Muwabi Economic Forum

As the Obama administration looks set to propose new mortgage modification legislation, we need to take a closer look at where the focus should be. “Should be” is key here because all indications are say we’re unlikely to get what would actually help. One of the main problems with housing stabilization has been the lack of speedy foreclosures. Government has been principally responsible for this, with foreclosure moratoriums, forced modification programs, and other stall procedures. I’ve documented this many times so I’ll leave commentary to that. One of the newest trends, however, is for banks to delay foreclosure. Observe…

Many borrowers in default stay put as lenders delay evictions

Throughout the country, people continue to default on their home loans — but lenders have backed off on forced evictions, allowing many to remain in their homes, essentially rent-free.

Several factors are driving the trend, industry experts say, including government pressure on banks to modify loans and keep people in their homes.

And with a glut of inventory in places like Southern California’s Inland Empire, Nevada and Arizona, lenders are loath to depress housing prices further by dumping more properties into a weak market.

Finally, allowing borrowers to stay in their homes helps protect the bank’s investment as it negotiates with the homeowners, said Gary Kirshner, a spokesman for Chase bank, a major lender.

“If the person’s in the property, there’s less chance for vandalism, and they’re probably maintaining the house,” he said.

Economists say the situation won’t last forever, but in the meantime the “amnesty” may allow at least some homeowners to regain their financial footing and avoid eviction.

The part getting attention from Barney Frank…

Banks Pressed on Second Mortgages

Pressure is growing on U.S. banks to ease terms for distressed homeowners on home-equity loans and other second-lien mortgages.

Rep. Barney Frank, chairman of the House Financial Services Committee, last week sent a letter to the four biggest U.S. banks demanding “immediate steps to write down second mortgages.”

The Massachusetts Democrat sent the letter to the chief executive officers of Bank of America Corp., Citigroup Inc., J.P. Morgan Chase & Co. and Wells Fargo & Co. Meanwhile, the Obama administration is preparing to launch long-planned initiatives aimed at addressing obstacles to restructuring mortgages.

Rep. Frank said banks’ reluctance to write down second mortgages is hurting efforts to reduce the first-lien mortgage balances of many borrowers who owe farm more on their loans than the current values of their homes. Reducing the mortgage balance typically requires cooperation from both the first- and second-lein holders.

Because such “underwater” borrowers often feel little incentive to keep paying, “homeowners are increasingly deciding to walk away and thus foreclosures continue to mount,” Mr. Frank said.

Many second liens have little value because of the plunge in home prices, Rep. Frank wrote, adding: “Yet because accounting rules allow holders of these seconds to carry the loans at artificially high values, many refuse to acknowledge the losses and write down the loans.”

Mark this one down because it’s rare but I agree with Mr Frank. The absolute lack of accounting standards for banks has allowed this type of behavior to take place. Second lien holders are holding on to worthless claims but manage to avoid writing down these assets. This makes it impossible for the primary lenders to negotiate principal reductions or initiate short sales (which are clearly beneficial to housing stability). The faster these homes return to performing loans or are written down, the faster a true recovery can possibly take place.

I’d take this one step further, however. Although the examples from the first LA Times article don’t apply, I’d be willing to bet a majority of the mortgages in similar situations are seeing foreclosure initiation because banks don’t want to write down those assets either. While non-performing loans do require increase in cash reserves and probably some declaration of asset impairment, I’d bet it’s not to the same degree as what the market foreclosure auction price would dictate.

Even if my suspicions are only a minor factor of foreclosure delays, both FASB and the SEC need to take serious consideration of this situation. It’s no secret that many banks would be insolvent if still marking assets to market. This type of inaction is almost certainly taking place across all different types of assets and should be extremely troubling to investors. As much as Wells Fargo, Citigroup, etc seem to be attractive investments due to their government guarantees, I would never invest a dime until I was fully confident what their balance sheet really looked like. Now that new accounting rules have forced off balance sheet items back on, it will be interesting to see earnings reports over the next quarter.

