Wednesday, September 23, 2009

Good Description of the Current Market Conditions - Why We See What We See

Below is an article from Steve Pearlstein of the Washington Post. Although the primary focus of the article is what the Fed should say at the conclusion of today's meeting, the article is an excellent summary of the current market. Text in bold is my emphasis:

For the past two years, the central challenge of U.S. economic policy has been to find a way to stabilize the financial system and the economy without reinflating the bubble or going back to the days of consuming more than we produce. In the end, that may prove harder than it seems.

Yes, the financial crisis has passed and the economy is growing again, but there's a good chance that growth will be temporary -- the result of one-time events like "Cash for Clunkers," the tax credit for first-time home buyers and the restocking of inventories allowed to dwindle during last year's crisis. But with businesses still reducing payrolls, bank lending still contracting, and anxious consumers determined to save more and spend less, a sustained recovery in 2010 isn't looking very likely.

To its credit, the Obama administration has never lost its focus on the goal of creating the conditions for sustained growth. At the G-20 meeting in Pittsburgh later this week, the president will push world leaders to take measurable steps over the next few years to move away from a global model that relies on Americans who buy too much, Asians who consume too little and Europeans who spend too much time at lunch. To prevent future bubbles, the leaders are also expected to embrace new international rules requiring banks to hold more capital and bankers to take less pay.

Less noticed but no less important is the "innovation" strategy that Obama outlined in his visit Monday to upstate New York. In it, the president reprised the quantum leap in public investment in infrastructure and research that was tucked into the stimulus bill and his budget plan. But he also laid out a set of "grand challenges" -- solar cells as cheap as paint, next-generation supercomputers and educational software as compelling as video games -- challenges that, if met, would preserve America's place as the world's economic superpower.

Less encouraging is what's happening on Wall Street. It turns out that all those bold and necessary steps by the Federal Reserve to prevent the financial system from collapsing wound up creating so much liquidity that it has now spawned another financial bubble.

Let's start with the $1.45 trillion that the Fed has committed to propping up the mortgage market -- money that, for the most part, was simply printed. Effectively, most of that has been used to buy up bonds issued by Fannie Mae and Freddie Mac from investors, who turned around and used the proceeds to buy "safer" U.S. Treasury bonds. At the same time, the Fed used an additional $300 billion to buy Treasurys directly. With all that money pouring into the market, you begin to understand why it is that Treasury prices have risen and interest rates fallen, even at a time when the government is borrowing record amounts of new money.

As it was printing all that money, the Fed was also lowering the interest rate at which banks borrow from the Fed and each other, to pretty close to zero. What didn't change was the interest rate banks charged everyone else. As a result, "spreads" between what banks pay for money and what they charge are near record highs.

So who is borrowing? By and large, it's not households and businesses, which are reluctant to borrow during a recession. Rather, it's hedge funds and other investors, who have been using the money to buy stocks, corporate bonds and commodities, driving prices to levels unsupported by the business and economic fundamentals.

The excess liquidity is even being used to finance a new "carry trade" in which global investors borrow at U.S. rates and buy government bonds in places like Australia, where prevailing rates are higher. Because the carry trade involves exchanging dollars for foreign currencies, it has been a major contributor to the recent decline in the dollar.

Naturally, this has been a blessing for Wall Street's biggest banks, whose trading desks have not only made big money executing and financing the investment strategies of others, but have also been trading actively for their own accounts. And with bubble profits come bubble bonuses.

Back at the Fed, the attitude has been to welcome anything that strengthens the balance sheets of banks, particularly while they continue to write off billions of dollars in soured loans each quarter. Nor is the central bank in any rush to begin pulling back from its current policies. Citing the mistakes made by their predecessors during the Great Depression and by the Bank of Japan during the "lost decade" of the 1990s, Fed officials are determined not to snuff out the economic recovery by moving too early to raise interest rates and reduce liquidity.

But the lesson I prefer to focus on is the one from this decade, which is that central bankers ignore financial bubbles at their peril. Given the new architecture of global finance, the Fed can no longer think of its job solely in terms of the trade-off between inflation and unemployment. Nor should it become complacent about restrained consumer prices while ignoring rapidly rising prices for financial assets. As Alan Greenspan discovered, it is also a mistake for central bankers to assume that they can quickly sop up excess liquidity whenever they decide the moment is right.

Alan Blinder, the Princeton economist and former Fed vice chairman, may be right when he says it's too early for the Fed to begin raising interest rates. The economy is still too weak, he says, the threat of deflation still too real.

But it is certainly not too early for the Fed, at the conclusion of its meeting Wednesday, to warn Wall Street that its current policies cannot, and will not, continue indefinitely -- particularly if the money is used to inflate bubbles rather than finance real, sustainable economic growth.

Tuesday, September 22, 2009

The Relative Importance of the US Dollar is Sliding Faster Than Earlier Thought

Tied to the entire mess of health care, the national debt, budget deficits, continuing financial crisis, etc. is the concern that the US is going to lose its predominance in the world as the primary currency. Many thought it would take decades to remove the dollar off its pinnacle. According to the HSBC the importance of the dollar is sliding much faster than previously thought. Text in bold is my emphasis. From the UK Telegraph:

The sun is setting on the US dollar as the ultra-loose monetary policy of the US Federal Reserve forces China and the vibrant economies of the emerging world to forge a new global currency order, according to a new report by HSBC.

"The dollar looks awfully like sterling after the First World War," said David Bloom, the bank's currency chief.

"The whole picture of risk-reward for emerging market currencies has changed. It is not so much that they have risen to our standards, it is that we have fallen to theirs. It used to be that sovereign risk was mainly an emerging market issue but the events of the last year have shown that this is no longer the case. Look at the UK – debt is racing up to 100pc of GDP," he said

From now on, think of the US as a bigger ZimbabweCrucially, China and rising Asia have reached the point where they can no longer keep holding down their currencies to boost exports because this is causing mayhem to their own economies, stoking asset bubbles. Asia's "mercantilist mindset" of recent decades is about to be broken by the spectre of an inflation spiral.

The policy headache was already becoming clear in the final phase of the global credit boom but the financial crisis temporarily masked the effect. The pressures will return with a vengeance as these countries roar back to life, leaving the US and other laggards of the old world far behind.

