Personal Bankruptcies Soar

Personal bankruptcies have skyrocketed lately. Is anyone surprised? The primary reason is not Katrina or Rita as some might think, although I am sure hurricane floodwaters pushed quite a few over the edge. The real culprit is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

Following are some of the highlights of the bill.

1) Before anyone can file bankruptcy under the Bankruptcy Reform Act, they must receive a certificate from an approved non-profit credit counseling agency that states that they have received a briefing on opportunities for available credit counseling and have been assisted in performing an individual budget analysis. The legislation mandates that the agencies offering the counseling be nonprofit in nature, such as the Consumer Credit Counseling Service of America (CCCS). But according to Jeffrey Morris, resident scholar at the American Bankruptcy Institute, the amount of time necessary to complete the counseling may take debtors away from work, which would put the struggling debtor even farther behind.

2) A small but vitally important part of the 500-page bill is the six-page section dealing with a "means test." The "means test" is the system by which the IRS determines who can legitimately file for bankruptcy and who cannot. The test is a rigorous process involving examination of the debtor's income and expenses, calculations as to whether or not their expenses meet the standards of their area, and judgments relating to whether or not they genuinely qualify for a Chapter 7 filing. If the combined gross income of your family is greater than the median family income in your state, you may be required to file a Chapter 13 repayment plan where you repay a percentage of your debts over a 36-60 month period, and not allowed to file a traditional Chapter 7 bankruptcy where your debts are eliminated. The "means test" is an inflexible standard designed to leave no leeway for debtors to abuse the system, but in the process it is bound to penalize a great many people who have fallen into bad circumstances through no fault of their own.

3) If required to file a Chapter 13 under the means test, your monthly expenses will be compared to the IRS National and Local Standard Expense guidelines. The Bankruptcy Reform Act strictly limits the amounts you can claim as expenses.

4) Another provision of the bill places the burden of proof for bankruptcy on the debtor's lawyer, requiring the attorney's signature on the petition and verification that they have investigated the claim sufficiently and found it to be solid. Many lawyers will demand their fees up front, or they will decide the case isn't worth their time.

Back in April I chimed "Anyone currently on the edge will be best advised to file for bankruptcy BEFORE this bill takes affect in October. There is an incentive now, if at all in doubt to file now and get it over with. I expect a dramatic increase in bankruptcies before this bill kicks in."

Well Surprise, Surprise, Surprise. Here we are with bankruptcy filings soaring as the October 17th deadline looms. The following chart says it all.



Thanks to The Washington Post for that chart. Let's tune in to what the article is saying:

Two weeks before a new, more restrictive national bankruptcy law goes into effect, financially strapped Americans are rushing to file for protection from their creditors, with filings climbing to an unprecedented average of 13,000 a day last week.

Week after week records are toppled. Last week's 68,287 filings surpassed the record set the week before by 24 percent, and this week's total is likely to be higher, according to data released yesterday by Lundquist Consulting Inc., a financial research firm. Daily filings averaged 10,367 in September, compared with an average of 6,079 in September 2004.

The surge is in anticipation of the new bankruptcy law, long sought by the financial industry, which takes effect Oct. 17. The law will make it harder and more expensive for people to completely wipe out their debts under Chapter 7 bankruptcy.

"We are seeing a rush, mainly from people we saw a year ago," Northern Virginia bankruptcy lawyer Robert Weed said. A year ago his clients thought they would be able to work their way out of debt without filing for bankruptcy, he said, "but now they're in a panic to get in before the law is changed."

The Charlotte Business Journal is singing verse two of the same song. Let's take a look:

It's boom time for bankruptcy in the Charlotte region. But it's hard to find a personal bankruptcy lawyer who's happy about it. "We're scraping by with as little sleep as possible," says Susan Robicsek, a solo practitioner who does bankruptcy work for individuals. "The number of calls is staggering."

"We are seeing some people who say, 'I have heard it will be hard for me later, so I will go ahead and file now,'" Robicsek says.

The increase in filings began in the spring, when Congress approved the provisions and President Bush signed them into law.

Cases filed in the three divisions of the U.S. Bankruptcy Court covering the 12-county Charlotte region are up 25% from a year ago. As of Tuesday, 4,110 Chapter 7 filings have been made in the region this year, up from 3,127 by that point in 2004.

"I'm getting very close to booked up -- and very tired," says Dave Badger, dean of bankruptcy lawyers in the region.

The new bankruptcy rules were more than a decade in the making. Pushed largely by the credit card and banking industries, it seeks to curtail the use of personal bankruptcy to wipe out debt.

The law imposes a means test to determine who can file for Chapter 7. And it authorizes judges to penalize individuals and their attorneys if they file but don't qualify.

Other requirements include a six-month counseling period before filing.

