However, if this method of funding government proves to be done irresponsibly, governments could spend too much with the expectation that they could get more from the central banks at a later date. They could spend so much that central banks would be forced to lower negative rates into the major category, where banks would save money pulling the cash out of the central banks and storing it themselves. Or the banks would have to charge customers, creating the risk of bank runs by retail customers.

That could even lead to a cashless society, and bankers like Larry Summers have called for the elimination of big bills, and Buiter has called for the elimination of cash.

So, the question would be, could government be careful about all this? I am reminded of the movie, Office Space, where the desperate costars (who fear being laid off) plan to pilfer just fractions of pennies from Initech, where they worked, into a bank account they controlled. Turns out a decimal point error makes the pilfering far in excess of the fractions of pennies.

I think most central bankers have all seen the film, because they likely want to avoid the error of overshooting to the negative, because they certainly are convinced that going a little negative with IOR is just ok, and will actually help governments. I realize that helping government scenario is not the Market Monetarist goal, because he wants banks to lend money to other banks in a hot potato effect, rather than have them pay the negative IOR to the central banks. Market Monetarists claim to be libertarian. I assume by that they mean they would not want negative IOR to be just a government money collection scheme.

And certainly, the MM guy does not want banks to buy bonds, pushing yield down and prices up. Negative bond yields are a bad idea even if negative IOR is a good idea to them. It would be ok if the bond yields stayed positive, but Econbrowser says banks could trade them with each other, pushing the yields down to negative. Bad idea.

So, getting banks to behave the way that the central banker wants them to behave in a negative IOR environment could become an issue.

It is clear that former Fed president, Narayana Kocherlakota, wants government to spend a lot of money through the use of negative nominal rates on Fed funds rate. This is different than negative IOR. He realizes, as I have noted in past articles, that there is massive demand for treasury bonds, and that more could be issued than are issued now. Projects could be financed by this issuance. Only problem is we aren't quite negative here in the USA, yet. Negative bonds could be a bad idea.

That is why Kocherlakota wants more government spending, to force the creation of more treasury bonds. That would help drive long bond yields up, which would be more normal, but at what cost? There could be unintended consequences. He switched from being a libertarian to some Keynesian and Monetarist ideals, especially with regard to fiscal spending. He and his Freshwater school was embarrassed when inflation did not go crazy as QE was implemented.

But Kocherlakota and some central bankers seem to want the big money paying government. It would seem that negative IOR is not enough for them. They are way more ambitious than that. Negative IOR would help but would not be a massive windfall for governments, but negative bond rates would be a massive windfall.

So, it makes more sense to me to ban long bonds for use as collateral in the derivatives markets, since that use creates a false demand for the bonds, than to just spend massive money in order to create more bonds for more derivatives deals. It looks like low long bond yields no longer predict economic downturn but just bond scarcity, though some are more cautious about that view.

Kocherlakota could be right (although I hope not), that growth must be molded by massive government stimulus since private industry has become too cautious. He may be right that preventing deflation in the world requires massive government spending. He may be right that more treasury bonds would force yields up, though I have some doubts with the collateral demand issue still in play. 

But once you start down the road of negative bond rates, where do you stop? How low can you go? Apparently some bankers are prepared to go very low. That is when this experiment becomes seriously risky.

So, the only conclusion here is that risk exists from doing nothing and risk exists in doing massive stimulus by government and there is risk in between, like with Negative IOR. Kocherlakota wants big stimulus, which seemed to work in WW2, but the hangover would be worse now. The US was stronger after WW2 and was able to shake off the hangover quickly. Williamson, who claims that Freshwater/Saltwater means little today,  seems happy with a little deflation and a little negativity of rates in Europe, and was ok with QE.

If there is a huge economic downturn, not getting it right could be hazardous to all of us.

Perhaps something else should be tried, since just protecting banks and the wealthiest has been the only solution and has never really worked that well. At least that was the view of Will Rogers:

"See where Congress passed a two Billion dollar bill to relieve bankers' mistakes. You can always count on us helping those who have lost part of their fortune, but our whole history records nary a case where the loan was for the man who had absolutely nothing." DT #1715, Jan. 22, 1932
And the loans from Congress end up being forgiven anyway.  That is doubly painful for main street.

It appears that most of the economists, ie., the New Monetarists who have moved past the Freshwater views, the New Keynesians and the Market Monetarists, are all for some sort of negative nominal rates placed on something. They all have their reasons, but they all play into this potentially dangerous trend, efforts toward a cashless society, that none of them seem to see as being very dangerous at all.