A monetary policy of near zero rates – further juiced by quantitative easing – is completely incompatible with circumstances in most of Asia, the Middle East, Latin America, and Africa. Divorce is inevitable. The US is expected to hold rates near zero through 2010 to tackle its own crisis.

What is occurring is an epochal loss in the relative wealth and economic power of the old G10 bloc of rich countries compared to rising regions of the world. The euro, yen, sterling, Swiss franc and other mature currencies will be relegated along with the dollar in this great process of rebalancing, but the Greenback will bear the brunt.

The Fed's super-loose policy is turning the dollar into the key funding currency for the next phase of the global "carry trade", taking over the role of Japan during its period of emergency stimulus.

Mr Bloom said regional currencies would emerge as the anchor for their smaller trading partners, with China, Brazil, or South Africa substituting the role of the US. Australia is already linking its fortunes to China through commodity ties.

Monday, September 21, 2009

Do You Know Who David Walker Is? - You Should

You may not always agree with the politics of David Walker, but you cannot ignore his grasp of the numbers. And when it is all said in done, "you live and die by the numbers". Text in bold is my emphasis. From the WSJ:

David Walker sounds like a modern-day Paul Revere as he warns about the country's perilous future. "We suffer from a fiscal cancer," he tells a meeting of the National Taxpayers Union, the nation's oldest anti-tax lobby. "Our off balance sheet obligations associated with Social Security and Medicare put us in a $56 trillion financial hole—and that's before the recession was officially declared last year. America now owes more than Americans are worth—and the gap is growing!"

His audience sits in rapt attention. A few years ago these antitax activists would have been polite but a tad restless listening to the former head of the Government Accountability Office, the nation's auditor-in-chief. Higher taxes is what hikes their blood pressure the most, but the profligate spending of the Bush and Obama administrations has put them in a mood to listen to this green-eyeshade Cassandra. "He's so unlike most politicians," says Sharron Angle, a former state legislator from Nevada, "his message is clear, detailed and with no varnish."

Mr. Walker, a 57-year-old accountant, didn't set out to be a fiscal truth-teller. He rose to be a partner and global managing director of Arthur Anderson, before being named assistant secretary of labor for pensions and benefits during the Reagan administration. Under the first President Bush, he served as a trustee for Social Security and Medicare, an experience that convinced him both programs are looming train wrecks that could bankrupt the country. In 1998 he was appointed by President Bill Clinton to head the GAO, where he spent the next decade issuing reports trying to stem waste, fraud and abuse in government.

Despite many successes, he was able to make only limited progress in reforming Washington's tangled bookkeeping. When he arrived he was told the Pentagon was nearly a decade away from having a clean audit, or clear evidence that its financial statements were accurate. When he left in 2008, he was told the Pentagon was still a decade away from that goal. "If the federal government was a private corporation, its stock would plummet and shareholders would bring in new management and directors," he said as he retired from the GAO.

Although he found the work fulfilling, Mr. Walker said he decided to leave last year with a third of his 15-year term left because "there are practical limits on what one can—and cannot—do in that job." He became president and CEO of the Peter G. Peterson Foundation, a group seeking to educate the public and policy makers on the need for fiscal prudence. Although it accepts private donations, its own future is secure given that Mr. Peterson, a former head of the Blackstone private equity firm and secretary of commerce under Richard Nixon, has endowed it with a $1 billion gift.

We met to hash over current events in his tastefully appointed office just off of New York's Fifth Avenue. Mr. Walker, a lean man with an unflappable demeanor, welcomed me with the observation that he's never been in more demand as a speaker "but it's only because everyone is so worried for our future."

His group calls itself strictly nonpartisan and nonideological, and that seems to limit how tough and specific it can be. Last year, it released a documentary "I.O.U.S.A.," that followed Mr. Walker as he toured the country on his fiscal "wake up" tour. The solutions the film proposes for the debt crisis are either glib or gray: The country should save more, reduce oil consumption, hold politicians accountable and get more value from health-care spending.

But in its diagnosis of the problem the film scores a bull's-eye. Among the fiscal hawks featured in the film is Rep. Ron Paul, who memorably tells Alan Greenspan that if doctors had the same success rate in meeting his goals as the Fed has had, patients would be dead all over America.

Mr. Walker's own speeches are vivid and clear. "We have four deficits: a budget deficit, a savings deficit, a value-of-the-dollar deficit and a leadership deficit," he tells one group. "We are treating the symptoms of those deficits, but not the disease."

Mr. Walker identifies the disease as having a basic cause: "Washington is totally out of touch and out of control," he sighs. "There is political courage there, but there is far more political careerism and people dodging real solutions." He identifies entrenched incumbency as a real obstacle to change. "Members of Congress ensure they have gerrymandered seats where they pick the voters rather than the voters picking them and then they pass out money to special interests who then make sure they have so much money that no one can easily challenge them," he laments. He believes gerrymandering should be curbed and term limits imposed if for no other reason than to inject some new blood into the system. On campaign finance, he supports a narrow constitutional amendment that would bar congressional candidates from accepting contributions from people who can't vote for them: "If people can't vote in a district not their own, should we allow them to spend unlimited money on behalf of someone across the country?"

Recognizing those reforms aren't "imminent," Mr. Walker wants Congress to create a "fiscal future commission" that would hold hearings all over America to move towards a consensus on reform. It would then present Congress with a "grand bargain" on entitlement and budget-control reforms. Its recommendations would be guaranteed a vote in Congress and be subject to only limited amendments. I note that critics have called such a commission an end-run around the normal legislative process. He demurred, saying that Congress would still have to approve any recommendations in an up-or-down vote—much like the successful base-closing commission created by GOP Rep. Dick Armey in the 1980s.

What kind of reforms would Mr. Walker hope the commission would endorse? He suggests giving presidents the power to make line-item cuts in budgets that would then require a majority vote in Congress to override. He would also want private-sector accounting standards extended to pensions, health programs and environmental costs. "Social Security reform is a layup, much easier than Medicare," he told me. He believes gradual increases in the retirement age, a modest change in cost-of-living payments and raising the cap on income subject to payroll taxes would solve its long-term problems.