The means test attempts to determine how much of a person's income goes to essential living expenses. If an individual has enough left after those expenses to pay 25% of unsecured debt, and the person makes more than the state's median income, the individual cannot file for Chapter 7.

Experts predict the rush in filings will end abruptly after Oct. 17. But the filings will rebound, Robicsek predicts. The economy, she notes, has been difficult for many working people. Gas prices are high. Layoffs have been frequent. Many have been forced to take lower-paying jobs than they had in the past.

"You can change the law, but the problems underlying a decision to file bankruptcy don't change," she says.

Indeed. That last sentence says it all. It’s also why I have a hard time feeling sorry for credit card companies with interest rates of 30% and fees for damn near everything bitching about not collecting every last penny from people they have no business lending to in the first place. Profits are at record levels but greed has been insatiable. Yes, some people have taken advantage of the system, but the bulk of filers have been those hit with huge medical bills, the loss of a job, or nasty divorce proceedings. Bush's "ownership society" striving to make second class citizens out of renters has not helped, nor have teaser rates on loans. With the economy slowing there will be another rush of filings next year in the aftermath of Katrina and Rita and the bursting of the housing bubble.

The idea behind the law is simple: to make debt slaves out of people forever. With that in mind, I have been thinking about ways the "means test" could backfire. Without knowing the legal specifics, it seems one way to pass the test is to make sure you have no job and no income when you file. I believe it's easy enough to get fired if you need to. Cap off the loss of a job with a six month mandatory counseling period during which lots of expenses are racked up, and writeoffs just might increase, not decrease as a result of the bill. I also think the law will backfire in another way. Anyone going thru this process will think twice about unnecessary expenses and credit card purchases for a long, long time. That of course is a good thing, except of course for the greedy credit card companies thriving on usury and absurdly high fees.

Bottom line: I think the credit industry slit their own throats with this bill, in more ways than one. Except for the additional suffering incurred by someone trapped with huge sudden medical expenses, that is just fine by me.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/p

Focus on Autos

MarketWatch is reporting Ford's SUV sales halved in September.

Ford Motor Co. reported Monday that sales of its traditional SUVs plunged 51% in September, as consumers continued their mass exodus from the thirstiest vehicles on the road amid record gasoline prices.

Overall, Ford turned in a 19% decline in U.S. sales last month to 228,157 cars and trucks. Crossover and passenger car sales actually improved, but not nearly enough to make up for the steep decline of its bulkier SUVs.

Sales of the Ford Explorer and Expedition were both off about 60% from a year ago while the much smaller Escape, which is available with a hybrid engine, shed only 4%.

And the trend doesn't appear to be going away anytime soon, according to Steve Lyons, head of Ford North America sales.

"Traditional SUVs will continue to face headwinds in the coming months," he said, adding that customers did most of their buying in the summer months when employee discounting sparked an industry-wide sales boom.

Sales of the top-selling F-Series truck fell 30% to 69,643.

Ford was not alone with SUV woes. General Motors SUV and pickup truck sales were down by one third. Now that sounds pretty bad to me. I would assume it would sound pretty bad to everyone but that is not the case. GM sales analyst Paul Ballew described sales as pretty comforting.

"I would describe final industry results as actually pretty comforting," said GM sales analyst Paul Ballew. "We're still waiting for a portion of the industry to report, but from the estimates we have, as well as what's been released to date, the industry right now is at or above our expectations heading into the month."

General Motors posted a 24% decline to 349,202 vehicles. Car sales fell 14.5% while truck sales plunged 29.5%.

Some of the biggest decliners included the Cadillac Escalade ESV, down 39.5% and the Chevy Suburban, off 56.6%.

The world's top automaker blamed a tough comparison to last year when it was promoting zero-percent financing. The diminishing effect of its employee pricing plan was also a factor, GM said.

GM is looking for its new GMT900 lineup, due out next year, to boost sales in the sluggish SUV segment.

It does not take much to get these guys excited does it? Since when is a 33% decline in sales anything to take comfort in? While GM is ramping up production of SUVs, Toyota and others are ramping up production of hybrids like Prius.

Toyota Q1 profits jump 28.8%.

This is what Toyota is doing: "Starting in the April-October 2005 period, Toyota plans to increase its production capacity of its popular hybrid Prius vehicles by 50 percent to 15,000 units a month from the current 10,000."

Yes those are Q1 profits but I am looking for forward strategy and leadership. Toyota seems to have it. GM and Ford do not. This is just a hunch, but with soaring gasoline prices I bet those hybrids do very well.

Mish, is that the extent of GM's problems? Hardly. Let's summarize all of the problems I can think of off the top of my head.

1. Falling sales
2. Enormous debt
   
3. Union strife
4. Delphi and supplier problems
5. Cost disadvantages vs Toyota to the tune of several thousand dollars per car
6. Piss poor management
7. Poor quality vs. foreign competition
8. Lack of industry vision
   
9. Medical benefit problems
   
10. Pension woes

Those were the problems that came to mind in about 15 seconds flat. There are probably more.

