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Notes to myself, possibly of interest to others.
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Thursday, September 20, 2012

Rosenberg rules faux's the pas. The new normal.

We at Vitus are slavish devotees of the Wisdom of Rosenberg, which has been, since the start of the crisis, the most reliable guide to the financial markets of all the pundits in the known world. This is in spite of his very strange, for a person of such obvious intellect, knee-jerk compunction to insert the occasional Tea-Party-esque political comment, tourette syndrom like, into the middle of his commentary - especially in light of the fact that when the chips are down he's actually a Keynesian (eg, eg1).

Having now acquitted ourselves of mentioning our admiration for Rosie, we will note that yesterday, in the middle of making a typically insightful point about housing, he says the following.  Note Vitus' underline:
In an environment of a spreading global turndown, heightened geopolitical risks, the need for a downpayment (at least outside of FHA financing), unemployment rates in the first-tlme homehuyer cohort, the fact that mortgage rates have limited downslde potenual from here and practrcally everyone who could refinance already has (to the extent that there are still numerous people with high FICO scores who qualify for refinancmg they have been unable to because the banks turn down their applications due to lack of capacity), and the reality that there is still 22% of the mortgage population that is ‘upside down“, I would not get overly excited about a [QE-inspired] wealth effect driving spending even if home prices manage to gain more traction.
"banks turn down their applications tue to lack of capacity"?  WTF?  Banks in general have tons of money sitting at the fed earning 0.25%, and a borrower walks in the door who will pay 3.65% or (much) more?  What's this about?

The only "capacity"issue Vitus can find is, eg, here:
Lenders including Wells Fargo & Co. (WFC), JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC) have said they will accept FHA streamline applications only from clients whose loans they currently service, citing an inability to keep up with demand. Banks also are turning away applications for HARP loans for all except current clients because they say they are worried about liability if the loans sour
Ie, banks say they don't have the the ability [Rosie's capacity?] to keep up with demand, but the reality is they don't want to refi anyone with less that a 740 or above FICO score - so, contra Rosenberg, they -don't- qualify for refis, despite a lot of so-far failed government programs (eg, HAMP).  Ie, per some recent Vitus posts, (eg), the pool of sterling credit-worthy borrowers is in fact quite small.

We will have to give Rosie the leeway to mis a play from time to time.  Even Derek Jeter makes the occasional error.

Nevertheless, we will finish beating the horse:  The point above about banks is a point that Rosie himself makes frequently:  There is too much private debt in the system for the economy to function as it used to.
  1. One way to help this situation would be to obtain major write-downs (losses) from lenders.   
  2. The other would be to do massive Keynesian stimulus as Krugman et, all have called for for a long time (see K's book End This Depression Now).  In reality, as much as we would like to see massive fiscal stimulus be applied to the US economy, this kind of thing only happens during war (Keynes: "in a slump governmental loan expenditure is the only sure means of securing quickly a rising output at rising prices. That is why a war has always caused intense industrial activity. In the past orthodox finance has regarded a war as the only legitimate excuse for creating employment by governmental expenditure.")  
Good luck on #1, without a real Justice Department (See Yves Smith...).  On #2, personkind has yet to be able to politically generate the kind of spending Krugman nee Keynes calls for without war.  So, we are four years in to a 10 minmum year recession.  The New Normal.

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