With the drama around Sarah Palin and the obsession with the latest polls, economic diaries have taken a beating and fallen quickly off the front page. For those of you who haven't been paying attention, time to wake up! There's a storm brewing! For those of you who been following along, and perhaps are getting weary of the bad news, apologies for the repetitive nature of this diary.
Here's a round up of a few good diaries from the last day or so:
- gjohnsit discusses Who will get bailed out next?
When it comes to Wall Street investment banks, it's almost easier to list the ones that aren't in trouble rather than list the ones that are. Because of that, the FDIC is in trouble.
The next rumored deal involves a shotgun marriage involving Lehman Brothers, a Wall Street giant, to foreigners or whoever is willing to take it on with its debt problems. But perhaps the most worrisome is the possibility that the 150 banks on the Federal Reserve’s watch-list will all go under and, if that happens, the Federal Deposit Insurance Corporation will have to be bailed out.
It won't take 150 banks to push the FDIC over the edge. It'll only take one or two big ones. In fact, Sheila Bair, the chairperson of the FDIC, recently floated the idea of "tapping lines of credit with the Treasury for working capital," in her testimony before Congress.
The FDIC currently has $45 Billion to cover future losses.
As for who might push the FDIC into insolvency and require an S&L-type bailout, the bank at the top of everyone's list is Lehman Brothers.
- Stranded Wind continues to ring the warning bell in Fannie/Freddie dead, FDIC dies soon.
Fannie and Freddie represent a five trillion dollar housing bubble that is certain to deflate by at least one third and perhaps as much as two thirds. The inevitable FDIC "bailout", which will come either right before or right after the election, means We, The People get to be responsible for a few trillion in deposits among those 2,200 dying banks.
This problem is systemic. A bailout presumes you have some way to spread the pain around, but in this case we’re got thousands of zombie banks that will cease to operate as the FDIC has the time and resources to unwind them and the malnourished survivors certainly can’t float the premiums needed to recharge the FDIC’s fund, unless of course depositors are willing to accept a -20% rate on their deposits, so it all lands in the taxpayer’s laps.
This is going to come hot on the heels of the Fannie/Freddie U.S. Treasury backstop. Our national debt doubles in the blink of an eye, then a quarter of our commercial banks implode, and it’s all backed by "the full faith and credit of the United States". This will bury the dollar, making imports crazy expensive ... and we’re importing 70% of our oil these days. Are you ready for $8/gallon gas and $10/gallon heating oil?
- bonddad talks about the Freddie/Fannie fallout:
But the real issue is our method of doing business as a country has finally gotten us in trouble. That means all of the people we have borrowed money from got nervous for the first time and said, "you better do something or we won't lend you money any more." And to keep the spigots pouring, we nationalized Freddie and Fannie.
Think about this basic fact: we -- the US as expressed through the Congress -- were not the people who decided what to do. Foreign investors forced out hand and made us allocate up to $200 billion to this endeavor.
Out way of doing business is broken.
- DarkSyde's last front page diary deserves a little more attention-Fannie and Freddie: The Intervention
The mortgage bubble expanded in part because of ‘subprime’ mortgages -- lenders put together mortgages to borrowers who, based on income, credit history, and collateral, wouldn’t have qualified in the past. Some of those mortgages had an adjustable rate, allowing the borrower lower interest payments on a larger principal and thus able to afford a bigger or nicer house than s/he would have had with a fixed rate, plus they were often used for investment properties. Now, as interest rates have risen -- a relatively small rise in rates can mean big increases in the monthly mortgage payment -- and property values have fallen, those borrowers can no longer charge enough rent to pay the increasing monthly mortgage. Since in many cases the borrower doesn’t live on the investment property, they don’t have the same incentive to bend heaven and earth to make those payments. They’re tempted to just walk away, mail the keys to the mortgage company, and many of them have done just that. The result is falling property values, which affect everyone sooner or later including lenders, borrowers, and local tax revenues, and the whole shebang can feed back on itself until it's a full blown economic crisis.
That puts traders and investors in a hell of bind: they have no idea what some these tranches are worth, especially the ones made up of subprime mortgages. If the mortgage can't be priced, then neither can the CMO or CDO it makes up, which means they can’t sell it to investors -- or investors are wary of buying it -- and thus money cannot be freed up for new loans undercutting one of the main reason Fannie and Freddie were created in the first place. In the meantime the income and paper value of those mortgages plummet and the company holding them swirls around the drain.
- Johnny Venom talks inflation in Sign of the times: $.99 says they can't sell for under a buck!
One can see how the average consumer is falling behind. If one accepts the official government-stated rate of growth for inflation of 4%, then one can see the problem. If inflation is at around 5.5% with a growth rate of 4% a year, wages need to exceed at the very least that rate of growth. Yet, the BLS's numbers show wages continuing a down trend starting from the mid-1970s. The latest figures show a rate of growth for wages at 4.08% (actually the previous quarter averaged around 3.5%!). Thus a gap exists not only at how much prices are increasing, but also at rates of growth in that inflation in reference to wages. Gets kinda confusing, I know, but not hard to realize we're getting burned. By rates of growth alone, we have half a percent as a gap and between the official rate of inflation and wages at least 1.5%!!!
Now to many, that may not seem like much, but these rates only highlight a small picture. In reality, the price of food and other goods has gone up much higher. Indeed, the only place we really ever see deflation in any former on a longer-term basis, in regards to consumer goods, is electronics. But folks don't buy iPods and computers every week, they purchase bread, veggies and other things. Last month McDonald's, after facing a near rebellion by it's franchises, allowed for it's Dollar Value meal to be altered.
- gjohnsit provides some interesting background information re the recent seizure of Silver State Bank in It must be nice to be in a rich Republican family
So why does this have anything to do with the presidential campaign? Because just five weeks ago, Andrew McCain, John McCain's son, stepped down from the Silver State Bank's board of directors.
Until recently, the son of Republican nominee Sen. John McCain sat on Silver State's board and was a member of its three-person audit committee, which was responsible for overseeing the company's financial condition.
Andrew McCain left the Henderson, Nev., bank July 26 after five months on the board, citing "personal reasons." He is Sen. McCain's adopted son from his first marriage.
Spokespeople for the McCain campaign didn't return calls seeking comment. Efforts to reach Andrew McCain Friday night at Hensley & Co., the family-owned beer distributor where he is chief financial officer, were unsuccessful.
Know of other diaries that deserve a second look? Please comment below!