Porkulous or Stimulus (Update)

Earlier this year (February to be exact), I wrote a piece (check it out here) about the "stimulous" plan that the newly inaugurated Obama administration crammed...er...passed into law. Needless to say, I cast a skeptical eye on the bill as it simply had way too much government waste included in it AND the money did not flow fast enough to give the economy the jolt it desparately needed. It is now becoming even more clear that the Obama administration did not pass the best bill possible as the economy remains in the tank, unemployement continues to increase (and the rate of unemployment is rapidly approaching double digits) and there is some loose talk of yet another "stimulous" plan (seriously, this is no joke)! Check out the recent interview on CNBC with Art Cashin of UBS ("stimulous is part Hoax..." WOW!):

To shed a bit more light on this, Joe Biden recently admitted that he and Obama "mis-read" how bad the economy was (here is one of the many news stories on the topic). It's somewhat laughable that he can suggest this and get away with it! Don't you recall all of the speeches about how this was the worst economy since the Great Depression (hard to say they mis-read it, eh)? Here's one example from a January 2009 speech from Obama (read the entire speech via the link):

"Throughout America’s history, there have been some years that simply rolled into the next without much notice or fanfare. Then there are the years that come along once in a generation – the kind that mark a clean break from a troubled past, and set a new course for our nation. This is one of those years. We start 2009 in the midst of a crisis unlike any we have seen in our lifetime..."

That sounds pretty dire! Well, the economy IS pretty bad (it's at least as bad as the early 80's and maybe worse than that) and I just don't buy that they "mis-read" it when, speech after speech, Obama talked about the "worst economy since the Great Depression." I think it's more likely that Biden and the Obama administration continue to try convince the American people that none of this is their fault even after they've ramped up government spending and passed an enormous spending bill with a "Stimulous" title on it. To be fair, they did inherit a pretty lousy situation and things were clearly getting worse when he took office. But, the American people are tiring of the blame game (Obama's approval rating is down to the low 50% range when it was in the mid to upper 60% range when he took office) and the ineffectual nature of Obama's economic proposals to date (trends in his approval rating prove this out - click here for Rasmussen data).

We were sold this "stimulous" package on the promise that it was necessary to turn things around and that it would bring us out of a tailspin. Unfortunately, it now appears that we were sold a bill of goods (don't say I didn't warn you in the February 2009 blog post).

I sincerely hope that Obama will refocus on what really matters right now (HINT: "IT'S THE ECONOMY, STUPID!!!") and drop plans for massive spending on healthcare and taxes green house gases (aka Cap and Trade). Making the case that we can't fix the economy unless we fix healthcare and the environment just doesn't make any sense. Let's get this economy going BEFORE dealing with these other issues. After all, if the economy (aka current and future tax base) continues to shrink, we definitely won't be able to afford any of these other initiatives.

That’s Fuzzy Math: Why Obama’s Budget Doesn’t Add Up for Future Generations

Michael Boskin, a well-respected professor of economics at Stanford University and a senior fellow at the Hoover Institution recently wrote an eye-opening piece on the future debt and taxation implications on President Obama’s 2010 budget plan. For anyone that’s been paying attention, it’s no surprise that the President’s budget calls for running substantial deficits indefinitely. It’s completely fair to note that President Obama inherited a bad economy and an already mind-popping budget deficit. But, what I found so interesting about Mr. Boskin’s analysis is that he sheds some light on Obama’s contribution to our future debt problems. Mr. Boskin asks the simple question, “What would happen to budget deficits and the national debt if Obama did not institute his new government programs?”

Well, the result of Mr. Boskin’s analysis are staggering. Yes, Mr. Boskin was an advisor to President George H.W. Bush (aka Bush 42). However, let’s say for a second that Mr. Boskin is off by 25%. You are still talking about a tax burden of over $120,000 per taxpayer. I don’t know about you, but I don’t have that kind of money laying around. Below is a summary of the implications of this study. Check out the entire article via the link below at WSJ.com. No matter who you voted for in November 2008 and no matter who you support today, it is critical that ALL AMERICANS understand what the government is signing us up for in terms of future debts and taxes.

“What does $6.5 trillion of additional debt imply for the typical family? If spread evenly over all those paying income taxes (which under Mr. Obama's plan would shrink to a little over 50% of the population), every income-tax paying family would get a tax bill for $163,000. (In ten years, interest would bring the total to well over $200,000, if paid all at once. If paid annually over the succeeding ten years, the tax hike per year would average almost $26,000.) That's in addition to his explicit tax hikes. While the future tax time-bomb is pushed beyond Mr. Obama's budget horizon, and future presidents and Congresses will decide how it will be paid, it is likely to be paid by future income tax hikes as these are general fund deficits.”

