Housing has been in a death spiral for a few years, and the latest evidence suggests that government support is the only thing keeping the housing market from complete collapse.
Facts are facts, and the fact that housing has been on government sponsored life-support for a few years has been under-reported and ignored. The housing marketplace has not improved, and is being kept alive only through massive government intervention and systemic support. As this support is gradually withdrawn, the housing market will continue to weaken. The pincer-like effects of continuing unemployment and increased foreclosure activity will multiply the effects of the gradual withdrawal of government aid.
The New York Times, reports here, that the nationalization of Fannie Mae and Freddie Mac fifteen months ago has resulted in massive government subsidies to these organizations. Fannie and Freddie, as they are commonly known, are stockholder-owned corporations chartered by Congress as government-sponsored enterprises (GSE’s). In September 2007, these GSE’s were placed into conservatorship of the Federal Housing Finance Agency. As of 2008, Fannie Mae and Freddie Mac owned or guaranteed about one-third to one-half of the U.S.’s $12 trillion mortgage market.
The controversy over Fannie and Freddie is fueled by the fact that the government has conveniently omitted their massive liabilities, estimated at nearly $5-8 trillion in debt and guarantees, from the Federal government’s financial statements. Recording their liabilities on government financial statements would dramatically increase gross federal liabilities and further weaken the US dollar, as sovereign investment funds would lose faith in the U.S.’s ability to repay these massive debts.
How to reorganize Freddie and Fannie have been highly controversial topics, as no one has yet determined how to replace the massive liquidity that these organizations inject into the housing market. The Federal Reserve has nearly exhausted its stated buying cap of $1.25 trillion in mortgage backed securities from Fannie and Freddie. The Federal Reserve has created, in the last year, nearly all the liquidity in the housing markets. Without these injections, housing’s death spiral would be nearly complete and Fannie and Freddy would collapse.
In a stealth maneuver that was not anticipated, the Treasury decided on Christmas Eve 2009 to eliminate the caps on how much bailout money the failed mortgage giants would receive to stay in business. Now, taxpayers will be on the hook for an “unlimited” amount for at least the next 3 years. The 3 year cap maximum is noteworthy, because it represents the likely range of mortgage resets (and mortgage failures), now estimated to last through 2012.
Assistance to homeowners in distress has been virtually nil, with government loan modification programs permanently modifying only 67,000 loans of nearly 4,000,000 foreclosure filings in 2009. The number of modified loans is a statistical blip and aberration.
Practically, foreclosure filings will continue to increase in 2010 and 2011, as mortgage resets peak. The government and banks will be unable to stem the hemorrhaging, which will cause an increasing tide of bank failures and FDIC takeovers, already estimated at nearly 1,000 banks. Keep in mind that only approximately 200 banks have been placed into receivership by the FDIC, to-date. 800 banks remain takeover targets, discounting the effects of the impending commercial real estate crisis.
Coupled with an impending crisis at the Federal Housing Administration, which insures nearly $1 trillion in mortgages, this crisis is approaching a critical phase. Mortgage delinquencies at Fannie and Freddie are increasing steeply, the Federal tax credit on home purchases is due to expire soon, and the Federal Reserve is quickly approaching the terminal phase of its support to Fannie and Freddie. Can the Federal government continue to nationalize the housing market?
No one has come up with a new model for liquifying the national mortgage markets, yet continued Federal support will result in substantially higher inflation, higher gold prices, higher interest rates, and a substantially weakened US dollar. The US government cannot continue to print dollars indefinitely without significant and substantial negative impacts to our economy, yet it remains the only support for the housing market. This ends badly.

Republicans have prevailed in their efforts to rein-in future spending, as deficit-saddled US governments will find it nearly impossible to increase spending for at least the next 10 years.
The New York Times reports, here, that the Obama administration has released startling budget predictions that anticipate massive budget deficits, through at least 2020, which will render the United States nearly impotent in its ability to create new domestic initiatives to alleviate our current crisis or develop new social programs. These deficits will strangle future governments’ ability to initiate new programs or provide aid to stagnant states or industrial sectors.
Starving the Beast, which refers to Republican’s fiscal policy of using budget deficits via tax cuts to force future reductions in the size of government, may ultimately prevail. Bush-era tax cuts, coupled with massive spending created by 2 wars, will result in budget deficits far into the future. These deficits have been largely funded by the Chinese, who have recently demonstrated their anxiety over the situation by admonishing the US government repeatedly.
While Starving the Beast was widely discounted and ridiculed as impractical or unsustainable throughout the Reagan and Bush era, it appears that the massive budget deficits created by the wars, coupled with the Bush era tax cuts, will have the same practical effect throughout the next decade.
The resulting deficits will largely succeed in choking future administrations, including Obama, from increasing or initiating domestic spending programs, especially while America fights a 2 front war. What are the practical implications of this? Future administrations, and Congress, will have to either make drastic cuts in expenditures or raise taxes, or a combination of both.
Republicans have largely ignored the deficits, and refuse to consider tax increases, while Democrats refuse to consider massive cuts to entitlement programs. This path is unsustainable, and will result in further weakening of the US dollar as governments abroad lose faith in the US’ ability to sustain itself. Meanwhile, the stock market continues its disconnect from mainstream America, and has continued its slow, if steady rise to new heights. The stock market reflects the increasing disconnect between the investment class, which prefers short-term solutions to long-term problems, and most of America, which is increasingly skeptical of any solution to these problems.
America’s present path is clearly on a collision course with its future. Starving the Beast will ultimately result in both massive cuts to entitlement programs, and the pain that this will engender throughout the lower and middle classes. Cuts to social services and entitlement programs will be coupled with increased taxes at both the state and federal levels, as state and municipal governments strain to balance their budgets. While state governments have largely avoided these cuts by adopting accounting gimmickry to forestall these cuts, real pain will ultimately be felt by real people. Unless another consumption bubble, fueled by runaway asset prices is created, the slow demise of America’s economy has been ensured by Starving the Beast.

