Mish's Global Economic Trend Analysis

Appraisal Madness in Illinois, Maryland, Missouri and Nevada
Good News: Only 83% Say Now is a Bad Time to Find a Quality Job
Collective Bargaining neither a Privilege nor a Right
Central Bank Authorized Fraud; Fractional Reserve Lending Problems Go Far Beyond "Duration Mismatch"

Appraisal Madness in Illinois, Maryland, Missouri and Nevada

Posted: 24 Mar 2011 09:42 PM PDT

Inquiring minds are investigating sheer lunacy regarding the appraisal process in Illinois, Maryland, Missouri and Nevada.

Please consider Four States Consider Legislation Barring Distressed Sales as Comparables

Four states – Illinois, Maryland, Missouri and Nevada – are considering legislation that would prohibit or restrict the use of "distressed sales," such as foreclosures and short sales, as comparable sales as a part of a residential real estate appraisal.

The Missouri legislation, known as House Bill 292, would prohibit appraisers from using a property that has been sold at a foreclosure sale as a comparable. Similar to the Missouri proposal, the Illinois legislation would prohibit appraisers for the next five years from using as a comparable sale "a residential property that was sold at a judicial sale at any time within 12 months."

The Nevada legislation would prohibit the use of foreclosures and short sales. The prohibitions contained in the Maryland legislation are somewhat broader and include any property that was sold under "duress or unusual circumstances, such as a foreclosure or short sale."

There is, however, conflicting language in the Maryland legislation that appears to allow for the use of distressed properties as comparables if the appraiser takes into account factors such as the motivation of the seller, the condition of the property and the property's history or disposition before the sale. Appraisers in Maryland will oppose this legislation during a hearing March 29.

If these bills were enacted into law, appraisers would be put in the difficult position of having to choose which law to violate. Appraisers are required to adhere to comply with the Uniform Standards of Professional Appraisal Practice in federally related transactions. The standard mandates that appraisers "must analyze such comparables sales as are available." Further, the standard cannot be voided by a state or local government.

Not following USPAP could subject the appraiser to having action taken against their license. Therefore, appraisers would have to make the decision to commit a USPAP violation – which in the case of federally related transactions would be a violation of state law – or to violate the law prohibiting the consideration of distressed sales as comparables.

Admittedly appraisers blew it in 2004-2006 with absurd valuations. However, the market rectified that situation quite nicely.

Let the appraisers do their jobs. They are the ones who ought to know what to include in comparables or not. If perchance some don't, the one thing we know with absolute certainty is that virtually 100% of legislators don't know either. If they did, they would have acted to prevent appraisal fraud six years ago.

Such laws would be bad enough as is, but conflicting standards makes the legislation considered by Illinois, Maryland, Missouri and Nevada complete lunacy.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Good News: Only 83% Say Now is a Bad Time to Find a Quality Job

Posted: 24 Mar 2011 03:58 PM PDT

A recent Gallup survey shows Gallup's Job Creation Index Sees Its Best Week Since Sept. 2008

Gallup's Job Creation Index reached +14 during the week ending March 20 -- its highest weekly level since the week ending Sept. 28, 2008. Thirty-two percent of employees nationwide say their companies are hiring and 18% say their companies are letting workers go. This is a slight improvement over the prior week, when 31% of companies were hiring and 18% letting go, and a similar reading for the month of February.

Pessimism About Finding a Quality Job Is Lowest Since October 2008

Thinking about the job situation today, would you say that now is a good time or a bad time to find a quality job?

While 83% of Americans in a separate question think March 2011 is a "bad time" to find a quality job, this is the lowest percentage since October 2008. Still, for more than two years, at least 8 in 10 Americans have been pessimistic about the job market.

Americans' perceptions of the market for quality jobs have shown similar improvement in recent months. Nevertheless, more than 8 out of 10 Americans believe quality jobs remain hard to find.

Regardless, to the degree that the jobs situation is improving, it continues to be insufficient to significantly lower overall underemployment and unemployment.

Inquiring minds may also be interested in Gallup Poll Pegs Unemployment Rate at 10.2%, Underemployment at 19.9%, Same as Last Year

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Collective Bargaining neither a Privilege nor a Right

Posted: 24 Mar 2011 09:13 AM PDT

The battle cry from Wisconsin is a union complaint that their "right" to collective bargaining has been taken away. Nothing could be further from the truth. You cannot take away something that does not exist and never did.

Please consider this simple sentence straight from the Declaration of Independence.

"We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness."

Public unions take away those "unalienable rights" via collective bargaining arrangements.

Five Ways Collective Bargaining Tramples Various Unalienable Rights

Collective bargaining agreements take away the right of individuals to pursue a career of their dreams void of union affiliation
Collective bargaining agreements force individuals into organizations against the free will of those members
Collective bargaining agreements force union dues out of members who do not even want to belong
Collective bargaining agreements dictate what members can and cannot do with their free time.
Collective bargaining agreements even dictate what non-members can and cannot do with their free time!

Example of Point Number Four

Union firefighters are frequently prohibited from being volunteer fire department workers for their city.

Example of Point Number Five

Union rules prohibit volunteers from helping schools paint, trim shrubbery, answer phones, clean blackboards, etc. The absurdity of such pro-union, anti-taxpayer arrangements should be self-evident.

Right to Pursue Happiness

Unions have no right to deprive others of their "unalienable right" to pursue happiness.

If it makes people happy to volunteer time, that "unalienable right" must not be stripped away by unions or politicians and their self-serving goals.

The alleged collective bargaining "rights" of unions were attained over the years via tactics of coercion, bribery, fear-mongering, and vote-buying. Regardless of how attained, even in good-faith, politicians have no right to take away "unalienable Rights".

Unions insist they won the rights to collective bargaining through negotiation. That is as impossible as whites negotiating rights to own blacks or to tell blacks where they can sit on a bus.

There is no right or even privilege that can make people slaves. There is no right or privilege to tell people what they can or cannot do with their free time. There is no right or privilege to collect dues from members forced into an organization against their will. There is no right or privilege that can force someone into a union, otherwise stripping them of the ability to pursue the career of their dreams.

The Issue is Unalienable Rights

Rights of unions must not and cannot be allowed to interfere on the rights of others to NOT belong to a union and to NOT pay union dues if they do not want to.

For more on the slavery aspect of public unions and collective bargaining advocates, please see Paul Krugman, