Mortgage Mess – Reading links

I confess to being late to this game. I thought it was just (?!) a foreclosure mess. Closing in on mortgages without adequate documentation, without adequate proof that even a mortgage existed, etc. But, there is also another aspect. Banks bought loans from originators, verified them, found most of them to be bad or of dubious quality, still went ahead and bought them but at discounted prices. Then, they sold them to investors as securitized products but, hey, forgot or failed to tell them that the quality of the securitized instruments was not up to scratch. Now, the investors are suing the banks to take them back.

That was the gist. If you want to dive right into the issues, here are the links:

(1) This one is on the foreclosure mess. The title of the article could not have been more apt: ‘One nation under fraud’. The author correctly asks as to when the Americans would foreclose on the banks? (ht: Felix Salmon from here)

(2) Now, if you want to know something about how the banks sold mortgage bonds, here is a good two-minute solo presentation by Felix Salmon.

(3) If you are into written stuff, here is a easy-to-read the introduction on mortgage bonds sales scandal. The example from Citi is real, by the way.

(4) Of course, it should not  come as a surprise that regulators knew about it for more than three years.

(5) Yves Smith of ‘Naked Capitalism’ has a hard-hitting piece on the Obama Administration’s ‘See no evil, hear no evil’ attitude on this whole matter.

(6) Former regulator William Black and Professor Randall Wray are very angry and with a lot of reason. A MUST-READ piece. (ht: Naked Capitalism)

(7) A news-story can both be short and strike you below the solar plexus. This story in FT is short and hits you hard. Makes you wonder what has America really come to?

If you are really short on time, I would suggest reading just (6) and (7).

(8) After I prepared this reading list, I came across another reading list that Barry Ritholtz has put together. Here is the link to his post.

(9) Joe Nocera is hurt, in pain and angry. He is right to feel all three. His full story here. (ht: Barry Ritholtz).

(10) This one is just the dessert or the icing on the cake. I would blame both banks and investors for this story. In fact, the latter is more culpable on this one, really.

This is the right note to end this blog on: “It stinks, doesn’t it?”

Reading links

A good letter in FT on why Chinese are not so keen on Western democracy.

Martin Wolf has a good piece on UK’s bold experiment in fiscal consolidation. Spending cuts usually bring down interest rates. But, it is  a good point that rates are already too low. What about behavioural impacts? Would it be positive? Do spending cuts show leadership and toughness and does that inspire and motivate the public to do their part? Will the collective positive consciousness boost the ‘feel-good’ factor and hence economic activity? There is little research on this aspect of spending cuts.

While Martin Wolf is somewhat sceptical that Britain would be able to pull off such spending cuts (nor is he convinced that Britain needed such drastic belt-tightening), Philip Stephens laments the diminishing importance and standing of Britain that the budget cuts suggest. But, I would like to wish UK well, here. It is a bold experiment and one that would set a precedent, one way or the other. It is real time economics experiment.

Writing in Business Standard (India), Prof. Deepak Lal lauds the UK spending cuts while criticising the US for its flawed fiscal stimulus. He thinks that the health care reforms area going to worsen the fiscal balance. The US is in denial, so he says. I would say that it applies to all aspects of US policymaking and public life today.

Even as Singapore is covered by haze from the annual ritualistic slash-and-burn tactics of Indonesian farmers, the Wall Street Journal covers the growing drought conditions in the Southeast in the US.

After Brazil raised the tax on foreign inflows into its domestic bonds, Thailand imposed withholding tax on foreigners investing in Thai government bonds. Korea is considering measures to curb capital inflows. The day is not far off when Emerging economies implement a more far-reaching capital control measure. That should, of course, be in 2011. Professor Michael Hudson seems to agree with me. His article is also a good riposte to Martin Wolf who wrote that the US would win the currency war. We had questioned his logic here.

Writing for the FT, Arvind Subramanian renews his call for multilateral action on China’s exchange rate policy. Nothing new here nor do I think it would make much difference to China’s exchange rate policy. Now, after their recent surprise rate hike, China is unlikely to do much on the exchange rate front. The rate hike was a good geopolitical signal that they are not going to be coerced into any particular action by any one. They are now trying to cool domestic asset price bubbles, domestic inflation and domestic demand and not boost them. In that situation, hurting their export prospects through currency revaluation would not be their immediate priority.

