Oct 3, 2012
Federal Reserve Chairman Ben Bernanke is determined to push mortgage rates to record low levels and he is encouraging the banks that the Fed regulates to make home loans more freely. Wait a second – isn’t that exactly what caused the last housing bubble? After 9/11, the Federal Reserve slashed interest rates and this caused mortgage rates to steadily fall. Financial institutions were urged to help “expand home ownership” in America, and many of them started making home loans to people who never, ever should have gotten home loans. When mortgage rates started to go back up, millions of families with adjustable rate mortgages discovered that they could not make their monthly payments. Mortgage delinquencies absolutely soared and large numbers of mortgage-backed securities suddenly turned into garbage. So what is the Fed doing about it? The Fed recently announced another round of quantitative easing in which it will buy 40 billion dollars worth of these mortgage-backed securities a month. Essentially the Fed is clearing the bad financial paper out of the system and is creating the conditions for another housing bubble. But will we really fix our problems by going back and doing the same things that got us into trouble in the first place?
The following chart shows how interest rates on 30 year conventional mortgages have declined over the past 30 years. After 9/11, mortgage rates were pushed to ridiculously low levels and that helped create the mess that we are currently in.
So what did the Fed decide to do to fix things? They decided to push mortgage rates even lower….
But even with mortgage rates at exceptionally low levels, new home sales in the United States continue to hover around record lows.
Does this look like a “housing recovery” to you?….
Of course we are not experiencing a housing recovery.
In order to have a housing recovery, people need to be able to afford to buy homes.
Unfortunately, median household income in the United States has declined for four years in a row, and the employment rate is currently just 0.1 percent above the lowest point that it has been at during this entire economic crisis.
And most of the new jobs that our economy is producing are low paying jobs.
As I have written about previously, only 24.6 percent of all jobs in America today are “good jobs”.
But if you don’t have a good job you can’t afford to buy a good house.
So unless Federal Reserve Chairman Ben Bernanke can somehow magically make millions of good jobs fall from the sky, the truth is that we actually need housing prices to fall so average American families can afford them.
When we push families into mortgages that they cannot afford, large numbers of them end up defaulting on those mortgages.
As the following chart shows, mortgage delinquencies continue to hover around all-time record highs. Right now mortgage delinquencies are about 5 times higher than they were a decade ago….
So the foreclosure nightmare is far from over. There are going to be millions and millions more families that are going to lose their homes eventually.
In fact, there are some very troubling signs that things are taking a turn for the worse….
-In the state of Illinois, the number of foreclosures is increasing again.
-In the state of New York, the number of pre-foreclosure notices has absolutely exploded over the past two years.
-In the state of California, mortgage delinquency rates are absolutely frightening.
We don’t want housing prices to rise until incomes start rising again. We don’t want to pump up home values and then get millions more American families to agree to mortgages that they cannot handle.
We need homes to be priced at levels that American families can afford, but Bernanke seems to think that rising home prices will solve our problems. And in some areas of the country home prices are actually rising. We are seeing a lot of investors and foreigners come in and pay cash for homes in many of our major cities.
Meanwhile, hard working families all over America are wondering why things never seem to work out for them.
If Bernanke really wanted to fix the housing market, the following three things would help….
1) Let the free market determine housing prices. Eventually home prices would fall to levels where people could afford them.
2) Stop manipulating mortgage rates and let the free market determine them. Eventually they would settle at a level that is good for both consumers and financial institutions.
3) Tell banks to only make home loans to people that can afford them.
But the central planners over at the Federal Reserve are not going to do those things. Instead they are going to keep printing money, keep manipulating interest rates and keep trying to create another housing bubble.
The mainstream media insists that QE3 is going to create more jobs, stimulate economic activity and significantly improve the housing market.
Of course the first two rounds of quantitative easing did none of those things, but somehow everyone seems to think that by doing the same thing again we will get a different result this time.
But what the first two rounds of quantitative easing did accomplish was that they padded the profits of the big banks.
And apparently QE3 is already accomplishing that. The following is from a recent CNBC article….
Bank profits from new mortgages have soared since the Federal Reserve began its third round of bond purchases two weeks ago, fuelling the debate over the fallout of the latest dose of quantitative easing.
The extent to which QE3 drives down new mortgage rates and helps homeowners or is pocketed by banks will be crucial to the success of the policy and the prospects for growth in the U.S. and global economies next year.
The big financial institutions always seem to win, and we always seem to lose.
Isn’t it wonderful?
Gap Between College Costs and InflationJames Hall, Contributor
Anyone who has offspring attending university knows all too well the spiraling costs of higher education. While purchases at the grocery or gas pump jumps at alarming rates, the expense of tuition over the past few decades have been in a league all of its own.