Mish, didn't GM say their pension funding problems were solved and they were fully funded? Yes they did. Unfortunately G.M. and a U.S. Agency See Pensions in Different Lights.

The federal government contends that General Motors' pension fund is $31 billion short of what it owes its work force, according to closely held government data, a figure in stark contrast to G.M.'s assurances that its pension plans are "fully funded."

The government's finding of a huge imbalance suggests that the pension fund may have much larger claims on the company than G.M.'s financial filings have indicated. It was calculated by the Pension Benefit Guaranty Corporation, the federal agency whose job it is to insure employee pensions if a company fails to meet its obligations.

Both the government agency's and G.M.'s methods of tracking pensions are legally acceptable, and their ability to produce such widely varying results shows the difficulty that employees or shareholders have in trying to ascertain the true condition of a corporate pension fund. But the disparity in such estimates has grown increasingly important as some large companies like United Airlines have gone bankrupt, leaving the agency, which took over United's pension plan, with far greater unfunded obligations than previously thought.

The discrepancy between the government's and the company's figures is the result of different assumptions made about how long G.M. would keep operating the pension fund. The federal guarantor made its estimate on what is called a termination basis - it measured the amount that G.M. would owe its workers if it were to terminate its pension plans immediately. G.M.'s calculation that its pension plan is fully funded assumes that the fund will keep going, rather than being ended.

Since 1994, companies with weak pension funds have been required by law to calculate the value of their pension funds on a termination basis and to send the information to the pension guaranty agency. But Congress also enacted a measure keeping the information secret, in response to the stated concerns of companies, who argued that the information could be misconstrued if shared with the public.

The pension agency did not release G.M.'s own estimate of its pensions on a termination basis, which continues to be secret. G.M. said it sent its most recent calculation to the agency about a year ago. The agency made its own calculation at the end of June and released the figure in response to a request under the Freedom of Information Act.

In response to questions about the federal agency's calculation, G.M. released a statement saying it considered it "unrealistic and not indicative of G.M.'s ability to provide future retirement benefits."

"G.M. takes its pension obligations very seriously," the statement continued. "The corporation has contributed more than $56 billion over the last 12 years to fund our pension plans and meet our obligations to our current and future retirees."

Now I don't know about you, but I have a problem taking seriously a company that is comforted when sales decline a mere 33% while banking on selling more SUVs with soaring gas prices. The article continues in explaining the discrepancy. Let's tune back in.

G.M.'s pension fund is actually made up of two big plans, one for salaried employees and one for hourly workers. At the end of 2004, G.M. reported that the two plans had total assets of $91 billion, and total benefits owed of $89 billion, for a surplus of $2 billion.

The government's calculation involves a variety of different assumptions about the future value of benefits the company owes. Terminating the fund means workers would no longer build up any new benefits, and G.M. would no longer provide cash from its continuing operations. But someone - either the government or an insurance company - would still have the obligation to pay all retirees the benefits they had earned, on schedule, in the future.

(Companies with plenty of money can also terminate their pension plans by paying an insurance company to take over the obligations. In G.M.'s case, the government estimated that an insurer would charge $31 billion in addition to the money in the fund.)

The government says its figure gives the more truthful picture of the plan's condition. The current pension accounting standard specifically cites the Pension Benefit Guaranty Corporation's method as "appropriate."

But most companies have resisted using the termination method, both because it can make their pension plans look very weak, and because they say they do not intend to end their plans. Business groups say that reporting pension values on a termination basis would needlessly alarm and confuse employees.

But as big corporate bankruptcies and pension plan failures accelerated in the last few years, weakening the entire pension system, a small but growing number of economists, accountants and government officials began to take the position that companies with low credit ratings - like G.M. - should be required to disclose the termination values of their pension plans.

Labor Secretary Elaine L. Chao called for such disclosure in a speech in January. Access to the termination data, now secret, would "empower workers, investors, regulators and the public," Ms. Chao said.

"The goal is to ensure that the assumptions that go into measuring a plan's liability better reflect whether or not it will be terminated."

United Airlines, for example, kept reporting its pension values on the usual, continuing basis, even in its third year of bankruptcy, when it was no longer making the minimum contributions required by law and it was clear that termination was inevitable. On this basis, United, a unit of the UAL Corporation, reported a $6 billion shortfall as of the end of 2004.

But when the government agency finally took over the plans this year, it recalculated them on a termination basis and found a total shortage of $10.2 billion. United's work force and the Pension Benefit Guaranty Corporation will bear that shortage.

The article said that the PBGC will bear any shortages. That unfortunately is not entirely accurate. The PBGC is just an arm of the Federal Government. Pension shortages when a company goes under will be covered in one of two ways.