While I think accounting rules require change, the main topic of this post is to demonstrate exactly why housing cannot stabilize. Obama, Frank & Company need to acknowledge that while modifications should be encouraged, foreclosures and other correction procedures are equally as important. Stall tactics only exasperate the problem and prolong this painful market. While this type of government behavior is nothing new, banks now see the same incentives. These articles are spot on in considering the benefits of homeowner maintenance and keeping a shadow inventory. Add bank inefficiencies and the accounting incentives to the mix and there’s little chance we’ll see bottom any time soon. Almost all recessions end with a strong housing recovery… I just don’t see this in the mix for years to come.

Municipal bonds have long been a popular investment, as they provide safety from default and tax exempt income. With Treasuries yielding virtually nothing, munis have become an even more popular investment. In 2003, investors chased yield with asset backed securities. While there are still yield chasers, many have replaced Treasury investments with munis expecting similar default risk. Historically, this would be an accurate assessment. Today, however, municipal bonds are beginning to see significant risk. Observe…

Muni Bonds Face Downgrade Risk

Today, many of these issuers are running into financial problems as tax revenues sag because of the weak economy. Morningstar doesn’t expect a dramatic rise in municipal-bond defaults, but argues there could be a significant rise in downgrades. That’s when one or more ratings agencies suggest that a municipal bond is at greater risk of default, even if that risk is still fairly low.

A bond downgrade generally makes a bond less appealing to investors, causing its price to decline. When that happens to enough bonds, the net asset value of a bond fund can fall, offsetting the gains investors get from interest earnings.

Long-term investors learn to live with this kind of jolt. But Morningstar says many muni fund investors, like those who have rushed into other types of bond funds over the past year or so, may be expecting more safety than they will get. Many inexperienced bond investors were fleeing volatility in the stock market, or piling on as they saw healthy gains in munis and other types of bonds.

A wave of downgrades is no longer a risk but a certainty. While the author think default risk is still relatively low, I completely disagree. Many local government are plagued by outrageous union contracts and benefits. These costs are not going away and we’re seeing how politically difficult it can be to actually make cuts. This leaves financing, which has been done for years. Let’s look a this in more depth…

Muni investors still shrug off bad news

“Everywhere you look, someone is saying this is the end of municipal bonds,” said Matt Dalton, chief executive at Belle Haven Investments. “Our customers are unsettled by headline risk, but there still is money coming into this market.”

Total returns in munis — tax-favored debt issued by states and local governments for schools, roads and airports — were just under 11 percent over the last 12 months, including gains of nearly 1 percent during February, according to Bank of America Merrill Lynch indices.

Treasuries, which thrived during 2008’s global credit crisis, have posted total returns of 1.86 percent over the last 12 months, according to the Merrill indices. In February, Treasuries posted total returns of about 0.4 percent.

“It’s almost the reverse of then, when people only wanted to own Treasuries as a safe haven,” said Paul Brennan, a portfolio manager at Nuveen Investments in Chicago. “Now, it is a continuation of what we saw in 2009.”

Badly beaten up in 2008, munis benefited greatly last year as governments stepped up anti-recession spending and investor fears diminished. A year ago, tax-free yields on municipals were eye-popping, sometimes twice that of U.S. Treasuries, when they are normally only two-thirds or a bit better than the taxable payouts on federal debt.

As long as investors refuse to require a premium for obvious risks, municipalities can keep kicking the can down the road. Eventually the economy will sputter and risk awareness will start hitting the investment world again. This author also believes defaults will be low. Again, I disagree. It is no secret how bad the finances at state and local government are these days. This might be concerning in an ordinary recession, however, people are ignoring how entrenched and irreversible these costs are. The city of Vallejo declared bankruptcy in 2008, setting a new precedent for dealing with unmanageable fixed costs. I’d expect many municipalities (in much bigger cities than Vallejo) to follow from this example over the next few years. A string of defaults will undoubtedly cause rates to soar and make funding for other cities that much more difficult. One might argue for state bailouts or bank insurance but these former guarantors have enough trouble of their own.