Medicare is a much bigger challenge, exacerbated by the addition of a drug entitlement component in 2003, pushed through a Republican Congress by the Bush administration. "The true costs of that were hidden from both Congress and the people," Mr. Walker says sternly. "The real liability is some $8 trillion."

That brings us to the issue of taxes. Wouldn't any "grand bargain" involve significant tax increases that would only hurt the ability of the economy to grow? "Taxes are going up, for reasons of math, demographics and the fact that elements of the population that want more government are more politically active," he insists. "The key will be to have tax reform that simplifies the system and keeps marginal rates as low as possible. The longer people resist addressing both sides of the fiscal equation the deeper the hole will get."

I steer towards the fiscal direction of the Obama administration. He says his stimulus bill was sold as something it wasn't: "A number of people had agendas other than stimulus, and they shaped the package."

As for health care, Mr. Walker says he had hopes for comprehensive health-care reform earlier this year and met with most of the major players to fashion a compromise. "President Obama got the sequence wrong by advocating expanding coverage before we've proven our ability to control costs," he says. "If we don't get our fiscal house in order, but create new obligations we'll have a Thelma and Louise moment where we go over the cliff." Mr. Walker's preferred solution is a plan that combines universal coverage for all Americans with an overall limit on the federal government's annual health expenditures. His description reminds me of the unicorn—a marvelous creature we all wish existed but is not likely to ever be seen on this earth.

As I prepare to go, Mr. Walker returns to the theme of economic education. Poor schools often produce young people with few tools to help them realize the extent of the fiscal trap their generation is going to fall into.

One way the Peterson Foundation wants to change that is to bring big numbers down to earth so people can comprehend them. "Our $56 trillion in unfunded obligations amount to $483,000 per household. That's 10 times the median household income—so it's as if everyone had a second or third mortgage on a house equal to 10 times their income but no house they can lay claim to." As for this year's likely deficit of $1.8 trillion, Mr. Walker suggests its size be conveyed thusly: "A deficit that large is $3.4 million a minute, $200 million an hour, $5 billion a day," he says. That does indeed put things into perspective.

Despite an occasional detour into support for government intervention, Mr. Walker remains the Jeffersonian he grew up as in his native Virginia. "I view the Constitution with deep respect," he told me. "My ancestors and those of my wife fought and died in the Revolution, and I care a lot about returning us to the principles of the Founding Fathers."

He notes that today the role of the federal government has grown such that last year less than 40% of it related to the key roles the Founders envisioned for it: defense, foreign policy, the courts and other basic functions. "What happened to the Founders' intent that all roles not expressly reserved to the federal government belong to the states, and ultimately the people?" he asks. "I'm pleased the recent town halls show people are waking up and realizing it's time to pay attention to first principles."

With that we parted, as he had to get back to work. Today's Paul Revere is hard at work on a book due out in January from Random House that will be called, "Come Back America."

Monday, September 14, 2009

Warnings from Joseph Stiglitz - Underlying Financial System Worse Than in 2007

Text in bold is my emphasis. From Bloomberg:

Joseph Stiglitz, the Nobel Prize- winning economist, said the U.S. has failed to fix the underlying problems of its banking system after the credit crunch and the collapse of Lehman Brothers Holdings Inc.

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today in Paris. “The problems are worse than they were in 2007 before the crisis.”

Stiglitz’s views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama’s administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing “excessively.”

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.’s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as “systemically important” and subject them to stricter oversight, his plan wouldn’t force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

“We aren’t doing anything significant so far, and the banks are pushing back,” he said. “The leaders of the G-20 will make some small steps forward, given the power of the banks” and “any step forward is a move in the right direction.”

G-20 leaders gather next week in Pittsburgh and will consider ways of improving regulation of financial markets and in particular how to set tighter limits on remuneration for market operators. Under pressure from France and Germany, G-20 finance ministers last week reached a preliminary accord that included proposals to claw-back cash awards and linking compensation more closely to long-term performance.

“It’s an outrage,” especially “in the U.S. where we poured so much money into the banks,” Stiglitz said. “The administration seems very reluctant to do what is necessary. Yes they’ll do something, the question is: Will they do as much as required?”

Stiglitz, former chief economist at the World Bank and member of the White House Council of Economic Advisers, said the world economy is “far from being out of the woods” even if it has pulled back from the precipice it teetered on after the collapse of Lehman.

“We’re going into an extended period of weak economy, of economic malaise,” Stiglitz said. The U.S. will “grow but not enough to offset the increase in the population,” he said, adding that “if workers do not have income, it’s very hard to see how the U.S. will generate the demand that the world economy needs.”

The Federal Reserve faces a “quandary” in ending its monetary stimulus programs because doing so may drive up the cost of borrowing for the U.S. government, he said.

“The question then is who is going to finance the U.S. government,” Stiglitz said.

Sunday, September 13, 2009

This Weekend's Contemplation - Just Maybe Lehman Had to Fail

A year ago was the weekend that Lehman Brothers found out that they would have to file for bankruptcy. The article below gives an analysis and opinion of the Lehman bankruptcy with the benefit of year's worth of history. A couple of things worth noting about September 2008. The market was going to panic, it just needed a catalyst. Many in the industry were surprised (shocked is probably a better word) that the government was going to allow Lehman to fail. The opinions below are interesting. From the NY Times:

What if, a year ago this weekend, the government and the banking industry had somehow found a way to keep Lehman from filing for bankruptcy? How might that have changed the course of the financial crisis?

We know, of course, what did happen; it is seared in our memory. On Monday, Sept. 15, 2008, when the news broke that, despite nonstop efforts that weekend, there would be no last-minute reprieve for Lehman, à la Bear Stearns, all hell broke loose.

The stock market tanked, dropping more than 500 points that day. The Reserve Primary Fund, a money market fund that held Lehman bonds, “broke the buck.” Shortly afterward, the American International Group nearly collapsed, and had to be bailed out with an extraordinary $85 billion loan from the government. Morgan Stanley was rumored to be next. Banks all over Europe were teetering. There were even fears about the stability of mighty Goldman Sachs. On Wall Street — indeed, in financial capitals all over the Western world — the panic was palpable.

Ever since that weekend, most people, including me, have viewed the decision by Henry Paulson Jr., the Treasury secretary at the time, and Ben Bernanke, the Federal Reserve chairman, to allow Lehman to go bust as the single biggest mistake of the crisis. Never mind that the two men have insisted ever since that they had no other option; surely, they could have created some options if they’d wanted to. Or so goes the conventional wisdom.

