China's Weaknesses

The Wall Street Journal pointed out some uncomfortable truths about China's oil vulnerabilities. China became the biggest importer of crude oil from Saudi Arabia in 2009, surpassing the US. Most of China's crude comes from Saudi Arabia:

The Middle East provides 2.9 million barrels of oil a day to China, more than half its total imports, and Saudi Arabia alone accounts for about 1.1 million barrels a day.

Chinese officials say they want to boost trade with Saudi Arabia by about 50% to $60 billion by 2015, further increasing Beijing's dependence on the kingdom.

China realizes its vulnerability, and has been doing what it can, mostly increased military spending and overt political alliances with Saudi Arabia, to decrease its vulnerability by gaining power. China's aircraft carrier program is aimed directly at gaining naval power and dominance over the Gulf, to assure the oil keeps flowing.

"Asia has been something of a bystander in the Middle East and importantly, in the case of China, an increasingly anxious bystander," said Andrew Shearer, director of studies at Australia's Lowy Institute for International Policy.

That anxiety comes from the economic implications of possible major disruption to energy supplies coming through the Persian Gulf's Strait of Hormuz and Beijing's unease that the calls for democratic change sweeping across the Middle East will set an unwelcome precedent at home. According to Mr. Shearer, the U.S. still has the military capability to intervene if the flow of oil from the region was threatened.
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In an extreme scenario, U.S. troops could seize control of oil installations in the region, leaving China and most of Asia dependent on the goodwill of Washington to guarantee their supplies. In such circumstances, "the oil would follow the gray naval ships" of U.S. forces in the Persian Gulf, Mr. Shearer said.

China may be racing to catch up. It has increased defense spending by almost 13% and is developing its own aircraft carriers. But its ability to project power beyond the South China Sea remains limited. Beijing sent one of its latest and most powerful warships, the Xuzhou, to help evacuate its nationals from the fighting raging in Libya, but this effort was dwarfed by the rapid U.S. navy buildup off the North African coast. "China has naval aspirations but they're still a long way from realizing that," said Mr. Shearer.

China remains hobbled by a fiscal system that is a mess. As the WSJ reports:

More important, the banks were relieved of their bad loans by what Messrs. Howie and Walter accurately describe as "accounting legerdemain."
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In 1998, the People's Bank of China—the state's central bank—reduced the Big Four's reserve requirement. This freed up reserves for the banks to acquire a special-purpose treasury bond issued by the Ministry of Finance. The loan proceeds were then used to recapitalize the banks. Beijing also created asset-management companies to buy the nonperforming loans from the banks at face value. In exchange, these repositories of toxic credit issued notes to the banks. (When these notes became due in 2009, they were extended for another decade.)

For the financial magicians' next trick, in 2005, other nonperforming loans were put into a "co-managed account" with the Ministry of Finance, which in return issued IOUs to the banks that were to be repaid through a combination of loan recoveries, bank dividends, sale of bank shares and tax receipts from the banks. To make matters even more convoluted, in 2009 the banks started acquiring large stakes in the asset-management companies that were still sitting on nonperforming loans from the previous decade.

As noted in the article (the review of "Red Capitalism" by Carl E. Walter and Frasier J.T. Howie), what this has done is given Chinese banks a guaranteed spread, between borrowing costs (artificially low) and what they charge for borrowing (high), but at the cost of artificially low rates on Chinese consumer bank accounts, aka "financial repression." Chinese have to save, save, and save, because they get in effect negative real returns on savings accounts. This accounts for all sorts of destructive bubbles in real estate, and the like. Empty apartments in Shanghai and elsewhere that Chinese families have purchased as investments, desperate for returns. Household deposits have financed the industrial banking system and export driven economy. Making Chinese domestic consumer consumption a joke (and a bad one on Western companies betting on it).

Bad loans are routinely hidden, and the various local, provincial, and special district liabilities for bad loans, often connected to White Elephant projects like high speed trains that will never recoup their investment costs, is probably on several orders of magnitude larger than the US state/local/county levels of indebtedness.

China is a formidable country with many advantages, but they are not world-beating supermen with no flaws. Their interior remains dirt poor and functionally illiterate. They have massive ethnic/racial/religious tension and separatism. [Tibet and XianXing Uighurs and Hui Muslims on the coast.] China has huge gaps between rich and poor, massive gender imbalance (roughly 30-40 million young men will never marry.) China is hideously vulnerable not just on its own sake for oil, but cheap Chinese goods rapidly increase in price if oil increases, by trans-Pacific transportation alone. Let alone cost of production. And as noted, its financial system is a shaky house of cards continually propped up, driven by insolvent State Owned Enterprises that must be continued to keep employment up (and the social safety net which is tied directly to employment, including schooling and welfare.)