Municipal bonds are still much safer than other investments and will always have the tax advantage. This isn’t a warning to avoid all bonds; many are bound to be solid investments. It’s hard to believe yields will continue falling, however, and thus it would be prudent to wait until the ticking time bomb explodes. At that point, I think this next Forbes article gives some good advice on limiting risk…

Beware Defaulting Munis

A few days ago as I analyzed the BRIC finances, I linked to an article talking about China’s hidden debt. This article must have been on to something, as China responds…

China to Nullify Financing Guarantees by Local Governments

China plans to nullify all guarantees local governments have provided for loans taken by their financing vehicles as concerns about credit risks on such debt surges.

The Ministry of Finance will also ban all future guarantees by local governments and legislatures in rules that may be issued as soon as this month, Yan Qingmin, head of the banking regulator’s Shanghai branch, said in an interview. The ministry held meetings on the rules on Feb. 25 with regulators including the China Banking Regulatory Commission and the People’s Bank of China, Yan said March 5.

China’s local governments are raising funds through investment vehicles to circumvent regulations that prevent them from borrowing directly. A crackdown on local- government borrowing, estimated at about 24 trillion yuan ($3.5 trillion) by Northwestern University Professor Victor Shih, could trigger a “gigantic wave” of bad loans as projects are left without funding, Shih said this month.

“Beijing’s fiscal situation probably isn’t as good as it looks at first glance,” said Brian Jackson, an emerging markets strategist at Royal Bank of Canada in Hong Kong. “Perhaps at some stage the central government is going to have to bail out the banks or the regional governments and take it on its own balance sheet.”…

A few cities and counties may face very large repayment pressure in coming years because of debt ratios already exceeding 400 percent, a person with knowledge of the matter said in January. The ratio is of year-end outstanding debt to annual disposable fiscal income.

This is a good article about the state of China’s finances. Such is the risk of non-transparency in the context of “emergency measures” or hasty government programs.

Federal pay ahead of private industry

Accountants, nurses, chemists, surveyors, cooks, clerks and janitors are among the wide range of jobs that get paid more on average in the federal government than in the private sector.

Overall, federal workers earned an average salary of $67,691 in 2008 for occupations that exist both in government and the private sector, according to Bureau of Labor Statistics data. The average pay for the same mix of jobs in the private sector was $60,046 in 2008, the most recent data available.

These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis.

Make sure you check out this article and find the link for specific salaries.

While this study is done at the federal level, state comparisons are even worse. The next time your state government asks for higher taxes, you simply need to make these exact same comparisons. Look up the average compensation (salary and benefits) of your average government worker and compare to the private sector. You also might ask what you’re getting for all this money? While I don’t like the politicians lacking backbone to identify specific programs and budget cuts, the tax increase people are even worse. This is going to be an interesting season as states start preparing their budgets. Once people realize exactly what they get for their existing money, the outrage will be that much greater when they have the gall to ask for even more.

I absolutely love sports and find the economics of thee most popular leagues and teams to be fascinating. Like any business, a sports franchise or the broad organized league have a goal to turn profit. George Steinbrenner is a classic example, where he bought the Yankees for $12 million and now sees its value north of $1 billion. Tiger Woods’ recent departure from golf demonstrates how athletes represent a brand with significant investment at stake. The most successful sports organization, the NFL, is considering expansion to other countries after its immense success in the United States. There is no denying how sports has become big business with an intent to maximize revenues rather than simply winning for the sake of local pride.