Christine Lagarde, France’s finance minister, for instance, called the decision “horrendous” and a “genuine mistake.” According to David Wessel, author of a book about the crisis, “In Fed We Trust,” the head of the European Central Bank, Jean-Claude Trichet, has said the same thing in private. He quotes one of Mr. Trichet’s aides as saying, “It never occurred to us that the Americans would let Lehman fail.” In speeches and articles, in books and television appearances, commentators of every political stripe have pointed to the Lehman bankruptcy as the event that turned the subprime crisis into a full-blown financial collapse.

As we approach this anniversary, though, I’ve begun to question that conventional wisdom. Yes, the fall of Lehman Brothers set off a contagion of panic. And I’m still convinced that Mr. Paulson and Mr. Bernanke could have found a way to save Lehman had they been so inclined (more on that in a moment). But I’ve become convinced that, if Lehman had been saved, the collapse would have occurred anyway.

John H. Makin, a visiting scholar at the American Enterprise Institute, wrote recently, “If the Lehman Brothers’ failure had not triggered the panic phase of the cycle, some other institutional failure would have done so.” I’ll go a step further: it is quite likely that the financial crisis would have been even worse had Lehman been rescued. Although nobody realized it at the time, Lehman Brothers had to die for the rest of Wall Street to live.

A week ago, a Reuters reporter traveled to Richard Fuld’s vacation home in Ketchum, Idaho, to see if the former Lehman chief executive would say anything about the anniversary. (When Mr. Fuld walked outside to meet her, he said, “You don’t have a gun; that’s good,” according to the reporter.)

Standing in his driveway, leading, as ever, with his chin, Mr. Fuld talked about the “pummeling” he had taken for presiding over the bankruptcy. “They’re looking for someone to dump on right now and that’s me,” he said. “The facts are out there. Nobody wants to hear it, especially not from me,” he added.

Mr. Fuld’s bitter remarks reflect the way many former Lehman executives feel, even now, about the fact that their firm was the only one to go under during the crisis. After all, they say, Lehman’s mistakes — too much leverage, an overreliance on shaky real estate assets, playing down the risks on its balance sheet — were the same mistakes just about every firm made. Bear Stearns made those mistakes — and was rescued. Citigroup made those mistakes — and was rescued.

What’s more, they say, in the months and weeks leading up to the September crisis, the firm, realizing that it might need a Plan B, proposed that it be allowed to become a bank holding company. It also asked for access to the Fed’s discount window, which is reserved for troubled banks. (What Lehman didn’t do, however, despite the repeated urging of Mr. Paulson, was find a partner with deep pockets or raise additional capital.) These are the “facts” Mr. Fuld was referring to when he spoke the Reuters reporter.

But Timothy Geithner, then New York Fed president, now Treasury secretary, didn’t like the idea of letting an investment bank become a bank holding company — so he said no. Immediately after the Lehman default, however, that is exactly what he allowed Morgan Stanley and Goldman Sachs to do, which helped stabilize both firms.
Of course, politics played a role, too. Congress had no stomach for another bailout on the heels of the takeover of Fannie Mae and Freddie Mac just a week before Lehman weekend. In his book, Mr. Wessel, the economics editor of The Wall Street Journal, quotes Mr. Paulson as saying in a conference call, “I’m being called Mr. Bailout. I can’t do it again.”

Although Mr. Paulson would later say that he had no legal authority to save Lehman Brothers, it seems pretty clear from Mr. Wessel’s account that he wasn’t really looking for any authority. He wanted to send a message. That Monday morning, in announcing the Lehman default, Mr. Paulson told the media: “I never once considered that it was appropriate to put taxpayers’ money on the line” to save Lehman Brothers.
For all of these reasons and more, former Lehman executives tend to feel that the process that led to the firm’s bankruptcy was profoundly unfair. I’ve heard the word “tragic” more than once. And I agree with them: it was unfair — and, certainly for the people who lost their jobs, even tragic. Lehman Brothers was simply in the wrong place at the wrong time. But for the sake of the financial system, it was also the luckiest thing that could have happened.

In the months between Bear Stearns and Lehman Brothers, Mr. Paulson and Mr. Bernanke had approached Congressional leaders about the need to pass legislation that would give them a handful of additional tools to help them deal with a larger crisis, should one ensue. But they quickly realized there was simply no political will to get anything done. After Lehman, however, Mr. Paulson and Mr. Bernanke were able to persuade Congress to pass a bill that gave the Treasury Department $700 billion in potential bailout money — which Mr. Paulson then used to shore up the system, and help ease the crisis. Even then, it wasn’t easy; it took two tries in the House to pass the legislation. Without the crisis prompted by the Lehman default, it would have been impossible to pass a bill like that.

That is one reason the Lehman default turned out to be a good thing. Here’s another: If Lehman had been sold to Bank of America, as originally planned, some other firm — no doubt bigger, and posing more danger to the global financial system — would have failed instead. By then, there was simply too much panic in the air. A crisis of some sort was inevitable.

Mr. Paulson, recall, wanted Wall Street to come up with its own solution for saving Lehman. But as the chief executives sat around the big conference table at the New York Fed all weekend, they kept worrying about who would be next. They talked openly about whether Merrill Lynch could last much longer. (Mr. Paulson bluntly told John Thain, Merrill’s chief executive, that he needed to find a buyer, which is why Bank of America turned its attention to Merrill and away from Lehman.) And there were rumblings that A.I.G. was in trouble. Why were they so reluctant to pitch in to save Lehman? They were worried that they might be next.

In truth, a Merrill or A.I.G. default would have created something akin to a financial nuclear bomb — much worse than Lehman’s filing for bankruptcy. Merrill was a much bigger firm, with deep roots on Main Street thanks to its “thundering herd.” A.I.G. was the world’s largest insurance company, whose credit-default swaps were propping up half of Europe’s banks. (By buying A.I.G.’s swaps, European banks could evade their capital requirements.) Lehman, by contrast, was a smaller firm, with practically no ties to Main Street. The risks it posed to the system were real — but smaller.

