As the program reaches its one year anniversary, we must ask about how responsibly the Administration is spending $75 billion of our taxpayer dollars. Treasury released the most recent numbers on Feb. 16, which covers the program results through January 2010. According to this report, about 1.3 million borrowers have been extended an offer for a trial modification, 1.0 million borrowers have started a trial modification, of which 830 thousand are still active, 60 thousand have been canceled, and 117 thousand permanent modifications were started.

So, after 11 months, the program has “reached” more than a million of the targeted 3 to 4 million at-risk homeowners, but has produced permanent loan modifications for only a hundred thousand. That said, the January results were a vast improvement over November and December 2009, when only 31 thousand and 66 thousand permanent modifications had been started, respectively. So it appears that the program is beginning to hit its stride, but it will need to continue this progress if it is to make a real dent in the problem because the problem continues to grow.

On Feb. 19, 2010, the Mortgage Bankers Association released results from its National Delinquency Survey for the fourth quarter of 2009. This report showed that the combined percentage of loans in foreclosure or at least one payment past due reached 15.02%, the highest level on record, up from 14.41% in the third quarter of 2009. In the fourth quarter, the percentage of loans in foreclosure was 4.58% and the percentage past due was 10.44%, up from 4.47% and 9.94%, respectively, in the third quarter. This translates into an additional 335 thousand new delinquencies and an additional 60 thousand foreclosures during the fourth quarter.

On Feb. 23, 2010, First American CoreLogic released a report in which it estimated that, in the fourth quarter of 2009, 11.3 million residential properties representing 24% of all properties with mortgages were “under water,” meaning that the borrower had negative equity because the value of the property had fallen to where it was less than the outstanding mortgage balance. This was an increase of approximately 600 thousand properties from the third quarter of 2009. More than 10 percent of properties are estimated to be underwater by more than 25% of loan value. The report goes on to demonstrate a strong correlation between negative equity and foreclosure.

So we see that delinquencies are growing by 100 thousand per month, foreclosures by 20 thousand per month, and underwater mortgages by 200 thousand per month. Against this backdrop, HAMP has managed a total of only 120 thousand permanent modifications, although 50 thousand of these took place during January. In order to reach its goal of 3 million permanent modifications by 2012, HAMP will need to average 125 thousand permanent modifications per month. Good luck with that.

Unaddressed thus far is the knotty issue of re-defaults. Some researchers estimate that re-default rates on modified mortgages will exceed 50% within 12 months of modifications.

Forty-five banks failed during the fourth quarter of 2009, raising the total for the year to 140—the largest annual total since 1992. The number of “problem banks”—those that bank regulators consider to be in danger of failing—rose to 702 at the end of December 2009, up from 552 at the end of September 2009, and from 252 at the end of December 2008. The assets of problem banks rose to $403 billion at the end of December 2009 up from $346 billion at the end of September 2009 and from $159 billion at the end of December 2008.  Both the number and assets of problem banks are at the highest levels since 1993. Clearly, these numbers don’t include any of the four largest banks, in spite of stress tests indicating that these banks are insolvent. Too-Big-To-Fail is alive and well at the FDIC and other bank regulatory agencies.

Asset quality continued to deteriorate, as measured by loan losses, past-due and nonperforming loans and foreclosed real estate. Loan losses rose for the twelfth consecutive quarter to a 2.89 percent annual rate of net charge-offs, up from 1.95 percent from a year earlier. The 2.89 figure is the highest rate on record during the 26 years banks have reported this item.

Non-current loans and leases (past due 90+ days or in nonaccrual status) rose to $391 billion, or 5.36% of all loans and leases—the highest percentage in the 26 years that banks have reported these data. This includes the banking crisis years of 1985 – 1992, when more than 1,000 banks failed, which gives us an indication of the number of bank failures to expect during the coming years. Noncurrent loans were concentrated in the real estate sector, both residential and commercial: 9.3 percent of residential mortgages were non-current and 15.9 percent of construction & development loans were non-current. Surprisingly, only 1.8 percent of home equity loans were non-current, indicating that homeowners are staying current on second liens while defaulting on first liens. In total, banks hold $1.92 trillion in residential mortgages, $661 billion in home equity lines and $451 billion in construction & development loans. They also hold an additional $1.09 trillion in commercial real estate loans.

An additional $140 billion in loans and leases were past due by 30 – 89 days, so that the combined value of past due and nonaccrual loans is $531 billion, or 7.28 percent of total loans and leases. By sector, 3.2 percent of residential mortgages and 2.6 percent of construction & development loans were past due 30 – 89 days.

