3.1 Trillion Hefty Hors d' voures
While some might argue that the record $3.1 trillion budget proposed by President Bush on Monday would produce eye-popping federal deficits, despite his attempts to impose politically wrenching curbs on Medicare and eliminate scores of popular domestic programs, others beg to differ and argue that he served us a hefty hors d'oeuvres of a three cause meal with the hungry hobo entree enroute culminating with a jumbo dessert.
The ubiquitous truth is that the economy is in very serious trouble. The White House budget director, Jim Nussle, attributed the softening economy, continuing war costs and the deficit-financed economic stimulus measure expected to clear Congress for the worsening deficit picture. He added that the deficits experienced during the Reagan and Bush Sr. administrations were far worse, when compared to the size of the economy. This analysis did not seem to ease the Wall Street’s biggest mortgage investors and bankers who aren't betting on a recovery in U.S. credit markets any time soon.
Fearing the all-pervading signs of the impending recession, central bank heads and their sidekicks as well as commerce and financial ministers have orchestrated a battery of conventions and forums to mitigate the unprecedented crash landing which many independent analysts and economists forecast to be worse than 50 cat 5 hurricanes hitting the US simultaneously. They're searching for ways to restore investor confidence in the so-called securitization market, which has emerged as the epicenter of the U.S. subprime mortgage crisis, while bracing for further hits in commercial mortgages and credit-cards, according to experts who gathered at one forum, the American Securitization Forum (ASF) meeting in Las Vegas.
According to the latest housing data, the 2 week change of distressed mortgages has risen from 4,621,581 (January 16th, 2008) to 4,885,293 (February 4th, 2008) signifying another increase of 263,712 properties. This translates to a loss of about $1.47 trillion, almost half of the currently proposed budget. This is part of the real money that the financial institutions most of which will fold are dreading to address.
Jan 16th , 2008
February 4th, 2008
A top central banker remarked that there is no end in sight to fallout from the credit squeeze that may trigger a bigger slowdown in U.S. growth and chill other economies too. Devaney, whose net worth has been cut in half by the U.S. subprime crisis, said most American investors were burned by previous mortgage bets to take advantage of new opportunities. "There are a lot of guys who won't buy triple-A any more," Devaney said, referring to the highest credit rating provided by rating agencies and the market's loss of confidence in those agencies. "New outside guys that haven't been involved need to come in."
This cry for foreign investors has most savvy Americans on edge for the fear of loosing the country to the sovereign investment funds as the bulk of the money comes from some not so friendly countries, such as UAE, China, Qatar, Saudi Arabia and other Asian and Arabian countries. “These countries have sensed a limp in our gait and are gunning for our jugular”, said one concerned citizen outside the county library. Jay Leno caught on the vibe and tried to feel the presidential candidates on this issue but most had no clue of the severity of the current situation and like the seasoned politicians they are just brushed it aside as a non issue.
With millions of homeowners opting to walk from their mortgage obligations, the financial institutions are faced with the unthinkable option of turning the properties into rentals as a means of collecting some revenue from the otherwise desolate and fraudulently inflated properties which are increasingly harder to sell than ever before. The new trend that has quietly gripped the nation is stretching the rent free occupation of the foreclosed properties by stalling the eviction process through time tested means such as imploring the judicial system of the various states. In California, the average stay from the moment of delinquency to the time of actual eviction is 10 months without communicating with the powers that be; however this can be prolonged by simply invoking the law and filing frivolous motions to contest the foreclosure and subsequent eviction. Some people have been in their properties for over 2 years without paying a cent to the mortgage companies, an ugly practice that is forcing the mortgage companies to come up with cash incentives to get the stalling tenants out.
Although the foreclosed properties have significantly dropped in price, many are still priced high for their markets and the banks are very reluctant to write new loans especially for those that have shaky credits. While the economic stimulus is supposed to raise the jumbo loan cap from $417,000 to well over $730,000, most banks have since tightened their lending guidelines after realizing the obvious truth that previous home buyers were fraudulently overstating their incomes to qualify for loans that they could not afford. The broad panic spectrum has spread to the investors who fear the credit squeeze triggered last August by defaults in the U.S. mortgage market would tip the United States into recession. And no one seems to have a clue when the so-called collateralized debt obligations, or investments that pool together mortgage securities, will find favor again.
For starters, the severity of the credit crisis has cost banks over $100 billion in writedowns as buyers shun complex financial products linked to unpaid home loans.
According to a report released by Barclays Capital analysts, Global banks may need to raise up to $143 billion in additional capital to offset possible losses on securities backed by the beleaguered bond insurance industry. These funds are readily available from the sovereign funds which have replaced hedge funds and private equity as a major driver of the global market as they seek to invest huge currency reserves in US businesses, especially in banks.
Funds from the Middle East and Asia have invested tens of billions of dollars in major U.S. banks which badly need this capital after huge losses from U.S. subprime mortgage investments.
There is a school of thought which is of the opinion that we have dug ourselves so deep a grave that only a war will actually save the union from disintegration. This train of thought is echoed by the recent crescendo of the drum beat of President Bush in his repeated mention of the 3rd world war. With the Russians stepping up their readiness, it wouldn’t surprise me one bit if the nation woke up tomorrow to the realization that we were actually engaged in military maneuvers in some of these countries that are maliciously masquerading as first responders to our ailing economy but are laden with surreptitious usurpation motives. That we are the laughing stock of the world is acutely overt; According to Kristin Halvorsen, the finance minister of Norway which also has an oil-financed sovereign fund "They need money and are, shall I say, in deep shit and can't manage without foreign capital in many areas of the U.S. market”.
The sovereign wealth funds managers have already started flexing their economic muscles as evidenced by the Singapore Foreign Minister, George Yeo Yong-Boon calling for China and India to immediately join the G7 and G8 world policy talks.
At this point no one knows for sure how much SIVs have invested in the US but it is safe to take the conservative approach of about 20%-30% of the economy. This simply translates to the foreigners owning 20%-30% of the country. Rather than the metered tone when addressing the level of the sovereign investments, President Bush should take a meaningful gravitas approach with all options on the table.
Increasingly independent economists acknowledge the fact that President Bush inherited an unsustainable economy on the brink of a major recession; nevertheless, he might be the one to get the country out of this conundrum given the nail-biting field of possible successors. He might have to launch a 3rd world war to reclaim the country from those who seek to use our fledgling economy as a weapon against our sovereignty.