Almost everyone I’ve ever spoken to in Hank Paulson’s old Treasury Department agrees that without the immediate panic caused by the Lehman default, the government would never have agreed to make the loans needed to save A.I.G., a company it knew very little about. In effect, the Lehman bankruptcy caused the government to panic, which in turn caused it to save the firm it really had to save to prevent catastrophe. In retrospect, if you had to choose one firm to throw under the bus to save everyone else, you would choose Lehman.

It would be nice to be able to say that officials at Treasury and the Federal Reserve understood this at the time. But of course they didn’t. Throughout history, people have stumbled their way through crises, not fully understanding the potential consequences of their actions, hoping the choices they make turn out to be the right ones.

Mr. Bernanke is a well-known student of the Great Depression, which guided many of his actions during the crisis. Mr. Paulson showed immense tenacity once the crisis struck. History, I now believe, will praise their efforts in subduing the collapse. But the Lehman default?

You know the old saying: Sometimes, it’s better to be lucky than good. A year ago this weekend, it turns out, was one of those times.

Thursday, September 10, 2009

Foreclosures are not Letting Up

The number of foreclosures in August in the US continues at it highs. New estimates indicates that foreclosures will continue to run at high levels well into 2010. In my mind this is additional proof that there is no underlying strength in the economy. So even if there is a recovery it will be fairly weak. Text in bold is my emphasis. From Yahoo.News:

U.S. mortgage foreclosure filings in August hovered near July's record high despite broad efforts to keep borrowers in their homes and will probably rise for another year, according to a report released on Thursday.

Filings -- including notices of default, auction and bank repossession -- dipped 1 percent last month from July's all-time high and were up 18 percent in August from the same month a year earlier, real estate data firm RealtyTrac said.

"The pipeline of early stage foreclosures and delinquent loans is still probably going to overwhelm the system's ability to quickly modify" terms so struggling homeowners can make their monthly mortgage payments, said Rick Sharga, senior vice president at the Irvine, California-based company.

One in every 357 U.S. households with loans got a foreclosure filing in August.

Though lenders are moving in the right direction, Sharga said, RealtyTrac is revising up its estimate for filings this year and now expects a more prolonged foreclosure crisis.

Some 3.4 million households will get a filing this year, up from the prior estimate of 3 million to 3.2 million, and sharply higher than 2.3 million filings last year.

If the forecast is realized, it will be more than four times the filings in 2005, before the deepest housing crash since the Great Depression began.

"We had been thinking that this year would be the peak, but at the rate things are going right now, it's appearing more likely that late 2010 might be the peak year before things start to moderate," Sharga said.

A quick recovery is not in the cards, either.

"I don't expect it to be that 2010 will peak and 2011 will be the wonderful land of Oz," Sharga added."

Foreclosures that were delayed by various state and federal moratoria that mostly ended in March have been pushing through the system in the summer.

Meantime, the Obama administration's housing rescue has slowly started taking hold.

Just 12 percent of U.S. homeowners eligible under the loan modification program have had their loans altered, the Treasury Department said on Wednesday. That share has risen in the month, but Treasury still expects millions more foreclosures.

"The reason the numbers are just phenomenally high is that we're dealing right now with two concurrent problems," said Sharga, referring to sour loans made when standards were lax as well as the highest U.S. unemployment rate in 26 years.

The lone bright spot in August was a modest decline in bank repossessions, Sharga said.

"Whether it's loan modifications or the banks just delaying the ultimate repossessions, we're not seeing quite the volume of repossessions you'd expect with this level of activity" of foreclosure notices, he said.

But while the REOs, or real estate-owned properties, dropped 13 percent in August, "we also saw a record high number of properties either entering default or being scheduled for a public foreclosure auction for the first time," RealtyTrac Chief Executive James Saccacio said in a statement.

Six states had 62 percent of total foreclosure actions in August, even though REOs fell in each of those states.

California REOs dropped 32 percent from July, but the state continued to post the highest overall total with 92,326 properties with loans getting a filing.

Nevada, Florida and California had the highest state foreclosure rates, respectively.

Nevada had the highest rate with one in 62 households getting a filing in August. Filings were down 8 percent in the month but up 53 percent in the year.

Rounding out the states with the highest rates of foreclosure activity were Michigan, Idaho, Utah, Colorado, Georgia and Illinois.

A new Michigan law requiring lenders to file a separate public default notice before slating a foreclosure auction pushed the state to the fifth highest rate from 19th place in the prior month.

Wednesday, September 9, 2009

China, Gold, and the US Dollar

Below is an article that connects some of the dots between China, the price of gold, and the US dollar. Combining our large national debt, the high money supply required to bolster our banking system, the stated Chinese position of moving away from the dollar as to a way to hold their large reserve position and the strain this puts on the US dollar it is no wonder that the Chinese are moving into gold. With the amount of gold the Chinese need it is no wonder that the price of gold has been relatively strong. Text in bold is my emphasis. From the UK Telegraph:

China has issued what amounts to the “Beijing Put” on gold. You can make a lot of money, but you really can’t lose.

I happened to see quite a bit of Cheng Siwei at the Ambrosetti Workshop, a gathering of politicians and global strategists at Lake Como, including a dinner at Villa d’Este last night at which he listened very attentively as a number of American guests tore President Obama’s economic and health policy to shreds.

Mr Cheng was until recently Vice-Chairman of the Communist Party’s Standing Committee, and is now a sort of economic ambassador for China around the world — a charming man, by the way, who left Hong Kong for mainland China in 1950 at the age of 16, as young idealist eager to serve the revolution. Sixty years later, he calls himself simply “a survivior”.

What he said about US monetary policy and gold – this bit on the record – would appear to validate the long-held belief of gold bugs that China has fundamentally lost confidence in the US dollar and is going to shift to a partial gold standard through reserve accumulation.

He played down other metals such as copper, saying that they could not double as a proxy currency or store of wealth.

“Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not stimulate the market,” he said.

In other words, China is buying the dips, and will continue to do so as a systematic policy. His comment captures exactly what observation of gold price action suggests is happening. Every time it looks as if the bullion market is going to buckle, some big force steps in from the unknown.

Investors long-suspected that it was China. We later discovered that Beijing had in fact doubled its gold reserves to 1054 tonnes. Fait accompli first. Announcement long after.

