Ben Franklin Report: Questions, Questions Everywhere

Unfortunately, due to the arcane nature of economic measurements and a desire on the part of the elite to remain elite, there is an entire market around attempting to provide answers to clients and predict near- and long-term economic phenomena. So, in an effort to help you from wanting to go spend money on overpriced financial services, here are some questions you may be asking, and some answers.

• How much will this crisis cost the economy in the long term? According to JP Morgan Chase, the overall costs could be as much as $1.2 trillion.
  
• How is the crisis being felt in other markets? Europe's economy is resilient against the contagion, thanks to the rising Euro and sound monetary policy of keeping interest rates stable, which, in turn, draws available capital into the Eurozone. Head of the European Central Bank President, Jean-Claude Trichet remains skeptical if the worst has yet to come. Canada's CIBC still is working through at least $25 billion in exposure to monoline insurers.
  
• Is there more unwinding yet to happen in bad loans? The simplest way to answer this would be to say, "Yes." However, as details are still emerging about the prevalence of home equity loans, or other liens placed on homes in addition to the traditional first lien, mortgages, there is still a lot of red ink to be spilled.
  
• Is the stock market going to be a viable investment anytime soon? Perhaps, but not for the next few years. In the cyclical nature of business, the stock market traditionally sours for a decade after a decade of strong trading. So if this trend continues, the market will probably not begin to make lasting gains until approximately 2012.
  
• With increasingly visible protests against financial corporations receiving bailouts from the Federal Government, are there any other potential targets of popular discontent? As all politics are local, one need look no farther than the financing of your local Wal-Mart. Does your local community allow 'tax increment financing?'
• The employment outlook is souring, but was there any good news in the latest batch of GDP data? Not really, almost every number on the page is down in comparison to the quarter before, with a very precipitous drop in government spending. Also of note, exports are declining at the same time as imports are decreasing, which is a reflection of real consumer spending. Also of note, the value of real residential fixed investments, that of houses and such, fell by 25.2%.
• With all of the concerns about moral hazard, is there really a bad way to intervene in the marketplace? Yes, there is. For instance, pushing Fannie and Freddie into buying bad loans and then holding more capital in reserve against this new volume of bad loans. Businesses and executives that made bad decisions need to face the consequences of their decisions. The government has enough work to do to get its own house in order. I'm not alone in thinking that with this bailout will come a spiraling dollar.
  

Ben Franklin Report: a Perfect Storm

As always, the world keeps spinning, and people will keep being people. So, by way of briefing, here are a few developments, like how a Recession is inevitable. Bush is optimistic.

Ben Franklins are increasingly worthless, compared to most foreign exchanges. The Dollar has gone below 100 yen for the first time in more than a decade, and keeps hitting new highs against our poor greenback. Inflation, though, reportedly didn't go up by very much in February, perhaps signifying a leveling out of prices, in the wake of consumer prices not properly reported in the Consumer Price Index. Any hope that inflation will be ameliorated by flattening or perhaps falling consumer demand is probably, at best, naive with oil on its march up to $125 a barrel. Fannie Mae and Freddie Mac may have been thrown a lifeline by Fed chief Ben Bernanke, but should he have? Is it enough? $200 Billion is a lot of money to be financed by Treasuries, yet not very much compared to the size of the mortgage market. Speaking of which, is going into dire straits as the crisis is beginning to move into the more traditional branch of mortgages, those whom enjoy good credit histories. In truth, the Fed has now set a course to assume all risk to the global financial system from the mortgage crisis.

Treasury Secretary Henry Paulson has announced new financial guidelines that are already market practice, which mostly center around risk assessment and the documentation required to receive a mortgage. Any notion of adjusting accounting requirements to allow banks to free up capital on their balance sheets, however, seems extremely misguided.

Fanning the entropy further, a pair of large financial institutions have collapsed in the wake of the problems in the financial sector. Bear Sterns, just after appointing a new head of East Asian operations, found its liquidity destroyed almost overnight. Thankfully for them, JP Morgan is riding in to the rescue. The Carlyle Group may come to the rescue of its stepchild, not-really subsidiary Carlyle Capital Corporation, as its assets have been seized. In a branding effort, David Rubenstein, Carlyle co-founder, wants to make sure that investors break even. This effort, like almost all of the efforts of the Fed and Treasury, are aimed at helping large banks and financial institutions recover their capital outlays lost as a result of inordinate risk assumption.

