The problems in China’s housing market are more severe than those in the US before the financial crisis because they combine a potential bubble with the risk of social discontent, according to an adviser to the Chinese central bank.

Li Daokui, a professor at Tsinghua University and a member of the Chinese central bank’s monetary policy committee, said recent government measures to cool the property market needed to be part of a long-term push to bring high housing prices under control.

He added that there were still signs that the economy was overheating and recommended modest increases in interest rates and the level of the currency.

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Not so long ago, Memphis, a city where a majority of the residents are black, was a symbol of a South where racial history no longer tightly constrained the choices of a rising black working and middle class. Now this city epitomizes something more grim: How rising unemployment and growing foreclosures in the recession have combined to destroy black wealth and income and erase two decades of slow progress.

The median income of black homeowners in Memphis rose steadily until five or six years ago. Now it has receded to a level below that of 1990 ”” and roughly half that of white Memphis homeowners, according to an analysis conducted by Queens College Sociology Department for The New York Times.

Black middle-class neighborhoods are hollowed out, with prices plummeting and homes standing vacant in places like Orange Mound, White Haven and Cordova. As job losses mount ”” black unemployment here, mirroring national trends, has risen to 16.9 percent from 9 percent two years ago; it stands at 5.3 percent for whites ”” many blacks speak of draining savings and retirement accounts in an effort to hold onto their homes. The overall local foreclosure rate is roughly twice the national average.

The repercussions will be long-lasting, in Memphis and nationwide. The most acute economic divide in America remains the steadily widening gap between the wealth of black and white families, according to a recent study by the Institute on Assets and Social Policy at Brandeis University. For every dollar of wealth owned by a white family, a black or Latino family owns just 16 cents, according to a recent Federal Reserve study.

A long but important article–take the time to read it all.

The economy trudges ahead yet debt dogs many Americans, stressing them out even as they firm up their own financial foundations.

There are new jobs produced but old worries persisting for people despite belt-tightening and boosted savings, according to an Associated Press-GfK poll.

About 46 percent of those surveyed say they’re suffering from debt-related stress, and half of that group described their stress as “great deal” or “quite a bit.” On the other hand, about 53 percent say they feel little or no stress at all.

That’s in line with findings from last year, even though times seem better today: The economy is growing and generating jobs, and households have made progress in repairing their financial footing, trimming debt, watching spending and saving more.

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Like last week, with stocks lurching wildly with the headlines — up by triple digits one day, down the next. For the month, the Dow Jones Industrial Average dropped 7.9% and is negative for the year. The Nasdaq Composite and the Standard & Poor’s 500-stock index also are in the red for the year.

Some pretty smart people are cautious. Seth Klarman at Baupost Group is worried. John Hussman of the Hussman Funds says all sorts of warning lights have lit up across his screen. Even Ron Muhlenkamp of the Muhlenkamp Fund, who usually takes a sunnier view of things, says he has moved a big chunk of his mutual fund into cash in case there’s a plunge.

How far will it go? Mr. Hussman says the technical indicators have only been this bad 19 times before in the last half century — and on average the market plunged about 20% over the following 12 months. When markets were also high, like now, the picture’s even worse.

Ugh.

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With the sudden drop in construction here, jobs disappeared. This shows another problem with a growth model built on construction: Employment swings up and down dramatically.

Professor JOAQUIN ARANGO (Director, Center for the Study of Migration and Citizenship, Ortega y Gasset Foundation): The Spanish economy is labor intensive.

GJELTEN: Joaquin Arango, of the Ortega y Gasset Foundation, points out that the economic boom in Spain brought more people into the workforce but mostly in low skill areas, like construction. A lot of the jobs could be filled by foreign-born workers. Arango, a sociologist, has documented the surge in the immigrant population that began with the economic boon in the last 1990s.

Prof. ARANGO: As a percentage of the population, at the beginning of that period, was two and a half percent or so. And now it is over 12 percent.

GJELTEN: Thats dramatic.

Prof. ARANGO: Yeah, spectacular.

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5. Nobody really understands the world economy.

