Republicans will be like the dog that caught the car

(11AM EST – promoted by Nightprowlkitty)

  Republicans have made themselves clear: no compromises.

  The GOP has plans that include cutting taxes while stimulating the economy.

 At least that is what they intend to do as long as reality doesn’t get in their way. Let’s face it: reality has not been a problem for the lion’s share of the Republican base. In their minds Obama is a muslim, and a socialist, who wasn’t born in America. And that’s just for starters, facts be damned.

 The thing is that most of America isn’t part of the Republican base. Most of America still lives in the real world. When things get tough that percentage is likely to grow because reality gets harder to ignore.

  That’s bad news for Republicans. There are several events building that are going to rain on their victory parade.

Lazy, Welfare Queens

“in general, as I survey the ranks of those who are unemployed, I see people who have overbearing and unpleasant personalities and/or who do not know how to do a day’s work.”

 –  Ben Stein

 The Republicans are no friend to the long-term unemployed, and they certainly aren’t in favor of extending the federal unemployment extensions that are set to expire at the end of November. Democrats are planning on forcing a vote on extending the extensions for a few more months. The problem is that the last vote to extend UI won by a single vote in the Senate, and Republicans are likely to win at least one race on Tuesday that will have the winner seated immediately.

 Republicans have warned Democrats not to push legislation during a lame-duck session, something they suggest would amount to going against the will of the American people.

Since the recession started, nearly five million people have dropped out of the workforce after having given up finding a job. Hundreds of thousands are exhausting their unemployment benefits every month.

  About 8.8 million individuals currently collect some sort of unemployment insurance benefits that will be effected by the November deadline. 1.4 million people will lose benefits within a few weeks, another 4 million by April.

  Cutting the lifeline for these people will save the federal budget about $80 Billion (annualized), and go a long ways toward reaching the $100 Billion goal of the Republicans.

 However, there is a cost to throwing millions of people into the streets that goes beyond just common decency and morality.

 Given that the average weekly unemployment cheque is about $300/week, this amounts to nearly $80 billion (annualized) loss of aggregate income over the next few quarters. This means that personal income could fall by 1.0% QoQ annualized for each of the next three quarters, starting in Q4. The 2% QoQ real GDP estimates penciled in for Q4 2010 to Q2 2011, will look far too optimistic if such a loss of income does occur.

 A 1% drop in national personal income at a time when an economy with 10% unemployment and is already having trouble generating demand is not a recipe for economic growth. If the economy drops back into recession then tax revenue will drop and already high deficits will explode.

 Speaking of economic growth, 70% of Q3 GDP number was from growth in inventories, not from consumption. If those same inventories are sold down during Christmas that will subtract from the GDP numbers.

 What economists call the “final sales” portion of GDP has just been growing at less than 1% over the last 18 months. That is a lukewarm number, to say the least.

The next round of the municipal crisis

 Speaking of unemployment benefit extensions, most people have forgotten that while these are being paid by the federal government, they are actually loans to the states. Repayment by the states have been deferred for the duration of Obama’s stimulus package.

  The stimulus package ends in January.

 The stimulus bill provided deferred-interest loans to states for that program, but only temporarily. That provision expires at the end of this year and next year the states have to begin paying the interest on those loans…

   All told, the federal government has loaned some $65 billion to the states that they simply cannot afford to pay back while continuing to deal with record numbers of people using state social services due to the ongoing economic situation. And it looks as though getting a fix through Congress is unlikely at best.

Some of the most broke states are going to suddenly be saddled with an extra hundreds of millions of dollars of repayment costs to the federal government, unless the stimulus package is extended and expanded.

  Since the GOP has run on an anti-Stimulus agenda, that is extremely unlikely.

 This is extremely bad news for the states because they are buckling under the current Depression. This isn’t some abstract crisis that may or may not strike in the coming years – it will come to a head within the next 12 months.

 The U.S. government will face pressure to bail out struggling states in the next 12 months, said Meredith Whitney, the banking analyst who correctly predicted Citigroup Inc.’s dividend cut in 2008.

  While saying a bailout might not be politically viable, Whitney joined investor Warren Buffett in raising alarm bells about the potential for widespread defaults in the $2.8 trillion municipal bond market. She said state and local issuers have taken on too much debt and that the gap between public spending and revenue is unsustainable.

 The Tea Party rhetoric and the state crisis is like an unmovable object meeting an unstoppable force. Something is going to break.

 The bondholders are betting on a federal government bailout, or at least a process where the states go into receivership. Either way, we are looking at massive, draconian budget cuts at the state and local levels before 2012.

 “GO bondholders are generally well-cushioned versus other interested parties — taxpayers, service recipients, employees, vendors — who will feel pain more directly,” said Municipal Market Advisors in a report today…

  Bank analyst Meredith Whitney offered an ominous prediction for the states: “The similarities between the states and the banks are extreme,” she said, suggesting that some are poised for failure of the same proportions as U.S. banks in 2008.

