Housing Bubble

• Subprime bubble is back: Lenders Again Dealing Credit to Risky Clients (NYT)
• Housing bubble is also back: AIG Is Planning a Return to U.S. Property Investing (WSJ)
• Spain and EU Reject Talk of Bailout (FT)
• Coeure Suggests ECB Could Restart Bond Purchases for Spain (Bloomberg)
• IMF Set to Recognise Shrinking Chinese Surplus (FT)
• Government to Propose New Mortgage Servicing Rules (AP)
• Japan Currency Chief Warns Against Delay Over Finances (Bloomberg)
• The 'Michael Corleone' of Libya (Reuters)
• North Korea Says Fuel Being Injected Into Rocket (Reuters)
• SNB Reaffirms Vow to Cap Swiss Franc (FT)

Before even taking into account the aftermath of the “unexpected” NFP result, it has been amazing to see over these past few months the number of experts, especially those that reside solely within the “science” of economics, proclaiming a successful engineering of the long sought-after recovery.  That this has been the third such claim in as many years is lost in the noise of confusing “headwinds” that are somehow beyond the control of those that now control most everything within the financial arena.  Stock speculators are beneficial components to the healthy financial transmission mechanism into the real economy (even when all they are supposed to do is provide liquidity 20,000 times per second), but anybody that dares speculate in the far more vital energy sector (or any real commodity) is the pure incarnation of evil.  That these two apparently disconnected speculative classes are really one and the same shows just how obtuse (not always intentionally) economists and the pandering classes really are.

Let's get it all out there. America's dirty laundry that is. Our family secrets. The skeletons in the closet. The goal is to create a list of the many and numerous ways in which our country is deluding itself into believing we are the greatest, smartest, most innovative, freedom loving country that ever was. Don't get me wrong, I'm not some unpatriotic ne'er do well. I love what the Founding Fathers of our country set out to accomplish, faults and all. I love it so much, I was willing to put my life on the line for this country by serving in a US Marine Corps special forces unit for 8 years (your move armchair patriot). But we have drifted so far from the original concepts, I believe our current central planning apparatus more closely resembles the USSR than what most people think is the USA. So I'm going to kick this list off but in no way do I intend this to be exhaustive.

Ben's selling the same old crap

Our feeling is that Germany is establishing a "Plan B" in place in case it needs to leave the Euro at some point. The catalyst(s) that might provoke this are the upcoming French, Irish, and Greek elections, which could see a resurgence in leftist, anti-austerity measures in these countries. Moreover, inflation is kicking up in Germany which will exacerbate tensions between it and the ECB.

The Fed is clearly worried about the economy. Ben Bernanke's latest speeches aren't exactly inspiring. It is as if he thinks the rosy(ier) numbers are some prank being played upon him by the gods; that soon this will all be taken away. He is right. He admits he doesn't understand why the economy is the way it is. Reality doesn't fit his theory. ("It's supposed to work, dammit!") So, what do you do when you are the head of the world's biggest printing press, and don't know what else to do? Why QE3 of course.

Deny that, bottom deniers.

Those snapping up housing for cash are either buying to rent the homes or to speculate that a resurgent housing market will arise and they can "flip" for big profits. This segment simply isn't large enough to soak up all the millions of homes languishing in the "shadow inventory" of homes being held off the market in the vain hope prices will bubble higher. The general idea of lower home prices is that once prices fall to some magic threshold, buyers will jump in and liquidate the inventory. That notion makes two enormous assumptions: 1) Interest rates will stay near-zero when inflation is factored in. 2) Household income will stop declining. In other words, there are three inputs to housing affordability, and price is only one of them. Interest rates and disposable income are equally important.

A mere two days ago we were enlightened on the glory of the central banking system and the general denigration of sound money and the gold standard as Part 1 of Bernanke's re-education lecture series. Today we are treated to Part 2 - a historical perspective of how the Fed has saved the world since World War II. As we watch the stream below, we suspect the word 'inflation' will outpace 'deflation' and 'monetary policy' will dominate 'intervention' or 'picking-winners' as the Chairsatan presents his view of the world-according-to-central-planners. Some early headlines of note:

*BERNANKE: MOST EVIDENCE SHOWS FED DIDN'T CAUSE HOUSING BUBBLE

Depending on debt to fuel nominal growth leads to an economic death spiral. Sometimes one chart says it all. Charted against consumer credit, the S&P 500 (SPX) collapsed after the 2000 dot-com bubble burst and has been tracing out a descending channel since then. The Fed's injections of liquidity via trillion-dollar purchases of toxic mortgages and Treasury bonds does not funnel money into productive investments--all it accomplished was to further incentivize speculative churning and financialization to enriched the few at the expense of the many. So sit back, tighten your seatbelts and enjoy the death spiral ride, brought to you by the Federal Reserve and your elected servants of the financial Elite.