Read the entire article at WSJ.com.

Porkulous or Stimulous (or a little of both)?

As everyone is no doubt aware, Congress announced an agreement on the nearly $800 billion spending bill that is intended to try to kick-start the economy. There has been much debate about this bill, specifically around whether it is true stimulous or is porked up good with lots of pet projects. I think it's fair to say that there is a lot of both in the bill - after all, it is $800 billion!!! Just to put this into context, that's approximately $2,700 per US resident or about $7,200 per family! WOW. Or, put another way, that's enough money to buy the following companies at current market caps:

IBM - $127B,
Microsoft - $171B,
General Electric - $122B,
WalMart - $189B,
McDonalds - $63B,
Wells Fargo - $71B, AND
Intel - $78B.

That's a lot of coin! So, the bigger question is "Will it help?" Unfortunately, this answer is about as clear the TARP 2 as outlined earlier this week by our new Treasury secretary.

Well, just for fun, I thought I would include a snippet from a recent FoxNews.com article that outlined some of the items in the report. I'm not so sure this is all "stimulous" but I will let you be the judge. Of course, there are some good things in this bill including allowing small business to deduct capital expenditures more quickly, tax credits for purchasing cars and houses, spending on roads, bridges and other infrastructure, and other truly stimulative things. But, it's laughable to say that $100 million for the Lead-Based Paint Hazard Control Grant Program is meant to stimulate anything (except for the lobbiest that won this concession).

- a provision to provide up to $198 million in pensions for Filipinos who fought alongside the U.S. during WWII. U.S. citizens would get $15,000 a year, but even non-citizens would still get $9,000 a year

- NASA is set to receive $450 million for "Science" and another $200 million for "Aeronautics"

- More than $28 billion is being provided to put kids in special education, Head Start and child care and development programs for disadvantaged children.

- $100 million for the Lead-Based Paint Hazard Control Grant Program

- $200 million to the Leaking Underground Storage Tank Trust Fund Program
- $300 million for "Violence Against Women Prevention and Prosecution Programs"
- $900 million for the IRS for the "Limitation on Administrative Expenses"
- $1 million for the Railroad Retirement Board for administrative costs
- $2 billion for the Drinking Water State Revolving Act
- $50 million for Health and Human Services to carry out injury prevention programs
- $1.1 billion for studies on the effectiveness of different medical treatments
- $200 million to upgrade labs and facilities for the Department of Agriculture "to improve workplace safety and mission-area efficiencies"
- $10 million for urban canal inspection
- $16 billion to pay for student financial aid
- $1 billion to pay for the U.S. Census
- $600 million to pay for a fuel-efficient federal auto fleet
- $650 million for the Digital Converter Box Program to help the constantly delayed transition from analog television
- $485 million to the Forest Service for "hazardous fuels reduction and hazard mitigation activities in areas at high risk of catastrophic wildfire"
- Up to $1 billion for "summer activities" for youths as old as 24
- $40 million for the occupational research agenda
- $3 billion for the Centers for Disease Control wellness programs and vaccinations
- $410 million for Indian health facilities
- $2.4 billion for carbon-capture demonstrations

So, what do you think - is that true stimulous? You may like Obama or not and you make like this bill or not. BUT, at least you should know what's in it. After all, YOU are going to have to pay for it...eventually!

SHOCKING MORTGAGE REVELATION!!!

In news that will SHOCK the country, people that made poor financial decisions over the last 24 months continue to make poor financial decisions (and they are still not paying bills on things they still can't afford). In a Reuters article whose conclusion is just entirely too predictable, the government is reporting that borrowers that stopped paying their mortgages once, are doing so again!!! Shocking, I know.

OK, so that's my poor attempt at blogging sarcasm, but you get the point. Why would anyone expect "loan modifications" to be successful? Sure, they may help some fraction of the folks that are having a tough time and were legitimately scammed by predatory lenders, but the simple fact is that there were WAY TOO MANY people buying homes that should have never bought a home in the first place (most of them are not bad people, they just were not ready to take on the responsibility of owning a home). So, as I've predicted many times in the past, loan mods just won't work for most loans because the people that should have never bought a home in the first place still own a house they still can't really afford!!!

