Northman's Fury

A number of disheartening stories for those paying attention to the economy. The first involves the continuing signs of the mortgage and credit crisis moving beyond the sub-prime lenders.

As home prices fall and banks tighten lending standards, people with good, or prime, credit histories are falling behind on their payments for home loans, auto loans and credit cards at a quickening pace, according to industry data and economists.

The rise in prime delinquencies, while less severe than the one in the subprime market, nonetheless poses a threat to the battered housing market and weakening economy, which some specialists say is in a recession or headed for one.

Until recently, people with good credit, who tend to pay their bills on time and manage their finances well, were viewed as a bulwark against the economic strains posed by rising defaults among borrowers with blemished, or subprime, credit.

“This collapse in housing value is sucking in all borrowers,” said Mark Zandi, chief economist at Moody’s Economy.com.

Moving beyond that is the announcement by GM that it is offering it's entire hourly workforce a buyout package in an attempt to get rid of the higher-wage workers, who also happen to be the most experienced, so they can replace them with lower-paid newbees, and not nearly as many of them. That's likely to put yet another crunch on the already weakening economy.

Then from Arizona, there are signs that the Latino immigrant community is leaving.

The signs of flight among Latino immigrants here are multiple: Families moving out of apartment complexes, schools reporting enrollment drops, business owners complaining about fewer clients.

. . .

On Monday, state lawmakers, concerned about shortages of workers and the failed revamping of immigration law in Congress, which was pushed by Senator John McCain of Arizona, pledged action.

Bills were announced that would create a state-run temporary worker program, though it would need Congressional authorization. And last week Gov. Janet Napolitano, a Democrat, offered to help the United States Labor Department rewrite regulations designed to streamline visas for agricultural workers, who growers say are increasingly hard to find.

While data for the last month or so are not available, there were already signs of migration out of Arizona at the end of last year. In the fourth quarter of 2007 the apartment-vacancy rate in metropolitan Phoenix rose to 11.2 percent from 9 percent in the same quarter of 2006, with much higher rates of 15 percent or more in heavily Latino neighborhoods.

“You have many people moving out, but they are not all illegal,” said Terry Feinberg, president of the Arizona Multihousing Alliance, a trade group for the apartment and rental housing industry. “A lot of people moving are citizens, or legal, but because someone in their family or social network is not, and they are having a hard time keeping or finding a job, they all move.”

A number of factors are at work here according to the article, with one being the tough new legislation targeting illegals, but the article does make a few other points worth considering, particularly those looking to do this sort of thing on a national scale. Getting rid of all of those illegals, and in some cases, their legal relatives, means further vacancies in a housing market already in deep trouble. Plus, as noted in the first paragraph, a lot fewer consumers for all types of business products and services.

The economic effect of tossing out millions of local customers would be a massive hit on the US economy, something most immigrant bashers tend to ignore.

The other major factor mentioned is in fact a slowing economy. Less chance for work means fewer people coming to look for it. Ties in nicely to the story about GM above. Well-paying jobs in the US are growing scarcer.

Ms. McLaren, the economist, said that in the end history showed it was difficult to stop illegal immigration so long as jobs paid better in the United States than at home. An economic rebound would probably draw people back here, no matter the laws.

Probably true. But the fact of the matter is, thanks to a number of factors, the jobs in the US may not pay more than elsewhere for a whole lot longer.

The ideology of unrestricted free trade (via globalization) assumes that the majority of the participants in the US economy are sufficiently differentiated from the billions in China, India and the rest of the world to command higher salaries. I suspect that isn't the truth and that the majority of Americans don't hold any substantive qualitative advantage over newly minted participants in the global economy.

Old advantages appear ephemeral -- seen in how quickly the US slipped to 38 in broadband. If we think in terms of how rewards/resources are allocated if the global economy operates as a single entity and not many loosely joined parts... then the vast majority of US workers will soon find their wages/salaries normalized to global standards (to those with similar skills etc.). The result will be that the US, as collection of citizens will get poorer (or at best tread water until everyone else keeps up).

It will, at least, solve the problem of illegal immigration, though I feel sorry for whatever group gets to take their place as scapegoats.