1. Reduced benefits
2. Taxpayer bailouts

When it comes to GM, I expect both to happen. An existing law due to expire in December let companies get away with murder on their pension assumptions. Presumably it was enacted to help companies tide themselves over while the "recovery" was gaining traction. Well here we are with a recovery that seems all but dead just as we are about to head into the recession of 2006. By postponing the problem, all we did was make things worse. I guess we will now see if Congress has the guts to mandate full funding of pension plans on a conservative basis as well as change the rules for pension accounting as applied to corporate quarterly earnings statements or if it will kowtow once again to industry lobbyists.

In the meantime, anyone working for GM that has a chance at an early retirement and a lump sum pension payout might wish to talk to a financial advisor about taking it. I remain convinced that GM is headed towards bankruptcy unless and until they confront that mammoth list of problems head on. I see no reason to believe they can or they will.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com

Farm Subsidies

I was encouraged to see US trade chief offers to cut farm subsidies at the Doha round of trade talks currently underway in Zurich. Let's take a look:

Rob Portman, the US trade representative, offered to eliminate farm export subsidies by 2010, the date demanded by the Group of 20 developing countries and some European leaders, including Tony Blair, the British prime minister.

Mr Portman also agreed to cut those domestic farm subsidies believed to distort world trade by 60 per cent, higher than the 55 per cent reduction the EU was demanding from the US. Bob Stallman, president of the American Farm Bureau, recently said the US should not go beyond 50 per cent.

The US also suggested halving a ceiling agreed last year on those farm subsidies regarded as less distorting of trade. The cut, though it meets a demand from development campaigners such as Oxfam, would still allow the US to retain its controversial “counter-cyclical payments”, which compensate farmers for low prices.

“The US offer is conditional on other countries reciprocating with meaningful market access commitments and subsidy cuts of their own,” Mr Portman says. The US proposals are designed to put the ball back into the EU's court by offering cuts in domestic farm support and ending export subsidies a key demand of Peter Mandelson, Mr Portman's European counterpart.

I thought that was at least "a start" for some kind of progress but I received this reply from Harmy on the Motley Fool:

The US has made the same offer in the past and I'm a complete cynic when it comes to making grandiose gestures which this is. The US and the EU will only break down their protectionist regimes brick by brick and stone by stone over decades of haggling. The one and only way real progess will be achieved is by the rest of the world by-passing both the US and the EU trading blocs and setting up their own trading regions which is already starting to happen. Only then will it may dawn on these two dinosaurs that their protectionist policies are an anachronism in today's global economy.
Regards
Harmy

My friend Steve offered these comments:
Here's the key phrase: "....would still allow the US to retain its controversial 'counter-cyclical payments' which compensate farmers for low prices".
Best of both worlds. The red state farmers get the same prices as if their export sales were still artifically increased by government subsidy, while the food processing industry reaps the benefits of the reality of crashing prices due to collapse of food exports. The government will just borrow a few hundred billion more from the Chinese to pay for it all.
Steve

I guess I should have known better. Once again it seems the odds are long that this is just all talk and no action. When is the last time progress was made in any trade talks that included Japan, the EU, and the US?

The French were sure quick to bash the idea:

Dominique Bussereau, the French agriculture minister, has gained the signatures of 13 of the EU's 25 member states, including Italy, Ireland and Spain, on a memorandum insisting that Brussels trade negotiators consult with them before offering any farming concessions in the Doha talks. His memorandum, seen by the FT, says: “The task is not to negotiate a date for the elimination of our export subsidies, but a period of implementation for what is a conditional concession.”

Can someone tell me what the hell "a period of implementation for what is a conditional concession" exactly means? On that note, Mish just received a telepathic answer from Harmy. Here is the real time telepathic translation of what the French agriculture minister is actually saying: "Postpone Forever".

Mish, what does Japan think about all of this? Once again enquiring Mish readers deserve answers. No translations from Harmy are required for this one. Let's take a look:

Japan: US trade proposals no basis for talks.

Japanese Agriculture Minister Mineichi Iwanaga on Monday said U.S. proposals to kick start the stalled Doha Round of global trade talks were not acceptable and that Japan and other countries would offer an alternative plan.

Iwanaga said that the U.S. plan revealed earlier on Monday would have required that Japan and the European Union make deeper cuts to their domestic farm aid programs than the U.S. itself would be forced to make under the plan.

"Japan is not able to accept the U.S. proposal of domestic support as a basis for further discussions," Iwanaga said through an official translator.

"The reductions which are being asked of Japan and Europe are out of balance with the reductions that the U.S. is ready to make," he said, speaking on the sidelines of a ministerial meeting in the Swiss business capital of Zurich.

Well that's pretty clear at least. I am grateful because my telepathic connection with Harmy went offline right after that last brief message.