In the essay, College Education Economics, the subject of the student debt is analyzed. This essay examines the primary reasons why the price of educational institutions so dramatically outpaces the nominal rate of inflation.
For even the casual observer, it is indisputable that colleges are big business and universities are renowned franchise conglomerates. The supposed stated purpose of these schools, the education of students, is often lost in the bureaucratic traps of academia.
Funding the fixed costs of running citadels of bricks and mortar, escalate with every new addition or expansion. Therefore, the constant pressure to increase enrollment and the recruitment marketing of these high-priced diploma mills of marginally useful degrees grows uninterrupted.
The topic of Skyrocketing College Costs by Gordon H. Wadsworth, helps explain the reasons why educational institutions charge such expensive fees.
College tuitions soar each year, advancing far in excess of the inflation rate. The overall inflation rate since 1986 increased 100.14%, which is why we pay nearly double for everything we buy. On the other hand, during the same time, tuition increased a whopping 412.62%.
Yet, the main reason tuition continues to rise is a dramatic change that took place regarding the Federal Stafford Loan more than a decade ago. When Uncle Sam opened the floodgates to government-backed student loans without parent income restrictions in 1992, colleges welcomed the news with open arms. The sudden injection of millions of additional aid dollars only furthered tuition increases. Add to that the government’s continued promotion of the Stafford Loan as a low-cost program, and you have the formula for hyperinflationary costs.
Now you constantly hear that tuition and fees only pay for a portion of the total costs. Seldom admitted is that academic expenses are a secondary factor, when viewed in the context of the real functions of universities. The often hidden partnership between the educational establishment and corporate/government research objectives, reveals a predominate explanation for the huge expenditure of such institutions.
The Cost of Education site presents a stark assessment of the Leading reasons for high college costs are research and public service.
As part of his new study, Opportunities for Efficiency and Innovation: A Primer on How to Cut College Costs, Vance Fried created a hypothetical college to find more efficient ways to run institutions of higher learning.
Since CELS’s primary focus is on undergraduate education, the most obvious spending cuts built into the hypothetical budget are to eliminate spending on research and public service. While these may be worthwhile activities in their own right, they add little, if any, to undergraduate education.
The COE article concludes:
Research costs are actually underreported, (in the above table) because industry accounting convention allocates most faculty salaries to instruction even though some faculty spend much time doing research. Consequently, about 40% of instruction costs at research universities are actually research costs.
The net result is that the students are targeted to fund a good portion of this research emphasis. What the corporatist is unwilling to pay for or the government to grant subsidization, the fall back burden is to raise tuition.
This is especially a handy technique when student loans are so freely provided to make up the difference.
The rate of inflation reported by official statistics is suspect at best.
Consider Time magazine’s article, What’s Your Personal Inflation Rate?, which provides an interesting approach to the question.
The fundamental problem is that people – economists and laypeople alike – talk about inflation as though it can be measured accurately and represented by a single number. In reality, though, inflation is a judgment call and varies enormously depending on what part of the economy is under consideration. The inflation figures that economists use when they calculate statistics can differ enormously from what you experience at the grocery store. In fact, you could say that every person has his or her own individual inflation rate.
Just ask the parents of any college student if inflation is nominal. Somehow, a $30,000 new car seems cheap, when compared to a total cost of $50,000 + a year at many schools. The deceptive grants and scholarship shuffle just placates normal common sense, that goes into most major expenditure purchases.
As the buying power of the dollar falls precipitously, it is inevitable that a fundamental reform in substance and emphasis is needed at most higher education institutions. The old formula of expanding the college rolls to increase the cash flow is a failed model. The day of easy living is over.
As long as the federal government uses university research facilities as “play pens” for their next level of predatory technology, the annual budgets of such facilities will not be trimmed back. Thus, the dilemma for the next generation of college students just intensifies.
Expect even greater degrees of government intrusion into the financing of approved institutes of establishment acceptability. The path for a lifetime of indentured servitude is coupled to the lowering of real after-tax income. Anticipate a dreadful response and conditions to the shaky college loan programs. The central government will inflict greater public service requirements as the price of a tuition check.
On top of the financing problems, the fact that the incoming students are often not qualified to study at the university level implies an even greater lowering of educational standards. The implication strongly evokes that the inflation rate to pay for the luxury of a leisure lifestyle does not resolve the financial burden of the absurd degree “paper chase”.
Honest education starts with getting what you pay for. College and university administrators and trustees need to reinvent their methods of operation and return to the sound practice of providing genuine educational instruction in the art of learning.