Sad, but true. For all the math and the theoretical models, economics remains an intellectual discipline rather than a predictive science. That is unlikely to change. Just as all the computer models in the world can’t tell you what the stock market will do tomorrow, all the world’s economists working together can’t tell you when the next crisis will come ”” or what you can do to avoid it. At any given point of time there will be economists predicting a crash and economists predicting good times along with every variant in between; some of them are bound to be right but so far this looks more like timing and luck than the repeatable and testable result of demonstrably better methods. The economics profession is full of dogmatic and pompous heretic hunters of all stripes, but as a group they are no better collectively at prediction than a similarly dogmatic and contentious group of medieval clerics. This doesn’t mean that economics is bunk (any more than theology is bunk); systematic and rigorous reflection on human economic activity yields many useful insights and an education in basic economic ideas remains an essential piece of intellectual equipment for any serious person.

Economic outcomes remain hard to predict not because economists are stupid (they aren’t, by and large) but because the world economy is continually in flux. Facts change; China rises, new industries emerge, under the influence of new economic ideas, central bankers and investors change the way they behave. Investors and entrepreneurs have mood swings: too optimistic in 2007, too pessimistic in 2008. All this change feeds back into the world system in unpredictable ways. Economics can help us understand what is happening and give us more sophisticated tools for investigating the unknown ”” but it cannot protect us from uncertainty and risk. The “unknown unknowns” will always be with us.

This means, among other things, that we are no closer to eliminating panics and crashes than the Dutch were in the wake of the Tulip Bubble.

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It is past time to end the conspiracy of silence about Fannie Mae and Freddie Mac, government-sponsored companies that buy and sell mortgages and related securities. Both were taken over by the Treasury Department in 2008. So far Washington has shelled out $140 billion to keep them afloat. A Congressional Budget Office study says their losses could reach $400 billion. Other estimates put them at $500 billion.

In contrast, the net cost to date of TARP, after loan repayments and other government income, is $172.5 billion, nearly half of which is owed by the auto industry.

While optimists foresee the repayment of most TARP funds, the same cannot be said of Fannie and Freddie, which own well over a trillion dollars in risky mortgages and mortgage-backed securities.

Unlike TARP funds, the subsidies to Fannie and Freddie do not show up in the government’s budget. If they did, it would be even further out of balance.

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Far be it for me to make a dicey situation dicier but you can’t smell the sulphur in the air right now and not think we might be on the threshold of an age of rage….

Whether in 1789 or now, an incoming regime riding the storm gets a fleeting moment to try to contain calamity. If it is seen to be straining every muscle to put things right it can, for a while, generate provisional legitimacy.

Act two is trickier. Objectively, economic conditions might be improving, but perceptions are everything and a breathing space gives room for a dangerously alienated public to take stock of the brutal interruption of their rising expectations. What happened to the march of income, the acquisition of property, the truism that the next generation will live better than the last? The full impact of the overthrow of these assumptions sinks in and engenders a sense of grievance that “Someone Else” must have engineered the common misfortune. The stock epithet the French Revolution gave to the financiers who were blamed for disaster was “rich egoists”. Our own plutocrats may not be headed for the tumbrils but the fact that financial catastrophe, with its effect on the “real” economy, came about through obscure transactions designed to do nothing except produce short-term profit aggravates a sense of social betrayal. At this point, damage-control means pillorying the perpetrators: bringing them to book and extracting statements of contrition. This is why the psychological impact of financial regulation is almost as critical as its institutional prophylactics. Those who lobby against it risk jeopardising their own long-term interests. Should governments fail to reassert the integrity of public stewardship, suspicions will emerge that, for all the talk of new beginnings, the perps and new regime are cut from common cloth. Both risk being shredded by popular ire or outbid by more dangerous tribunes of indignation.

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Senator Arlen Specter of Pennsylvania, who left the Republican Party a year ago in hopes of salvaging a 30-year career, was rejected on Tuesday by Democratic primary voters, with Representative Joe Sestak winning the party’s nomination on an anti-incumbent wave that is defining the midterm elections.