Must Watch Video: Tent Cities in LA.

A Testimonial that generically represents the leading edge of the crisis.

Ben Franklin Report: What's That Flushing Noise?

For those who have been watching the Dow Jones since Friday, one might feel a sense of relief as markets appear to be recovering value, but as new data points suggest, the economy has not yet begun to feel the pinch of the financial crisis.

The first two points of data are a double whammy against two of the biggest motives in a capitalist system, the ability of a producer to make a profit and the willingness of the individual to spend money on goods and services. While a 7.4% increase may not seem like much of an increase in the Producer's Price Index, one can be sure that such a trend would lead to inflation above the 1%-2% range preferred by the Fed. However, deteriorating consumer confidence because of a bad job market means that addition spending on the part of the aforementioned consumer will not be spurred by a material increase in wealth but rather will be pried out by higher costs, which means that the increased revenue will be pure stagflation. This is only spurred on further by the third point of data, continued deterioration in the value of housing, which has served as a store of value in the face of a negative savings rate.

The combined effect of these trends in the market mean that the dollar is going to continue losing value, which will be reflected in exchange rates against other currencies, especially the Euro. Unfortunately, for the American citizen, the U.S. Dollar has ceased to be a safe investment vehicle, which is beginning to be reflected in the price of oil. As the dollar loses its value, the basis for the U.S. Dollar's Oil Standard will be eroded. Some of this increase will, of course, be based on speculation, but this is a losing proposition as the infrastructure that supports the movements of our economy might . This, of course, is not a permanent situation, but the painful solution to the crisis is not immediately forthcoming: fiscal conservatism, re-evaluation of oil as an energy source, and stricter regulation of the financial marketplace.

All in all, expect the situation to get worse, and a clear sign will be yearly earnings releases from Fannie Mae and Freddie Mac, on Wednesday and Thursday, respectively.

Ben Franklin Report: Time to Testify

Eliot Spitzer, the Governor of New York, yesterday weighed in on the ongoing financial crisis, with the unique perspective of one who was attempting to halt predatory lending practices before they were allowed to become the problems that we are seeing unfold today. The obscure bureaucracy, the Office of the Comptroller of the Currency (wiki), appears to have played a key administrative role in allowing this crisis to involve much more capital than would have otherwise been possible. As black has become white and white black, the Bush Administration has seemingly turned a bureaucracy dedicated to providing a degree of confidence in our banking system and protecting consumers, has become a tool for financial profiteering. Comptroller Dugan has this to say in response to the Governor's allegations, essentially pointing the finger of blame back at the states and arguing that the worst abuses came from institutions that do not fall under the purview of the OCC. Is this, perhaps, the next scandal to emerge from the Bush Administration?

In other news, Freddie Mac has announced plans to ease the financial liability of of its private mortgate partners. At issue is the liabilities said partners are burdened with incidental to the protection afforded by the mortgage agency. In tandem with this, the stimulus proudly signed by Bush into law the day before yesterday, increases the maximum value of a mortgage that the twins Freddie Mac and Fannie Mae may take onto their books, up to a maximum of $729,750. These two actions, in different ways, accomplish the same financial objective: to shield the private investors from the risk that they themselves took on by means of regulated governmental entities, which will inevitably mean that the taxpayer or, more likely, the purchasers of U.S. Treasuries will be stuck with the consequences of the ballooning crisis. Of particular note to the Presidential Election, some of the markets that would fall into the category to receive the largest margin of protection are in New York and California.

MBIA, Inc. executive said in Congressional testimony that they are in a position to withstand the financial crisis and no new regulation is required. The other contender for who rejected Warren Buffet's offer, FGIC Corp. announced intentions to be split up into two separate corporations, one for municipal bond insurance and another for the subprime mortgage liabilities, to cope with a new rating from Moody's at below investment grade.