China has been lucky, propping up its broken financial system. Betting on luck forever is not a wise move. It may well be that Japan's earthquake exposes China's weakness, as Japanese companies pull back from Chinese investment to focus on reconstruction at home and Japanese led export growth (to pay for reconstruction). Japan is highly indebted, aging, and with very little growth domestically. The only way for Japan to reasonably pay for reconstruction is export-led economic growth, in direct competition with China.
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The Shadow Banking System and The Return of Risk

Several articles in the Financial Times have highlighted how the political response to risk in the financial system, and indeed in society, have driven risk into a "shadow system" of institutions and individuals that are largely unregulated or known, driving risk, both financial and otherwise, in ways beyond control of any social institution. This is because risk does not simply disappear by fiat. Indeed, Western societies depend on risk, and need risk, for the regular social transformations that since 1000 A.D. have made Westerners ever more inter-connected, more specialized, more inundated by change, and more wealthy and secure. But now, risk is being pushed into the shadows, where it operates beyond the ken of our social institutions, including in areas beyond finance, in unhealthy ways that promise a terrible reckoning when inevitably, the costs of that risk come home to the West in bets gone bad.


The Basel III regulations, reported by the Financial Times, are complete. And while they deal with risk in banks, raising requirements for the amount and quality of the capital banks hold, much of the risk is simply being pushed into largely un-regulated hedge funds, private equity groups, energy companies, and agribusiness. The graph at the top of the post (courtesy of the FT) shows just how much money is at stake.

Most fundamentally, the practice of pure proprietary trading – whereby banks bet their own money dealing in anything from gold to Greek bonds – is being outlawed in the US within two years.
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Yet a nagging worry is expressed by some regulators, bankers and other experts within the financial services industry that these reforms, like others in the past, risk backfiring. What if those taboo, high-risk businesses cannot be stopped in their tracks as regulators and politicians would like? What if, instead, they just move to a new home – within the sprawling mass of hedge funds, private equity firms, trading houses, even energy companies, all of which are largely unregulated and free of the capital requirements imposed on the banks?

Few are prepared to talk openly about the issue for fear of seeming disloyal to the campaign for concerted action against the banks but in interviews conducted over several months the Financial Times has pieced together a picture of mounting unease that the focused crackdown on banking could just push risk out of the reach of the toughest regulation and into fast-growing “shadow” areas.

“I think this is a real risk,” says one influential European bank executive on condition of anonymity. “I don’t buy the argument that if it’s a hedge fund it doesn’t matter because it’s a bunch of rich people’s money and so the government isn’t going to have to bail it out if it fails.” With hedge funds growing far bigger, and being increasingly backed by big pension funds and insurance companies, it can be systemically important whether these funds fail or not. “Who says a hedge fund can’t be a systemic failure? Then you’ve just shifted the problem from the banks to somewhere else where you can’t really get at it.”

There is a pretty powerful precedent for the theory that a “shadow” banking system can cause or compound a crisis. The fall of Lehman, Bear Stearns and other banks around the world in 2008 was made possible because the financial risk that stemmed from the US subprime mortgage lending was being recycled around the market via shadow banking structures. These entities, from money market funds to investment products such as collateralised debt obligations, hid the real risk because they were not properly regulated.

It is impossible to know how another shadow banking market will evolve, but even top regulators suggest lightly supervised non-bank financial services companies could be the next accident waiting to happen.

The biggest concern probably surrounds the growth of prop-style trading operations within hedge funds and private equity companies. “Private equity and hedge funds could be winners, taking on more risk,” says Kian Abouhossein, banks analyst at JPMorgan. “Through derivatives, for example, you can imagine them taking on very big positions. This is all about risk fragmentation, which could be a good thing. But if you then get risk concentration within hedge funds, that’s the real danger.”

Simon Gleeson, an expert on financial regulation at Clifford Chance, the law firm, is clearer still. “There is a real danger that risk moves out of the regulated system – out of the bit of the industry that regulators can see. Non-banks – funds and insurers, for example – will have a significant cost advantage under the new rules on bank capital. It’s a third more expensive in regulatory capital terms to do business with a bank than with a non-bank. This is a powerful incentive to use non-banks as counterparties.”

As the FT reports, Goldman Sachs, BNP Paribas, and Deutsche Bank have seen traders set out for hedge funds as the opportunities end at their old institutions and the action (and money for traders) moves to the hedge funds. Or private equity, or energy companies, or agribusiness.

Nervousness also exists about the volumes of trading being done within energy companies and other commodity trading houses. Oil companies and trading houses have been steadily extending their reach beyond their traditional focus on physical commodities into exotic over-the-counter derivatives to serve customers, a trend that some expect to accelerate now that their capital advantage over banks is widening sharply.

Oil companies such as Total and BP and traders including Cargill and Vitol are in effect shadow banks for the commodities industry, replicating the services that the likes of Goldman Sachs and Morgan Stanley monopolised for years. That might mean selling an oil swap to an airline or an OTC corn option to a farming group.