Since when did renting gain such a stigma? There is nothing wrong with renting a place and making it your home. We (the politicians especially) got a little caught up in this whole home ownership/american dream thing and we are now paying for it in the financial, real estate, business and every other market you can name. In what many of you may see as a bit of a stretch (but, I honestly believe it), Americans forgot that the American Dream revolves around EARNING things and not being given things (that whole sense of entitlement thing). What happened to saving for a 20% down payment before buying a house? If someone can work hard and save 20% (or even 10-15% fo that matter), they're not only putting a lot of "skin in the game" but they've also demonstrated financial management skills (i.e. they are likely to be very good credits). If we'd adhered to this very basic standard alone, we would not be in the mess that we are in! It sounded great that you could buy a house with only your good name and your word (stated income or "liar's" loans as they're now called), but it was all too obvious what would happen (people would stretch the truth...or simply lie to get what they wanted - a house they could not afford). Now, since we have not learned our lesson, let's give people something for nothing yet again - e.g. freebies to show them that defaulting on a loan ACTUALLY HAS A REWARD!!!!

So, let me summarize why this is such a silly policy:

1) people that should have never bought a house still own houses
2) the resultant homeowners STILL have no skin in the game (formerly known as a down payment); and, most importantly,
3) defaulting borrowers ARE BEING REWARDED for defaulting!

It's quite easy to see that people are going to continue to default until they stop getting freebies. I have several friends who are thinking of defaulting on their mortgages just so they can renegotiate with the bank! If this kind of silly policy continues, the downward cycle we are now in will only last longer and be more painful than it has already been. I really hope that does not happen. Wake up, Washington!!!

Let's wise up!

Early Christmas Present from the Fed: Refinance NOW!

As you may or may not know, mortgage rates have plummeted over the last couple of days on the news that the Fed is going to be buying $500 billion (about 10% of the entire market) worth of mortgage backed securities. So, now could be the best chance you will have in the next couple of years to refinance your mortgage. PLEASE consider locking yourself into a fixed-rate mortgage. You will sleep better, I assure you.

Here is a run down of what's happening from our friends at Bankrate.com.

Fed will buy $500 billion in securitized home loans
By Holden Lewis• Bankrate.com

Mortgage rates plunged after the Federal Reserve announced that it would buy up to $500 billion of securitized home loans.

Rates on 30-year, fixed-rate, conforming mortgages fell well below 6 percent after the Fed announced Tuesday morning that it would buy up to a half-trillion dollars' worth of mortgage-backed securities over the next year to year-and-a-half. Bankers and brokers say rates fell as far as 5.25 percent, at least for a while. Last week, the 30-year fixed averaged 6.33 percent in Bankrate's weekly survey.

The rate reduction is exactly what the Fed intended: "This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally," the central bank said in its announcement.

"It's pandemonium around here right now," says Bob Walters, chief economist for Quicken Loans. "This is going to have a major effect on refinancing opportunities and it should absolutely translate into increased home buying."

Walters offers a hypothetical example of a California house that has lost $175,000 in value over the last couple of years. In 2006, a borrower would need a $500,000 mortgage to buy the house; today, a borrower would need $325,000.

Two years ago, the average rate on a 30-year fixed was about 6.5 percent. At that rate, the principal and interest on a half-million-dollar loan was $3,160 a month. Now, if someone borrowed $325,000 at 5.5 percent, the monthly principal and interest would be a more affordable $1,845.

The Fed's action helps not only buyers, but also homeowners with adjustable-rate mortgages who want to refinance into fixed-rate loans.

Government gift
The mortgage and real estate industries look upon the announcement as a gift from Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson.

"Wow," says Jim Sahnger, mortgage broker with Palm Beach Financial Network, in Stuart, Fla. "I don't know who invited Bernanke and Paulson to Thanksgiving, but I'm glad they did! They showed up with the equivalent of a 50-pound bird and all the fixin's today, ready for the table."
He suggests that borrowers apply for loans and lock rates quickly, in case rates rise again or home values continue to fall. Declining home values can endanger owners' ability to refinance. Sahnger advises homebuyers to talk to mortgage brokers or loan officers early in the process, to identify "any issues you need to deal with prior to writing a contract," such as errors on credit reports.

Ryan Kennelly, a mortgage banker for Residential Mortgage Services, Inc., of Bedford, N.H., says the Fed's action is huge, for two reasons. "First, with lending institutions getting the much-needed support of the U.S. government, they (lenders) will ease some of their most restrictive lending rules -- opening the door to more consumers to get loans," he says, adding that more qualified borrowers means more home sales.

