Tuesday, January 05, 2010
Brief Side Notes
I do want to continue with a comprehensive overview of US "public" financing/banking problems, which includes stuff like:
- The Fed (snicker) says it is going to end its mortgage security purchases. But that will drive up mortgage rates, which will both suppress home values further and constrain sales. CR has been doing a good job covering commentary on the topic, and here's his last.
- A wacked-out Congress keeps trying to tinker with banking, and keeps effing up. Lord knows what they will come up with next. However FHA has already blown the whistle, but I expect Congress to try to prevent it from saving itself. This should be interesting, but FHA either tightens considerably or goes under, so my guess is that FHA financing will be harder to get next year.
- One of Congress' signally destructive achievements was contained in credit card reform. Some of the measures were truly great, but some were pretty much the equivalent of stuffing PETN in the public's knickers and lighting a defective fuse. I want to cover that; it's going to be a serious tailwind in 2010.
- The situation at Fannie.
- The situation at FHA.
- The expiration of some guarantees at banks, and what people should know and do to protect themselves.
- The position of the FDIC fund.
For a more global look at some of this stuff, Mauldin's Outside the Box features an Ambrose Evans-Pritchard review of 2010. I generally find Evans-Pritchard a bit overblown, but the Japanese problems are real, and the European banking problems are very real. You might want to read the article. A quote about Japan:
The shocker will be Japan, our Weimar-in-waiting. This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time. Every auction of JGBs will be a news event as the public debt punches above 225pc of GDP. Finance Minister Hirohisa Fujii will become as familiar as a rock star.Haha. The news services have been burning up with speculation that Fujii would retire, and the news broke today that he had succeeded on getting out with the excuse of ill health. I don't know how much most readers here follow Japanese news. The new administration has vowed to fight deflation with liquidity (their nominal GDP is shrinking), and I am not surprised poor Fujii's got high blood pressure at the prospect of pushing all those bonds. Anyway, the situation Evans-Pritchard is discussing relates to why Fujii's condition has been such a hot item on the financial wires.
I would strongly recommend that US citizens spend some time contemplating Japan's response to their bubble collapse and the results which have been unfolding for nearly two decades. It ought to be an incentive to us to develop some fiscal self-discipline.
I also am sure that there are substantial additional banking problems in hunks of Europe. Some of the eastern bloc are still dependent on infusions of money, and just as in the US, the bad loans haven't peaked yet. An even worse problem for Europe is that the ring of fire which has been responsible for much of old Europe's growth over the last decade is a ring of smoldering coals. A couple of the countries should return to growth in 2010, but it won't be epic growth, and foreign currency loans are a big problem. The bright side is Germany, because its citizens are just too conservative to have really participated in the credit explosion. However if you look at worker incomes in Germany (found here on this useful Bundesbank page), they look very similar to the Treasury receipt data I have been tracking for the US:
Industrial turnover looks worse (but should now be improving substantially)
But you can see the healthier situation of German households (no debt drag) in retail sales:
Keeping some perspective is important; I don't want to be telling the truth about the US but implicitly muddying the global picture. This entire thing is not over at all.
One of the comments in Evans-Pritchard's article might seem more explanatory if you spend some time on the Bundesbank page. German industrial growth and thus jobs are pretty strongly linked to some of the Eastern bloc countries. But Germany has less at stake for countries like Greece or Spain, and extending heavy loans to keep these countries liquid really does extract money from conservative-living Germany for the benefit of those considered less responsible. In the end the German citizenry will pay those loans, and there is apt to be some serious angst over it.
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