Tuesday, February 16, 2010

My nominee for next Fed Chairman

Thomas Fracking Hoenig.
The US must fix its growing debt problems or risk a new financial crisis, Thomas Hoenig, president of the Federal Reserve Bank of Kansas City, warned on Tuesday, adding a mounting deficit could spur inflation.

Mr Hoenig said that rising debt was infringing on the central bank’s ability to fulfil its goals of maintaining price stability and long-term economic growth. “Stunning” deficit projections were putting political pressure on the Fed to keep interest rates low, infringing on its independence at the risk of inflation, he said.
Without pre-emptive action, the US risks its next crisis,” Mr Hoenig said in a speech at the Pew-Peterson Commission on Budget Reform.

He was the only Fed member who dissented at last month’s meeting against language indicating that interest rates should remain near zero for an “extended period”.
The hawkish Kansas Fed president also warned against “dire” consequences of the central bank prolonging its holdings of mortgage-backed securities, which it purchased in an effort to prop up the US housing market. Mr Hoenig painted a picture of a slippery slope, where a less independent Federal Reserve was asked to find ways to support other ailing sectors, such as agriculture.

The Federal Reserve is purchasing $1,250bn in MBS through March. Mr Hoenig said that it must shrink its balance sheet as quickly as possible while being careful and systematic.
In the land of the blind, the one-eyed man is king. Get this man a crown and a mace.

The post is in my head and I'll push it out sometimes soon, but here is the Executive Summary: mark my words - we have 36-months to get some fiscal sanity and then all your Fleet-size projections for the next 20 years will be nothing but vanity - bubbles in the budgetary sh1tstorm that is coming.


The Brickmuppet said...

I agree wholeheartedly.

The Japanese  defense policy from 1868-1931 was a highly sucsessful one..."Rich Nation=Strong Army".
They went from feudalism to world power in that time.

US power was based on the same principle, less deliberately applied.

Argentina was considered by the US to be a peer power in the 1890s. They re a basket case now.

Some will point out that the US weathered the great depression as a great power, but we had NOTHING like the debt we do today. We were a net creditor nation at the time.
If nothing is done to our current fiscal tragectory we might end up selling China and India our CVNs at fire sale prices just to cushion the crash.


John said...

AMEN!  The debt is killing us now.

What will really hurt is when nno one else can or will loan us more money except at ridiculously hig interest rates.

Either every dime of GDP will go to interest, or be rendered worthless as inflation devalues it.

The ONLY possible viable option is to CUT THE SPENDING NOW!

ewok40k said...

And add to this possibility of the Chinese waltzing in like in Die Hard 3, but instead of makig massive heist, just demanding their lawfully earned cash... Oh, perhaps they will accept carriers and SSNs as a payment? But I doubt they will take any LCS!

Grumpy Old Ham said...

The Fed Chairman is powerful, true, and he might be able to hold the line on fiscal policy for a little longer...but like a ship which is taking on water faster than the pumps can handle (nautical analogy used with some trepidation here), the only "hope" for any "change" to this trajectory is to send all 535 of the Capitol Hill miscreants (well, except Scott Brown, perhaps) packing and replace them with people who will hold the line on spending.

Unfortunately, as I've posted here before, we've now bred two generations (at least) of people who think "Obama money" grows on trees.

<span>It really will take TEOTWAWKI</span><span> or TEOTRAWKI to make a real difference.

Grumpy Old Ham said...

Payment?  More like repossession, I think...

CV60 said...

A couple of points:
1) What the ^%^$%^**! is the Fed doing, holding mortgage backed securities?   My understanding is that they can only hold Government Bonds, or their equivalent.  In other words, they are acting ILLEGALLY, and risking the US economy in the process

2) The point has been made before, but bears repeating: US power requires a strong economy.  Absent money, our military, our foreign policy and our national security goals become difficult, if not impossible to maintain.  Unlike the Great Depression era, we have exported much of our manufacturing base.  Consequentially, there is relatively little we can use to pull our economy out of this hole, at least in comparrison to the 1930's.

MR T's Haircut said...

We have not even seen how bad it will become... imagine 200% GDP to pay interest... the canary has died in the mine shaft....   plan on owning what you drive for a while and prepare for the worse while hoping for the best.  Can you plant a garden?  Can you fix your car if it breaks down?  Can you offer anything of value to your immediate neighborhood? 

We are a debtor nation, because we are a nation of consumers and no longer produce.  The Armory is full and we have bread and circus...

Andrewdb said...

I've mentioned it before (but when has that ever stopped me?) - "The Wages of Destruction" is an excellent economic history of Germany before and through WWII.  The Germans had to pay hard currency for everything - if we had to do that (instead of running a printing press) things would be very different - and that time if fast approaching.

MR T's Haircut said...


CV60 said...

Here's why the Fed holding Mortgage Backed Securities: approximately 25% of the houses backing those securities are about to go into default:

Source: http://www.housingwatch.com/2010/02/17/the-coming-foreclosure-flood/?icid=main|htmlws-main-n|dl2|link3|http%3A%2F%2Fwww.housingwatch.com%2F2010%2F02%2F17%2Fthe-coming-foreclosure-flood%2F

Many homeowners have fallen behind on their mortgages or stopped paying, but foreclosure has not yet arrived. Mortgage servicers, the folks who send you the bills and file for foreclosure when you can't pay them, are overwhelmed. Courts, too, are backed up. Mortgage modifications and foreclosure moratoriums have put off the day of reckoning for borrowers, but not forever. And unemployment is sabotaging more homeowners every day.

Out of more than $1.6 trillion in existing mortgages that were packaged into mortgage-backed securities by Wall Street, some $425 billion worth are extremely late on their payments, and therefore likely to go into foreclosure. Only a fraction of borrowers who fall seriously behind are able to catch up, with the help of a loan modification. And even then the majority end up falling behind again. That amount of bad mortgage debt has been spiking up every month, slowing down just a little thanks to the government's Home Affordable Modification Program, but still continuing to rise.

Meanwhile, even as the amount of unpaid mortgage debt rises, the number of foreclosed, bank-owned homes for sale has been holding fairly steady. That tells us that the number of foreclosures for sale on the market is actually just a sliver of all the ones that are really out there. S&P's chilling conclusion: "Overall, it is our opinion that recent positive housing reports should not be construed as a sign that the distress in the residential housing market is abating, but rather should be attributed to the temporarily limited supply of homes on the market."

The bottom line: just counting the homeowners who are currently behind on their mortgages, along with the existing number of foreclosures for sale, at the current pace it will take nearly three years to sell all the foreclosures out there. That doesn't include all the borrowers who haven't fallen behind yet but are going to, because of unemployment or because their Option ARM payments are spiking up or because they just decide to stop paying.

The shadow inventory is equal to half the size of the entire market of homes for sale. When it starts getting listed, expect home prices in areas with lots of foreclosures to plummet. Yes, more.

Reverb said...