In Kentucky, Rand Paul, the most visible symbol of the Tea Party movement, easily won the Republican Senate primary and delivered a significant blow to the Republican establishment. His 24-point victory over Trey Grayson, who was supported by the most powerful Republican on Capitol Hill, Senator Mitch McConnell of Kentucky, underscored the anti-Washington sentiment echoing across the country.

The outcomes of both contests, along with a Democratic primary in Arkansas that pushed Senator Blanche Lincoln into a runoff election in June, illustrated anew the serious threats both parties face from candidates who are able to portray themselves as outsiders and eager to shake up the system.

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In a plastic tent under a glorious desert sky, Richard Lee preached the gospel of the second chance.

The chance to make money on the next housing boom “is like it’s never been,” Mr. Lee, a real estate promoter, assured a crowd of agents, investors and bankers. “We’re going to come back like you’ve never seen us before.”

Home prices in Las Vegas are down by 60 percent from 2006 in one of the steepest descents in modern times. There are 9,517 spanking new houses sitting empty. An additional 5,600 homes were repossessed by lenders in the first three months of this year and could soon be for sale.

Yet builders here are putting up 1,100 homes, and they are frantically buying lots for even more.

Las Vegas is trying to recover by building what it does not need. It is an unlikely pattern being repeated in many of the areas where the housing crash was most severe.

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Despite some indications that the economy is recovering, the housing market remains a disaster area. Currently, about seven million homeowners are behind on their mortgages and that number is only getting worse.

Banks, with the help of the government, are offering some relief to homeowners who’ve lost jobs and just can’t meet their payments.

But there’s a growing number who can pay but are simply walking away from houses that are now worth as little as half of what they paid for them.

It’s called “strategic default.” People have done the math and decided making those monthly payments is just throwing money away, leaving the mortgage holders – the banks – as zookeepers of an ever-growing parade of white elephants.

In the past year it is estimated that at least a million Americans who can afford to stay in their homes simply walked away.

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The New York attorney general has started an investigation of eight banks to determine whether they provided misleading information to rating agencies in order to inflate the grades of certain mortgage securities, according to two people with knowledge of the investigation.

The investigation parallels federal inquiries into the business practices of a broad range of financial companies in the years before the collapse of the housing market.

Where those investigations have focused on interactions between the banks and their clients who bought mortgage securities, this one expands the scope of scrutiny to the interplay between banks and the agencies that rate their securities.

The agencies themselves have been widely criticized for overstating the quality of many mortgage securities that ended up losing money once the housing market collapsed. The inquiry by the attorney general of New York, Andrew M. Cuomo, suggests that he thinks the agencies may have been duped by one or more of the targets of his investigation.

Those targets are Goldman Sachs, Morgan Stanley, UBS, Citigroup, Credit Suisse, Deutsche Bank, Crédit Agricole and Merrill Lynch, which is now owned by Bank of America.

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China’s inflation accelerated in April after house and food prices jumped and bank lending increased.

The news will fuel concerns that the world’s third-largest economy is overheating and that Beijing may need to raise interest rates.

April’s consumer prices were up 2.8% from a year ago, the highest rate in 18 months, and property inflation hit 12.8%, China’s statistics bureau said.

Read the whole article from the BBC.

Fannie Mae asked the U.S. government for an additional $8.4 billion in aid after posting an $11.5 billion net loss for the first quarter, the latest sign that the bailout of the mortgage investor and its main rival, Freddie Mac, is likely to be the most expensive legacy of the U.S. housing-market bust.

Fannie’s losses reflected continuing weakness in the housing market and would have been worse without accounting changes that reduced its deficit. The quarterly loss was an improvement from the $23.5 billion loss for the year-ago quarter and marked the 11th consecutive quarterly loss for the Washington-based firm.

The company has now racked up losses of nearly $145 billion, or nearly double its profits for the previous 35 years. While many of the nation’s biggest banks have repaid their government loans and some are back to racking up big profits, Fannie and Freddie are still suffering from the housing-market crisis.

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Update: FNM’s balance sheet could very well be hiding even more losses. Ugh–read it all also.