Second, Kennelly says, "this news also couldn't be better for current homeowners who want to stay in their homes but can no longer afford the payments due to their adjustable-rate mortgage increasing. By interest rates coming down, combined with lenders easing some of their qualification requirements, more and more homeowners in this situation will be able to refinance."

Dan Green, a mortgage broker for Mobium Mortgage in Cincinnati, calls the Fed's purchase plan "an explicit safety net for lenders, and that should encourage more lending."

The Fed's decision to cut mortgage rates won't help people who can't refinance because they owe more than their houses are worth. And people who already are two or three months' behind on their home loans probably won't get much out of it, either, says Dean Baker, economist for the Center for Economic and Policy Research, a Washington think tank.

Lack of transparencyBaker worries about lack of accountability or transparency: The Fed and the Treasury have not disclosed details about their purchases under the Troubled Asset Relief Program, setting a precedent for secrecy about the Fed's purchases of mortgage debt under the plan announced Tuesday. "We don't know who they're going to be buying bonds from, or how much they'll pay -- or if they'll overpay," Baker says, adding that if the Fed pays a dollar for a security that's worth 20 cents, "that's the same as handing (the seller) 80 cents." Baker adds: "I think it takes a lot of gall to do something like this."

Green says that there is an element of moral hazard in the Fed's action: In the future, borrowers might expect a bailout from the unintended consequences of this action. Nevertheless, the Fed's buying binge might be the best way out of a dilemma. "On moral hazard, some say it led to the bubble. It may now lead the economy back," Green says, koan-like.

Yields fall, mortgage rates do too
By buying mortgage-backed securities, the Fed will be taking direct action to reduce mortgage rates. That's because mortgage-backed securities behave like bonds. When bond prices rise, their yields fall. A wonkish detour into the behavior of bonds will illustrate this point.

A bond is an IOU. Let's say you lend someone $100 and the borrower gives you a piece of paper, promising to give you $105 a year from now. That paper is a $100 bond with a 5 percent yield. The yield is equivalent to an interest rate. Now assume that the government stepped in and offered to give the borrower a better deal: $102 now in exchange for $105 a year from now. The bond's yield would be roughly 3 percent. That's how the bond's yield gets lower as the price gets higher.

The Fed says it's going to be that buyer who pays a higher price for the bond, causing the yield to drop. As the yields on mortgage-backed securities fall, consumers generally see mortgage rates fall, too.

By pledging to buy up to $500 billion in mortgage-backed securities over the next 12 to 18 months, the Fed is signaling that it's ready to buy a big share of the conforming mortgages underwritten during that period. That could keep bond yields and mortgage rates down. So far this year, Fannie and Freddie have issued about $857 billion in mortgage-backed securities, and the issuance pace has slowed dramatically in recent months.

What happened to personal accountability?

The $700 billion bailout package has raised a lot of eyebrows on Main Street. After all, isn't it Wall Street's fault for making all these risky investments that went bad? If so, why on earth would the government want to use taxpayer money to bail them out? Well, I've listened to a lot of radio commentary and read a whole host of opinons and articles on the topic and I am disheartened by one key thing that is missing in all of these pieces; where is the personal accountability in all of this?

Let me make this a bit more clear for you if you are having trouble following me. If you were walking down the street and a drug dealer popped out and offered you some drugs for free, would you take them? You know it's bad for you even if it is free. You know this decision is not likely to have a good outcome for you, but you decide to give it a shot anyway because everyone else is doing it and the dealer tells you it's good for you and you can handle it.

Is it the dealer's fault that you decided to take something you knew was bad for you? Now we all know that the dealer is a bad guy and should be punished for breaking the law and dealing drugs. But, aren't you also somehwat responsible for your bad choice? Shouldn't you shoulder some of the blame?

By now, you know where I am going with this. Sketchy mortgage brokers and slick Wall Street types told you that you could afford that $500,000 house even though you had not saved for your down payment and you only made $50,000 per year. After all, all your friends and neighbors were doing it, right? Even though it was available to you, you knew it did not make sense that you could get such a loan. But, you took it anyway. Then, when your house rose to $700,000 in value, another slick mortgage broker told you take take a second mortgage for $200,000 so you could put in a pool, go on that nice vacation and buy that expensive car. Or maybe you could just refinance your first mortgage and "Pick Your Payment" so that you could cover the new GIGANTIC mortgage (at least for 12-24 months until the payment adjusted). Hey, you deserve it and everyone else is doing it. Never mind that you couldn't affored the first mortgage payment much less the second mortgage payment.

