Tuesday, October 30, 2012

Debts vs Wealth

"Debts are subject to the laws of mathematics rather than physics. Unlike wealth, which is subject to the laws of thermodynamics, debts do not rot with old age and are not consumed in the process of living. On the contrary, they grow at so much per cent per annum, by the well-known mathematical laws of simple and compound interest ... It is this underlying confusion between wealth and debt which has made such a tragedy of the scientific era." 

-Frederick Soddy, 1926

Friday, October 26, 2012

Where's the gold?

There have been a flurry of reports in the mainstream media (e.g., here) about Germany wanting to audit it's gold reserves, most of which is kept in the US.  The concern is that the gold has been leased or swapped and is not actually at the Federal Reserve Bank of New York.  Gold is commonly leased to finance gold mines.  Since the miners owe gold, not dollars, they are hedged in case the price of gold goes down.  I have a theory that the gold was leased to China (a major holder of US debt) and possibly Russia under the pretense of financing mines, but in reality to reassure them with regard to our national debt.  I don't think we'll ever see it again.

Tuesday, October 16, 2012

Reverse Mortgage

There was a New York Times piece yesterday about the elderly getting scammed by reverse mortgages.


There are definitely many things to beware of, but a reverse mortgage is a great way to "short" sell your house because it's a non-recourse loan in all states (i.e., they cannot come after you for more than the house, no matter how much the house goes down in value).  Back in '05 I would have bought a house and immediately done a reverse mortgage but you have to be 62 years old.   I wouldn't do it now though, because house prices my be bottoming out.

Tuesday, October 9, 2012

Wells Fargo gets sued . . . finally

Voltron says: Someone got the government to sue Wells Fargo under the False Claims Act.   The False Claims Act is a civil-war era law that allows whistleblowers to provide evidence that the government (in this case, the Federal Housing Administration) was defrauded.  The government can usually sue for triple damages, and the whistleblowers are entitled to keep around 20% of the money recovered.  If the Federal prosecutors refuse to sue, the whistleblowers can file the suit themselves.

I guess they had to wait for the criminal statute of limitations to expire before they got around to doing anything.

Since this is only about FHA loans (remember Fannie Mae and Freddie Mac were not officially government agencies), the amounts involved are not enough to sink Wells.

Background: http://www.bloomberg.com/news/2012-10-09/u-s-files-civil-mortgage-fraud-suit-against-wells-fargo.html

Dealbreaker makes the point that although there are no embarrassing "smoking gun" emails of mal intent, this case is actually more straight forward because there were clear violations of explicit rules.


Saturday, October 6, 2012

Egan Jones sued by SEC

Nothing has changed.  The Security and Exchange Commission has declined to indict Moody's and Standard & Poor's, the ratings agencies employed by the banks to sanctify their garbage mortgage securities; however, they decided to sue the much smaller independent ratings agency, Egan Jones, which did not have a role in the crisis, but had the nerve to downgrade US debt.


Friday, October 5, 2012

Why haven't house prices crashed in Australia?

Voltron, spanning the globe to bring you the gouge:

Why haven't house prices crashed in Australia?  I bring this up, because I need something new to short sell!   It looks like house prices may have bottomed in the US because the Fed will continue to print money to buy bad mortgage debt and the banks stubbornly refuse to write off bad loans.   House prices in Canada are still very high, especially Toronto and Vancouver, but I can't figure out how to short this market because all the loans are guaranteed by the Canadian government (CMHC).  It's waaaay undercapitalized, but the Canadians have a printing press too.

Loans in Australia, on the other hand, are generally not guaranteed by the government and their housing prices have remained stubbornly high in the face of a global real estate collapse and debt deflation.

Why?  According to Karl Fitzgerald on Australian Community Radio (The Renegade Economist on 3CR) says that in Australia, the bank counts the "expected price increase" as "income" when deciding if you can afford the loan.  Since prices have been going up 6-8%/year, the houses are basically self-financing and it doesn't matter what your income is.

This HAS to be the reason.  That is a level of insanity not even approached in the US.

Thursday, October 4, 2012

Demographics is destiny

Voltron says: I recently heard someone say "demographics is destiny" and this gave me an epiphany. Let's think about how people will fund their retirements and consider an extreme case: There are 100 retirees and 2 workers on an island. Does it matter how much money the retirees have? How many bonds they have? How great their pensions are? Whether or not their pensions are fully funded? No, it does not. Two people cannot support 100 retirees so matter what the bookkeeping entries, bank statements and balance sheets say.

What does it mean for society as a whole to "save money"? It doesn't mean anything because all money is debt. It is both an asset and a liability. You can try and indebt the future generations by promising to tax them, but future generations may or may not honor that debt. Of course, in any case, debts that cannot be paid, will not be paid.

It is in bad taste to turn a moral obligation (taking care of the elderly) into a financial obligation. We would recoil at the idea of family members sending bills to one another. The older generation looking down and saying you have to take care of us, because we said so, or because you owe us a financial debt, may not carry as much weight as the simple moral obligation.

Now what the older generation, CAN save, is productive capital: infrastructure and machines. That can increase productivity of the working generation to help them support the retired generation, but only up to a point.

The older generation ultimately passes down to the next generation all of their capital, including all government lands and unused resources.

If money represented capital, instead of debt; if it represented the accumulated capital of society, then it WOULD represent the capital that could be saved and then purchased or inherited by the next generation and used to support retirees.