As they contemplate high unemployment, foreclosed homes, shrivelled house prices and the arrogant follies of their investment bankers, Americans may cast envious glances across their northern border. Despite its umbilical links with America, Canada’s economy suffered only a mild recession and is now well into a solid recovery. The Canadian dollar, having dipped sharply, is back up to rough parity with the greenback. The Bank of Canada has signalled that it may soon raise interest rates. When Stephen Harper, the prime minister, hosts the get-togethers of the G8 and G20 countries next month he will be able to boast to his visitors that his country’s economy is set to perform better than that of any other rich country this year.

How has Canada avoided the plagues that are afflicting everyone else? The short answer is a mixture of good policies and good luck …. The main reason for the country’s economic resilience is that neither its financial system nor its housing market magnified the recession. The banks remained in profit. House prices held up fairly well and are now rising. And for that regulators deserve a chunk of the credit.

Canada’s banks face high capital requirements and a cap on their leverage, such that their assets cannot exceed 20 times their capital (a lot less than the corresponding figure for many Wall Street firms and European banks). Canadians who take out mortgages worth more than 80% of the value of the property must also take out insurance against default from a federal agency, the Canada Mortgage and Housing Corporation.

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If you see Joseph Laubinger on your doorstep, start packing. His courtly presence means you have exhausted all excuses, arguments and options for keeping your house.

“It’s like I’m a doctor,” said Mr. Laubinger, an agent here for big lenders. “People ask me how much time they have left.”

Hardly any. Legally, they have already lost ownership. If they do not respond to the carrot the lenders offer ”” as much as $5,000 in cash in exchange for leaving the house in good order ”” he employs the stick: the county sheriff, who evicts them.

Mr. Laubinger is having a busy spring.

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US mortgage giant Freddie Mac saw a loss of $8bn (£5.3bn) in the first three months of 2010 and said it would ask for a further $10.6bn in state aid.

The firm has made a number of federal cash requests since it was taken over by regulators in September 2008.

And it said it would continue to need government funds with the US housing market not yet fully recovered.

The new request brings the total cost for rescuing Freddie Mac to $61.3bn.

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Increased hotel bookings, spending by foreign tourists and business recruitment deals are three indicators that South Carolina is pulling out of the long economic slump.

Gov. Mark Sanford got the good economic news Tuesday during a Cabinet meeting in which his agency directors told him that South Carolina is doing better in business recruitment and travel and tourism than neighboring states.

Chad Prosser, director of the Department of Parks, Recreation and Tourism, said the state’s recovery is more pronounced than in Florida, Georgia and North Carolina, according to a benchmark that factors in hotel stays, available rooms and the price of the rooms.

Read it all from the front page of the local paper.

We often say that investors can be bullish, bearish, or not enough of either. “Our debt is clean, we will not have to ask for help,” said Elena Salgado, Spain’s finance minister, on April 30th, appealing to the bulls. That is, if there are any bulls left in sovereign debt.

Currently, there is no shortage of bearish sentiment regarding global sovereign debt issues. In recent weeks, Greece, Portugal, and Spain have all had their credit ratings downgraded, with Greece taking on junk status. Yet despite this flurry of negative news, I would submit that investors are still not bearish enough, particularly on Spain.

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Goldman Sachs Group Inc. executives were grilled by U.S. lawmakers who compared the bank’s mortgage bankers to bookies as Senator Carl Levin asked why they sold securities the company itself called “shitty.”

“How about the fact that you sold hundreds of millions of that deal after your people knew it was a shitty deal?” the Michigan Democrat asked Daniel Sparks, who ran the bank’s mortgage unit at the time. “Does that bother you at all?”

Members of the Levin’s Permanent Subcommittee on Investigations, winding up a probe of Goldman Sachs that has lasted more than a year, used today’s hearing to pepper current and former executives with questions about their duty to clients and the ethics of betting against the housing market as the bank also sold mortgage-linked securities to customers.

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Seventy-nine percent of investors say it’s likely Goldman Sachs committed fraud – but only 39% of Americans believe the government’s investigation of Goldman is based on a legitimate concern about fraud.

