The US economy continues to worsen. GM is on the verge of bankruptcy, now that the auditors have cast doubts on their continuation as a going concern. The financial services industry continues to bleed or shall we say hemorrhage profusely.
The Obama Administration is talking tough but not acting as tough. There seems to be a hesitation or reluctance to go all out and act to solve the problem. This is costing us dearly. We - the taxpayers - are putting money in the likes of AIG with no result. The stock market continues to go down (well, it has to stop when it hits zero, if that can be a consolation).
It is time we leave our inner phobias and nationalize these institutions - AIG, CITI, BofA and so on. This nationalization does not mean that we would create a federal bureaucracy to manage them. No. But we should oust all executives, replace them with more ethical professional managers who report to Government Accountability Office, conduct an independent audit, determine the amount (approximations OK specially in favor of classifying an asset as toxic, if it turns out to be otherwise, that would be a pleasant surprise) of toxic asset (or debt), transer it over to Resolution Trust Corporation v. 2.0 and let these institutions be run with a leaner balance-sheet. If we do not bite this bullet soon, we will continue to pump taxpayer dollars in a black hole and Mr. Obama's far of decades of depression will indeed come true.
And let the Republicans suck it up. Bipartisanship is an illusion, which we have no time for.
And job losses continue to pile up. I do not know how Mr. Obama will create jobs when in the last 30 years, we have stopped manufacturing anything in this country in the name of capitalism and free trade. We made funny money by lending money to each other, with no value added. And now the house of card has collapsed.
Saturday, March 07, 2009
Friday, February 20, 2009
The Housing Stimulus
I must admit upfront that I have not read President Obama's housing stimulus in great detail. But based on what I read, I think it is a good start. That's right. It is a good START.
According to a commentator from The Economist on NPR, only 12% of the mortgates are sub-prime (sub-prime is defined generally as someone who has a below 600 credit score though there may also be other criteria), but about 50% of foreclosures are sub-prime. Of the 2 million foreclosures last year, approximately 45% were in four states - Nevada, Florida, Arizona and California (not necessarily in that order).
Back to the President's housing stimulus package.
It will begin the process of cleaning out some of these toxic assets. But there are quite a few questions (or as they say the devil is in the details).
I assume that this package will also apply to future to-be toxic mortgages. Currently, the cost of this package is put at around $275 billion but what if GM or Chrysler files for bankruptcy?
The problem with this current recession is that there is no visibility of the bottom yet. May be it would be a good exercise for the financial institutions to look at their books and actually work to determine a reliable estimate of the extent of their assets which are toxic. May be they know this and are reluctant to admit it. Or may be they are clueless. I would bet on the latter, because the process is still ongoing. But for loans bundled as CDOs or MBCSs it is possible (albeit mathematically) to estimate the percentage that would become toxic in the future. This is not a one-day or one-week task, but is doable. Because until we identify the extent of the problem we can not get a handle on resolving it.
According to a commentator from The Economist on NPR, only 12% of the mortgates are sub-prime (sub-prime is defined generally as someone who has a below 600 credit score though there may also be other criteria), but about 50% of foreclosures are sub-prime. Of the 2 million foreclosures last year, approximately 45% were in four states - Nevada, Florida, Arizona and California (not necessarily in that order).
Back to the President's housing stimulus package.
It will begin the process of cleaning out some of these toxic assets. But there are quite a few questions (or as they say the devil is in the details).
- 1. It does not apply to non-Fannie/Freddie mortgages. How many such mortgages are there and what per cent of these are in foreclosure today and may go into foreclosure in the future.
- 2. It does not apply to people who bought homes that they obviously could not afford. What are the criteria to determine this affordability?
- 3. The mortgage payment can not exceed 31% of gross income. What happens if the person is unemployed? 31% of zero is zero. And in case the person is employed, what happens to the difference? Is it being added to the mortgage by extending the term of the loan?
