Finally, but is it for real?

When Obama swept into office, there was an ongoing, left-over Bush program in place to rescue the financial system which focused on getting banks recapitalized through the Fed.  Despite worsening unemployment and rising bankruptcies, a stimulus that was top heavy in worthless tax cuts was hurried to congress and a program–that was more of a plea to banks than an actual program–was pasted together to focus on refinancing underwater mortgage holders.  The stimulus may have changed the momentum of GDP growth and the FED program definitely stabilized the banking system, but the programs for homeowners and the unemployed were less-than-successful.  The President was itching to put something together on health care to prove that he could do something that hadn’t been achieved by the Clintons.  It looks now like his primary economic advisers were warning him that just feeding tax breaks to choice businesses and and cheap loans to banks was not going to solve a major financial crisis.  Obama’s focus never really appeared to be on things that mattered at the time.  As a result, serious improvement in key areas of the economy  never materialized.

It’s not a surprise to any of us around here that Obama’s handling of the US economy is souring voters.  James Carville’s mantra–it’s the economy stupid–has never been more relevant to the vast majority of Americans who have been made worse off by the policies of the last ten years.

Americans’ views on the economy have dimmed this summer. But so far, the growing pessimism doesn’t seem to be taking a toll on President Barack Obama’s re-election prospects.

More people now believe the country is headed in the wrong direction, a new Associated Press-GfK poll shows, and confidence in Obama’s handling of the economy has slipped from just a few months ago, notably among fellow Democrats.

The survey found that 86 percent of adults see the economy as “poor,” up from 80 percent in June. About half — 49 percent — said it worsened just in the past month. Only 27 percent responded that way in the June survey.

That can’t be good news for a president revving up his re-election campaign.

There’s a good chance that GDP–now growing at a miserably slow rate–may go into negative territories shortly, forcing the NBER to date the start of yet another recession when the recovery from this one has not really taken hold.  There’s indications in the market that another crash could be on the horizon.  After all, businesses can only wring so much profit out of restructuring debt to take advantage of cheap interest rates and cutting costs primarily by dumping workers.  Here’s some really frightening news on reinsurance on banks which is also causing weird stuff in the CDS market.  That’s the same damned market that messed up the economies of Europe and US the last time around which really needs some restructuring, standardization, and reform that has not been done despite Dodd-Frank and similar efforts on the other side of the pond. Bankers have fought new regulation and we’re likely to see the same problems revisit us in a different sector of the same market for the same kinds of vehicles.

Credit default swaps on the bonds of Royal Bank of Scotland, BNP Paribas, Deutsche Bank and Intesa Sanpaolo, among others, flashed warning signals on Wednesday. Credit default swaps (CDS) on RBS were trading at 343.54 basis points, meaning the annual cost to insure £10m of the state-backed lender’s bonds against default is now £343,540.

The cost of insuring RBS bonds is now higher than before the taxpayer was forced to step in and rescue the bank in October 2008, and shows the recent dramatic downturn in sentiment among credit investors towards banks.

“The problem is a shortage of liquidity – that is what is causing the problems with the banks. It feels exactly as it felt in 2008,” said one senior London-based bank executive.

While Obama is on vacation, White House gnomes are pasting together two programs for the poll-beleaguered President to announce when Congress gets back into session. The first is a “jobs” package.  The second is a plan for massive mortgage refinancing.  This is something that should’ve been on the front burner years ago so now I’m actually wondering if it’s going to work in time to stymy the right wing nut jobs coming up through the Republican primary process or it’s actually going to be serious rather than some lame ass attempt at some neoReaganesque policy that will move farther right when Republicans start saying no to clearly Republican policy.

Here’s the “Contours of Obama jobs package” via Reuters.

The president is widely expected to repeat his calls for an extension of a payroll tax cut, push for patent reform and bilateral free trade deals, and suggest an infrastructure bank to upgrade the country’s roads, airports and other facilities.

Retrofitting schools with energy efficient technology would allow the government to directly hire for labor-intensive work and also give a boost to the clean energy sector that Obama has said could be an important U.S. economic motor.

Other measures being considered, according to economists who have advised the White House, include tax credits for firms hiring more workers, funds for local governments to hire teachers, and retraining help for the long-term unemployed. Steps to boost the ailing housing market are also under review.

“What’s going to be included in this plan are some reasonable ideas that could have a tangible impact on improving our economy and creating jobs … the kinds of things that Republicans should be able to support,” Earnest said. “These are bipartisan ideas that the president is going to offer up.”