Other real estate owned (OREO), which consists primarily of real estate seized through foreclosure on previously delinquent loans, rose to $41.4 billion in December from $37.2 billion in the September. When combined with the $531 billion in bad loans, the total book value of nonperforming assets was $572 billion or 7.85% of total loans and leases. Banks hold reserves against loan losses of 3.12 percent of total loans and leases—the highest level in the history of the FDIC.

Total assets declined for the fourth consecutive quarter to $13.1 trillion, down 5.3% from a year earlier. Total loans and leases declined for the sixth consecutive quarter to $7.29 trillion down from $7.88 trillion a year earlier—a 7.5 percent year-over year decline that is the largest since the 1940s.

Earnings during the fourth quarter of 2009 were $914 million, which translates into a miserable return on assets of only 0.01 percent, but a dramatic improvement over the $37 billion loss recorde during the fourth quarter of 2008. The percentage of banks that were losing money rose to 29.5% in December, up from 24.8 percent in December 2008 and 12.1 percent in December 2007.

Obama-land is a fantasy world where up is down and down is up; where a trillion-dollar health care bill is projected to reduce the natiotal debt; and where 2 million jobs were “saved or created” during the same period of time when almost 4 million U.S. workers lost their jobs. Yes, Obama-land is a magical place that is "long on fantasy" and "short on facts," just like Tim Burton's fantasy world.

This morning, President Obama and Vice-President Biden took a victory lap—celebrating the one-year anniversary of the Stimulus Act of 2009. In his prepared remarks, the president claimed that “the Recovery Act is responsible for the jobs of about 2 million Americans who would otherwise be unemployed” and that “it is largely thanks to the Recovery Act that as second depression is no longer a possibility.” Of course, the President provides no facts to support these statements, but instead refers to unnamed “nonpartisan economists across the spectrum.” Certainly, far-left-leaning Paul Krugman of the New York Times might be one of these economists, but I know of no right-leaning, or even center-leaning, economists who possibly might fit this description. Like the 2 million “saved jobs,” this is just another Obama fantasy. Into the "rabbit hole" we go. 

Let’s look at the facts instead of fantasy: According to the Bureau of Labor Statistics (“BLS”), 3.9 million U.S. workers have lost their jobs since Obama took office on January 20, 2009, and another million unemployed workers have given up looking for a job, thereby falling out of the official labor force. The number of chronic unemployed—those out of work for more than 26 weeks—has more than doubled from 2.7 million in January 2009 to 6.3 million in January 2010. Currently, there are 14.8 million unemployed U.S. workers, and another 10.5 million who have given up looking for work or been forced to take on part-time work when the would like to work full-time.

The simple answer is that these contradictory numbers come from two different surveys conducted by the BLS each month. The payroll employment number comes from the “establishment survey,” which is a monthly survey of large businesses that employ most workers. The unemployment number comes from the “household survey,” which is a smaller monthly survey of households. The larger establishment survey is more accurate because of a larger sample size, but it cannot provide information on unemployment because it is a survey of employers, not workers. The smaller household survey is less accurate because of a smaller sample size, but enables the BLS to estimate how many workers are unemployed.

During January, the household survey showed that unemployment declined by 430,000 workers and that employment actually rose by an astounding 541,000 workers at the same time that the establishment survey showed employment falling by 20,000. One reason that the two surveys can be going in opposite directions is coverage. The establishment survey only covers workers on the payrolls of large established businesses, so it misses the self-employed, employees of small and newly established firms. This is critically important because research has shown that about two-thirds of employment growth takes place at small businesses, especially at newly established entrepreneurial firms. The half-million new jobs identified by the household survey may indicate that the economy has finally turned the corner and that small firms are on a hiring spree. I say “may” because of the large sampling error inherent in the design of the household survey. Just one month earlier, the household survey for December 2009 showed employment falling by 589,000, so we are still looking at a net loss of 48,000 jobs over two months. We can be hopeful, however, and await the February report for more information on which way the trend is really moving.

Now, more about the January report. Twenty thousand workers lose their jobs, but the BLS report states that “payroll employment was essentially unchanged.” Are these bureaucrats tone deaf or what? Also, the employment reports for November and December were revised, with November going from +4,000 to +64,000, but December going from -85,000 to -150,000. These revisions emphasize that the initial numbers reported each month are preliminary because not all establishments get their surveys in by the monthly deadlines. Instead, they get counted later and then the BLS releases revised numbers.