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CHARLIE ROSE: Goldman also says it’s wrong in law and in fact. Where’s it wrong in law?

DAVID BOIES: Well, I think what they mean — I think what they mean is based on the facts that are in there, it’s not an illegal conduct.

The issue is whether there are more facts that would bring it under conventional law. As Michael says, this is an unusual case. This is the first time you’ve seen a case like this. I happen to think it’s no coincidence it comes out just at the time that the administration is going after the financial regulatory reform in Congress.

CHARLIE ROSE: Wait. You think the administration had some influence with the SEC in terms of bringing this complaint now?

DAVID BOIES: I think that there’s a climate in Washington that is — wants to show aggression in terms of regulation. I think that — that’s not necessarily a bad thing.

But I think you’ve got to be careful that when you bring an SEC complaint as opposed to bring a bill to change procedures or to add new regulations that you’ve got something that is improper under existing law.
And looking at the complaint, I don’t see where that is right now.

Watch it all (a little over 34 minutes).

Two years into a merciless downward spiral, Antonio Moore was threatened with living on the street.

He had lost his $75,000-a-year job as a mortgage consultant, his three-bedroom house with a Jacuzzi, his Lexus sedan. He could no longer pay even the rent on his cramped studio apartment ”” not on his $10-an-hour part-time job as a fry cook at a fast food restaurant.

Faced with eviction, he was staring last month at the imminent prospect of joining the teeming ranks of the homeless. His last hope was a new $1.5 billion federal program aimed at preventing that fate. Within days of applying, a check for $775 was on its way to Mr. Moore’s landlord, enabling him to stay ”” at least for now.

Much like the Great Depression, when millions of previously working people came to rely on a new social safety net for their sustenance, a swelling group of formerly middle-class Americans like Mr. Moore, 30, is seeking government aid for the first time. Without help, say economists, many are at risk of slipping permanently into poverty, even as economic conditions improve.

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Even as prospects for the American economy brighten, consumers are about to face a new financial burden: a sustained period of rising interest rates.

That, economists say, is the inevitable outcome of the nation’s ballooning debt and the renewed prospect of inflation as the economy recovers from the depths of the recent recession.

The shift is sure to come as a shock to consumers whose spending habits were shaped by a historic 30-year decline in the cost of borrowing.

“Americans have assumed the roller coaster goes one way,” said Bill Gross, whose investment firm, Pimco, has taken part in a broad sell-off of government debt, which has pushed up interest rates. “It’s been a great thrill as rates descended, but now we face an extended climb.”

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The Federal Home Loan Banks are a frequently overlooked band of government-chartered cooperatives whose name screams systemic risk with every word. Federal means Uncle Sam. Homes are a declining asset. A loan is money out the door. And banks are the things that get taxpayer bailouts when they’re too big to fail and enough of their loans go bad….

Last week, the FHLBs, which is pronounced “flubs,” published their combined audited financial statements for 2009. And at first glance, it might seem like they had a profitable year. Net income was about $1.9 billion, the banks said, up 54 percent from the year before.

The most striking part about that dollar figure was what it didn’t include: About $8.8 billion of paper losses from their portfolios of mortgage-backed securities. By the banks’ own description, these losses were “other than temporary,” meaning the values of the investments aren’t expected to recover soon.

The reason those losses weren’t included in earnings? The Financial Accounting Standards Board rewrote its rules a year ago so they wouldn’t have to count, following an intense campaign by the banking industry and its friends in Congress….

Read the whole thing.

Today, the matter is far from theoretical for the 15.2 million American households holding mortgages that exceed the value of their homes. It will help determine how many of them choose to “default strategically”””that is, walk away from their mortgages even when they can afford them, because they’ve determined that it’s no longer worth it to keep paying. And that, in turn, will help determine the future health of the American housing market””and thus of the U.S. economy.