More than multilateral action or unilateral action by the US, this kind of analysis could be more persuasive. Peter Tasker does a good job of showing why Japan had a bubble in the 1980s. He does not attribute it to yen gains. Deutsche mark too gained against the US dollar. But, Germany did not have a bubble. Hubris in Japan played a role. These are the lessons for China to learn and not resistance towards currency appreciation. He thinks that the Chinese are drawing the wrong lesson from the Japanese experience. I agree. We can blame Prof. Ronald McKinnon for this. He has been advising China for quite some time, on this matter.

MINT has written two excellent editorial recently on India’s economic and fiscal management. They are here and here. In a sense, this wonderful column by former Foreign Secretary K. S. Bajpai provides the answer. India is being destroyed by small men with small minds pursuing small ends.

We are  being destroyed by small men with small minds pursuing small ends. We have abandoned even minimum standards of quality—in thinking, in behaviour, in manners and morality no less than in performance. [More here]

Not so rare?

There is a big furore over the rare earth export policy of China. Are they holding back on exports? Have they imposed a export quota? Are they holding back for better prices? Is it an accidental embargo? Questions abound and, as in many situations with China, there are no easy nor straight answers. Bloomberg says that what is happening could be the culmination of a policy decision taken in 2006 to consolidate rare-earth mining companies.

First , what are these rare-earth elements? According to another Bloomberg story, rare earths are a group of 17 chemically similar metallic elements, such as lanthanum, cerium, neodymium and europium. The elements are used in radar, high-powered magnets, mini-hard drives in laptop computers, catalytic converters for vehicles, electric-car batteries and wind turbines.

The same Bloomberg story reports the following. This was first flagged in New York Times, I think:

China has begun to use that market power recently, according to Japanese officials. They said supplies of the elements to Japan were cut after a Chinese fishing trawler collided with two Coast Guard boats in the East China Sea near islands claimed by both countries.

This week, Chinese customs officials began stopping shipments to the rest of the world, according to two people involved in the industry who spoke on the condition of anonymity because of concern about Chinese reaction. Chinese customs officials are delaying shipments by requiring shippers to open containers of the elements for chemical analysis, one of the people said.

China called these accusations groundless. But, this report in International Herald Tribune gets the interpretation correct.

Despite a widely confirmed suspension of rare earth shipments from China to Japan, now nearly a month old, Beijing has continued to deny that any embargo exists.

Industry executives and analysts have interpreted that official denial as a way to wield an undeclared trade weapon without creating a policy trail that could make it easier for other countries to bring a case against China at the World Trade Organization.

So far, China seems to be taking a similar approach in expanding the embargo to the West. [More here]

Geithner’s sense of humour

“The United States of America and no country around the world can devalue its way to prosperity, to competitiveness,” Geithner said today in a panel discussion in Palo Alto, California. “It is not a viable, feasible strategy and we will not engage in it.” He also said the U.S. will “work very hard to make sure that we preserve confidence in a strong dollar.” [More here]

Brazil raised taxes on foreign investments in fixed-income securities for the second time in a month, and Finance Minister Guido Mantega said countries trying to defend exports must end the “currency war.”

The so-called IOF tax on foreign inflows will climb to 6 percent from 4 percent, Mantega told reporters today in Sao Paulo. The government of Latin America’s biggest economy will also close a loophole that allowed investors to avoid the tax on some margin deposits for transactions in futures markets. [More here]

Bernanke sounds the bugle…

… or his ‘Panchajanya’ on quantitative easing or, to put it less scarily, non-conventional monetary policy. He gave his rationale for planning to use unconventional tools in a speech at the Federal Reserve Bank of Boston symposium on Friday. This blogger came away unconvinced. One, credit for controlling inflation was given to central banks. I argue (and have argued many times before) that it was serendipitious. Commodity prices declined because of a slump in demand growth in the 1980s and 1990s and excess supplies were there. Climate change had not arrived then.

He is sanguine on growth in 2011 and he is sanguine on employment. Yet, his fear of inflation running below trend or below theircomfort level is a reason for them to think of drastic remedies. 

But, he minimizes the costs of such actions by listing relatively inconsequential trade-offs. The real issues are going to be about setting off asset price booms and busts, speculative run-up in commodities prices, triggering beggar-thy-neighbour exchange rate policies and creating cost of living increases in the rest of the world, hurting the poor more than others.

That is why I wonder quite what Mr. Martin Wolf had in mind when he wrote that the US would win the global currency battle. With consequences such as the above, would the US be able to set them off against gains in employment, economic growth and a rise in the inflation rate within its borders or would they also go unmet?

Check out the implications for the so-called risky assets here in this delightful post by Macro-man.