Also in January, construction lost 75,000 jobs but temporary workers gained 52,000 jobs. Now that’s change we can believe in, isn’t it! Of course, the federal government grew, adding 33,000 jobs. The average work week increased by 0.1 hour to 33.9  hours. This is another good sign, but increasing the number of hours worked by existing employees enables firms to avoid hiring new workers, keeping unemployment at elevated rates for a longer period. Average hourly earnings rose by 4 cents, up 2% over the past year.

U-6, the broadest measure of unemployment provided by the BLS, declined from 17.3% in Dec to 16.5% in Jan. on a seasonally adjusted basis. The 9.7% number is the U-3 measure of unemployment, which only includes unemployed members of the labor force. To be counted in the labor force, a worker has to actively look for a job during the previous four weeks; otherwise, they “drop out” of the labor force. Also excluded are employees working part-time even though they want to work full time. U-6 includes these discouraged and underemployed workers, but even U-6 excluded discouraged workers who have not actively looked for a job for more than one year. Some estimate that unemployment actually exceeds 20% when these long-term discouraged workers are counted as unemployed.

All of these numbers are “seasonally adjusted” by BLS staff using a statistical model that “smooths” out the month-to-month variations in employment numbers. For example, we know that employment jumps every June when high-school and college students look for summer jobs and then declines every September when they go back to school. The problem is that these “seasonal adjustments” allow for considerable mischief should unscrupulous or politically motivated staffers tweak their models to make things look better than the real numbers show. For example, U-6 actually rose from 17.1% in December to 18.0% in January on an unadjusted basis, so that the January unadjusted U-6 was of 9% higher than the seasonally adjusted U-6. Unadjusted, the U-3 measure of the unemployment rate would be 10.5%, not 9.7%. Such a large adjustment factor raised questions about the validity of the seasonally adjusted series. The January employment summary notifies us that the BLS just updated its seasonal adjustment model and its net birth/death model that is used to account for its undercoverage of small and newly established firms. Hmm.

Also in the January report is the result of its annual benchmarking process, whereby it reconciles the results from the establishment survey with actually unemployment records, which are not available on a timely basis, but are far more accurate. As a result of this process, payroll employment for March 2009 was revised downward by 930,000 and December 2009 employment was revised downward by 1,363,000!!! The numbers as originally reported and as revised cleary show that the establishment survey was consistently biased in the direction of higher employment. They appear in Table A of the BLS report.

The January report also notifies us that the household survey also was adjusted to reflect new population estimates from the U.S. Census and that this adjustment renders comparisons across time unreliable. So, how are we to ascertain if the newly announced decline in unemployment rate from 10.0% in Dec 2009 to 9.7% in Jan 2010 is actually an improvement, as it would appear.

Prior to this vote, the narrowest margin was 84-16 in favor of Paul Volker’s second term in 1983, after what had, up until now, been acknowledged as the worst U.S. recession since the Great Depression. (Unemployment was actually higher in 1983 at 10.8% than the 10.2% peak recorded during 2009).

Why the opposition to Bernanke? To better understand the opposition to Bernanke, let us consider the Fed’s three main areas of responsibility: (i) monetary policy; (ii) consumer protection; and (iii) bank regulation.

The Fed’s monetary policy is driven by a dual mandate: keep inflation and unemployment low. While the Bernanke Fed kept inflation under check, many economists (including this one) think that Bernanke’s “easy-money” policy on interest rates led to excessive leverage, (i.e., borrowing) in the financial system, which not only created the housing bubble but also fueled speculation by investment banks, hedge funds and other financial institutions, leading to the ongoing financial crisis. We now have a 10.0% unemployment rate. Moreover, the Bernanke Fed has more than doubled the size of the Fed’s balance sheet, from about $800 billion before the crisis, to more than $2.25 trillion in the most recent week. While most of this increase was initially for “liquidity facilities” used to provide liquidity to the financial markets during the crisis, the Fed has wound down most of these facilities and replaced those assets with purchases of $1.25 trillion in mortgage-backed securities (MBS) designed to keep mortgage-interest rates low. The Fed now has to craft an “exit strategy” for reducing its balance sheet in order to keep the money supply from exploding and causing double-digit (or worse) inflation. Yet, if the Fed sells the MBSs, which  no other entity would purchase during 2009, it risks pushing mortgage-interest rates up by hundreds of basis points. If rates rise while the Fed holds these MBSs, then the Fed will lose hundreds of billions because the market value of the long-duration securities will fall precipitously as rates rise. One can easily arrive at a grade of “F” for Bernanke’s monetary policy.

