November 26 2009: Beyond Obama Time

Ilargi: Everybody thinks the dollar will fall. Everybody thinks gold will rise. Everybody thinks China is the next major world power. Everybody thinks the markets will climb well into the new year.

Every bank seems to need more money. Both in the US and in Europe, the banking systems need tens of billions of dollars in additional capital. And soon. China is reining in its banks, which will also need to raise billions more after spending 2009 in a wild government ordered lending spree. Japanese banks have lived in the twilight zone longest of all. The IMF estimates there's at least another $1 trillion in losses to be absorbed. Standard and Poor's simply says most large banks are unsafe. Too much risk.

But risk happens to be how everybody's trying to make up for their previously incurred losses. Which made banks and funds invest in the likes of Dubai, now fast turning into a downside risk of $100-150 billion. Credit Suisse estimates a $40 billion Dubai exposure for European banks, but I'm guessing most Dubai bonds may well reside with for instance pension funds.

Every government seems to need money too. More than they can print and live to tell about. It's not just the US. Société Générale's Glenn Maguire predicts China's trade surplus will turn into a deficit perhaps as early as next year. That would sure shift the rules of the game a notch, wouldn't it? It would rob the US of its sugar daddy and give China some real solid ground to boost the US dollar. Just got to find a way to explain it to the billion or so servants back home who will be thrown back a few decades and forced to return to lands now so polluted they won’t return to their former state for decades, if ever.

The Case-Shiller index says US home prices fell 9.4% (some say 8.9%, same difference) in the past 12 months. Doesn't even seem that bad at first glance, does it? Not even 10%. Well, how about you realize that just about anybody in the US has been able to purchase a home with an mortgage, 3.5% down, $8000 tax credit towards that down payment, all courtesy of the government, and prices still came down 9.4%? Doesn't make it look any better, does it? Makes one wonder where they would have been in a free market system. Then again, that's something Bulgarians never asked themselves either back in the day.

What would make home prices stabilize, or even rise? Employment is and will remain the number one factor. The connection between jobs and foreclosures has been well documented, and jobless people don't buy many homes either, not even when the administration serves them on a silver platter. There may be stats and graphs of falling inventory, but they are worthless until we see a full and open report across the country of both foreclosures in the pipeline and already foreclosed homes that don't show up in any stats. There are an estimated 7 million of those. 10.7 million more households are underwater.

One party or another will have to be the first to get out of this housing racket, and it won't be the banks. It’ll be either the US government, represented by Fannie Mae, Freddie Mac, the FHA and Ginnie Mae, or it will be the Federal Reserve, which has bought up $1 trillion plus in mortgage backed securities (hard to keep score) just in the past year, and has lost either $100 billion on that investment if you just follow home prices, or much more than that if you look at, among others, mortgage resets and default percentages. Like the 8% of loans modified in 2009, or the 38.8% of those modified one year ago, that have already re-defaulted. The Fed holds lots of securities based on those loans.

The racket has to stop. It will when the losses become overwhelming. Judging from what's being lost right now, that moment shouldn't be far off. Obama needs to reserve money for employment programs. He doesn't have that money. He plans to establish a bipartisan panel to squash the deficit. But squash it with what? Higher taxes? Not very likely, at least not on the federal level; state- and local taxes may have to rise more than enough. Spending cuts then? Cut what where? Obama will need to spend much more, not less, on jobs. Moving out of the mortgage field may be the best -or even only- choice left. Still, it has a huge drawback: it would mean bankruptcy for thousands of banks and millions of home-owners, and potential all-out economic mayhem.

No matter how you look at it, when it comes to either spending more or cutting more, there doesn't seem to be a way out with odds that any bookie would favor. Or is there? Maybe we will see a first glimpse of a third option in Obama's address to the nation December 1 from West Point Academy. The President will announce next Tuesday that he’ll send -probably- between 30,000 to 40,000 extra troops to Afghanistan, at $1 million per soldier. What he should also elaborate on, and what was told the media in preparation for the speech, is that the White House has now pushed the decision to be out of Afghanistan to 2017. In other words, beyond "Obama time", even if he were to seek and get a second term.

Maybe that's the line of thinking on the economy as well, to leave the hard decisions for the next guy. It would fit the pattern Obama has set until now. He hasn't stood up to anyone really so far. He's watched from the sidelines on his own watch as the rich got richer and the poor got more destitute. He's chosen the easy way out. When it comes to Wall Street and the economy, I find it hard to name even one single thing that Obama has done that Bush 43 wouldn't have done exactly the same. And that is a disconcerting realization, even after a whole year of same old same old.

Moreover, if that's the idea, to avoid the hard decisions, it wouldn't work anyway. The US will be called to -financial- order even long before Obama's first term is done. But then there's of course always the possibility lingering in the background that it's not a matter of not making the hard decisions now. Maybe those decisions were made long ago, by the people who paid to get Obama where he is today. I have no doubt we’ll know by Thanksgiving next year.

FDR recognized how much certain special interests hated him, and famously proclaimed he welcomed their antagonism. Obama is no FDR.

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