What's Inside America's Banks?

Great article from The Atlantic summarizing the sad situation that US banks are able to conceal the true state of their financial health through legal loopholes. 

Article starts with a broad summary then gets good and wonky (we like that!)

Good quote: “Investors can’t truly understand the nature and quality of the assets and liabilities. They can’t readily assess the reliability of the capital to offset real losses. They can’t assess the underlying sources of the firms’ profits. The disclosure obfuscates more than it informs, and the government is not just permitting it but seems to be encouraging it.”

Check it out. 

Milton Friedman and the Famous Helicopter Money Drop

The next time we have a depression, we should print a lot of money to stabilize prices and prevent deflation. Fiscal stimulus - in which the FDR New Deal famously hired people to build dams and schools, etc... -  actually prolonged the depression.

At least that's what University of Chicago professor Milton Friedman theorized.

This is his book-length retort to Keynesian/New Deal fiscal stimulus: Monetary History of the United States. 

All Milton Friedman books here.

Published in 1963, Friedman's economics eventually carried the day in academe. Fed Chairman Ben Bernanke explicitly makes this clear and later quoted Friedman's own words about throwing money out of a helicopter to stimulate growth.

It is important to point out that Friedman wrote after the Great Depression and that his theories were never actually tried during the Depression. In addition, the modern world's electronic money, the expansion of credit, and derivatives may mean that theory and reality are once again, two different animals.  

So understand the difference between fiscal and monetary stimulus.

Researching Banks' Balance Sheets

Here's how to research a bank's, credit union's, or other financial institution's deposits, loans, credit card loans, home loans and more. You'll see several years' worth of data and get to compare it to other factors like equity, book value of loans and more. 

The best database for this is Mergent - at least for large public financial corporations like Bank of America or Capital One. You can see detailed breakdowns of their financial assets.

American Financial Directory is also good. Less detail, and it's in print, but it does have some numbers on loans, liabilities and assets. Particularly good for smaller banks, privately-held banks, and credit unions.

Now, this one is pretty amazing indeed: Federal website where you can check your local bank's deposits, loans, mortgage, etc... figures

Book Review: American Nightmare by Richard Lord

 
Before it was cool, Richard Lord's American Nightmare: Predatory Lending And The Foreclosure of the American Dream looked at the scourge of predatory home mortgages and lending programs aimed at fleecing the declining American lower middle class.

This is a slice of life book that examines the experiences of ordinary people in Lord's hometown of Pittsburgh in the 1990s. Each person needed a little money to live in retirement, start a business or pay medical expenses.

They ended with loans with impossible to pay off balances, opaque contracts that turned into something else, banks that turned a deaf ear, and ultimately lost their houses and went bankrupt.

There are two lessons here:

1) don't assume the financial system is safe or ethical. The country has recently stripped away of decades-worth of regulations designed to protect people. You can and will be taken to the cleaners and it's all legal.  

2) learn when to say no to money and loans. A lot of the people in this book really, really wanted a house or home improvements and let that cloud their judgement.

History of Land Registration in the UK

It is very important to have a reliable, objective system of land titles - something we do not currently have in this country. I've written before about the importance of property rights to capitalism and the problems with unreliable electronic record-keeping in this country.

A lot of American law comes from English origins, so here's this good article about the history of land registration in the United Kingdom.

There's a reason we have county clerks and land registries and so on, and it wasn't always so!

Book Review: Griftopia by Matt Taibbi

Matt Taibbi's Griftopia is a good place to start to understand how many believe that derivatives and lack of regulation is damaging our financial system. Especially if you like your economic explanations to come with four letter words.

Taibbi - a frequent contributor to Rolling Stone - chronicles our national transition into a casino, where financialization of the economy takes precedence over allocating capital and actual work.

The result? Higher prices for food and oil, government officials paid to look the other way, and a towering edifice of credit and collateral debt swaps supported by a tiny amount of actual capital.

(By the way, that real capital has been sold and leased a hundred times over, so real ownership is unclear at best).

Features a great chapter that explains collateral debt swaps, and the musical chairs aspect of this form of financial insurance.

There's also a chapter about the ideology of the elite, and its growing influence in what is supposed to be a democracy under rule of law.

Book Review: Boomerang:Travels in the New Third World

Michael Lewis's Boomerang: Travels in the New Third World (another copy available here) is a collection of elegant, wickedly insightful essays about the just-burst debt bubble and different countries' attempt to come to terms with what just happened - and, more ominously, - what is ABOUT to happen.

In the aftermath of the initial financial meltdown of 2007-8, Lewis visits several European countries and the United States and writes about national character turned loose "in the dark" with unlimited free money.

The best chapters are the Greek and Irish ones - masterpieces of cynicism, theft and tragedy.

Highly recommended for giving a flavor of the madness of our times. The abandoning of common sense, the incompetence and complacency and corruption in high places, and the cultural acceptance of what is basically debt peonage. Future generations will read this book and shudder.

It's important to read these things so you can rise above your present surroundings and make critical judgements.

MERS and Clear Title to Property

For centuries, county clerks have recorded land sales and deeds so as to create an objective record of ownership. The rule of law makes commerce and credit (loans against title) possible.

MERS is a new-ish system of electronically recording transfers of titles that bypasses this old system. It is not controlled by the government - it is entirely a private system. The bottom line is that chain of title is no longer entirely clear under this system.

Make up your own mind by reading this in-depth article from the Austin American Statesman.

A very wonky article that critiques some of the legal reasoning behind MERS.

Peruvian economist Hernando de Soto discussing the importance of law in making capitalism possible.

Financial "Pro" Loses House

Here's a New York Times article making the rounds.