While this is relatively obvious, there are many economic stories in sports that can provide lessons for the broad economy. Let’s take an older example to start. A few years ago, the NHL was in severe trouble after a lockout followed by a decision to leave ESPN’s broadcast networks. Many questions whether the league would survive, as attendance dropped to record lows. The problem wasn’t lack of interest in hockey but a marketing problem, especially compared to NFL, MLB, and even the emerging NASCAR. Only a few short years later, the addition of exciting new ideas like the annual outdoor New Year’s game have led to a resurgence. The excitement from the Olympics guarantees new public interest in the game. The lesson here is that an exciting product isn’t all that exciting without altering public perception through innovative marketing ideas.

Let’s focus on the present. In reading this blog or rather any financial media, you’d see how serious an issue debt and over spending can be. Not surprisingly, this extends into the sports world…

The Ugly Side Of Soccer

It’s easy to get seduced by the glamour of top-tier soccer. There are no limits to how much teams can spend on players–hence the eye-popping 80-million-pound ($129.6 million) price tag for Cristiano Ronaldo last month. The teams themselves are seen as trophy assets–hence the sale of Manchester City to not one but two gold-plated buyers in as many years, namely Thai billionaire Thaksin Shinawatra in 2007 and Abu Dhabi’s Sheikh Mansour bin Zayed Al Nahyan in 2008.

But there is a dark side that often gets lost amid the frothy deals and front-page splashes.

The glitzy soccer teams of England’s Premier League have seriously big debt piles, and even when chalking up record transfer fees or sky-high ticket prices, their revenues don’t make up the difference. (See “Most Valuable Soccer Teams.”) Although team accounts for the 2008-09 season have not been released, the numbers for 2007-08 show Manchester United’s debts at 699 million pounds–nearly three times the club’s annual turnover–and Arsenal’s debts at 416 million pounds, almost twice annual sales.

Falk Says N.B.A. and Players Headed for Trouble

Still, the signs are troubling, and the sides have rarely seemed so far apart. About half of the league’s 30 franchises are losing money, according to some estimates. Owners want a radical restructuring of the economic system, starting with a hard salary cap to replace the current soft-cap system. The union is in favor of maintaining the status quo.

In his annual All-Star address Saturday, Commissioner David Stern said the league was projecting a loss of $400 million this season, after annual losses of about $200 million in the previous four years. Although he declined to confirm the reported details of the league’s proposal, Stern made it clear that he was indeed seeking a reduction in salaries.

“We’ve shown the players the facts, and our current level of revenue devoted to player salaries is too high,” Stern said. “I can run from that, but I can’t hide from that. And I don’t think the players can, either.”

In concert with labor negotiations, the league is also working on a plan for greater revenue sharing — a measure that the union and many agents have been demanding for some time.

The economics of these sports are complicated but can be briefly summarized. Soccer lacks a salary cap to keep upper salaries in check. In order to compete, the top teams need to sign the best players and often use debt as a means of funding the eventual losses. The lower teams don’t sign the best teams and remain uncompetitive for long periods of time, perpetuating this cycle. NBA Basketball has also seen salary escalation but has a bigger problem of guaranteed monster contracts regardless of skill or performance. MLB is similar due to the incredible power of the players unions. The NFL, meanwhile, has the opposite problem. Player salaries and benefits are minimal, which causes problems for lower contract players later in life when they encounter problems from the harsh realities of the game and can’t afford it.

Sound familiar? It sure does to me. The NFL resembles big corporations failing to take care of their lower paid employees because of a lack of bargaining power. The NBA or MLB resembles the auto industry or public workers where excessive union power pushes compensation beyond the means of their companies or comparable industries (sports). Soccer resembles big finance, where giant top salaries are justified based on the dollars they bring in but still excessive. Another interesting example is excessive salaries in general. Athletes make tremendous amounts of money, and often draw the ire of the public. Compare this to bankers, who have been on a major collision course with public opinion. Both generally justify their salaries by the massive revenues they generate.

The reason I make these comparisons is it’s much easier to understand in sports than a complex business/labor world. While fun and exciting, sports can also be indicative of broad economic lessons. Will the results or consequences be similar? Time will certainly tell.