I assume that this package will also apply to future to-be toxic mortgages. Currently, the cost of this package is put at around $275 billion but what if GM or Chrysler files for bankruptcy?
The problem with this current recession is that there is no visibility of the bottom yet. May be it would be a good exercise for the financial institutions to look at their books and actually work to determine a reliable estimate of the extent of their assets which are toxic. May be they know this and are reluctant to admit it. Or may be they are clueless. I would bet on the latter, because the process is still ongoing. But for loans bundled as CDOs or MBCSs it is possible (albeit mathematically) to estimate the percentage that would become toxic in the future. This is not a one-day or one-week task, but is doable. Because until we identify the extent of the problem we can not get a handle on resolving it.
Monday, February 16, 2009
When did This Recession Begin?
Well, that's a very good question.
After the Internet bubble burst in the late 90s, and as we moved into this millennium, the US economy forked such that corporate America improved their profitability by cutting costs (rather than increasing revenue) - they accomplished this by shifting production overseas and other cost-reduction methods. While US consumer income stagnated, this stagnation was compensated by rising housing values which created an illusion of prosperity among consumers. This coupled with cheap and easy credit meant that consumers could continue spending while their income was stagnating and their savings were moving into negative territory.
And then as they say, the chicken came home to roost, when the housing market burst. This was bound to happen as housing prices had moved into unsustainable territory.
So in my opinion, the recession earlier in this decade (I am not sure if it was technically a recession) never really ended, it just became more intense as more fuel was added to the fire.
After the Internet bubble burst in the late 90s, and as we moved into this millennium, the US economy forked such that corporate America improved their profitability by cutting costs (rather than increasing revenue) - they accomplished this by shifting production overseas and other cost-reduction methods. While US consumer income stagnated, this stagnation was compensated by rising housing values which created an illusion of prosperity among consumers. This coupled with cheap and easy credit meant that consumers could continue spending while their income was stagnating and their savings were moving into negative territory.
And then as they say, the chicken came home to roost, when the housing market burst. This was bound to happen as housing prices had moved into unsustainable territory.
So in my opinion, the recession earlier in this decade (I am not sure if it was technically a recession) never really ended, it just became more intense as more fuel was added to the fire.
Saturday, February 07, 2009
The Economy
It is a popular perception that the economic meltdown began with sub-prime mortgages. Though I am not sure how much truth is there in that statement. In my opinion, the problem began when we all started buying homes we could not afford - sub-prime, teaser rates, ARMs, etc. Now one may ask why does it matter? Why split hair now? Well, for two reasons - firstly, if we understand the causes, we may (just may) be able to make sure that it is not repeated in the future. And secondly, we must understand that we are all responsible for causing this crisis. We - the home owners/buyers wanted to get as big a house as we could without worrying about the future. And the greed on Wall Street (of course, taking responsibility for our actions does not reduce the role of Wall Street.
Now, that we are here...
The impact of of housing meltdown on the broader economy did not become obvious until the holidays last year, when consumer spending was substantially curtailed. And then the downward spiral begins. If we buy less, manufacturers have to make less. If they make less, they need fewer people to do the job. That means lay-offs. And then people have less money, because they have been laid off, they buy less and so on. The circle goes around and around.
The Fix.
President Obama's stimulus package (if and when passed) will help. Public works projects always help in that they create jobs. The problem is that it may take longer to materialize due to the nature of these projects. I think we need a short-term solution in the meantime. That solution needs to be something that will give a jumpstart to consumer spending. One way that I can think of is consumer rebates. But with a twist. Instead of the government sending us all rebate checks (as done last year), they should send the money in a pre-paid card with a MC/VISA logo. This would ensure that the money is spent only and not saved or used to pay existing bills. This would have a shorter-term impact while the longer-term projects are up and running.
Are we at the bottom yet?