Trading and oil company executives see their move towards derivatives as a natural extension of their business, saying the OTC deals help their clients to hedge price risk. But some analysts say the activities, which are largely unregulated, bring big risks to the system. Without the capital requirements imposed on banks, a default becomes more dangerous, they say. The shift also awakens unwelcome memories of Enron, the failed US energy company whose traders severely disrupted the California energy markets in 2000-01 as well as costing investors billions of dollars.

Recently, some trading companies have withdrawn from providing commodities derivatives services to customers after losing large amounts. Japan’s Mitsubishi Corp is to close its oil derivatives business by March 2012. The unit made heavy losses on jet fuel hedges related to the collapse of JAL, the Japanese airline.

As the world becomes far more interconnected, and herd-like behavior by the class of professional investors who control about 75% of the money invested globally (there are about ~100,000 of these investors, a small group globally, according to Michael Lewis in "the Big Short"), even savvy investors can get steamrolled by herd behavior. As pretty much every asset class, from equities to bonds to commodities, is correlated. Because the same few people trade them to make money. This is the downside of the global connectivity. It enables "smoothing" of global shocks such as food shortages by allowing US and Australian farmers to send grain out to the world when Russia has a terrible harvest. But it also connects said farmers to the global financial system, and can amplify shocks as well as mitigate them. By magnifying the effect of a bad bet.

The US housing market collapse, had CDOs and the like, not been sold globally, would have been a US concern only. But when the customers of the CDOs the writers of CDS were institutions like the German Landesbanken, then the US disaster threatened not just the wider US economy by potentially bringing down AIG (and much of the insurance it wrote) but German banks which needed to be bailed out by the German government, or UK institutions, or French ones, and so on.

The response of the regulators, particularly with the Dodd-Frank Financial Reform Law in the US, has been to over-regulate, areas without risk, and leave the "shadow system" untouched.

Insurers are facing uncertainty created by sweeping definitions in the Wall Street reform act, which leave open the possibility that their products will be covered by the new swaps regime.

The Commodity Futures Trading Commission has the power to use the ambiguity of wording in the Dodd-Frank financial reform act to extend its reach to financial products that share some of the characteristics of derivatives, lawyers have said.

Gregory Mocek, former director of enforcement at the CFTC, said the very wide definition of swaps – derivatives in which two counterparties exchange benefits – in the legislation left it “unclear as to how insurance will be covered”.
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“The most lethal thing about Dodd-Frank is that a lot of market participants don’t even know that they could be impacted,” Mr Mocek, a partner at law firm McDermott Will & Emery, said. “There are people out there trading metals or agriculture or energy who could be regulated and historically have never been under regulatory oversight on a daily basis.”

What is striking about the West is how risk has become the enemy of society, and has been pushed into the shadows. Part of that is the response to the two world wars in the Twentieth Century, destructive beyond belief. And, of course, the risk inherent in the Cold War duopoly, later joined by China, of dueling ICBMs staring down at the planet, ready to launch upon warning. Risk then, was very, very bad.

Risk of course, tends to destroy social institutions, or even familiar commercial institutions. Changes to marriage, family, and the like strike many as unnecessary and indeed, harmful changes, risk for little reward. Making marriage and family "gay" might indeed help a tiny few gays and lesbians seeking to raise children in a monogamous, life-long commitment, but tends to act very destructively upon heterosexual family formation. "Gay" marriage being not very attractive to men who are straight. The disappearance of say, Pan Am or Saturn or Pontiac, seems change with little benefit. Indeed, the people who lost jobs as corporate institutions fail, or disappear, generally find fewer opportunities even as good, let alone better, as most White and Blue collar workers are in an endless competition with lower-cost workers in China and India. Even Harvard Law is no longer a golden ticket, as most low level stuff can be outsourced to India for pre-trial preparation:

Many bloggers paint a similar picture, noting that even lower-ranked law schools still charge more than $100,000 for a three-year education and don’t prepare graduates to be competitive in the current job market.

They note that while there’s a glut of laid-off associates, more law firms are getting their basic legal work, such as document review, completed by contract attorneys who are paid hourly for temporary jobs with no benefits. This is the type of work that in flush times was handled by the new associates hired by firms. Those firms also are increasingly turning to India for cheaper document review.

Temporary Attorney blogs about the struggles of attorneys working hourly temp jobs. The author draws a contrast by posting law school profiles that show deans even at low-ranked schools are paid handsomely, as much as $500,000 a year.

“There are legions of underemployed document reviewers slaving away in unventilated basements so that morally bankrupt individuals [at law schools] can continue pulling down half a mil a year by scamming unsuspecting college graduates,” the blogger states.