A financial "pro" - who answered an ad for "securities" thinking it was for a security guard (yes, really) - gets caught up in the consumer lifestyle in Las Vegas and has to walk away from his house.

Great cultural history of American nonchalance. Much like the New York Times guy who lost HIS house.

But here's how this won't happen to YOU - read these books about investing.

Legendary Investor Explains The Financial Crisis and Aftermath

Michael Burry ran a relatively nondescript hedge fund - until he realized that the US housing market was about to collapse and set about to profit from that.

(Remember, the market was overvalued, corrupt and unbalanced, and there is no ethical problem with benefiting from its implosion. Correction from corruption is part of the ecosystem. You don't want wasteful and unjust imbalances - like abnormally high housing prices - to persist.)

Made about $700 million that way.

Burry - one of the central characters of Michael Lewis's book The Big Short - has written a very interesting article here.

Read his take on what caused the crisis, how no-one noticed, what's next, and his view that our society still has not come to terms with an unresponsive elite class.

Where's My Mortgage?

Click this link to find out who owns your mortgage - and if they can produce the note. It's always helpful to live in a society that requires documents and proof rather than just having strangers show up and tell you to get out of your house.

Please see the book review about Hernando de Soto's: The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else about why the rule of law and equal protection before the law is critical to capitalism's success.

Book Review: Busted: Life inside the Great Mortgage Meltdown

You may know business, but do you know personal finance? It's actually a whole different skill set.

So today we're going to read a book that shows you what NOT to do.

Busted: Life Inside The Great Mortgage Meltdown is a sad and in hindsight predictable tale of the consumer real estate excesses of 2000s America. The land where credit was inexhaustible and enormous home mortgages just didn't matter. In fact, critics of this debt-doesn't-matter mentality were widely derided. It goes to show you that a culture can develop temporary insanity.

This is the story of a New York Times business (!) reporter who attempted to keep up with the Joneses. He bought a house with a disastrous adjustable rate mortgage, continued to pile up huge credit card debts (with the assistance of his materialistic second wife), all while paying out punishing amounts of alimony and child support to his first wife and children.

Eventually reality came a- knockin'.

No, this is not a book with abstract theories but rather a personal history of America's experience with debt.

Read it to absorb the cultural milieu of the time and also to remind yourself that a culture can be very, very wrong.

Keep your eyes open out there!

How Texas Avoided the Real Estate Meltdown

Less than 6% of Texas mortgages are in foreclosure: the national average is 10%. 19% of Texas subprime loans were bust - almost the lowest rate in the country (numbers taken from the article linked below)

True, Texas is relatively unscathed by the recent economic troubles. But what's really interesting is the WHY of how most mortgage holders stayed solvent.

According to this article in Slate, it has to do with sane state government regulation of cash-out and home equity loans. You can't borrow crazy amounts of money against your home equity.

In fact, this provision is in the state constitution.

Aw, who are we kidding. The answer is we have Chuck Norris!

Underwater Mortgages in Austin and Texas

Good question today: How many home mortgages in the Austin area are underwater (i.e. people owe more than the house is worth)?

The standard figures, from an organization called American CoreLogic, has come up with a report that is cited by several newspapers and business newspapers.

It includes the top 50 metropolitan areas by underwater status.

I would have put the report up in PDF form, but you must register for free beforehand, and I don't want to step on anybody's toes over at American CoreLogic.

Book Review: Against the Gods: The Remarkable Story of Risk

These books are the kind of thing that can put you over the top in business, school and life.

So let's do another one.

Peter Bernstein's Against the Gods, The Remarkable Story of Risk.

Here's what Publishers Weekly said about this title:

Risk management, which assumes that future risks can be understood, measured and to some extent predicted, is the focus of this solid, thoroughgoing history. Probability theory, pioneered by 17th-century French mathematicians Blaise Pascal and Pierre de Fermat, has made possible the design of great bridges, electric power utilities and insurance policies.

The statistical sampling methods invented by dour Swiss scientist Jacob Bernoulli undergird diverse activities such as the testing of new drugs, stock-picking and wine tasting. Bernstein (Capital Ideas) animates his narrative with a colorful cast of risk-analyzers, including gambling addict Girolamo Cardano, 16th-century Italian physician to the Pope; and John Maynard Keynes, whose concerns over economic uncertainty compelled him to recommend an active, interventionist role for government.

Bernstein also traces the development of business forecasting, game theory, insurance and derivatives, and surveys recent advances in risk forecasting made possible through chaos theory and by the development of neural networks.

Weblink to Niall Ferguson Explaining Financial Crisis Background

Niall Ferguson is a popular historian that's hosting an excellent series on PBS entitled The Ascent of Money.

Lotsa cool stuff about the role of money and credit in shaping society and Niall makes it easy to follow. Recommended for you to get a sense of how this stuff works in real life.

You can watch the entire 4 part series on the official PBS web site here.

Part Four is dedicated to the current financialization crisis.

The Housing Meltdown

For years, I couldn't figure out how everybody was paying for their houses. I just thought I didn't get it. Last time I mistrust my intuition. So now my intuition tells me that we'll have a train in the Austin metro area, get reality shows off the air, and I'll finally become an English rock star.

Here are the official government numbers about housing starts.

You've heard of the famous Case-Schiller index about housing prices? It's a standard measure of house value.

And that's not all!

There are a number of great, interactive maps that show the differing magnitude of declining house sales and deflating house values.

The New York Fed has a map that shows how your zip code is faring with foreclosures.

Do you know Zillow? Zillow is a website that shows you what homeowners are asking - and getting - for their homes.

A company called Realty Trac has an interactive map of foreclosures.