On the legal front, the SEC is looking at revising financial transparency in response to more than three dozen investigations underway by the agency. The FBI is investigating a total of 16 corporations for fraud in relation to the financial crisis. I'm sure that this type of indeterminate liability will weigh heavily on the minds of investors who are desperately needed to provide all-important capital. The latest figure, produced by an analyst at UBS, forecasts the potential loss resulting from the ongoing financial crisis at $203 billion, which is likely to go up as other sectors of the credit market and municipalities become less safe investment choices.

This news, of course, makes Ben Bernanke's assurances of adequate insurance from risk sound like a flight of fancy. In light of Bernanke's precarious position, one must look to figures that measure confidence in U.S. monetary policy, like foreign exchange rates (Updated Dollar-Euro Exchange Rates). Considering the fall in the dollar in response to the Fed Chairman's comments, it would appear that the investment community does not share his opinions on the long-term outlook for the greenback. Considering his acknowledged position as the foremost authority in central banking, one might ask if Ben Bernanke is second guessing the Fed's dovish rate policy with the European Central Bank taking a more hawkish policy, keeping interest rates above 4%.

Below, is Bernanke's testimony yesterday, a song inspired by the Fed Chairman, and hot video from Reuters. Enjoy!

Taxpayer Exposure

Treasury Secretary Henry Paulson is scheduled to give a speech today, outlining the administration's efforts to ameliorate the effects of the ongoing financial crisis. In mentioning the investor reluctance to fund mortgages, Sec. Paulson also seems to depend on "market discipline" to restore confidence in the markets. He also plans to use the occasion to defend a freeze in subprime borrowing costs. Although the author of this article, Jeanne Sahadi, seems to believe that there are two exclusive camps surrounding the crisis, one camp that feels that the Treasury's plan is too little, and another that feels that free market principles should prevail and those who took on risk should learn the meaning of risk, I find merit to both arguments.

Regardless, some are wishing that they had agreed with Ron Paul in 2005 when he wanted to remove the implicit taxpayer backing for the GSEs, such as Fannie Mae and Freddie Mac, to avoid a government bailout after the housing bubble burst. After a closer look at the liquidity figures of the Federal Reserve and the European Central Bank and the regulatory options available to forestall the crisis, "Mish" Shedlock says that there is no possible rescue plan, and clears up the mistaken notion that liquidity is capital, which can be used to underwrite shaky markets, which it is not.

"Raghu" offers up some advice through his new book, on how the subprime crisis can be further averted, although I have to wonder how he thinks the government will find the money to bail out the market, for even 1%, nonetheless 20%.

IndyMac Bancorp Inc. is looking at darker days as Fannie Mae and Freddie Mac have raised fees and surcharges to securitize risky loans.

Benjamin Franklin Report: The Sucking Noise Gets Louder

For those financial analysts who are looking at the balance sheets over at the mortgage twins, Fannie Mae and Freddie Mac, are probably worried now that the CEO of Fannie Mae is "preparing for a long winter" and Freddie Mac expects $10-12 billion in mortgage losses over the next quarter. Can the twins survive another bad quarter or two, and could the financial markets withstand their collapse? Ask again in 2010. The news brought down the Dow Jones and the wider markets when announced.

Bush Sending Mixed Messages on Economy

Its as if Bush believes the economy will do what he says as long as he refuses to admit there are problems. So we get speeches like he delivered today that send mixed messages about the economy.
Compare, http://money.cnn.com/2007/12/04/news/economy/bush/ with, http://hosted.ap.org/dynamic/stories/M/MORTGAGE_CRISIS?SITE=DEWIL&SECTION=HOME&TEMPLATE=DEFAULT

W as Little Dutchboy

In the course of the next year or so, the US government has some serious financial difficulties it needs to work out. Primarily, the ballooning national debt is about cross the $10 trillion dollar threshold. Instead of having the debt paid off within a decade, we're not mortgaging our future for more than a decade. On a deeply interrelated note, is the current financial crisis that is roiling the markets. Not surprisingly, the CEO of Countrywide is eager for Fannie Mae and Freddie Mac to have temporary increases in the volume of loans they can take on. Will W risk his political capital and any notion of being called a fiscal conservative? Or will he appeal to his base and help the artificially rich people continue to enjoy the lap of luxury that fewer and fewer people are able to share.