Republicans have made it perfectly clear that their only priority is to make Obama a one term president.  So, in yet another attempt at trying to look above the fray instead of fighting for what is right, we’re going to see another lukewarm policy that won’t have any immediate effect and will undoubtedly be pushed further to the right and further into the ineffective zone.  Plus, it will probably just be offset by other spending cuts in key areas which are likely to have stronger recessionary multiplier effects attached than any positive multiplier effect of the new legislation.  I still can’t figure out what the obsession is with tax cuts for new employees.  The big cost of new employees is health insurance for one and you can avoid that cost by going any where in the developed and developing world BUT the US.  Plus, no  business is going to hire any one when the have no customers.  I feel like a broke record on the number of repeats on that one.  Having spent my life doing strategic planning and budgeting for corporations and having one of my PhD field areas in corporate finance, I can tell you that the US looks like one of those offshore tax havens right now for most major corporations.  Also, more ‘free trade’ deals are likely to have just the opposite effect on unemployment anyway as prices tend to equilibriate in the countries involved and we’re the cheap capital market, not the cheap labor market part of that equation.  (Hence, in our country, incomes to capital go up and incomes to labor go down as the market goes towards price parity for our country.)

So, the second program is no a way for the US to back mortgage refinancing. This is also something that should’ve been done years ago.

One proposal would allow millions of homeowners with government-backed mortgages to refinance them at today’s lower interest rates, about 4 percent, according to two people briefed on the administration’s discussions who asked not to be identified because they were not allowed to talk about the information.

A wave of refinancing could be a strong stimulus to the economy, because it would lower consumers’ mortgage bills right away and allow them to spend elsewhere. But such a sweeping change could face opposition from the regulator who oversees Fannie Mae and Freddie Mac, and from investors in government-backed mortgage bonds.

Administration officials said on Wednesday that they were weighing a range of proposals, including changes to its previous refinancing programs to increase the number of homeowners taking part. They are also working on a home rental program that would try to shore up housing prices by preventing hundreds of thousands of foreclosed homes from flooding the market. That program is further along — the administration requested ideas for execution from the private sector earlier this month.

But refinancing could have far greater breadth, saving homeowners, by one estimate, $85 billion a year. Despite record low interest rates, many homeowners have been unable to refinance their loans either because they owe more than their houses are now worth or because their credit is tarnished.

I’ve already looked into refinancing my FHA/VA loan from 7% to 4%.  I have good credit and my loan balance is about one half of what my house is worth–even with the recent decrease in home prices–because I’ve owned it for 11 years.  I didn’t follow through because the points charged by Wells Fargo–who processes my mortgage at the moment–were ridiculous.  They’d have to pick up the fees or points to intrigue me, frankly. The people with the worst problems are the ones that are now strategically defaulting because they are underwater.  Interesting enough, I’m set to discuss just that topic this fall in the Denver FMA meetings using this Philadelphia FED working paper.  Their findings suggest that people have the ability to pay these mortgages but they are defaulting anyway because they are underwater. The weird thing is they are defaulting on first mortgages while keeping their second liens current.  This means they are ‘strategically’ defaulting to get rid of the house because it’s a stupid investment for them.  Any plan that doesn’t deal directly with underwater mortgage holders specifically will not work.  Banks really don’t have any incentive to work with them now because they get more fee income from processing defaults than they do from renegotiating the mortgage.  The incentives on both sides of the market are totally warped at this point in time.  Again, quoting from the NYT article, this isn’t in the plan.

A broader criticism of a refinancing expansion is that it would not do enough to address the two main drivers of foreclosures: homes worth less than their mortgages, and a sudden loss of income, like unemployment. American homeowners currently owe some $700 billion more than their homes are worth.

I don’t see how the issues in the housing market are going to be solved until you solve this problem.  Dumping houses on the market is going to continually depress prices and cause this problem to regenerate.

So, this gets back to sort’ve my main point about both these big ideas.  First, they are a little too little and way too late.  The inside and outside lags on these kinds of fiscal policy measures are long and getting them through congress and into fruition is likely to lag-filled. We’re also likely to get a lecture and ransom demand from the austerity demons.  So, is this a real effort or a symbolic effort?  Second, the policy prescriptions are anemic. Neither of them focus on the real problems or the known solutions. So, again, is this a real effort or symbolic effort?  Third, these aren’t very aggressive policies nor or they what you would call traditionally Democratic policies so who are they really aimed at? Again, it seems like a symbolic offering to voters. If you’re getting the impression that I’m not impressed at all with this, you’re right.  I suppose this is all to make the confidence fairy come home to roost.  It still seems to me that she’s on her honey moon with the high priest of voodoo economics. Imaginary beings are symbolic too.