Next, consider the Bernanke Fed’s record on consumer protection—not a pretty picture. Under Bernanke, the Fed failed miserably in protecting consumers from predatory mortgage lenders, who saddled uninformed borrowers with “teaser-rate” mortgages, option ARMs, subprime mortgages and usurious credit-card loans. It also failed to reign in home-equity loans, which consumers used to turn their homes into piggy banks, paying off credit card balances with cash-out home-loan refinancings. The four largest banks hold more than $400 billion in home-equity loans that, if marked to market values, would be worth pennies on the dollar, wiping out the capital of these systemically important “too-big-to-fail” banks. Again, one can easily arrive at a grade of “F” for Bernanke’s record on consumer protection.

This leads us to the third main area of the Fed’s responsibility—bank regulation. Under the Bernanke Fed, the big Wall Street banks funded lines of credit to the unscrupulous mortgage brokers who originated the toxic home mortgages (subprime, Alt-A, Option ARM, stated income, etc.) that Wall Street securitized and led to the financial crisis. Two of the four largest bank holding companies--$2 trillion Citigroup and $800 billion Wachovia--arguably failed (or had to be bailed out by taxpayers). The Fed is the primary regulator for bank holding companies. Losses at failed banks have pushed the FDIC into insolvency for the first time since the early 1990s, and the banking system is in shambles, with more than a thousand banks in serious danger of failure. The widely publicized “stress tests” of the 19 largest bank holding companies were designed by the Fed and have been roundly criticized as a total fraud. Under Bernanke, the Fed punted on providing liquidity to Bear and Lehman, allowing them to fail, but somehow figured out how to allow Goldman Sachs and  Morgan Stanley to become bank holding companies, which saved them from insolvency. In so doing, Bernanke extended the taxpayer safety net to these two investment banks, which were largely responsible for creating the financial crisis. Again, it is easy to arrive at a grade of “F” for the Bernanke Fed’s record on bank regulation.

With grades of “F” in each of the Fed’s main areas or responsibility, it is truly amazing to this economist how 70 U.S. Senators and the President could possibly consider Bernanke fit to serve another term. It just goes to show how, in the world of Washington politics, nothing succeeds like failure.

The financial crisis isn't over. We are looking at either double-digit inflation (perhaps the best case) or a massive double-dip recession (the worst case).

Press releases about the program have been confusing, with language similar to the ‘save or create three million jobs” mantra of the $787 billion Stimulus Package. Back on August 4, 2009, a Treasury press release announcing the July 2009 HAMP performance report boasted that “more than 400,000 modification offers have been extended and more than 230,000 trial modifications have begun” and that the program was “on track to offer assistance to up to 3 to 4 million  homeowners.”  Notice the key operative word here—“offer.”  An “offer” to help is the Stimulus-talk equivalent a “saved” job, but slightly better because you can at least measure an “offer.” The administration is still struggling with how to “measure” a saved job. 

Also note the emphasis on “trial modification” rather than “permanent modification.” In fact, not a single word was mentioned in the press release or the report about permanent modifications because there had been so few of them.

Yesterday’s headline trumpeted “more than 850,000 homeowners now with median payment reductions exceeding $500.” What this headline doesn’t tell you is that these are “trial modifications” rather than “permanent modifications.” The headline continues “more than 110,000 permanent modifications approved to date.” What this doesn’t tell you is that the actual report quantifies the number of permanent modifications at only 66,465, or only 7.4% of the 902,620 trial modifications claimed in the report; where the other ~44,000 permanent modifications claimed in the Treasury press release come from we do not know. (Perhaps they are simply bad at math?) Also not mentioned is the fact that most experts forecast a “redefault rate” (i.e., the borrower defaults on the modified mortgage)  of more than 50 percent during the first twelve months following a modification, and that this rate could be even higher should the employment situation continue to deteriorate during 2010.

The report also includes a set of four spiffy graphs showing what the administration would like you to think are “green shoots” in the U.S. housing market. What they don’t show you is the delinquency- and foreclosure-rates, which, when combined, have continued to make new monthly highs during almost every month since the HAMP was announced. From March 2009 to November 2009, the non-current loan rate, which is the sum of the delinquency and foreclosure rates, has risen from 10.33% to 13.24%--an increase of 28 percent.

This perky housing report also calls to mind the "Stimulus-talk" or "Obama-Speak" about “saving or creating” 600,000 jobs during the same time period when the Household Survey of the Bureau of Labor Statistics shows a loss of more than 5.5 million jobs. Now, we are told that we have “saved” 850,000 homeowners during the same time that an additional 1.05 million homeowners have become non-current on their mortgages. And, of course, this number doesn’t include the hundreds of thousands who lost their homes during this period—they aren’t included in the non-current loan rate once they get booted and their house sold at auction.