The Florida Bar has initiated investigations of 35 of Scott Rothstein’s partners, investigating trust account misdeeds and misappropriations.
The Miami-Herald has reported, here, that Florida Bar investigators are focusing on the equity and non-equity partners of the failed firm, which served as the foundation for Scott Rothstein’s $ 1 billion Ponzi scheme, one of the largest in Florida history, and whether any of the partners misappropriated client trust funds or otherwise lied about the status of those funds.
That the investigation has turned to Scott Rothstein’s former partners is unsurprising, given the massive nature of the Ponzi scheme that unfolded at their feet. Without concrete evidence of complicit behavior, investigators are likely wielding the only tool at their disposal: the trust accounts and the annual certifications that occur when lawyers renew their Florida Bar memberships. The highly technical focus on these largely perfunctory certifications is evidence that investigators have been unable to directly tie partners or other attorneys to the massive, $1 billion Ponzi scheme, and are seeking creative, if technical, links that tie these attorneys to the fraud.
What should the senior members of the firm have known about Rothstein and his practice? The firm’s partners, equity or non-equity, should have known that firm revenues were largely unsupported by firm employees, associates or staff, and that a significant disconnect was occurring between the work being performed by firm employees and overall firm revenues. Did any partner review firm revenue, by practice area, and determine which associates were assigned to these unique areas?
Given Rothstein’s extravagant lifestyle, did any partner determine the primary source of the firm’s significant revenues, and establish the link between those practice areas and the associates being assigned to the work? Did senior partners review payroll expenditures and establish the funding source for the shortfall between the payroll expenditures and ongoing, systematic revenue?
Even a cursory review of these patterns and linkages would have established that something was terribly wrong at Rothstein’s firm. These 35 partners either turned a willful blind-eye to these obvious problems, were blinded by Rothstein’s inflated generosity into believing that everything was fine, or were actively complicit in the fraud.
Evidence sufficient to support criminal prosecution of these attorneys will be difficult to uncover and nearly impossible to substantiate, but their collective ignorance, willful or haphazard, reveals a simple truth about the legal profession: attorneys are simply not very good at detecting, preventing or otherwise understanding fraudulent behavior.

Frank Rich of the New York Times writes, here, that the narrative of our decade has been defined by how easily we’ve all been duped by the con-artists in our midst. Collectively, Americans have become inured to the deception that surrounds our social, commercial, cultural and economic relationships.
Our vacuous minds have purposely ignored the fraying of these relationships and the resulting impact on our country because acknowledging this reality would require a painful acceptance of the cancer that is slowly consuming our society.
Rich notes that we have witnessed a decade of scam, fraud and misfortune in the likes of Citigroup, Fanny Mae, Ted Haggard, Enron, Madoff, Drier, housing, Stanford, AIG, Barry Bonds and Iraq, to name a few, and that Tiger Wood’s fraud is merely the culmination of this era. Tiger’s demise is all the more pronounced, writes Rich, because of his “sham beatific image, questioned by almost no one until it collapsed”.
Rich emphasizes, though, that it is not Tiger’s hypocrisy and our collective disappointment at yet another fallen hero that is remarkable, but the canyon-like gulf between Tiger’s public image as a “paragon of businesslike discipline” and his “maniacally reckless life”. A worse breach, though, reveals the lie of Tiger’s near-obsessive dedication to building trust as the cornerstone of his public image, and also of Tiger as the paragon of corporate resoluteness and self-discipline.
Trust and its destruction have defined these frauds. Tiger purposely cultivated an image of trust and self-discipline, and ultimately became Accenture’s standard bearer. Similarly, Enron, AIG, Fanny Mae and Madoff collectively hyped trust and reliability as the cornerstones of their businesses. Rich notes that “We keep being fooled by our leaders in all sectors of American life, over and over” and that after Enron, our financial leaders and government regulators should have been more careful in monitoring our financial landscape and critically analyzing the developing housing bubble.
The Tiger drama becomes but the latest example of this cancer, a drama which has been reduced to comical farce, freak-show, and circus tent. Tiger’s saga is interesting not because it is the undoing of a celebrity, but because this painful collapse represents the culmination of a decade of duplicity, fraud and self-righteousness.
These frauds enshrined these celebrities and institutions with masks and accompanying standards which most ordinary Americans could never achieve, and which are antithetical and contrary to our innate, imperfect, human selves. Exposing these frauds removed the masks that these celebrities have worn and which most of us accepted as impossibly true.
Perfection was imbued in these institutions and stars, Tiger Woods as the paragon of trust, Enron as the standard of corporate America, housing’s hysterical climb as the perfect asset. When measured against these standards, the rest of us were ultimately exposed as imperfect, flawed and incapable. These were impossible benchmarks to achieve or judge ourselves against, because they were ultimately revealed as scams or fiction, and yet their resolution quietly restored the vision of ourselves as flawed and imperfect, but human.
Shredding these masks returns our humanity and acknowledges that even the best among us, those near-perfect celebrities and stars, are indeed identical to us in their collective failures and misfortunes.