Following is a chart of crop supports and income for corn, cotton, rice, soybeans, and wheat:



Can someone tell me why we are even attempting to grow rice here?
Should we really be encouraging such foolishness?

Following is a chart showing how much money the government is wasting on price supports.



Both of the above charts are from Monitoring Agri-trade Policy.

Following are a few snips from that article.
Mish note: The article seems rather biased in favor of the EU vs. the US.
That said, its summation of the problems in the US seems accurate enough.

Current U.S. farm policy is built on a bewildering array of complex mechanisms, described using a series of acronyms that are every bit as cryptic as the oft-criticised vocabulary that the EU and others use to describe their farm policies. ‘Counter cyclical payments’ and ‘loan deficiency programmes’ give as little away outside the States as ‘modulation’ and ‘cross-compliance’ do outside Europe.

Loan deficiency payments: Introduced under the 2002 Farm Bill, these are a farm income safety net mechanism that makes up the difference between the loan rate and the actual market price, thus allowing producers to sell at a price that could be well below the per unit revenue they receive.
Expenditure on LDPs rose from negligible levels in 1997 to over $8 billion in just three years, and far from balancing supply and demand, one of their key features is that they actively provide the incentive to continue planting, even when prices fall, because of the generous levels of compensation they provide. This contributes to over-production, suppressed prices and a complete dependence on the LDP system.
As one American commentator put it, “the irony of the entire loan deficiency payment rests in itself. Low prices exist because of loan deficiency payments. It is all a sort of ‘catch 22’ that is fostered by our current farm programme. Farmers are caught in a system that is chasing its tail.”

Perhaps also guilty of creating a ‘catch 22’ situation are counter-cyclical payments (CCPs), introduced into U.S. farm policy under the 2002 Farm Bill to replace the former ad hoc Market Loss Assistance (MLA) payments. Like loan payments, they too were introduced as a safety net (or additional safety net) income stabilisation mechanism that makes up the difference between low commodity prices and target prices (which the loan programme does not cover).

Is the US content to propose reforms that it knows will not be accepted elsewhere?
Is that all that is really going on with these trade talks?

For whatever reason, progress is sure slow in coming on agricultural trade issues.
With the criticism coming from Japan and the EU over the latest proposals it looks like another year may fly by with no progress being made. In the meantime the US is wasting billions of dollars on crop subsidies. When does it all end?

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

The Wisdom of Richard Fisher

Back on June 13 in Stupid Comments by the FED, we took a look at (and blasted) some comments made by Richard Fisher, president and CEO of the Federal Reserve Bank of Dallas, and a new member of the FOMC.

Here is a short recap:

• Where would the world be if Americans did not live out their proclivity to consume everything that looks good, feels good, sounds good, tastes good?
• We provide a service for the rest of the world. If we were running a current account surplus or trade surplus, what would happen to economic growth worldwide and what would be the economic consequences? So I think we are doing our duty there.

Those quotes will likely go down in history as some of the dumbest things a FED governor have ever said. This guy is really quite amazing, and he is seriously challenging $Ben "Helicopter Drop" Bernanke for all time stupid FED comments.

Back in June Fisher was talking Baseball when he made these comments:

"I think we've room to tighten a little bit further but the U.S. central bank is in the eighth inning of its tightening cycle and entering the ninth, and usually final, inning this month."

Fisher was yapping again today, October 4th, and given that the baseball playoffs recently started I was hoping for some hot baseball tips. Specifically I wanted to know his opinion on the Chicago White Sox vs. the St. Louis Cardinals. From what I have seen, his opinions on baseball can not possibly be any worse than his economic thoughts as a FED governor.

Given that we were in the 8th inning in June and have had two more rate hikes since then, it seems clear to me we are now in "extra innings". Surely something exciting as extra innings should deserve some kind of comment but alas none came. I was distraught when Fisher could not muster up a single comment about what inning we are in.

Instead of baseball, Fisher was yapping about football. "I traveled to College Station this weekend to watch the Aggies eke out an overtime victory against the Baylor Bears. Before watching those two teams from storied Texas universities go at it hammer and tongs, I spent a couple of hours with the Aggie Corps of Cadets. After the game, I heard that the Texas Longhorns had walloped Missouri.".

Those comments came when Fisher spoke before The Greater Dallas Chamber Economic Forum. He also offered A Perspective on the Economic Outlook. Let's tune in to his economic outlook:

From an economic standpoint, Katrina and Rita have left their marks on Texas. Some state firms lost inventories. Others lost customers that were in the supply chain for the impacted area. The state budget has also taken a hit. A total of 265,000 evacuees fled to Texas, and many have no home to return to. More than 45,000 evacuee students have enrolled in Texas public schools—about 1 percent of total Texas enrollment. Another 10,000 to 15,000 students may be in the pipeline. The fiscal burden for evacuees in public schools could be $335 million to $432 million, assuming the evacuees remain in Texas for the entire school year.

