Mortgaging Our Future?

Government programs for mortgage lending implicated in the Great Recession--

Mortgaging the Future? | The Big Picture: ".... in the postwar period an above average mortgage-lending boom unequivocally makes both financial and normal recessions worse. By year five GDP per capita can fall considerably, as much as 3 percentage points lower than it would have otherwise been. In contrast, booms in nonmortgage credit have virtually no effect on the shape of the recession in the same postwar period. Why the difference? At this point we can only speculate. A mortgage boom gone bust is typically followed by rapid household deleveraging, which tends to depress overall demand as borrowers shift away from consumption toward saving. This has been one of the most visible features of the slow U.S. recovery from the global financial crisis (Mian and Sufi 2014)... Our research suggests that the explosion of credit has played a more important role in shaping the business cycle than has been appreciated up to now. A growing consensus along these lines has renewed interest in revisiting the assumptions about cyclical macroprudential policy (for example, Aikman, Haldane, and Nelson 2014). Much of the recent expansion in bank lending took place through real estate lending, and this particular component of the credit mix appears to have the most relevant macroeconomic effects. A natural inference is that economic policy needs to adapt to this new reality." (read more at the link above)


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Obama's Dream World of Unlimited Government Spending And Debt

Henninger: The Obamaian Universe - WSJ.com: ". . . . He (Obama) doesn't want to cut spending. He wants more of it. Forever. Public spending is beyond ideology for Barack Obama. It's the oxygen in his universe. This explains Mr. Obama's End-of-Days speeches the past week. Rationalists around Washington's professional budgeting community have been trying to explain that this apocalypse is entirely avoidable. The bureaucracies can move spending under many shells. But Mr. Obama really believes the stars will fall from the sky if spending declines. In Washington's standard model, it's all just politics. Mr. Obama is running an established strategy of driving public opinion to marginalize and ultimately defeat Republicans. Who could doubt it? But maybe it is also time to start taking Barack Obama at his word. Maybe it's time to come to grips with the fact that he sees the public economy of federal spending as the life force of the nation as no president ever has, not even Franklin Roosevelt. . . ."

Only problem--look at Illinois (or Greece, etc.) for the results of runaway spending and debt. Of course by the time the ____ really hits the fan, Obama will no longer be in office (that's the way Illinois Democrats have operated for generations--irresponsible fiscal policy is a way of life in Chicago and Illinois, so I guess Obama gets it naturally).

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Japan - the 'Mother of All Bubbles'

Paul Krugman and other economists think Japan is doing better than the U.S. and others. They better think again--

Japan's Debt Addiction Creating 'Mother of All Bubbles' - Yahoo! Finance: " . . Andy Xie, an independent economist, agrees that Japan's debt situation is not sustainable and that the country is becoming increasingly reliant on foreign capital flows. Even though the yield on 10-year JGBs is less than 1 percent, the interest expense is expected to top 22.3 trillion yen ($280.6 billion) in the current fiscal year, Xie said. "This is one-quarter of the budget," he added. "If the bond yield rises to 2 percent, the interest expense would surpass the total expected tax revenue (this year) of 42.3 trillion yen." Xie added that Japan is caught in a vicious cycle - it needs a strong yen so that yields, and hence interest costs can stay low, but a strong currency kills domestic companies. "A strong yen makes people willing to take on the low yield, people think that by buying into the Japanese yen, they may make (money) on capital gains," Xie said. "But once people realize that a strong yen is really hollowing out the Japanese industry like automakers and electronics firms, there will be a real backlash." Another expert who is worried about high levels of debt is Richard Duncan, Chief Economist of Blackhorse Asset Management, and also the author of "The New Depression: The Breakdown of the Paper Money Economy. . . "

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Greek Default is not End of the World

Climax nears in Greek drama | Reuters: "Tortuous negotiations over a second bailout for Greece are set to come to a head on Wednesday, putting fragile market confidence to the test on the same day data is tipped to show the euro zone is entering a mild recession." 

While the crazy Europeans continue their state of denial, let's pause for a little reality check. Greece is in default--it is insolvent and cannot pay its creditors. The question is whether the Greeks will continue to agree to the Eurozone's (Germany et al) funding of Greece's payments to its creditors (Eurozone banks et al) and in return submit to further punishment ("austerity") of the Greek people. Hopefully, the Greeks will soon come to their senses--

Krugman Says Greece Will Default on Its Debt, May Leave Euro - Bloomberg: "Greece will default on its debt and will probably quit the European monetary union, Nobel economics laureate Paul Krugman said. “The Greek situation is essentially impossible,” Krugman said at a conference in Moscow today. “They will default on their debt. In fact they already have. The question is whether they will also leave the euro, which I think at this point is more likely than not.”"

Note: leaving the euro doesn't mean leaving the European Union, just the Eurozone.

And the sooner Greece defaults and leaves the euro, the better off the Greeks will be in the long term.

A euro exit is the only way out for Greece - FT.com: "The Greeks will have to leave the euro, recreate the drachma and re-enter the still-existing exchange rate mechanism of the European Monetary System, the so-called ERM-II, which they departed in 2001."

Oh, and who owns the Greek debt? Go here and here. Biggest losers outside of Greece: Germany and France--surprised?

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