Standing back, you can see that the steady rise in gold over the last eight years to $994 an ounce last week – outperforming US equities fourfold, even with reinvested dividends – has roughly tracked the emergence of China as a superpower in foreign reserve holdings (now $2 trillion).

As I have written in today’s paper, Mr Cheng (and Beijing) takes a dim view of Ben Bernanke’s monetary experiments at the Federal Reserve.

“If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

This line of argument is by now well-known. Less understood is how much trouble the Fed’s QE policies are causing in China itself, where they have vicariously set off a speculative boom on the Shanghai exchange and in property. Mr Cheng said mid-level house prices are now ten times incomes.

“If we raise interest rates, we will be flooded with hot money. We have to wait for them. If they raise, we raise.”

“Credit in China is too loose. We have a bubble in the housing market and in stocks so we have to be very careful, because this could fall down.”

Of course, China could end this problem by letting the yuan rise to its proper value, but China too is trapped. Wafer-thin profit margins on exports mean that vast chunks of Chinese industry would go bust if the yuan rose enough to close the trade surplus. China’s exports were down 23pc in July from a year before even at the current exchange rate, and exports make up 40pc of GDP. “We have lost 20m jobs in this crisis,” he said.

China’s mercantilist export strategy has led the country into a cul-de-sac. China must continue to run its trade surplus. It must accumulate hundreds of billions more in reserves. Ergo, it must buy a great deal more gold.

Where is the gold going to come from?

Tuesday, September 8, 2009

Five Lessons to Draw from the Financial Crisis a Year Ago

The following from the WSJ Economics Blog gives an interesting perspective on 5 lessons that should be learned from the financial crisis that started a year ago. If you want to look over the actual presentation go to link above and click on presentation.

With the one-year anniversary of the collapse of Lehman Brothers approaching, economists are listing lessons learned. Among them is Richard Berner of Morgan Stanley.

Here are his five lessons, drawn from a presentation at recent conference sponsored last month by the Central Bank of Argentina and elaborated on in a note to clients last week:

1. “A strong and well-regulated financial system should be the first line of defense against financial shocks …. [T]he more free-market oriented we want our economies to be, the more we need official supervision and oversight of our financial institutions and markets. That’s because truly free-market economies involve a high risk of business failure, and corresponding high risks to the financial institutions and investors that lend to and invest in those businesses. A key lesson from this crisis is that competition among lenders breeds innovation, but also instability.”

2. “Aggressive and persistent policy responses are the second line of defense … [F]rom past crises like Japan’s lost decade, we learned that the persistence of policy support is also critical to facilitate balance-sheet cleanup, offset the drag on the economy, and prevent deflation … For market participants, understanding just how persistent policy support will be is important; they want central bankers to make a clear distinction between the end of easing, which is now underway, and exit strategies or the beginning of tightening, which lie ahead.”

3. “Macroprudential supervision and asset prices should both play bigger roles in monetary policy …. There is broad agreement that a global focus on systemic risk is needed. There is less agreement on exactly how to define and implement it. ”

4. “Flexible exchange rates enhance the ability of monetary policy to respond to shocks.”

5. “Global imbalances contributed to the crisis by allowing internal imbalances to grow. … [R]ecession is helping to rebalance the US and global economies and markets. The question now: Will this rebalancing process be benign and sustainable for economies and markets, or will it be disruptive? I worry about the latter because current US policies are expanding rather than reducing imbalances, and officials elsewhere are limiting exchange-rate adjustment.”

Monday, September 7, 2009

A Good Description of the U-6 Unemployment Rate

Below is a brief description of U-6, which is the broadest measure unemployment rate currently used by the Dept. of Labor. From WSJ Real-Time Economics. If you really want to dig into the numbers see the BLS,

Job losses moderated in August, but the unemployment rate ticked up 0.3 percentage point to 9.7%, the highest level since June 1983.

But another more comprehensive gauge of unemployment ticked up even more. The government’s broader measure, known as the “U-6″ for its data classification, hit 16.8% in August, 0.5 percentage points higher than July.

The comprehensive measure of labor underutilization accounts for people who have stopped looking for work or who can’t find full-time jobs. The index had declined last month, along with the headline unemployment rate. That decline was sparked by more people dropping out of the labor force. This month the labor force increased by 73,000 people and the plunge in employment was larger in the household survey, which is used to calculate the jobless rate, than in the payroll survey used to calculate the change in nonfarm payrolls.

The U-6 figure is the highest since the Labor Department started this particular data series in 1994. But, similar to the headline unemployment rate, it likely isn’t as bad as it was in the 1980s. U-6 only goes back to 1994, but a discontinued measure has a longer history. That old U-6 measure peaked at 14.3% in 1982. Through some calculation, a comparable measure can be determined in the current report. Under the old U-6 methodology, the August rate would be 13.3%, the highest rate since 1983, but still below the peak.

Still, the elevated U-6 rate gives a clearer picture of the broader employment situation. The 9.7% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The “actively looking for work” definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things.

The U-6 figure includes everyone in the official rate plus “marginally attached workers” — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

Many forecasters expect the official unemployment rate to top 10% by the end of this year, and the broader rate could easily top 18%. For people in this group, comparisons to the Great Depression (when 25% of Americans were out of work) may not look so wild even if overall economic activity is holding up better.

Friday, September 4, 2009

The unemployment is Up to 9.7% for August

The BLS released the August unemployment numbers this moring and the most widely accepted unemployment rate U-3 was up in August to 9.7%. A broader measure of unemployment U-6 was up to 16.8%. It is clear that the rate of increase in unemployment is declining, but it is still on its way up. The article below from Yahoo gives a more detailed discussion of the unemployment data. Text in bold is my emphasis.

U.S. employers cut a fewer-than-expected 216,000 jobs in August, while the unemployment rate rose to a 26-year high, the government said on Friday in a report showing a still fragile labor market.

The Labor Department said the unemployment rate rose to 9.7 percent after dipping to 9.4 percent in July and the decline in payrolls was the smallest in a year. The department revised job losses for June and July to show 49,000 more jobs lost than previously reported.

Analysts had expected non-farm payrolls to drop 225,000 in August and the unemployment rate to rise to 9.5 percent.

The labor force increased by 73,000 in August, indicating the return of some jobless workers who had given up looking for work accounting for part of the rise in the unemployment rate.