Other negatives for Texans include increases in the costs of doing business. Rebuilding efforts will push up prices for construction materials. Many industries are likely to encounter higher fuel, freight, utility and transport costs—a heavy burden for those sectors, like airlines, already facing hardships. Consumers will have to pay more for winter heating bills and possibly gas at the pump, so they may have less to spend at retail stores and restaurants.

Yet, even with these drags on the economy, it appears that the hurricanes’ net effect will be slightly positive for Texas.

Obviously Fisher is yet another proponent of the "Broken Window Fallacy". If two hurricanes were good for Texas, three must be better. Right? Perhaps Fisher believes the real problem with Rita was that it did not break enough windows. For those not familiar with the concept, I highly recommend reading the Parable of the broken window.

At this point I must issue a staunch warning to my friend and fellow Daily Reckoning writer, the Mogambo Guru. Mogambo, if per chance you are tuned in I have a duty to tell you to have a stiff drink (or three) before reading any further. I would hate to be responsible for causing some kind of Mogambo Consternation.

With that warning, Fisher went on to say:

• The Federal Reserve has staunchly resisted monetizing deficits for more than a quarter century, and I feel strongly that it can ill afford to monetize them today.
• I will never vote to monetize fiscal profligacy. And while I never speak for my colleagues, it is my distinct impression that none of them will do so either.
• When it comes to accommodating inflation, central bankers everywhere have become, to quote my late, great father-in-law, Jim Collins, "tighter than a new pair of shoes".
  

The FED has staunchly resisted monetizing deficits for more than a quarter century?! The FED has been "tighter than a new pair of shoes"?! Is that tightness what brought about a parabolic increase in money supply and 1% interest rates? Is this clown serious?

Fisher did make two comments that are totally 100% believable:

• Five years ago, Chairman Greenspan told his colleagues at the FOMC that Information Age technology had begun rewriting the operations manual for the economy. "We really do not know how this systems works," he said. "It’s clearly new. The old models just are not working."
• I believe the same can be said of globalization today: We really do not understand how globalization works.

Finally, I leave you with these Fisher comments:

• No government anywhere in the world can go on taxing and spending as if it is still operating in yesterday’s economy. If the United States is to remain an economic colossus, its fiscal authorities, like its central bankers, will have to become paragons of prudence and restraint, implementing policies that will put the nation in a position to bolster, not hamper, its competitive edge.
• The FOMC has taken note of the fiscal situation, as shown by this pre-Katrina passage from the released minutes of the Aug. 9 meeting: “Few signs were evident that greater fiscal discipline in the budget process would emerge any time soon.”
  
• Business is risky enough without the additional uncertainty created when a nation’s unit of account—in plain language, its money is undermined.

Truer words were never spoken but unfortunately the evidence is clear that Fisher has no idea what he even said. Our money right now is undetermined, backed by nothing and printed at will. Congressional spending is running amok and the purchasing power of the US dollar is based only on the faith of those willing to accept it.

It is clear to me that Fisher was arguing for a return to the gold standard.
Unfortunately he doesn't have the slightest clue about what he was really saying.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Will the Housing Bubble Fizzle or Pop?

The S&P reports Regional Housing Bubbles Vulnerable, then asks the follow up question: Will they fizzle or pop? Let's have a look.

With housing prices continuing to outpace both income and inflation from coast-to-coast, it is hard not to see a housing bubble, according to a comprehensive report published today in Standard & Poor's CreditWeek. The report looks at the implications of the bubble for builders, bankers and owners in the US and abroad, as well as in the structured finance and REITs markets, from both the credit and equity perspectives.

"If the past is a guide," says S&P Chief Economist David Wyss, "home prices in the U.S. are less likely to crash nationwide than to stop accelerating and then stabilize until incomes catch up with unsustainably high mortgage debt. This happened after home price spikes in the late 1970's, and again in the late 1980s. The coming rebalancing period could last half a decade, because it will take a 20% correction nationally to restore the normal ratio of home prices to income."

Echoing a similar theme abroad, Standard & Poor's senior economist in Europe, Jean-Michel Six, forecasts an orderly slow down in house price inflation in Europe, owing to a combination of demographic, financial, and structural factors, with a soft landing likely in the UK and near-term overheating in Spain.

"While the overall outlook may be reasonably benign," Mr. Wyss continued, "there's a regional danger: the possibility of deeper, more disruptive corrections in the most overvalued markets. In urban areas on both coasts, for instance, housing costs have risen 30% or more above the normal home price-to-income ratio - all the more alarming considering that in these regions this ratio was about twice the U.S. average before prices soared. This could make such places particularly vulnerable to economic shocks or rising interest rates."