When Ray McDaniel, president of Moody’s, addressed a debate in Davos last week, the mood was so hostile that some speakers joked that he was brave to appear “without a bodyguard”.

No wonder. As the credit squeeze persists, ratings agencies are being forced to downgrade thousands of securities, after failing to foresee the recent wave of defaults, particularly in subprime loans. On Wednesday night alone, Standard & Poor’s downgraded more than 8,000 residential mortgage-related securities worth some $534bn (£268bn, €360bn).

These downgrades have triggered bitter recriminations, amid a wave of losses at asset managers and banks. “Much of the money lost has been held by people who held AAA securities [that were downgraded],” points out Wes Edens, head of Fortress Investment Group, a big hedge fund. “That has caused a tremendous loss of confidence.”

But the downgrades have also left policymakers and analysts scrambling to determine what has gone so badly wrong. As this search intensifies, some economists are starting to suspect that the answer lies in a striking recent change in American household choices – a shift that could have important implications for policymakers and investors alike.

What has gone so badly wrong?  One could make the snarky comment that no one could have possibly suspected that giving huge loans to people who couldn’t afford them would ever cause any kinds of problems, but what the article actually points to is something pointed out in this schadenfraude alert.

It isn’t that they didn’t know the loans were going to go bad.  It’s that they figured they’d have some more time and a better warning of when to leave some other suckers holding the bag.

The issue at stake revolves around so-called delinquency rates, the proportion of people who fall behind on their debt repayments. When American households have faced hard times in previous decades, they tended to default on unsecured loans such as credit cards and car loans first – and stopped paying their mortgage only as a last resort. However, in the last couple of years households have become delinquent on their mortgages much faster than trends in the wider economy might suggest. That is particularly true of the less creditworthy subprime borrowers. More­over, consumers have stopped paying mortgages before they halt payments on their credit cards or automotive loans – turning the traditional delinquency pattern on its head. As a result, mortgage lenders have started to face losses at a much earlier stage than in the past.

“In the past, if a household in America experienced financial problems it tended to go delinquent on its credit cards, but kept on paying its mortgage,” says Malcolm Knight, head of the Bank for International Settlements, the central banks’ bank. “Now what seems to be happening is that people who have outstanding mortgages that are greater than the value of their home, or have negative amortisation mortgages, keep paying off their credit card balances but hand in the keys to their house ... these reactions to financial stress are not taken into account in the credit scoring models that are used to value residential mortgage-backed securities.”

The other major point seems to be that the fall in house prices means people can no longer refinance their way out of trouble and have left some people concluding it makes more sense to walk away from a house that’s worth less than there mortgage on it is, rather than struggling to keep up the payments on it.

All part of a nasty cycle whose effects continue to spread.  The Washington Post has a decent article on how the housing market collapse has affected the Canadian lumber industry, (though it takes a typically American-style view of the softwood lumber tariffs issue).  And as the credit tightens and the economy slows, the US isn't just shedding wage growth, it's beginning to shed the jobs themselves.

The U.S. unexpectedly lost jobs for the first time in more than four years, increasing the odds the economy will fall into a recession and making it likely the Federal Reserve will cut interest rates another half point next month.

The Fed will continue doing all it appears it can do and cut interest rates yet again, though there isn't much room left for them to do so. Of course, doing so increases inflation fears, or more likely, stagflation, as prices rise while the economy fails to grow. And on that bright note, I give you the other economic shock headed our way.

China’s latest export is inflation. After falling for years, prices of Chinese goods sold in the United States have risen for the last eight months.

Soaring energy and raw material costs, a falling dollar and new business rules here are forcing Chinese factories to increase the prices of their exports, according to analysts and Western companies doing business here.

The rise was a modest 2.4 percent over the last year. But even that small amount, combined with higher energy and food costs that also reflect China’s growing demands on global resources, contributed to a rise in inflation in the United States. Inflation in the United States was 4.1 percent in 2007, up from 2.5 percent in 2006.

Because of new cost pressures here, American consumers could see prices increase by as much as 10 percent this year on specific products — including toys, clothing, footwear and other consumer goods — just as the United States faces a possible recession.

Isn't economics wonderful?