I’ve long been wondering when the most popular Internet media applications would develop a better platform with television. While Hulu, Youtube, and ITunes have made groundbreaking advances, there’s still a major problem. I really have no interest in watching a Hulu video on my small computer with inferior audio and visual capabilities. If only there was an easy way to hook this up to my television. However, I also don’t want to disable my computer during this process. Inevitably, there would be a way to pull these online media applications directly from the cable source. It appears the first major step is made here…

TiVo Premiere: Blockbuster, Netflix, Amazon on Your TV

TiVo, the box that pretty much changed the way we watched TV, was getting a little old. But that’s OK: The new TiVo Premiere looks like it might do the same thing all over again.

The new, hi-def Series 4 box, the smallest TiVo so far, not only shifts live programming like any other DVR, it also sucks in movies and TV from across the internet, letting you access Blockbuster, Netflix and Amazon content, YouTube and (this is huge) video podcasts. You can also stream music from Rhapsody and listen to radio on Live 365.

In short, the Premiere is the one set-top box you’ll need to access almost any content out there, all with the TiVo features you already know and love. Better still, the Swivel Search feature has been extended to search the internet, so in a few clicks you can track down movies featuring, say, a favorite actor and be streaming them to your TV

Exciting developments! TiVo revolutionized television with their widespread entry into digital video recording technology. Since cable providers were able to use their economies of scope to offer these services in bundled packages at much lower rates. Expect similar developments as TiVo continues to pioneer new technologies.

For all the talk about the power, influence, and positive trends in the nations comprising BRIC (Brazil, Russia, India, and China), it’s always important to examine how they are funding growth. For example, Ireland and Eastern Europe appeared to be among the fast growing economies over the last decade until investors soon discovered it was all a facade of easy money backed by little productivity. The population, land, and resources of these nations are undeniable, providing justice to their exclusion as a separate entity of emerging markets. However, these are not the only factors to consider in evaluating popular investment areas. Poverty, corruption, infrastructure, government influence, and free markets are all important factors to consider. However, in a debt driven world bordering on crisis levels, this will be the attribute to consider most. Let’s take a look…

Moodys:Brazil’s Baa3 Rating Captures Improved Conditions

In its annual sovereign report on Brazil, Moody’s Investors Service indicates that the Baa3 government bond ratings with a positive outlook capture both the material improvement that has been observed in the sovereign credit profile and the presence of favorable medium-term prospects as the country is well-positioned to resume growth at a fast pace.

“Brazil’s performance during the recent global turmoil confirmed its economic and financial resilience,” said Moody’s Vice President Mauro Leos, regional credit officer for Latin America and author of the report. “A short-lived GDP contraction, minimal weakening of the country’s international reserve position and lack of financial stress in the banking system reflect increased shock absorption capacity which is consistent with the government’s investment-grade ratings.”

Moody’s upgraded Brazil’s ratings from Ba1 to Baa3 and assigned the positive outlook in September 2009, incorporating a favorable assessment of policy continuity on the fiscal and monetary fronts.

According to Moody’s, Brazil’s fiscal challenges include a persistent upward trend in primary spending, government debt ratios that are above peer group benchmarks –gross debt amounts to 60% of GDP — and gross financing needs that exceed 10% of GDP.

“The government’s balance sheet has strengthened steadily as an improved debt structure has significantly reduced credit exposure to exchange rate and interest rate risks,” said Leos. “Foreign currency-denominated debt now accounts for less than 10% of government debt, while floating rate debt has steadily declined during the last six years to 33% at year-end 2009.”

Despite a solid economy with excellent performance of late, Brazil still has significant challenges. I think Moody’s assessment is right on, which is interesting considering there are many other sovereign debt situations with better ratings and much more substantial risks. Nonetheless, I remain cautiously bullish on Brazil due to a government seeming to understand fiscal restraint and pro business policy, combined with a fundamentally sound outlook for commodities going forward.