Since the start of the recession in December 2007, the economy has shed 6.9 million jobs, the department said. Stubbornly high unemployment is wearing on consumer confidence and crimping domestic demand, pointing to an anemic recovery from the worst slump in 70 years. Consumer spending accounts for over two-thirds of U.S. economic activity.

However, the August report confirmed the pace of layoffs was easing from early this year, when nearly three quarters of a million jobs were lost in January.

Manufacturing employment fell by 63,000, with a total of 2 million factory jobs lost since the start of the recession. Payrolls in construction industries dropped 65,000 after falling 73,000 in July.

The service-providing sector purged 80,000 workers in August, while the goods-producing industries shed 136,000 positions.

Education and health services continued to add jobs, with payrolls increasing 52,000 in August after rising 21,000 in July. Government employment fell 18,000 after slipping 28,000 in July.

Thursday, September 3, 2009

Problems in the Supply Chain?

An inordinate amount of time is spent talking about the recovery, the banks, health care, etc. But no one has spent any time talking about the companies that produce the components that go into the manufacture of goods for consumers and companies, the critical portion of the supply chain. This could be one of the biggest problems facing the US as the economy starts its long recovery process. It is probably worth keeping your eye on "this ball". Text in bold is my emphasis. From Reuters:

Think this downturn was rough on manufacturers?

Some analysts believe the sector's woes may worsen when demand for industrial products rebounds -- and manufacturers discover key suppliers cannot rebound with them because they are effectively -- but not yet officially -- out of business.

Call them zombie suppliers. Analysts say the speed with which major manufacturers cut output in this recession put unprecedented strain on thousands of small manufacturers that supply the industry with critical parts.

That has left the supply chain with an unknown number of suppliers who are dead but do not know it -- companies so undercapitalized and overleveraged they will never raise the money they need to get their idle plants running again.

"Their lenders are going to say, 'Sorry, we're not going to increase our exposure with you because we don't know if you're going to make it or not," says Bill Diehl, the chief executive of BBK, an advisory firm that does supply chain risk analysis.

And that, of course, would be a horror show for the publicly traded manufacturers that rely on these suppliers. It could leave them scrambling to secure components once the recovery starts -- and missing some of the rebound's benefits.

"That's the bigger risk," says Craig Giffi, the head of Deloitte's U.S. consumer and industrial products practice. "They could be left unable to capture the upturn."

In the past, suppliers were often initially insulated from the effects of industrial cycles because their big customers were slow to cut production -- because they believed the downturn would be brief or because slow internal processes made quicker cuts impossible.

But the industry's move from mass production to a build-to-order paradigm, and the outsourcing of many parts once produced in-house to outside suppliers, have changed all that.

That is a big reason why U.S. industrial output tumbled at a record rate in this downturn. Sure, demand evaporated last fall after the collapse of Lehman Brothers essentially paralyzed the credit markets. But manufacturers also reacted differently than they had in the past, immediately shutting down production at their own plants -- and, by extension, those of their just-in-time suppliers.

"It's never happened this fast before," said Alex Blanton, an analyst at Ingalls & Snyder who has covered manufacturing since the 1970s.

The sector, in other words, is in uncharted territory. So concerns are high. "When you take 50 to 75 percent out of your purchases overnight ... you can inflict terrible, permanent damage on your supply base," says Eli Lustgarten, an analyst at Longbow Research.

During a recent meeting with analysts, Gerard Vittecoq, Caterpillar Inc's production guru, acknowledged that the company was already seeing "a lot of disruption with suppliers going bankrupt or having difficulty" -- and the Peoria, Illinois-based company is still largely cutting output.

The banking industry's troubles are adding to the uncertainty. Diehl at BBK believes many lenders, overwhelmed by the woes of consumer borrowers, have resisted foreclosing on distressed commercial borrowers -- provided they keep their heads down and do not come looking for help.

"Lenders don't want to have to pay the property taxes and everything else associated with keeping that stuff up once they foreclose," he says.

"So as long as the borrower isn't trying to request additional funding, they've basically been sitting still, even with borrowers who are in default, hoping that the market would come back and some of them will be able to survive."

Giffi at Deloitte agrees. He says that "bankruptcy statistics aren't indicative yet of the weakness that we're seeing in a broad base of suppliers.

"Until those companies have to produce something -- and to secure raw materials, to make a part, to hire more workers -- no one will know how weak their balance sheets and credit positions really are."

To be sure, not everyone thinks the industry is on the verge of a "Night of the Living Dead"-like supplier nightmare.

An analysis by the financial information company Sageworks of the quarterly balance sheets of more than 1,000 small manufacturers -- the kind that often produce parts for larger companies -- found surprising signs of health.

While the analysis found that average profit per employee had tumbled nearly 50 percent at small manufacturers over the past year, other financial metrics have improved. The average quick ratio, for instance, a rough-but-reliable indicator of a company's ability to pay its bills, rose to 1.7-to-1 from 1.4-to-1 over the last year. Any ratio above 1-to-1 is considered healthy. And cash as a percentage of total assets has also improved.

That leads Melinda Crump, a Sageworks spokeswoman, to declare suppliers "may have a fighting chance" -- especially if the economists are right and the rebound turns out to be a slow, U-shaped affair rather than a rapid, V-shaped uptick. That, Crump says, would allow companies with low production levels "to rebuild economies of scale instead of being part of an overwhelming wave hitting the banks for large sums."

But no one denies that some suppliers will never return, no matter what shape the recovery takes.

"The robustness of the supply chain won't be the same," says Lustgarten. "You're going to lose some of the marginal players and manufacturers that aren't thinking about that right now will probably be facing some difficulties in the upturn."

Wednesday, September 2, 2009

Will 1,000 Banks Fail Over the Next Year? John Kanas Thinks So

Below is an interview with John Kanas, a private investor in banks. Listen to video. He gives a pretty fair assessment of the banking industry whether you like it or not. From CNBC:

The US banking system will lose some 1,000 institutions over the next two years, said John Kanas, whose private equity firm bought BankUnited of Florida in May.

“We’ve already lost 81 this year,” Kanas told CNBC. “The numbers are climbing every day. Many of these institutions nobody’s ever heard of. They're smaller companies.” (See the accompanying video for the complete interview.)