The content isn’t all flaming hyperbole. The blogs link to mainstream media news stories about the harsh realities of the legal industry, and the plight of recent graduates who can’t find legal work or perform temp jobs for wages such as $10 or $20 an hour in places like Chicago and New York.

“Thirty people [working as legal temps] are absolutely miserable, but nobody has the courage to stand up and say anything,” one blogger stated, noting that the air conditioner in the room was set uncomfortably low. “The market is so rotten, so-called professional attorneys are afraid of rocking the boat and being frozen out of low-rate $20 an hour temp gigs.”
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“Does babysitting count as employment?” queried a third-year UConn law student who asked to remain anonymous. UConn reported this year that 89.9 percent of its 2009 graduating class found employment, but that figure includes temporary jobs and positions outside of the legal industry. Other law schools, such as Quinnipiac and Western New England, also count those jobs toward employment figures.

The third-year student said “it’s terrifying” to think where she and her classmates might end up after graduation next year. “The competition for crappy jobs is amazing,” she said. “The anxiety over getting jobs is palpable.”

And it reaches into the most prestigious schools.

“I have a friend from Harvard Law School who summered at a firm and didn’t get an offer last year,” she said. “If Harvard isn’t a golden ticket, then there’s no golden ticket anymore.”

By contrast, people in their twenties and thirties happily slaved away at fairly crummy jobs in the Dot-Com era, hoping that they could trade insane hours, and terrible pay, for a chance at the brass ring at the new Microsoft or Apple Computer. Risk in the start of the internet era was socially acceptable, now an attempt to tamp down risk has at least in part, led to a leveling of wages, globally, even in law. If Harvard Law is not a golden ticket, nothing is.

Indeed, the picture of risk in professional graduate schools, from Business to Law, is a few superstars earn considerable amounts of money, and everyone else gets next to nothing. Corporate clients and law firms alike can mitigate their risk in taking on higher cost employees, by outsourcing work to India or India like boiler rooms, but the long term cost, the transfer of risk, is the (mostly) White professional class becoming enraged at the lack of opportunity, suddenly, for upward mobility.

Some of the risk aversion shows up in cultural spheres. Movies and TV shows depicting male heroes who "risk it all" to restore moral order, from "Dirty Harry" to "Death Wish" to "Batman," are becoming increasingly rare, particularly in female dominated TV. In the 1950's and 1960's, Westerns were common, along with shows like "Hawaii Five O," and even in the 1970's, shows like "Streets of San Francisco" did not shy away from showing male heroes, loners among other men, leading efforts to clean up a city, or a town. From "the Rifleman" with Chuck Connors to Karl Malden in "Streets of San Francisco," TV did not find risky male efforts to restore a sense of order and justice something that lacked appeal to the audience.

But, as noted in When Did TV Get Girly?, TV changed to a female centric audience in the late 1970's, and was very female by the late 1980's. As Sonny Crockett and Hannibal Smith gave way to Jerry Seinfeld, the approach of risk in cultural spheres became a thing of the past. This is why the essence of male heroism has been driven out to big budget comic book movies (re-incarnated Westerns and Action movies). Male risk is inherent in the heroism, and women by and large don't like risk that much.

Risk of course, properly understood and managed by society, is critical to maintaining the West's social cohesion and civilizational advantage. Risk, if properly mitigated, allows young men to move up, advance themselves, and more and more risk is required for young men who are the equal of young women, to make themselves attractive, in a stable and prosperous society. Much of the risk taken by young traders, seeking to roll the dice on big bets, can be seen by pushing risk out into the financial sector, and away from the traditional venues of male risk-taking. The military, entrepreneurship, and the like, all entail very significant risk, but relatively little reward. Men do not come back from military service respected and honored, only as "victims" and those deserving of pity. Entrepreneurship, is difficult and pay-offs few and far between. Even those who hit it big, like Mark Zuckerberg of Facebook, lack social cachet and dominance, the way say a grade Z actor like Jared Leto would.

Much of the risk, and social changes, that would have been channeled in times past into more productive avenues (think the Wright Brothers or the birth of Television), has now moved into the financial realm. With mostly disastrous consequences. Paul Volcker famously opined that the only real financial innovation worth anything in the last fifty years was the ATM. High frequency trading promises rich returns to a few highly capitalized proprietary traders, but increases systemic risk (the "Flash Crash") without much reward for everyone else. Most of the ownership of Equities is in big, institutional hands.

Moreover, lack of social wealth building by properly managed risk in manufacturing, or energy extraction, and the like, have made all sectors of society "greedy" for risk. Bob Citron, former OC Treasurer, was not alone in taking on insane risk to get insane returns for a county strapped for funds to manage its obligations, from retirement to special projects. Naturally his bet, egged on by astrologers and Merrill Lynch alike, went bust. But the larger lesson is that from German Landesbanken, to pressed County Treasurers, when money cannot really be made by any other means, people of all stripes will seek it in financial markets. Where the risk is poorly understood, often sold to unsuspecting customers, and only a few insiders reap the rewards.

As "the Big Short" confides, America's smartest young men (and it is almost always young men) seek out big rewards by moving, now to hedge funds and private equity groups. Where they can make big money by making big bets, with mostly other people's money. "I'm short your house" is just another aspect of seeking risk in the only venues allowed.

But that risk takes place in the shadows. Poorly regulated, but even less understood. The Dodd-Frank law will simply push the risk out to places like Singapore, or Hong Kong, or Geneva, where the risk will be largely unregulated, but even worse, in the shadows, unseen, until disaster strikes and the risk, inevitably, transfers to Main Street. But the problem is not just "greedy bankers" and the like. Greed is a basic human emotion, you might as well exterminate the human race to get rid of it. So too is the desire for risk. Not everything can be regulated, certainly not by laws and regulators. There is too much money, in too much of the globe, and too many resources stacked against the regulators. We'd need a virtual army of tens of millions of regulators, paid top-dollar, just to winkle out every bit of risk and slap regulations and rules upon it. The cost of the regulation would be punishing, and like Canute's shield-wall, simply push the water around the shields as the tide came in.

What is needed is first, open-ness and social agreement, broadly in the West and particularly in America, about what risks society will and will not take. Loosening of the rules for risk-taking, in some areas where social benefits are large, and promoting the risk-taking culturally. Making entrepreneurs, or military men, or scientists, or technologists who take considerable risk at times, in one way or another, respected for their risks and accomplishments. Moving risk taking into these areas and away from financial areas. This is as much a cultural arrangement as one of regulation.

As even the Financial Times acknowledges, risk-taking cannot be simply outlawed by fiat, and regulation alone merely pushes it into the shadows. It is time for Western society to stop pushing risk into the shadows, and bring it out into the light, where it will continue to transform the West, for both good and ill, but maintain the critical advantage the West has always had: better appetite and adaptation for change. As technology shapes society to new heights of wealth and power.

Famously, both Oliver Stone and Michael Douglas were shocked to find young men admired Gordon Gekko from "Wall Street," even though the character was supposed to be a villain. Gekko was active, was important, his actions made him matter. Instead of passive victim-hood and status mongering, that does not get a young man the girl or much of anything else. This is not surprising.

Nor is the largely female-centric castigation of "male risk preference" in Wall Street, the City, or hedge funds. Women get overwhelmed by choice, so it is no surprise they'd want a system where men are static in status and power, where today's pauper could not be tomorrow's prince, and vice-versa. Indeed, people of both sexes get overwhelmed by choice, and prefer actions to narrow the choices. Women of course have far more choice in mate selection than men (men propose, women dispose). It is not surprising that an overlay of female-centric risk-avoidance, that mitigates risk that can be quite harmful to women (in childbearing and child rearing) and enhances accuracy/simplicity of mate choice, runs right up against the male preference for risk. To be Gordon Gekko, after all, is preferable to being the blue collar throw-away man of Charlie Sheen's character's father. Those guys don't matter, especially to women. In turn, the relative equality or even superiority in earning/status among professional women vs. men in their twenties, when it matters the most (when people choose mates in one way or another), unsurprisingly drives even more risk-taking among young, male traders like the "Fabulous Fab," Fabrice Tourre, of Goldman Sachs. Who famously boasted to his girlfriend in e-mail messages about just how fabulous he was, in being "the only survivor" of the deals he was pushing.

Guys like Fabrice Tourre will always want risk. It is up to culture and popular entertainment (which shapes culture) as much as regulators, to push that risk-taking in socially beneficial ways.
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Home Ownership: The End of the American Dream

When reading newspapers, magazines, and online stories, it is important to remember that journalists are mostly, lazy hacks who write whatever Journolist or other co-ordinated efforts tell them to write, often pushing the Democratic Party line of the day. Journalists (hacks) basically re-write press releases and issue it as news, sometimes not even re-writing the press release. Often the two (re-issuing press releases, parroting the Democratic Party message of the day) efforts are combined. So when the Financial Times and USA Today both proudly trumpet "the end of Home Ownership" as a goal by people close to the Obama Administration, it is wise to take a look at why this goal is being pushed, and the inevitable consequences. Neither of which, predictably, is good for America. The Death of the American Dream (of home ownership) will have significant and long-lasting costs.


The Financial Times article may be found here. Money quotes include:

“The goals of housing policy should be that people are well housed, not necessarily that they are homeowners,” says Raphael Bostic, a senior official at the Department of Housing and Urban Development. Mr Bostic’s views differ from the administrations of Presidents George W. Bush and Bill Clinton, which tried to expand ownership. “We want sustainable home ownership, not just home ownership for ownership’s sake,” Mr Bostic says.

Ownership rates have already fallen from their pre-crisis peak and any further decline could be damaging for Democrats as they head into the November midterm elections. Nearly 10 per cent of borrowers are at least 90 days behind on their mortgages in the average Congressional district, more than two-and-a-half times the rate on election day 2008, according to a Deutsche Bank study. Democratic districts tend to have more troubled borrowers than Republican districts, suggesting Democrats might face greater voter anger over housing.

...

Australia, Ireland, Spain and the UK all have higher home ownership rates than America, and although those countries have suffered from the housing bubble’s collapse, none has suffered quite as much as the US. One reason is that American home buyers had greater access to cheap credit, created by a Wall Street securitisation machine that bundled mortgages, many of which were high-risk subprime debt, into bonds and sold them to investors around the world.

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US policymakers have long upheld the benefits of home ownership, including the creation of safer, more stable communities. Studies have even shown that children of homeowners perform better in school than children of tenants. But now some researchers are starting to rethink those assumptions, arguing that a community of renters can be just as stable, so long as those renters are encouraged to stay in their properties for a long time. New York City, which has a large number of renters and also communities that are civically minded, is a prime example. “The benefits of home ownership are largely a myth,” says Dean Baker, co-director of the Center for Economic and Policy Research, a left-leaning think-tank.

...


Some government officials have started to play down the benefits of home ownership. Speaking in January at a meeting of the American Economic Association, Karen Pence, the Federal Reserve’s chief researcher for household and real estate, argued that homes were a terrible investment. Emphasising that she was speaking for herself and not on behalf of the Fed, Ms Pence said that unlike stocks and bonds, homes were an indivisible asset. “You can’t just slice off your bathroom and sell it,” she said. And because home prices are closely tied to the job market, what amounts to the largest financial asset for most people would decline in value just when they needed it most.

There is another downside to generous subsidies funnelled to homeowners, namely that the US is potentially investing too little in other important areas such as education, infrastructure and technology. At the height of the housing bubble in 2006, for instance, mortgages accounted for nearly half of all US debt issued that year, about double the historical norm, according to Haver Analytics. “We’ve over-emphasised our investment in housing and neglected to invest in education and infrastructure,” says Bill Gross, who, as the founder of Pimco, is the manager of the largest bond fund in the world. “We need to refocus on the production of ‘things’ rather than the production of financial products and houses.”

Administration officials have hinted that they plan to do just that by scaling back some support for government-backed home loans in a broad overhaul of housing finance.

USA Today's story is here. Notable quotes include:


Federal housing policy offers the wealthiest Americans billions in tax breaks without delivering much bang for the buck in increased homeownership, critics told government policymakers Tuesday.

"We aren't getting our money's worth," Mark Zandi, chief economist of Moody's Analytics, said at a government conference on reforming housing policy.
The government spent $230 billion last year to promote homeownership through tax breaks and spending programs. The biggest chunk — $80 billion — went toward the mortgage interest deduction, according to the Congressional Budget Office.


Michael Stegman, housing policy specialist at the MacArthur Foundation, said the mortgage tax break goes primarily to the wealthiest households. A study this year by the Tax Policy Center of the Brookings Institution and the Urban Institute noted that the mortgage deduction was worth just $91 a year to families earning less than $40,000 — and $5,459 a year to those making more than $250,000.
The government, seeking to overhaul the housing market after the collapse of mortgage giants Fannie Mae and Freddie Mac, is unlikely to touch the politically sacrosanct deduction anytime soon.
But analysts suggested that the government's debt — $8.8 trillion and growing — meant that housing subsidies might one day face the knife. "We can't afford it," Zandi said.
The U.S. homeownership rate (66.9%) is about the same as Canada's and is lower than Australia, Ireland, Spain and Britain's even though "these countries provide far less government support for homeownership," Michael Lea of San Diego State University wrote this year.

Treasury Secretary Timothy Geithner told the conference "there's no clear consensus yet" on reforming the way mortgages are financed. He promised "fundamental change" in the way Fannie and Freddie do business: They used an implicit government guarantee to borrow cheap money and make big bets in the housing market. When their gamble went bad, taxpayers picked up the tab.

Messages, co-ordinated from government officials and Democratic think tanks, and government dependent ratings agencies (Moody's like the others is dependent on the good-will of the Obama Administration not launch investigations into how they rated junk CDOs that went bust in the 2008 melt-down, and regulations that could put them out of business)?

Message 1: People should not own houses, because every place can be turned into rent-controlled New York City, on the Upper East Side.

Message 2: Mortgage deductions are bad for the budget, and Europe doesn't have them [America must ALWAYS copy Europe in every little detail.]

Message 3: Owning a house is no better and actually "worse" than renting in creating stable and prosperous communities.

Message 4: The financial crash was caused by home owners borrowing too much money, and therefore economic stability requires far less home ownership.

Message 5: Only "rich people" benefit from home mortgage deductions, let's eliminate home ownership as a goal for most Americans.