The latest criticism of the HAMP comes as hundreds of thousands of homeowners who have entered into “trial modification” are at risk of disqualification. The program requires these borrowers to make three monthly payments on their modified mortgages and fill out required paperwork in order to qualify for a “permanent modification.”  What is holding up the process is the troublesome paperwork. Borrowers actually have to document their income to qualify for the permanent modification, but a large portion of these borrowers originally took out “stated-income” mortgages (also known as “liar loans”) and many of these are having difficulty documenting enough income even for the modified mortgage.  Many more have lost their jobs or taken significant pay cuts that preclude them from qualifying even for the modified mortgage.

Now, I’m not a rocket scientist, but it seems pretty obvious to me that you should allow the trial modifications to continue so long as the homeowner continues to stay current on the modified mortgage. Foreclosing on these homes will only exacerbate what is already a disastrous situation in the residential mortgage market by adding to the inventory of vacant houses. Moreover, we know that a significant portion of foreclosed homes are stripped and vandalized as soon as the former owner vacates, leaving a blighted and damaged structure that is of little value to the lender and dragging down property values in the surrounding neighborhoods. It is a far better option to keep someone living in these houses by extending the trial modifications.

No one benefits by evicting these borrowers. Let them stay--and pay.

Hidden from the headline numbers was far worse news. The Household Survey shows the December job losses at a staggering 589,000, comparable to the worse days of the financial crisis. Unemployment actually fell by 73,000 as 843,000 persons left the labor force. Had those losing jobs remained in the labor force rather than giving up, the unemployment rate would have spiked upwards to 10.4%. Now these former workers show up in the U6 unemployment rate, which included discouraged workers who are no longer actively looking for jobs; that rate moved upwards to 17.3% (representing 26.5 million persons) from 17.2% in November.

So now it appears that the hopeful numbers from November 2009 were most likely just a statistical blip, as was the improvement back in July 2009. This bodes poorly for the economy, especially for the U.S. housing market. People without jobs can’t pay their mortgages. People who can’t pay their mortgages feed the growing shadow inventory of homes facing foreclosure. The growing shadow inventory of homes facing foreclosure continues to drag down the housing market and, with it, the U.S. economy. A “double-dip” recession during 2010 looks like all but certainty at this point.

The “green shoots” apparent in the November employment numbers apparently were just an illusion. Perhaps now the administration will heed the wisdom of James Carville, who famously advised Bill Clinton during his 1992 presidential campaign “It’s the economy, stupid!”  It is long past time for the President and Congress to focus on creating jobs rather than creating trillion-dollar deficits.

Some "Happy New Year," eh?

The increases occurred in spite of the fact that the subprime crisis has largely run its course; new delinquencies and foreclosures are driven by prime fixed-rate loans. Prime adjustable-rate mortgages, which include the highly toxic "pick-a-payment" option ARMS, also continued to deteriorate, while subprime fixed and adjustable-rate mortgages both saw improvements.

According to the MBA, "the outlook is that delinquency rates and foreclosure rates will continue to worsen." So much for the obsequious and premature media reports that the "housing market has bottomed and is improving." Not yet. No way. Gonna get worse. A LOT worse.

What does this mean for the economy? In combination with the deterioration in the commercial-real-estate sector and the continuing problems in the labor market and in the financial-services industry, this spells trouble. Look for a "double-dip" recession in 2010--the so-called "W" recovery, or, as I call it, the "O"-shaped recovery. We're going to go 'round-and-'round in circles instead of moving ahead.

And will somebody tell me what is going to happen to the housing market when the Fed, which has purchased virtually all of the mortgages securitized this year and now holds almost $1 trillion in residential mortgage-backed securities--yes, you read right: ONE TRILLION DOLLARS with a capital T--begins to sell off these securities as it tries to stave off a crippling new wave of inflation? Can you say CRASH, with a capital C?

Just like a subprime mortgage, Harry is going to sell this to us taxpayers without any loan documentation or income verification to see if we can afford this trillion-dollar albatross. Never mind that we already owe $13 trillion and are going into the hole at the rate of another $1 trillion per year. Of course we can afford it!

Just like a teaser mortgage, this loan has an artificially low payment for the first few years, but then, BANG, the payment will double after ten years. But don’t worry, in the bizarro-world of the Senate, we only look at your payments for the FIRST TEN YEARS!!! After that, uh, er, KEEP QUIET. (If I taught corporate finance like this, I’d get fired, and rightly so.)

As for the twist, it's a doozy--you don’t get to “live in the house” for the first three years. In other words, you PAY into the kitty for the first three years, but get no health insurance policy. Aren't these Senators creative?