On to Russia…

Can Russia Repay A Debt?

Yet it has been long road since 1998 for Western investors to gain confidence in the Russian economy. Today Russian credit default swaps, which measure the cost of insuring against default, are at 193 basis points over those for Germany, but they soared to a screaming 772 basis points exactly a year ago in the midst of the global credit crisis.

The market was pricing Russian bonds as if the country was about to default, even though it had little or nothing to default against. “The sentiment was negative on Russia, so no one bothered to look at those fundamentals,” says Svedberg.

Such is the nature of the market that Russia’s new bond issue this year could be as much a statement about itself, as it is an attempt to raise money. “It’s a chance to say that we’re stable, and for Russia to show a certain level of confidence in its future,” says Marshall Spectrum’s Kart.

There are other practical reasons why Russia is going to the debt markets, and not just tapping into its $450 billion of foreign currency reserves or borrowing from local banks, to pay down its new budget deficit.

Among other terms, Russia’s so-called Stabilization Fund is only meant to be used to balance the budget when oil prices fall below $27 a barrel. And issuing new treasury bills to domestic banks would risk pushing up local borrowing rates and crimping economic growth. “They want to get foreigners to fund some of their spending,” said T. Rowe Price’s Conelius.

I really like the Russian economy. With the rest of the world at excessive debt levels, it makes news that Russia is even tapping the debt market. This is a telling sign and a major opportunity for Russia. Energy prices are probably not coming down any time soon and investors are enthusiastic about Russian prospects again. Nonetheless, the Russian economy still relies far too heavily on energy prices. We saw what impact that had during its 1998 default and scary 2008 situation. Still, Russia is growing heavily and not from the debt driven reasons seen elsewhere. This is a positive sign for investment going forward.

Next is India…

Indian Bonds Fall as Investors Wary of First-Half Debt Sales

India’s 10-year bonds fell, pushing yields to their highest level since October 2008, on concern the government will increase borrowing in the first half of the year beginning April, when the bulk of debt will mature.

The government will raise a record 4.57 trillion rupees ($99.3 billion) in the next fiscal year, Finance Minister Pranab Mukherjee said on Feb. 26. Debt payments will more than double to 1.14 trillion rupees, of which almost three quarters are scheduled to be repaid in the four months through July, according to the government’s budget.

“Since you have heavy redemptions you have to be prepared for big bond sales in the first half,” said Rajeev Radhakrishnan, who manages the equivalent of $4 billion of debt at SBI Funds Management Pvt. Ltd., a unit of the nation’s biggest bank, in Mumbai. “Yields will be under pressure until the auction calendar is announced.”

Of the economies in the BRIC group, I’m not particularly crazy about India. They have a well educated population and competitive labor force but poverty, poor infrastructure, government corruption, and questionable business public policy. Add these debt problems and I think investors need to choose their Indian plays wisely.

Finally China…

China’s Hidden Debt Risks 2012 Crisis, Northwestern’s Shih Says

China’s hidden borrowing may push government debt to 96 percent of gross domestic product next year, increasing the risk of a financial crisis in the world’s third-biggest economy, Professor Victor Shih said.

“The worst case is a pretty large-scale financial crisis around 2012,” said Shih, a political economist at Northwestern University in Evanston, Illinois, who spent months researching borrowing transactions by about 8,000 local-government entities. “The slowdown would last at least two years and maybe longer,” the author of the book “Factions and Finance in China” said in a phone interview March 1.

Surging borrowing by local-government entities, uncounted in official estimates of China’s debt-to-GDP ratio, is the key reason for Shih’s concern. Harvard University Professor Kenneth Rogoff said Feb. 23 that a debt-fueled bubble in China may trigger a regional recession within a decade, while hedge-fund manager James Chanos has predicted a Chinese slump after excessive property investment.