Message 6: Homes are a terrible investment.

Message 7: We invest too much in housing, and not enough in education and infrastructure (and sub-rosa, welfare spending and Democratic pork).

Taken altogether, the co-ordinated propaganda message dutifully spewed out by the Press means only one thing:

Obama plans to end mortgage deductions. He also plans to end Fannie and Freddie guarantees for home loans (something Barney Frank now backs, a switch from his position just a few months ago).

Why?

Because the Obama Administration is running out of money for its ambitious program of "transfer the wealth." The primary objective of Barack Obama and the people around him is to transfer money from ordinary (mostly White) Americans to the pockets of intermediaries like Rev. Wright, Louis Farrakhan, ACORN, Jessie Jackson, Bill Ayers, Civil Rights attorneys, Shirley Sherrod, and the like on behalf of Black and Hispanic residents and citizens.

Looking ahead to the fall mid-term elections, a Republican House (likely) and fewer Democratic Senators (likely) will mean that Obama's ambitious program to transfer that wealth will be constrained in the areas of "cap and tax" and "green" idiocy, and even using the EPA to do so by executive order can be problematic, given the House's ability to probe all sorts of financial dealings and sweetheart deals that are likely to be given out to favored Democratic constituencies. The Value Added Tax, a favorite of Obama's (because it hits Whites with middle class consumption patterns hardest, and is what Europe does), seems dead on arrival.

In addition, Fannie and Freddie are falling apart. There are trillions "off the books" in liabilities, there is essentially no private market for mortgages any more, even those with good credit histories, well established, with solid earnings records and little risk. Given the uncertain condition of the world economy, and the US failure to provide any employment gains against what Vice President Joe Biden calls the permanent loss of more than 8 million jobs, this is understandable.

But there is another reason behind the "Death of the American Dream" to turn Americans into a nation of renters. It is simple racial animus, on the part of Obama, and his Chicago cronies (like Valerie Jarrett) who are Black, and class animus against ordinary middle class White Americans, by the rich, White elites that form the backbone of Obama's supporters and administration.

Rose Fitzgerald Kennedy was supposed to have said, upon learning to her horror that the cars in the private chapel on her estate belonged to the servants, "What's the point of being rich if ordinary people can have nice things too?"

This is the primary motivating factor behind the instinctive push for ending home ownership for most Americans, and turning them into a nation of transient renters.

It is true, that as Steve Sailer, and others have noted, expanding home ownership to those with no chance of paying back the mortgages, was insane and spread the defaults globally. Offering a strawberry picker who made $14,000 a year a $670,000 mortgage, as "The Big Short" author Michael Lewis ("Moneyball," "Liars Poker") notes, was bound to go bad. Massive reforms on how CDOs (collateralized debt obligations) were rated, sold, and "cloned" were, and are needed. That mortgages were securitized and sold to investors wanting streams of cash, was not in itself a bad thing. That the mortgages were mostly junk, bound to fail, and sold as investment (near riskless) grade is something straightforward to address. Much of the blame falls on lazy, and greedy investors who failed to do their due diligence.

Moreover, the decline in home ownership rates (as the Financial Times chart makes clear) is due to not the absence of easy credit, but the decline in real wages. As noted by Citizen.org, US wages have stagnated since the 1970's, largely as the result of foreign wage competition. "In 1973, the average hourly wage for American workers, in today's dollars, was $17.26 while in 2007 it was up less than 1 percent to $1742. Over the same period, US workers average productivity nearly doubled." In the 1980's, the competition from first Mexico, then China, drove down wages of blue collar workers. In the 1990's and onwards, competition from outsourcing drove down the wages of white collar workers, along with job losses as manufacturing moved to China or Vietnam. That Boeing has an assembly plant in Vietnam for the wings of the new Dreamliner, is indicative how far manufacturers will chase cheap labor, and as noted in the Financial Times:


Mr Johansson, the head of the European Roundtable of Industrialists (ERT) and also chief executive of truckmaker Volvo, told the Financial Times that public debate was focusing on the wrong issue.

"We have much too much discussion about labour costs. What we really need to be concerned about is that we have the right skills and education."
...
He added: "We have too few young people all in all, and too few young people going into engineering. We are beginning to see real competition coming from India and China in, for example, highly-qualified engineers."

The view of the ERT is highly significant because it is made up of business leaders in charge of companies with revenues of €1,600bn ($1,980bn) and 6.5m employees.

He railed against the idea that Europe can live off knowledge only and keep research and development while letting manufacturing drift to lower-cost countries.
"There needs to be a political debate: how can we compete?
"It is a false model that we can live off knowledge and have manufacturing elsewhere. Over time manufacturing and R&D go hand in hand."