  State tax revenue is 11.5% lower in 2010 than in 2008, while need for services has climbed. 48 of the 50 states had to close budget gaps in 2010.

 Total government payrolls have already been cut by 350,000 since the start of 2009, and that doesn’t count private sector jobs that are dependent on government employees. It’s hard to picture a positive change in national employment while the state and local governments are slashing payroll and services.

 Realistically, the federal government can’t let the states fail. California’s economy alone is the 8th largest economy in the world, and California isn’t in the worst fiscal shape. If California or Illinois defaulted it would likely cause a panic in the $3 Trillion muni bond market.

 The budget problems at the state level will cascade down to the city and county level. The capital of Pennsylvania, Harrisburg, defaulted on $228 million in muni bonds last month. They will hardly be the first. The cities of Los Angeles and Seattle are on the brink of bankruptcy.

  This is a no-win situation. How the Tea Party Republicans will respond to this crisis will be interesting.

Kicking the Housing Bust

 One of the Republican pledges involves our government’s favorite black hole for money – Fannie Mae and Freddie Mac.

 End government control of mortgage giants Fannie Mae and Freddie Mac, which buy residential mortgages to free up lenders to engage in new deals.

 That’s an interesting goal that I support. I’m just curious how that is going to be done right now as Fannie and Freddie are hemorrhaging money by the tens of billions.

 After several months of modest price increases, due directly to immense government intervention, housing prices are falling again. Some analysts are predicting home prices to drop a lot more.

 The real problem here is inventory. Enormous, massive, indescribably large amounts of it.

 Banks managed to pare down the shadow inventory, but largely by taking possession of foreclosed homes. As of September, they owned nearly 994,000 foreclosed homes, up 21% from a year earlier. The shadow inventory stood at 5.2 million homes, down 7% from a year earlier. Grand total: 107 months of inventory.

Nine years of inventory. Nine YEARS. How can anyone reasonably expect a rebound in housing with nine years of inventory either on the market, or waiting to come onto the market? Not to mention the over 11 months of official housing inventory that is currently sitting on the market.

  It’s not like the Obama Administration didn’t try to stem the tidal wave of foreclosed homes coming onto the market. It’s just that they failed miserably.

 Speaking of foreclosures, we come to our third, near-future crisis.

There is no easy way to put this: the foreclosure system is rotten to the core. It is rife with fraud that will tie up the court system for years and years to come.

 What’s more, it is yet another systemic risk to the banking system.

 Let me tell you what the Fed says they’re worth. The Fed tells us they’re worth 50 cents on the dollar. So if the Fed’s request to Bank of America is honored, right, Bank of America, assuming they are carrying these bonds, assuming when they buy them back they mark them to market, Bank of America will take a $23 billion loss.

“The Federal Reserve further informs us that there is nothing particularly unique about that particular set of mortgage-backed securities — meaning they have not been chosen…because they’re particularly bad. They believe they are of a common quality with the rest of Bank of America’s underwritten mortgage-backed securities. There are $2 trillion [worth] of Bank of America’s underwritten mortgage-backed securities.

“Five such deals — five such requests, if honored to Bank of America…will amount to more than the current market capitalization of Bank of America, which is $115 billion.

“Now do you wish to retract your statement that there is no systemic risk in this situation? And the word is ‘risk’ — not ‘certainty’ — but ‘risk’? And I would urge you to do so, because these things can be embarrassing later.”

“The whole essence of this crisis is fraud and unless we restore the rule of law and transparency of disclosure, we are not going to fix this.”

– Laurence J. Kotlikoff, economics professor at Boston University

Corruption, incompetence, both, whatever you want to call it, the banks are in trouble.

  For the moment, banks are estimating the cost of the foreclosure fraud at somewhere between $50 Billion and $100 Billion.

  The fact is that no one knows how much it will cost. The guesstimates are all over the map. In a worst-case scenario it could run into the trillions of dollars.

  The reason why is because no one knows how deep the fraud runs. Until recently, no one wanted to know. But we do know a few things for certain: 1) It’s real, and there is nothing that will stop the lawsuits in the pipeline, 2) it will eventually negatively effect the sale of foreclosed homes, thus increasing house inventories even further, and 3) the only thing that will prevent this from blowing up is bold, progressive action from Congress, the exact opposite of the Republicans goal of getting out of the mortgage market.

 Congress tried to give the banks a get-out-of-jail-free card for their fraud, but Obama vetoed it. I don’t expect the lame duck Congress to do anything about it, thus this problem will fall into the lap of the next Congress, but only after it has festered for several more months.

 All these issues remind me a little of the mess that Bush left Obama at the end of 2008. The difference is that things had already blown up by the 2008 election. This stuff is timed to blow up afterward.