Hmm. Do we as a country really want to go down the "subprime" path—AGAIN?

How about if we try to calculate how much this “reform” is going to cost per policy-year. Now that is a metric we all can understand. We all have a pretty good idea about how much a health insurance policy costs, at least if we count the subsidy that  most of our employers throw in pre-tax. A good ballpark estimate for an average person is about $400 per month or $4,800 per year.

How does the Senate bill stack up? The bill is supposed to cost about $1 trillion and provide health insurance for about 15 million persons for six years. Yes, only six years. Harry’s financing plan forces you to pay into the kitty for three years before you get ANY insurance! What a financial genius Harry is! Bernie Madoff has nothing on our Harry! Ok, back to the calculations. So that’s six times 15 million or roughly 90 million policy-years. We now divide $1 trillion by 90 million to get our estimated cost per policy-year, which comes in at about $11,000.

Oops. We forgot to account for the $500 billion in “savings” from fraud and waste in Medicare. This is a "cost offset," so the real cost of coverage is not $1 trillion, but $1.5 trillion. Now, our cost per policy-year jumps to almost $17,000! For a policy that you or I could buy today for $5,000. Now, that is what I call “bending the cost curve.” Unfortunately, it is bending it in the wrong direction!

Now, I think that there is a lot of room for agreement on the need for health insurance reform.  Most agree that we need to cover pre-existing conditions. Most agree that we need portability of coverage across employers and across state lines. Most agree that we need to cover the uninsured, who now clog the nation’s emergency rooms, which they use as their primary provider of health care, at massive cost to the rest of us.

Portability is going to require a total revamping of our payment system, which, since World War II, has relied upon employers instead of individuals. So long as you get your health insurance where you work, you will NEVER have true portability because it is your employer’s plan as much as it is your plan. Let’s put this one aside for now.

We can cover pre-existing conditions. Most large employers where I have worked during my career, such as the federal government and even DePaul University, already cover pre-existing conditions because their “risk pools” are large enough to spread the costs of covering these workers across the pool. By making such pools available to other employees, we can easily deal with this problem. Of course, it will require legal reforms to allow insurance companies to sell plans across state lines in order to create risk pools that are sufficiently large. Politicians don't like this reform because they get a lot of political contributions from insurance companies with near-monopolies in individual states.

We can cover the uninsured. For less than half of the cost of Harry’s plan, we can simply BUY coverage for 15 million uninsured.  For a lot less than that, we could provide a tax credit enabling the uninsured to buy their own plan. Health savings accounts sell for as little as $100 per month. While bare-bones plans are not for everyone, they certainly fill a niche for the young and relatively healthy who are willing to bear the risk of non-catastrophic health care costs; the HSAs cover the risk of catastrophic costs. Isn’t this a better way to deal with the problem than forcing everyone to buy a Cadillac plan on the taxpayer’s dime?

I think so, but, then again, I’m an economist . . . .

In November, the household survey showed that employment actually increased by 227,000, after showing losses of about 1.5 million during September and October. This number may be the first real “green shoot,” indicating that the long recession is finally ending.  There also was a downward blip back in July, when the unemployment rate fell from 9.5% in June to 9.4% in July, but that was driven by a 637,000 person decline in the size of the labor force rather than by a rise in the number of employed. During November, for the first time since April, employment actually rose. On the downside, the number of workers leaving the workforce because of discouragement and other reasons continued, with 291,000 members of the labor force leaving during November.

Evidence from more comprehensive measures of unemployment also was positive. The U-6 measure, which includes discouraged workers and part-time workers who want to work full time, fell from 17.5% in October to 17.3% in November. The only real negative news was from those unemployed for 15 weeks or longer, which rose from 5.7% to 5.9% of the labor force.

From the establishment survey, there was more good news, as the job losses reported for September and October both were revised downward by a total of 169,000. In addition, the average workweek ticked up from 33.0 hours to 33.2 hours. Employers will first utilize existing workers for longer workweeks before hiring new workers, so this increase provides additional evidence that the labor market is finally on the mend.

It is important to keep in mind that these results are from samples with large margins of error. We will need a couple of more months of positive data to confirm that the November good news is not simply the result of statistical noise or faulty seasonal adjustments by BLS staff. Most of the month-to-month changes in unemployment are the result of seasonal trends, which BLS staff “removes” using statistical models.

That said, we all should welcome this nascent "green shoot."

In the third quarter of 2009, U.S. banks earned $2.8 billion in net income, which was quite an improvement from the $4.3 billion loss reported in the second quarter and much better year-over-year, as well, up from $878 million in Q3 2008. Hiding behind this headline number, however, were some far more disturbing numbers, indicating that the financial condition of the U.S. banking industry continues to deteriorate, which jeopardizes the “green-shoot” hopes for an economic recovery during 2010.