The concept of government power is a strange and complex cipher.  The existence of governments has always been predicated on assumptions of necessity, but few societies have ever truly considered what those necessities might be.  What is government actually good for?  What do they do that is so important?  And, what happens when a government fails in the roles and duties that a culture deems vital?  We tend to view government as an inevitability of life, but the fact is, government is NOT a force of nature, it is a creation of man, and it can be dismantled by men just as easily as it can be established. In America, many people see government as an extension of the Republic, or even the source, and an animal that feeds at the behest of the common citizen.  An often heard argument against the idea of drastic change or even rebellion within the establishment system is the assertion that the government “is us”.  That it is made of Americans, by Americans, and for Americans.  That there is no separation between the public, and the base of power.  This is, of course, a childish and fantastical delusion drawn from a complete lack of understanding as to how our system really operates today.  How many people out there who make this argument really believe at their very core that they have any legitimate influence over the actions of the state?  I wager not many…    At bottom, to cling to the lie that the government as it stands is a construct of the people is an act of pure denial designed to help the lost masses cope with underlying feelings of utter powerlessness.  

While the college debt bubble has been extensively discussed on Zero Hedge (here, here and here) and elsewhere, the reality is that without college student loans, as cheap as they may be, the vast majority of students would not be able to afford going to college, untenable (and non-dischargeable) post-graduation leverage be damned. Please ignore for a second the reflexivity of this symbiotic relationship - that college is so expensive only because college debt is so easily obtainable (and as noted here, between car loans and student debt, is the primary source of consumer debt in the past year)... That said there are two sides to every story: on one hand students are conditioned to believe that they need college to survive in the current world (with statistics such as these floating out there: drop outs since 2002 have "cost" the nation $3.8 billion in lost income and over $700 million in lost taxes), while on the other hand, the burden of a massive debt load, even if with manageable interest expenses, leave the student burdened with principal amortization which alone has a crippling effect on the individual psychology. Is it time to reevaluate higher education? Look at this infographic from OnlineCollege, which summarizes the side effects of soaring college costs, and decide for yourselves.

The surprising tale that I will attempt to pen in this blog entry has a very familiar cast of characters; the Obama Administration, the Housing Bubble, "Toxic Mortgages", and Too Big To Fail "TBTF" Banks among others. While the headline of TBTF banks in a $25bil mortgage settlement is known to many, the underlying details of the settlement are less known and quite appalling when you pull back the covers. The wounds on past and present homeowners are still fresh from the housing crisis. As Jonathan Laing points out in this weekend's Barron's cover story, "five million of the country's 76million mortgage holders have lost their homes to foreclosure or lender ordered short sales since 2006, and an estimated 14million more own more on their homes than their properties are currently worth. In all, some $7.4 trillion in homeowners' equity has been destroyed according to Mark Zandi..."

Yet another whistleblower has stepped up, this time one already known to the general public, and one that Zero Hedge covered just over a month ago: we refer to the case of former CBO worker, Lan T. Pham, who, as the WSJ described in early February, "alleges she was terminated [by the CBO] after 2½ months for sharing pessimistic outlooks for the banking and housing sectors in 2010" and who "alleges supervisors stifled opinions that contradicted economic fixes endorsed by some on Wall Street, including research from a Morgan Stanley economist who served as a CBO adviser." As we observed in February, "what is most troubling is if indeed the CBO is nothing but merely another front for Wall Street to work its propaganda magic on the administration. Because at the core of every policy are numbers, usually with dollar signs in front of them, numbers which have to make sense and have to be projected into the future, no matter how grossly laughable the resultant hockeystick." As it turns out, somewhat expectedly, the WSJ version of events was incomplete. There is much more to this very important story, one which has major implications over "impartial" policy decisionmaking, and as a result, Ms. Pham has approached Zero Hedge to share her full story with the public.

Being an intrinsically destabilizing force, financialization led to the global financial crisis of 2008. Central banks went into panic mode, printing and injecting trillions of dollars of new infectious material into the global economy in the hopes of sparking a new even grander cycle of financialization. But you can't create a new cycle of plague when the hosts are either dead or already infected. The world has run out of sectors that can be financialized; that plague has already killed or infected every corner of the global economy. Ironically, all the central banks' attempts to reinflate the speculative leverage-debt bubble are only hastening the disease's decline and collapse. The global markets are cheering today because the plague-riddled corpse of Greek debt has been turned into a grotesque marionette that is being made to "dance" by the European Central Bank before an audience that has been told to applaud loudly, even though the ghastly, bizarre spectacle is transparently phony. Greek debt is already dead; it can't be reinfected and killed again, and neither can the debts of Ireland, Spain, Portugal, Italy et al. Housing is also already dead, though the still-warm body is still twitching in certain markets around the world.