Many people think that we don’t have to worry about widespread strategic defaults. When I discussed the problem with a board member of one of the top four American banks, he categorically denied its existence: “The idea that people would walk away from their homes when they can still afford to pay the mortgage is unfounded.” A study from the Federal Reserve of Boston seems to confirm his skepticism. Evaluating Massachusetts homeowners during the 1990”“91 recession, it found that only 6.4 percent of “underwater” borrowers””that is, those burdened with mortgages that exceeded the value of their homes””ended up in foreclosure. And not all of those households were defaulting strategically; many, presumably, were actually unable to pay their mortgages.

Unfortunately, such evidence may not tell us much about the likelihood of strategic default today. During the 1990”“91 recession in Massachusetts, home prices fell just 22.7 percent from peak to trough, and most borrowers had made 20 percent down payments””so few owed much more than their houses were worth. Even people who had bought at the peak owed, on average, just 3 percent more than the value of the house. Over the last few years, by contrast, home prices have fallen by 40 to 50 percent in several areas, and many borrowers had put very little or nothing down when they bought their houses….

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By December 2005, subprime mortgages that had been issued just six months earlier were already showing atypically high delinquency rates. (It’s worth noting that even though most of these mortgages had a low two-year teaser rate, the borrowers still had early difficulty making payments.)

The market for subprime mortgages and the derivatives thereof would not begin its spectacular collapse until roughly two years after Mr. Greenspan’s speech. But the signs were all there in 2005, when a bursting of the bubble would have had far less dire consequences, and when the government could have acted to minimize the fallout.

Instead, our leaders in Washington either willfully or ignorantly aided and abetted the bubble. And even when the full extent of the financial crisis became painfully clear early in 2007, the Federal Reserve chairman, the Treasury secretary, the president and senior members of Congress repeatedly underestimated the severity of the problem, ultimately leaving themselves with only one policy tool ”” the epic and unfair taxpayer-financed bailouts. Now, in exchange for that extra year or two of consumer bliss we all enjoyed, our children and our children’s children will suffer terrible financial consequences.

It did not have to be this way. And at this point there is no reason to reflexively dismiss the analysis of those who foresaw the crisis. Mr. Greenspan should use his substantial intellect and unsurpassed knowledge of government to ascertain and explain exactly how he and other officials missed the boat. If the mistakes were properly outlined, that might both inform Congress’s efforts to improve financial regulation and help keep future Fed chairmen from making the same errors again.

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Despite a real estate implosion, property tax revenue collected by states and localities actually rose 2.7% last year to $421.8 billion.

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Obama administration officials on Friday ramped up their attempts to help struggling homeowners, announcing major changes to the government’s much-criticized $75-billion program to modify mortgages to avoid foreclosures.

The most significant change is a set of complex new incentives for banks and investors to reduce the principal on so-called underwater mortgages — loans for homes now worth less than what is owed.

In addition, the administration announced that many unemployed homeowners could receive three to six months of reduced mortgage payments while they look for a job.

Together, the revisions are designed to spur the Home Affordable Modification Program to reach its target of helping 3 million to 4 million homeowners avoid foreclosure through 2012.

While the changes are significant to a year-old program that so far has helped just 170,000 homeowners receive permanently lowered mortgage payments, administration officials stressed they would only make a dent in the projected 10 million to 20 million foreclosures expected in the next three years.

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The net results of the credit bubble are as follows:

1) An enormous number of families living in homes they cannot afford.

2) Bank balance sheets laden with current bad loans and lots of potential future defaulting loans.

3) Real Estate Sales, despite being propped up with historic low mortgage rates and tax purchase credits, are continuing to slide.

4) A weak overall economy with a very slow, soft recovery.

Whether a function of populist politics or bad economics, the proposals so far appear to address items one and three. But upon closer examination, they do nothing of the kind. In fact, they are actually gaming the system to help issue two ”” the bad loans the banks are carrying.

Even worse, they are making issue #4 ”” the economy ”” increasingly problematic.

We should allow the real estate market to experience a healthy price normalization process. Even though home prices have fallen dramatically, they have yet to reach their historical means relative to income or the cost of renting. This is to say nothing of the usual careening past the median towards under-valuation that typically follows a massive mis-allocation of capital.

Read it carefully and read it all.