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Great Recessions II - coming soon to an economy near you.

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Message John F Scanlon

Great Recessions GRs II

The lack of correct, adequate reregulation and, I believe, improper regulator interference, has created another RE boom soon to be bust.

The repeal of Glass-Steagall allowed conflicts of interest and self-dealing.  During the run up to the GRs I, our bankers abused those conflicts of interest.  Since the GRs I, the abuse continued.  Our large banks are too large, have too much power in too many areas, are willing to abuse those powers, and are willing to collude in abusing those powers. 

The following are a few indicative examples: 

Banks which are supposed to compete with each other colluded to fix the Japanese benchmark rate, Euribor, and Libor.  Bloomberg News reported global fines had totaled 6 billion by 12/4 (g). 

JP Morgan, the country's largest deposit bank, paid a settlement of 410 M to FERC for Enron style manipulation of energy prices.  In 2003 an exemption was passed which allows Wall Street banks to enter into transactions in physical commodities that are complementary to their financial activities (8/17/2013 Economist p.59). 

I submit we don't need feel-good PR in an unnecessary, new consumer protection agency or a thousand pages of regulations and interpretations on the Volcker rule prohibiting banks from proprietary trading.  We need to reestablish and enforce Glass-Steagall and anti-trust regulations.  We are micro-managing when we should be macro-managing. 

The Fed - protecting us from deflation and affordable housing

Fed management states it has kept interest rates low to stimulate the economy and stop deflation.  As noted above, this will not necessarily increase business investment.  It has been temporarily successful in fighting deflation given the rise in our bond, stock, and homes markets.  But, if as I believe, we are in a bubble, then the coming GRs II will eliminate this temporary success.  I believe Fed management is aware of these points and is pursuing other purposes.   

The S&P Case-Shiller US national home price index was 100 in 3/2000, 189.93 in 6/2006 peak, 124.20 in 3/2012 low, and 150.92 in 9/2013.  The homes market peaked nationally in July 2006.  It then dropped dramatically reaching a market low in early 2012 but that low was still much higher than the homes market in 2000.  The homes market in 2000 was not deflationary, and the homes market at the 2012 low was also not deflationary.  Source: http://us.spindices.com/indices/real-estate/sp-case-shiller-us-national-home-price-index 

The unnatural state of our homes market is apparent in the fact that 42% of all residential sales in November were to buyers who paid cash -- investors/ speculators (h).  They're bidding up the prices of our homes; they're blowing bubbles. 

There has been a campaign to get people to refinance their homes at lower rates to help keep them in their homes.  All the reporting about refinancing never mentions that once you refinance you cannot use your state's anti-deficiency laws.  Most states prohibit creditors from pursuing borrowers personally for deficiency balances in foreclosures on purchase money mortgages.  Creditors can only move against the collateral.  Once you refinance, you become personally liable for your loan beyond the value of your collateral.  When this bubble bursts, refinanced borrowers will not be able to walk away from their mortgages on underwater homes and escape personal liability. 

California changed its laws in January 2013 to allow anti-deficiency laws to apply to the portion of a refinancing used to pay off a prior, purchase money mortgage, but this law is not retroactive.

Whether the price of your home is $1 million or $200,000, you still need a home to live in.  You must sell your home to recognize an increase in value.  I submit higher home prices do not increase our standard of living if we simply stay in our homes, and certainly reduces the standard of living of new buyers and indirectly increases rents, reducing living standards of renters.

Federal Reserve Accounting

12/31/2012 Federal Reserve Combined Financial Statement

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John F Scanlon is a mere Irish-American and a former Marine. He has a BA in Business Economics from UC Santa Barbara, 4 years experience as a bank loan officer, 13 years experience as a bank examiner, and 60+ years of life experience. He has (more...)
 

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