By Shih’s count, China’s debt may reach 39.838 trillion yuan ($5.8 trillion) next year. His forecast for debt-to-GDP compares with an International Monetary Fund estimate for China of 22 percent this year, which excludes local-government liabilities. The IMF sees Spain at 69.6 percent, the U.S. at 94 percent, Greece at 115 percent and Japan at 227 percent.

Chinese officials allowed lending to explode from late 2008 to fight off the effects of the global financial crisis. In 2009, new loans rose to a record 9.59 trillion yuan ($1.4 trillion).

Because China has such substantial foreign reserves, their debt problems tend to go ignored. Shih’s analysis is intriguing, as Chinese official statistics are generally unreliable. Since China grew at such a tremendous pace, we now see public debt problems, a guaranteed credit default problem in their consumer space coming soon, a property bubble, and an economy dependent on their export sector. Add substantial poverty and the potential for public unrest and China is not the miracle story it is commonly portrayed as. This is why I’m so confused why everyone is so certain their currency will appreciate if left to float. Personally, I want no part of the renminbi in light of the uncertainty of how the currency would respond. Because of their substantial trade surpluses, the currency would probably appreciate in the short term, but I think this trend could reverse very quickly. Without such export dominance and these vast reserves, China’s various holes are ripe for exposure. Long-term, China will grow and eventually become the world’s largest economy. Access to their market will drive asset prices around the globe for a long time to come. I simply prefer Taiwan, Singapore, or the most fundamentally sound Chinese companies because of the substantial risks in China’s macroeconomic situation.

Commercial real estate has long been a danger and now we’re starting to see it hit the mainstream. Let’s take a look…

Kocherlakota Sees Risk of Small Banks Sparking Crisis

Narayana Kocherlakota, president of the Federal Reserve Bank of Minneapolis, said he sees a chance that smaller banks will become the source of the next financial crisis, given their links to commercial real estate.

“Yes, the last financial crisis was centered in larger banks and financial institutions,” Kocherlakota, 46, said in a speech today in Minneapolis. “This hardly means that the next crisis could not come from smaller institutions,” whose ties to commercial real estate “may be exerting a significant drag on the overall economic recovery.”

Kocherlakota underscored the need for the central bank to keep its supervisory powers, saying suggestions in Congress that the Fed no longer oversee small banks show “a dangerous lack of imagination.” The government’s efforts to boost regulation of larger firms will lead to more risk-taking at smaller banks, boosting the odds they’ll trigger the next crisis, he said.

TARP Watchdog Says Commercial Real Estate Loans Pose Danger

Commercial real estate loans have the potential to go sour and wreck the U.S. economy unless regulators prepare now, according to a report today from a watchdog Congress created for the government’s financial bailout program.

The report should be a “red flag” that prompts regulators to increase preparations for staving off another banking crisis, said Elizabeth Warren, a Harvard law professor and chairman of the Congressional Oversight Panel of the Troubled Asset Relief Program. The panel was created in October 2008 to monitor the Treasury’s efforts to rescue the banking system from the worst financial crisis in decades.

Between 2010 and 2014, about $1.4 trillion in commercial real estate loans will reach the end of their terms and nearly half are “underwater,” meaning the borrower owes more than the property is worth, the report said. If economic conditions and tighter lending standards mean that borrowers can’t refinance, “hundreds” of banks could fail and the broader economy could suffer, said the report, which the panel approved unanimously.

Warren estimates half of CRE loans will be under water! While a certain percentage of households may feel a moral obligation to continue paying these types of mortgages, I can guarantee there won’t be too many businesses making that same choice. After only 2 months, we’ve already had 22 bank failures, putting us on pace to match last year’s 140 figure. I think we’ll easily top that amount as the CRE crisis has yet to fully reach its peak. Whether this spreads to the overall economy remains to be seen, however, we should not be listening to the Fed’s inaccurate reassurances this time. This is a serious problem, potentially even greater than the residential crisis. Stay tuned to this one…

Since I had a relatively short post tonight, I thought I’d also share this very interesting video. Enjoy…

Some real controversy brewing courtesy of my favorite Senator…

One Senator Holds Up Bill, in New Level of Gridlock

The Senate tied itself in knots Monday as it tried to get around a single lawmaker’s objection to a spending bill, a showdown that has become emblematic of capital’s partisan gridlock.