The economists at the S&P seem to be parroting the consensus view:
1) The overall outlook is benign
2) There is no national housing bubble
3) There are indeed regional housing bubbles
4) There will be a housing soft landing in both the UK and the US
5) The only real problem is in the most bubbly areas on the coasts

Wyss did attempt to give himself an out by mentioning a "possibility of deeper, more disruptive corrections in the most overvalued markets" but his overall "benign" view seems to me to be the equivalent of the "permanently high plateau" theory. It is based on his interpretation of "prior history" but more importantly on a belief in rising incomes. "If the past is a guide, home prices in the U.S. are less likely to crash nationwide than to stop accelerating and then stabilize until incomes catch up with unsustainably high mortgage debt."

Well judging from the experience in Japan, if past history is any guide, US home prices will sink for the next 18 years. Since there are differences between Japan and the US let's instead focus on the income side of the statement.

Are incomes likely to catch up to "unsustainably high mortgage debt"? I think not.

• We are losing manufacturing jobs.
• We are outsourcing technical jobs.
• We are gaining service jobs at Walmart, Pizza Hut, and retail outlets.
• Pension plans are going under (United Air, Northwest Airlines to name two), and auto pension plans at Ford and GM are under attack.
• 50% of the jobs gained in this recover were related to housing expansion. What happens to those incomes if housing so much as slows?
• Will pay raises at Walmart catch up with mortgage debt? When?
• What about rising energy costs and peak oil? When will wages catch up to those costs?
• What about those on ARMs whose mortgage costs will start rising dramatically in 2006 and 2007 from low teaser rates?
• What about rising property taxes and increased medical expenses, or does the S&P suggest that such items are not a concern?
  

Mish wonders what the economists at the S&P are smoking when they think that rising wages will catch up to the absurd home prices in the bubble areas in any sort of likely "soft landing". We are three years into a recovery and real wages in general are still declining. Demand for housing as suggested by rising inventories is now slackening at the same time. Demand for gasoline even seems to be recently declining. What about real estate sales commissions if home sales even modestly decline? What about other sales commissions if retail spending slackens? Is Wyss aware that there is an 18-1 or 20-1 wage differential with China that is putting pressure on jobs, wages, and benefits? Under what logical scenario will overall wages finally start rising now, this far into a recovery? The only way I can see wages rising is if the bubble keeps inflating. All that would do would be to postpone the problem and make it bigger in the long run.

Note too, that the S&P also seems to be discounting the affects of Katrina as well as any upcoming recession. Perhaps the economists at the S&P think that the spend and spend policies of this Congress and this administration have forever eliminated the business cycle as well. Who knows? Whatever they are smoking sure is powerful stuff.

I do not buy this "permanently high plateau" nonsense or any talk of a miracle "soft landing" either. Nor do I accept that the business cycle has been defeated and there will be no more recessions. The next consumer led recession is going to be a doozie and along with it will come a severe strain on home prices. The upcoming correction is likely to be dramatic in terms of price action or length of time or both. It may come about as a very long painful slow leak (the Japan scenario), or some sort of faster price crash. I think the latter is the most likely scenario, perhaps in a sloping stairstep fashion. The least likely ending is the widely held fairy tale belief that wages keep rising, jobs will be plentiful, the business cycle is defeated, and "everyone lives happily ever after".

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/

Strong September ISM?

CBS Marketwatch reports ISM factory index up in September. Hurricane Katrina sparks higher prices and new orders.

Instead of depressing activity, there was a rush of new orders from manufacturers concerned about losing supplies. In addition, prices shot up as those manufacturers appeared willing to pay top dollar for the goods they needed.

The ISM index rose to 59.4% in September from 53.6% in August. Read full survey. This is the highest level since August 2003 and well outside of expectations.

The consensus forecast of estimates collected by MarketWatch called for the index to slip to 52.1 % in the wake of Katrina. See Economic Calendar.

Economists were cheered by the headline, which they said alleviated some concern about the national impact of the two hurricanes that struck the Gulf Coast in the past two months.

"This data supports the Fed's view of Katrina," said Drew Matus, economist at Lehman Brothers.

The Fed said Katrina would only have a near-term impact on growth, and officials have been warning the market that the Fed is committed to hiking rates at a measured pace.

Were those strong ISM numbers for September? The Marketwatch headlines would have you believe so. Mish, is there another explanation? Yes indeed there is and the article mentions it but beats around the bush. I can sum it up in a single word: hoarding. Let's take a look.

But the ISM said some of the surprising strength might be temporary as it represented a scramble of manufacturers to maintain a steady stream of supplies.

Norbert Ore, chairman of the ISM survey committee, said Katrina sparked new orders as manufacturers sought to lock in materials that they feared might become in short supply. In some instances, manufacturers had to place two or three orders to get their regular supply.

The new orders index rose to 63.8% in September from 56.4% in August. The price index soared to 78% from 62.5%.

Fearing a short supply, factories locked in supplies at soaring prices.