James Hall is a reformed, former political operative. This pundit’s formal instruction in History, Philosophy and Political Science served as training for activism, on the staff of several politicians and in many campaigns. A believer in authentic Public Service, independent business interests were pursued in the private sector. Speculation in markets, and international business investments, allowed for extensive travel and a world view for commerce. Hall is the publisher of BREAKING ALL THE RULES. Contact [email protected]
By Eric W. Dolan
Monday, October 1, 2012 19:27 EDT
New York Attorney General Eric Schneiderman on Monday filed a lawsuit against JPMorgan Chase for alleged fraud relating to mortgage-backed securities, a type of investment that consists of mortgage loans that have been pooled together.
The case is the first brought by a White House task force called the Residential Mortgage-Backed Securities Working Group against a major bank. President Barack Obama formed the group in January to investigate fraud in the mortgage-backed securities market.
The task force alleged that the bank “kept investors in the dark” regarding the quality of the loans it packaged into mortgage-backed securities. The bank failed to disclose problems with the mortgage-backed securities with its investors, such as the fact that the loans had been made to borrowers who “were highly likely to default,” according to the lawsuit.
The billions of dollars worth of subprime securities were issued by Bear Stearns before they were purchased by JPMorgan in 2008.
“We’re disappointed that the NYAG decided to pursue its civil action without ever offering us an opportunity to rebut the claims and without developing a full record — instead relying on recycled claims already made by private plaintiffs,” Joe Evangelisti, a JPMorgan spokesman, told Bloomberg.
The crash of the mortgage-backed securities has been blamed for the global financial crisis of 2008.
Read the full complaint via Reuters (PDF).
9:39PM EST October 1. 2012 – USA Today
NEW YORK (AP) — The New York attorney general’s office has hit JPMorgan Chase with a civil lawsuit, alleging that investment bank Bear Stearns — prior to its collapse and subsequent sale to JPMorgan in 2008 — perpetrated massive fraud in deals involving billions in residential mortgage-backed securities.
The lawsuit is the first to be filed under the auspices of the RMBS Working Group, which was set up by President Obama to investigate and prosecute alleged misconduct that contributed to the financial crisis.
New York-based JPMorgan said it intends to contest the allegations. Spokesman Joseph Evangelisti noted that the lawsuit relates solely to alleged actions by Bear Stearns prior to its takeover by JPMorgan in May 2008.
In the lead-up to the financial crisis, subprime mortgages were sold to people with less-than-ideal credit. Many of them defaulted on their loans when the housing bubble burst and their introductory “teaser” interest rates skyrocketed.
By Agence France-Presse
Monday, October 1, 2012 18:15 EDT
WASHINGTON — Federal Reserve Chairman Ben Bernanke said Monday he is confident the US economy will continue to expand, but he urged the US Congress and the White House to act to support stronger growth.
“We expect the economy to continue grow… We are not expecting a recession,” Bernanke told an audience in Indianapolis, Indiana.
However, he said the economy is growing at a weak 1.5-2 percent rate, not fast enough to lower the employment rate, and that the Fed’s stimulus efforts need to be backed up by action from the rest of the government.
“Our concern is not really a recession. Our concern is that growth will continue but at a pace that’s insufficient to put people back to work,” he told the Economic Club of Indiana.
“Many other steps could be taken to strengthen our economy over time, such as putting the federal budget on a sustainable path, reforming the tax code, improving our educational system, supporting technological innovation, and expanding international trade,” Bernanke said.
“They must find ways to put the federal budget on a sustainable path, but not so abruptly as to endanger the economic recovery in the near term.
“In particular, the Congress and the administration will soon have to address the so-called fiscal cliff, a combination of sharply higher taxes and reduced spending that is set to happen at the beginning of the year.
“According to the Congressional Budget Office and virtually all other experts, if that were allowed to occur, it would likely throw the economy back into recession,” he warned.
In a poison-pill law crafted last year, Congress and the White House agreed to implement radical spending cuts and tax hikes from January 2, 2013 — the so-called fiscal cliff — if the two political parties could not agree on a more moderate solution to the government’s deficit problem.
So far no solution is in sight.
Meanwhile, Bernanke warned against moves in Congress aimed at getting Congressional review power over monetary policy-making at the Fed.
“These reviews (or the prospect of reviews) of individual policy decisions could be seen, with good reason, as efforts to bring political pressure to bear on monetary policymakers,” he said.
“A perceived politicization of monetary policy would reduce public confidence in the ability of the Federal Reserve to make its policy decisions based strictly on what is good for the economy in the longer term.”
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