Sen. Jim Bunning (R., Ky.) again blocked a $10 billion bill that would have extended unemployment benefits and other programs after halting its progress last week. And on Monday, the impact of his blockade started biting, with the expiration of benefits to 100,000 people and the suspension of 41 transportation projects across the country.

Mr. Bunning is holding things up by objecting to a “unanimous consent” request to advance the bill quickly, a routine maneuver for moving legislation forward that requires all senators to go along.

As the $10 billion measure foundered, Senate leaders began debating another, more than $145 billion bill that would achieve some of the same ends, including prolonging unemployment insurance until year’s end. A vote on that bill is expected by Friday, and lawmakers hope to make it retroactive so that jobless workers would still get their benefits, albeit delayed.

Even so, those who lost benefits might have to reapply, resulting in delays from three weeks to two months, according to Andrew Stettner, deputy director of the National Employment Law Project, a left-leaning advocacy and research group.

Democrats used Mr. Bunning’s move to highlight what they said was a pattern of Republicans gumming up the works on even the most popular measures.

Bunning and the Republicans supporting him here are making a really dumb mistake. First of all, this constant filibuster nonsense is starting to get old fast. All the people that are supposedly jumping on the bandwagon are bound to start jumping off if they decide to completely shut down government. As much as the tea party movement is powerful, people still blame the government for inaction in a bad economy. Even though the public realizes the liberal approach is misguided doesn’t mean they’re willing to do absolutely nothing without a strong narrative why. Blocking jobless benefits of all things is just about the most unpopular thing they can do. This paragraph was an effort to appeal to the one thing Republican’s care about: getting elected.

Now on to the more important things… like whether this is good policy. On this front, I actually agree with Bunning (although I think the appropriate way to express this is simply to speak against it and vote nay). The reasoning is very different, however. Unemployment benefits are an absolute disaster. As we can see, those on emergency benefits are now almost numbering 6 million. This is insane… are we simply going to pay these people to sit at home and do nothing all this time? I’m extremely sympathetic to people who have lost their job and cannot find something new. However, a year without a new job begins to beg other questions. Are these people unable to find jobs because they realistically cannot find something or is it because they have an unrealistic expectation of what jobs should be available and at what compensation. Probably a combination of both, but I would venture a guess that more people fall into the latter camp. I hear plenty of stories about how people feel entitled to a certain job, salary, or benefits. Some hold the misguided belief that they economy is actually in recovery. Others are perfectly content with the government’s check to sit at home with no conditions.

Now let’s assume the government eliminated emergency benefits. I think there would be a much bigger urgency to get a job… any job. Six months buffers the blow of an unexpected job loss and is ample time to find work. Unemployment benefits are typically about $300 a week. At 40 hours a week, you’d simply need about a minimum wage job to make up for the loss. I guarantee there is no difficulty in finding jobs for more than minimum wage. This doesn’t have to be the final career destination, but serves as honest work to get past the tough times.

Like housing or banking losses, the government is simply delaying a bottom with these stalling efforts. I know their intent is noble by trying to help those struggling most. What they don’t seem to understand is the economics of this situation require a lot of distasteful choices. All the people adversely affected in the short-term will be much better off down the road. In 2012, 20% underemployment with slowly declining wages is much worse than 10% underemployment and normal market forced wage declines. This is the choice as I see it. Rather than pretend things are okay and be worried about 2010 and 2012 elections, maybe we should start getting realistic and making these difficult choices now. Bunning is on the right track and is noble to put his foot down on more government “solutions” but he’s going about it the wrong way and not citing the correct reasons behind his decisions.