America, even more than Europe, has not been able to keep income rising. Cheap credit, and falling prices for electronic goods, primarily computers, and new gadgets like IPods, IPads, IPhones, and the like provided the illusion of growing income, which was based on credit and fairly cheap imported Chinese goods, also including textiles and shoes, and the like. Dub it the "Wal-Mart model of prosperity." Which was illusory.

For big ticket items, like homes and cars, America remained mired in low or static income growth, as energy costs rose and desirable places to live increased in value (due to mass immigration of poor, Mexicans, making previously nice, pleasant, middle class places into barrios ridden with crime).

America has a housing problem. But it is really just an extension of low wage growth, and mass immigration. Middle class Americans traditionally own homes in their later middle ages as a retirement place. They aim to have no more mortgage payments, and own their homes free and clear, so they can adjust to much lower retirement (and fixed) incomes when they do retire. Thus the pattern of Americans is to move around, chasing jobs, until the final job near retirement allows a free-and-clear title to a middle class home, in a neighborhood unlikely to change anytime soon (for the worse). Young people will take a risk on gentrification, older folks closer to retirement seek to cash out equity when they move to their final home, and pay off their mortgage.

Obama does have levers available to him, either through lame-duck legislation, after the November elections, but before a new Congress is seated, or through regulation. He can if he wishes end mortgage deductions, to raise more money that can be distributed to his supporters. ACORN, Jessie Jackson, Louis Farrakhan (and the Nation of Islam), perhaps the Annenberg Challenge and Bill Ayers, or the Gates Foundation, with Ayer's brother. [The Gates Foundation, by the way, explicitly excludes White children from scholarships, only non-Whites need apply.] He can instruct Tim Geithner, Treasury Secretary, to have Fannie and Freddie stop purchasing home mortgages, or slow that down, creating far fewer home purchases, and using the money for say, ACORN initiatives or salaries for local government employees through Federal Block Grants.

These are all very attractive prospects to Obama, and the Rose Fitzgerald Kennedy folks in the Media, Think-Tanks, Democratic politics, and the like.

It will however, come with a cost. Rentals are places that impose significant downward pressures on White middle class families. Pet ownership is forbidden in most of them. Rentals are in areas with bad schools, mostly non-White majority. The surest way, as Steve Sailer noted, to turn White kids into non-White hating adults, is to have them beaten up every day by non-Whites. Which is guaranteed in non-White majority school districts. White middle class people, accustomed to owning their own homes, will suddenly and irrevocably be placed in fairly squalid rentals, with much lower living standards (no more backyard barbecues, no more dogs or cats as pets, no more small garden, no more sunning themselves in the backyard in private, no more living in relative privacy). The neighborhood is likely to be considerably downscale, transient, and fairly non-White. [Few places in America resemble NYC's Upper East Side.]

This as America is filled with empty spaces, simply begging for spread-out houses, particularly away from the water-constrained coasts, and Chicago/NYC style water constrained metropolises. There is no particular reason for say, the Dallas-Fort Worth area not to build out, other than keeping Whites cheek and jowl with non-Whites.

And this is a dangerous and irrevocable step. As Whites lose guilt over segregation and slavery, a development already well underway, they are likely to resent terribly being pushed into non-White majority areas with the "crime tax" imposed upon them, and demand vigorous, non-PC, and non "disparate impact" or "racial profiling" concerned policing. In other words, move the White majority into rental housing in non-White areas, and they will reliably demand that police crack down hard, without any concern over racial profiling, on non-Whites.

America's social peace has been bought by private home ownership, by Whites realistically fearing non-White crime and retaliation (for past wrongs), living in safe, removed, mostly White suburbs. Move Whites out of safe, removed, White-majority suburbs, in large numbers, and they will fight. If not to return to the suburbs, to move non-Whites out of the rental areas.

Something similar has already happened in Britain. As noted by the Daily Mail, the English Defense League has grown from a few members to several thousand members in just a year. Over 10,000 were predicted at the Bradford match (likely to be banned). Yes, of course the EDL is made up of mostly White soccer hooligans. But the issue is simple: who does Britain belong to? Muslim "conquerors" who came to "take over" or the natives (who have nowhere else to go). Of course England's destiny is violent (and quite possibly a Muslim take-over). The EDL members may be yobs, but they are trapped. They don't have the income or education to flee to Switzerland, or the south of France's rural areas, or other places English folks from the Upper classes are escaping to. Thus, a running street fight that never ends.

America is much bigger. It can, probably, absorb (though not without huge costs including social and political) some portion of the illegal aliens and their descendants already present in the US. That of course supposes a vast physical separation by virtue of middle class, safe suburbs providing a safety valve for social discontent as Whites are made a minority in their own nation, for no reason anyone explained. Obama's obvious plan to turn most aspiring home owners into renters is likely to produce the US version of the EDL. With the end of White Guilt, the result is likely to be a simple, and ugly battle over turf "ownership."

The nation is in the best of hands.
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