Failed banks tend to be smaller and private, which exacerbates the problem for small business borrowers, said Kanas, who became CEO of BankUnited when his firm bought the bank and is the former chairman and CEO of North Fork bank.

“Government money has propped up the very large institutions as a result of the stimulus package,” he said. “There’s really very little lifeline available for the small institutions that are suffering.”

This comes at a time when the FDIC has established new rules on bank sales. Private equity, for instance, would have to hold double the capital of their competitors in order to buy such an institution, said Kanas.

“This will have somewhat of a chilling effect on our participation,” he said. “As a result of having to keep higher capital levels, we’ll see lower prices coming from that sector.”

Of the 81 failed banks this year, two have been successfully acquired by private equity, he said. Kanas’ private equity firm bought UnitedBank, the failed Florida-based bank, from the FDIC in May. Regulators also allowed the sale of IndyMac Bank of California earlier this year.

“We are seeing more people step up and lobby bids in this situation,” he said. “We’re seeing more players mostly as a result of being attracted to the sector. I’m not so sure that will continue now that the rules have been ratchet it up.”

Meanwhile, much of the commercial realty problem resides in the regional and small community banks, said Kanas, because larger banks haven’t fueled that sector in the past.

“The market is expecting about the way we were expecting,” he said. “Unfortunately, we’re not seeing any evidence of a recovery in the real estate market in the southern Florida market,” he said.

Tuesday, September 1, 2009

Recovery of the Housing Market?

Many believe that the housing market is recovering. To support this position they give the recent statistics on housing starts, home sales, and the increase in the Case-Shiller index. I will not deny any of this. However, foreclosures continue at high rates, mortgage delinquencies continue to plague the banking industry, and the unemployment rate, driver of these problems, has not been resolved. Once again let me beat the "no underlying strength in the economy" drum. Personally, we should all take naps until Thanksgiving (it is less than 3 months away) and then look at all the economic data again. This should give us a clearer picture of where we are headed. Text in bold is my emphasis. From CNN Money/Fortune:

Is the housing bust over?

Shares of Toll Brothers, Hovnanian and KB Home and other builders have surged. The exchange-traded fund that tracks the group has nearly doubled since March.

Home starts have risen for five straight months, while sales of new homes recently hit their highest level since last September. Prices are up as well: the Case-Shiller index of national house prices rose 2.9% in the second quarter, ending a three-year decline.

These signs -- as well as anecdotal reports about house shoppers growing more willing to write a deposit check -- have executives at homebuilding firms declaring the worst is over.

"We believe declining cancellations and more solid demand indicate that the housing market is stabilizing," Toll Brothers chief executive officer Bob Toll said this month in a conference call with investors and analysts.

But housing boosters have forecast turnarounds repeatedly since the market peaked in 2006, only to be proved wrong by plunging prices. And skeptics say they're wrong again now.

They argue that a deeply indebted consumer, a weak job market, expiring incentives and rising foreclosures spell a quick end to any housing rebound.

"We're entering the phase where the homeowner has to earn his way out of this mess," said Mark Hanson, who runs a California real estate research firm. "This summer is shaping up as the gateway into the next move down."

Hanson attributes the much-ballyhooed recent house price gains to a shift in the types of properties changing hands. Earlier this year, as many as half of all transactions nationally were resales of foreclosed properties, largely at low prices.

Since then, so-called organic sales (those not involving distressed properties) have risen while foreclosure sales have remained stable. This improved mix -- together with cheap financing and a couple of popular tax incentives -- helped to revive prices in some hard-hit areas.

Thus, house prices in California have risen for three straight months, according to data provider MDA DataQuick. Foreclosure sales there have dropped to about a third of recent transactions from a high of 57% earlier this year.

But with schools opening up again and the summer home-selling season winding down, sales by nondistressed sellers are likely to fall in coming months, Hanson said.

Adding to the pressure on prices, the end is in sight (or already here) for some popular housing subsidies. An $8,000 federal tax credit for first-time home buyers is due to sunset in December. A $10,000 California tax credit for buyers of newly constructed houses expired last month.

Another concern is that the housing woes appear to be spreading well beyond the questionable borrowers who were at the center of the first stage of the financial crisis.

While many mortgage defaults in 2007 and 2008 stemmed from frauds perpetrated at the height of the bubble, a greater share of problems now are being driven by the weak job market. That's evident in the fact that more so-called prime borrowers -- those with the best credit histories -- are falling behind on their payments.

Prime fixed-rate mortgages now account for about a third of foreclosure starts, according to the Mortgage Bankers Association. MBA chief economist Jay Brinkmann said in a statement earlier this month this is "a sign that mortgage performance is once again being driven by unemployment."

Some 44% of prime borrowers fell behind on payments last year because they lost a job or income. That's up from 36% in 2006, according to data from Freddie Mac.

Other numbers bode ill for a housing recovery as well. The inventory of houses for sale has come down from a recent peak but remains "high on a historical basis," Office of Thrift Supervision economist Sharon Stark said this month.

"The supply of homes continues to be a drag on home prices and the ability for home prices to recover," she added.

An orgy of homebuilding over the past decade has driven vacancy rates higher. The Census Bureau said 14.3% of rental and owner-occupied housing units were vacant in the second quarter, compared with 9.7% a decade ago.

And Hanson said the pace of foreclosures could soon accelerate as mortgage servicers catch up on foreclosures they have delayed while grappling with new mortgage modification guidelines.

"There could be a big wall of foreclosures once the servicers get running again," he said.

Even Toll, who was talking about housing markets "dancing on the bottom or slightly above that" as long ago as December 2006, has been saying lately that the homebuilders could use a hand -- from taxpayers, of course.

Toll said on a conference call Aug. 12 that the government should consider a Cash for Clunkers type plan for the housing market: giving consumers a rebate to scrap an old home and buy a new one.

Toll argued that a four-month program that offered people $15,000 vouchers for new home construction could "put twice as many people to work, twice as fast as what's being done with the auto industry."

It won't be a shocker if Toll finds some takers in Congress for that one, given the growing jobless rolls across the nation. But legislators might first want to consider how effective such a plan might be.

"It took 10 years to create this problem," said Hanson. "Do people really believe we can correct it all in 36 months?"