No. I think we will hit the bottom in Q2-Q3 time frame - late summer-early fall. That assumes no other unforeseen events occur (e.g. natural disaster). I also believe that the uptick we see will be so tiny - if you blink, you miss it. But that will be the beginning of the end. The actual recovery in terms of its impact on consumers will not happen until 2010. In the meantime, tighten the seat belts, it is going to be a rough ride.
And just one more point. Do I think there will be waste in this package? You bet. But we have to start somewhere and improve as we go. Also, I think the onus is on us - the citizens - to be alert about wasteful spending and keep our representatives and government agencies (at all levels) on their toes. After all, as Lincoln said, the government is of the people, for the people, by the people.
Now, that we are here...
The impact of of housing meltdown on the broader economy did not become obvious until the holidays last year, when consumer spending was substantially curtailed. And then the downward spiral begins. If we buy less, manufacturers have to make less. If they make less, they need fewer people to do the job. That means lay-offs. And then people have less money, because they have been laid off, they buy less and so on. The circle goes around and around.
The Fix.
President Obama's stimulus package (if and when passed) will help. Public works projects always help in that they create jobs. The problem is that it may take longer to materialize due to the nature of these projects. I think we need a short-term solution in the meantime. That solution needs to be something that will give a jumpstart to consumer spending. One way that I can think of is consumer rebates. But with a twist. Instead of the government sending us all rebate checks (as done last year), they should send the money in a pre-paid card with a MC/VISA logo. This would ensure that the money is spent only and not saved or used to pay existing bills. This would have a shorter-term impact while the longer-term projects are up and running.
Are we at the bottom yet?
No. I think we will hit the bottom in Q2-Q3 time frame - late summer-early fall. That assumes no other unforeseen events occur (e.g. natural disaster). I also believe that the uptick we see will be so tiny - if you blink, you miss it. But that will be the beginning of the end. The actual recovery in terms of its impact on consumers will not happen until 2010. In the meantime, tighten the seat belts, it is going to be a rough ride.
And just one more point. Do I think there will be waste in this package? You bet. But we have to start somewhere and improve as we go. Also, I think the onus is on us - the citizens - to be alert about wasteful spending and keep our representatives and government agencies (at all levels) on their toes. After all, as Lincoln said, the government is of the people, for the people, by the people.
Wednesday, May 26, 2004
Intro
Hello, I am Smita and today I decided to jump on the blogging bandwagon.
I live near Boston in Massachusetts. Have lived in this state for almost twenty years and thoroughly enjoyed it. But lately, I have been thinking moving. Not sure where. May be to another country far away from here, where there are no conflicts and wars. Must be on Mars, right?
How about Antarctica? Well, that's one neat place (never been there). Have tried to find a job there without success. May be they think I am too old for that. But I would love to go and live there for some time, may be a couple of years. Actually four years, beginning 1/1/2005.
Recently, I was in NYC and went on a tour of the Village. The guide said he had never felt such a dispair before. That's when I suddenly realized what I was feeling. Discouragement (is that a word?) and despair about the direction of this country.
I am not sure I will be able to keep up with blogging. But we shall see. I am not too comfortable talking (writing) about my personal thoughts and feelings to total strangers. Well, as they say, wait and watch.
More later.
I live near Boston in Massachusetts. Have lived in this state for almost twenty years and thoroughly enjoyed it. But lately, I have been thinking moving. Not sure where. May be to another country far away from here, where there are no conflicts and wars. Must be on Mars, right?
How about Antarctica? Well, that's one neat place (never been there). Have tried to find a job there without success. May be they think I am too old for that. But I would love to go and live there for some time, may be a couple of years. Actually four years, beginning 1/1/2005.
Recently, I was in NYC and went on a tour of the Village. The guide said he had never felt such a dispair before. That's when I suddenly realized what I was feeling. Discouragement (is that a word?) and despair about the direction of this country.
I am not sure I will be able to keep up with blogging. But we shall see. I am not too comfortable talking (writing) about my personal thoughts and feelings to total strangers. Well, as they say, wait and watch.
More later.
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