Net charge-offs of loan losses totaled $50.8 billion, up 80.5% from Q3 2008. The rate of net charge-offs, at 2.71%, was the highest on record since banks began reporting quarterly income in 1984. Non-current loans increased to $366.6 billion or 4.94% of loans and leases—the highest rate in the 26 years that banks have reported these items, exceeding anything seen even during the banking crisis of 1985-1992, when more than 1,000 banks failed.

Perhaps most troubling to hopes for an economic recovery is the decline in lending by banks. Loans and leases fell by$210.4 billion, or 2.8%, during the quarter. This implies that bank lending is declining at an 11.2% annual rate, which almost certainly will choke off any economic growth during 2010, should it continue. Commercial & industrial loans suffered even more, declining at an annual rate of 26%. These declines were the largest in the 26 years that these statistics have been collected by the FDIC—again, worse than anything seen during the banking crisis of 1985-1992.

The number of “problem banks”—those with CAMELS ratings of 3, 4 or 5—increased to 552, up from 416 in the second quarter, and the assets held by these problem banks increased to $346 billion, up from $300 billion. This increase took place in spite of the closure of 50 banks during the quarter—the most since the fourth quarter of 1992. More than 100 banks have been closed thus far in 2009—also the most since 1992.

When one looks at the balance sheet of the banking industry, one sees little reason to think that the situation will do anything other than continue to deteriorate, as toxic assets continue to pollute bank portfolios. As of third quarter 2009, banks held $1.93 trillion in residential mortgages, and another $667 billion in home equity lines of credit outstanding. The U.S. housing market continues to deteriorate, according to Lender Processing Services, the leading servicer of U.S. mortgages, which just reported that both non-current mortgages and foreclosures reached new records in October, just as they both had in August and September. Banks could easily face a half trillion in additional losses from their exposures in the housing sector alone.

However, banks’ problems are not confined to the housing sector, as they also hold $1.58 trillion in commercial real estate loans, of which $492 billion are the highly toxic “construction and development” loans that are responsible for most of the bank failures this year as well as for the surge in the number of problem banks. The values of commercial real estate assets continued to plunge during the recent quarter, with no bottom in sight, as vacancy rates skyrocket followed closely by delinquency rates. Compounding the problem for commercial borrowers is the fact that securitization markets remain frozen and lenders have no stomach for rolling over commercial mortgages. Look for another half trillion in additional bank losses from the commercial real estate sector.

As bad as the situation looks when evaluating residential and commercial real estate, it gets even gloomier. Banks hold $393 billion in credit-card loans, which also are experiencing soaring loss rates as unemployed Americans can no longer make even the minimum payments on their credit cards.

All in all, not a pretty picture, but not a surprising one, either. The Troubled Asset Relief Program, or TARP, was supposed to help banks remove toxic assets from their balance sheets, but this did not happen because then-Treasury Secretary Hank Paulson, aided and abetted by Fed Chairman Ben Bernanke and NY Fed President and now Treasury Secretary Tim Geithner, chose to concentrate on saving Goldman Sachs and the Wall Street mega-banks instead of saving the banking system. Now, the rest of the country is paying the price of this leadership.

"We expect that our credit losses and credit loss ratio will continue to increase for the remainder of 2009 and during 2010. However, we also believe that, absent  further economic deterioration, our credit related expenses will be less in 2010 than in 2009."

In other words, the residential real estate and RMBS markets are going to get a lot worse before they get better, possibly in 2011. During the interim, expect Fannie to be coming back each quarter asking for another $10-$20 billion.

Freddie Mac reported a third quarter 2009 loss of only $6.3 billion, which was a great improvement from Q3 2008, when it lost $25.3 billion, and said that it didn't need any federal aid at this time. However, it went on to say that it expects to ask for more taxpayer dollars in future quarters, as it expected credit-related losses to climb during the rest of 2009 and during 2010 as the housing market continues to deteriorate.

The biggest losses at both companies have come from subprime and Alt-A  mortgages that they bought and guaranteed during the peak years of the housing bubble in 2006 and 2007, as they sought to curry favor with Senate Banking Committee Chairman Chris Dodd, House Banking Committee Chairman Barney Frank and other housing zealots in Congress and regulatory agencies who were pushing mortgages for low-income borrowers who could not afford to repay them.

In combination, Fannie and Freddie have tapped the U.S. taxpayers for $112 billion thus far, trailing only the $160 billion provided to AIG; but look for the housing giants to take first place sometime during 2010. Treasury has committed to providing as much as $200 billion to each company or $400 billion total.