Now that all of these loans are going bad (not really a shocker, by the way), banks and mortgage companies are going under and the securities issued to allow these silly loans are defaulting, people are trying to blame everyone but themselves. Greedy CEOs, lying mortgage brokers, etc. are the only ones to blame. It's not my fault that my payments are TWICE AS MUCH as my income!!

Why don't people start to take a little responsibility for their decisions and actions. Sure, there are plenty of cases of legitimate fraud, lying, cheating and stealing and the corporations that profited from all of this mess should also be severely punished. But, if that were the only problem, we would not be in this mess. The bottom line is that Americans have spent more than we make for over a decade now (think negative savings rate) and it is catching up to us. So, here is who I blame (in my opinion):

1) Individuals: if you are not diligent enough to read your own loan documents and understand them, then you probably shouldn't be taking on the debt required to buy a house, car, etc. While the small print is mind numbing for sure, the Truth in Lending Disclosure is actually pretty easy to read (shows the costs of the loan and your payments over time). If your paycheck was only $2,000 per month, you can't afford a $4,000 per month payment (now or 24 months from now)! It really is that simple! Spend less than you make (that's called saving, by the way) and don't get duped into believing it's OK to do otherwise.

2) Congress/Federal Reserve: The knuckleheads in Congress and the Fed have promoted easy money for so long now that we all believe we are entitled to it. When a number of Congressmen raised the issue that Fannie and Freddie might be a disaster in the making (in 2004 and 2005), most folks in Congress buried their heads in the sand. "We are meeting our housing objectives" (this is code for people that can't afford homes are getting loans for them - this is also known as "subprime" and the initial shoe to drop in this mess). Even Alan Greenspan (who shoulders a good chunk of the blame for his easy money and 1% interest rates) noted that Fannie and Freddie were a potential ticking time bomb. No one in DC listened and now they want to spend $700+ billion to try to fix the problem (I'm skeptical this will work, by the way).

3) Wall Street/Ratings Agencies: We were all convinced that the smart guys on Wall Street had invented a way to make risky borrowers less risky. Somehow, through financial alchemy, Lehman Brothers, Bear Stearns, UBS, etc. all convinced us that you could take a bunch of risky loans, wrap them up into a nice little bow, slap some insurance on them and call them AAA quality. Then, the ratings agencies, who were being paid to provide ratings on these securities (no conflict there), called them "Investment Grade" which allowed pension funds, retail investors and others to buy them up. As if that weren't bad enough, the investment banks et al decided to borrow 30 TIMES their equity capital to buy these toxic securities (for every $1 of capital they had, they would borrow $30 and buy these bad securities). When it came time to borrow more money as loans came do, the investment banks imploded.

So, what can we learn from all of this? First of all, people need to take responsibility for their own decisions and the consequences for those decisions. If you bought more house than you could afford, you have to live with the consequences of that decision. If you are spending more than you make on your credit cards, that too has a consequence for you. Just because you got a great 0% APR offer (think free drugs - see above) that doesn't mean it's a good decision to load that card up. I fear that the government bailout only reaffirms the dangerous and increasingly pervasive cultural phenomenon that individuals are not responsible for their own decisions. If there is always someone to bail you out when you make a bad choice, then is it really all that bad a choice to make in the future? The corollary to this is that good decisions are not rewarded, but rather penalized (think higher taxes). Until we return to the basic economic principals of freedom, individualism and true capitalism, I fear there is going to be a lot of economic pain in our great country.

$500 oil coming?

A recent Money.com article points out some reasons to be concered about the future of oil prices (actually, prices are up some $25 today along, as I write this article). While I am the last person on earth that should be predicting oil prices, I thought P2P-Loans.com readers might appreciate the analysis presented in the article below from Fortune Magazine.

---------------------------------

Here comes $500 oil

(Fortune Magazine) -- Matt Simmons is as perplexed as anyone that it has fallen to him to take on OPEC, Exxon, the Saudis, and all the other misguided defenders of conventional wisdom in the oil patch. Why should one investment banker with a penchant for research be required to point out what he regards as the obvious - that from here on out, oil supplies can't meet demand, and if we don't act soon to solve this crisis, World War III could be looming?

Why should a man who scorns most environmentalists have to argue that locally grown produce and wind power are the way of the future? Why should a lifelong Republican need to be the one to point out that his party's new mantra - "Drill, baby, drill!" - won't really fix anything and that his party's presidential candidate is clueless about energy? That the spike in oil prices earlier this year wasn't a temporary market anomaly and the recent retreat in prices is just a misleading calm before a calamitous storm? That we're headed toward $500-a-barrel oil?

Read the rest of this article online at Fortune.com (click here).