The bond market reaction to these numbers may force yet two more rate hikes out of the FED this year. Consumer sentiment is already in the gutter and consumer sales are slowing. SUV sales are anemic. It is unlikely that additional rate hikes are going to lift consumer sentiment any. The question remains whether or not this hoarding is going to prove warranted based on forthcoming demand. I believe it is not.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com

Faith Based Financing

Bill Fleckenstein is reporting Empty houses, falling prices, and the end of a boom. For one homebuilder it seems that "Faith Based Financing" has gone to hell. Let's take a look at what Bill Fleckenstein is saying:

You can see how the housing bubble is bursting in places like Columbus, Ohio, where builders and lenders threw common sense away and enticed people to buy homes they couldn't afford.

In June, I suggested that Time magazine's cover story, "Home Sweet Home: Why We're Going Gaga Over Real Estate," might be signaling the peak. It's looking more and more like June was the peak (witness last week's disappointing new-home sales, pre-Katrina), as various problems begin to surface around the country.

Turning to one such place, I am indebted to a reader of my daily column, who forwarded a copy of the Sept. 19 Columbus Dispatch. It ran a thorough article on the plight of a couple in the Galloway Ridge subdivision in suburban Columbus and also shed light on some financing techniques that get folks into trouble. The article, "Suburban Blight," singled out Dominion Homes (DHOM) for enticing people to reach too far. Allow me to share a few quotes:

"Big dreams filled Rick and Christy Alonso when they bought their new house from Dominion Homes. Start a family. Build equity. Move to a larger house. But six months later, their suburban neighborhood on the Far West Side began to deteriorate. New houses suddenly emptied. Thistles and dandelions overran lawns. Neon orange labels appeared in windows, signaling foreclosures."

"Nearly a third of the Franklin County houses and condominiums built since 1998 that have been listed for sheriff's sales involved Dominion buyers." Further, the company is cited for its loan violations: "In 2002 and 2004, HUD randomly selected 42 Dominion loans and found violations in 22 cases, some of which had more than one problem."

Sometimes folks who are on the innocent side wind up getting hammered. (It's not always greed that leads to destruction. Often, just being naive will do it.) Though the Alonsos hadn't planned on spending more than $140,000, a Dominion salesman showed them how they could buy a house for $189,900, of which they financed $187,500. The family was able to shoe-horn into the loan with a creative financial package.

Meanwhile, the Alonsos were given a low estimate for property taxes, and when they got their first payment notice, the tax increase really stung: "'I about croaked,' said Mrs. Alonso." Of course, increasing property taxes hurt their neighbors, too. As of a month ago, 10% of the houses in the Galloway Ridge development, were either in foreclosure or had gone through foreclosure.

The Alonsos now find themselves with a house that cost $189,900 in 2001 and now can't be sold for that price. The real-estate agent has told them that if they really wanted to sell it, they'd have to knock off about $30,000 from the asking price.

"Homebuilders across the country, including Dominion Homes, have found a way around a Federal law barring sellers from giving money directly to buyers for a down payment. They route the money through charities such as the Nehemiah Corp. of America, a faith-based group in California. Nehemiah provides down payments for both existing and new homes, and its relationship with Dominion is the largest of its kind in central Ohio between a builder and charity.

"Nehemiah uses a loophole in federal regulations that allows charities to provide the 3% down payment required to qualify for Federal Housing Administration mortgages. An uncounted number of copycats have followed, leading to an explosion of 'zero-down' loans. Federal authorities do not regulate or track such organizations."

The real question that Fleck does not address is whether or not Dominion Homes purposely overpriced houses then found unwitting buyers by providing minimal down payments. If you jack prices up enough, a "free" down payment is no bargain. To be 100% clear, I am not accusing Dominion of doing that. For all I know Dominion builds the best homes on the market for the prices given. However Dominion (and every other homebuilder for that matter) leaves themselves open to such questions by providing down payment assistance. Is this akin to 30% off sales where prices are raised 30% before the sale? I certainly would like to see an accounting. Losing $30,000 on a house bought in 2001 should raise more than just a few eyebrows.

This is yet another problem with Bush's "Ownership Society". Corruption and greed are rampant, and the very act of trying to get everyone to "own" their home vs. renting has in and of itself jacked up prices to the point that houses are no longer affordable. Affordability of housing in California is 12% or so. This is what happens when laws are passed to favor certain asset classes. It should not be the role of government to persuade people to buy homes whether they really want one or not. Combine stupid government policies with absurdly low 1% interest rates (long gone but the aftermath speculation continues) and you get housing bubbles. We are in one right now but it is breaking.

Let's finish of with a chart of Dominion Homes. Here goes:



Dominion Homes fell from 40 to 15 huh?
The market does not seem too impressed with those overly dependent upon faith based financing and neither am I.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/