Meanwhile, lurking in the shadows is the FHA, which took over the heavy lifting in the residential mortgage markets after the federal takeovers of Fannie and Freddie last year. According to the American Banker, the FHA has delayed release of an audit of its capital reserves, fueling speculation that FHA, like Fannie and Freddie before it, will need a multi-billion dollar taxpayer bailout.

Our country's failed housing policy continues to haunt the taxpayer and, apparently, will continue to do so for at least another couple of years. Why did our legislators push so many qualified renters that were unqualified borrowers into home ownership, and, now, into foreclosure and, in many cases, bankruptcy?

However, economists point out that this growth was entirely the result of government stimulus, and, in particular, the "cash for clunkers" program and tax credits for first-time home buyers. These economists also point out that car and home sales resulting from these programs largely borrowed against, and wiped out much of, future home and car sales. This means that future GDP growth will be even lower; effectively, we “borrowed” from future GDP growth. Wasn’t too much borrowing what got us into this problem to begin with?

According to numerous news outlets, analysts at the car-buying research website Edmunds.com have estimated that the $4,000 cash-for-clunkers tax credit cost taxpayers $24,000 for each additional car sale that wouldn’t have taken place anyway. The average price paid for a car in August was only $27,000. In other words, we might as well have had the government buy these cars and give them away!

Similar numbers have emerged from economists at the left-leaning Brooking Institute for the first-time homebuyer tax credit: $43,000 per additional home sale for homes with values of $100,000 – $150,000.  These programs showered massive windfalls on those who participated, at the expense of the rest of us taxpayers. And for those suffering in foreclosure, they have the added joy of subsidizing the sale of what used to be their home.

So what is Congress considering? How about another round of credits? And it gets worse. The homebuyer program is going to be extended to other than first-time home buyers. These costs have been estimated at $240,000 per additional home sale. Pretty expensive.

Now how about the fraud? Children as young as four filed for and received the tax credit. At least  50 IRS employees are being investigated for taking the home tax credit illegally. More than 100,000 potentially fraudulent claims total are being investigated as part of this $15 billion plus program. The true cost won't be known until everyone has filed their tax returns for 2009.

As for costs, the cost of the original clunkers program tripled  while the cost of the original home-buyer tax credit has doubled (so far) from initial estimates.  Look for the costs of both of the "new" programs costs to double or triple again.

Why is the government in the lottery business?

Shouldn't we be helping the people who are losing their homes to foreclosure, instead of the subsidizing speculators who are buying those very same homes?

When will this fiscal madness come to an end?

The new rule, announced in April to help deal with the growing glut of residential mortgage foreclosures, gives loan servicers incentives to modify second mortgages, as well as first mortgages, for the majority of borrowers who took out multiple loans on their properties. Second mortgages have been a major stumbling block in modifying delinquent mortgages.

Second mortgages, typically known as "home equity lines of credit" or HELOCs, allowed borrowers to put down less than a 20% down payment. First mortgages that are securitized typically can be worth no more than 80% of the value of the property, in order to protect the investors in those securities. The first-loss positions are the equity of the borrower and then the amount of the HELOC. Without this protection, investors would require higher returns on securitized first mortgages, pushing up interest rates in the housing markets.

The new Treasury rule strips MBS investors of this protection, even though it was spelled out in their contracts that they would be paid in full before holders of second liens received a penny. Instead, second-lien holders are getting repaid, often on the same terms as first-lien holders. The unintended consequences of this new rule will be the continued freeze-up of securitization markets and, longer term, higher residential mortgage rates. Way to go, Geithner!

Why is this a bailout of the big four banks (BofA, Chase, Citi and Wells)? It turns out that the vast majority of HELOCs are held in portfolio by banks. The total amount is more than $1 trillion dollars, of which the "big four" own around $450 billion. Were these loans marked to market at current values, which are around ten cents on the dollar, these banks would essentially see their common equity all but wiped out again, requiring yet another unpopular bank bailout. To avoid this, Geithner and his buddies on Wall Street have come up with this subterfuge to bail them out through the back door, without having to go back to Congress and ask for more money.

If the big four banks can't make money in an enviroment when they borrow from depositors at less than 1% and lend out at 6% and more, then the industry is doomed. Today Citibank announced that it eked out a profit of only $101 million in the third quarter because it was forced to add $8.8 billion to cover expected loan losses as nonperforming loans grew from 4.7% from 4.2% in the second quarter. It is expected to lose almost $2 billion next quarter. But not if Geither has his way . . . .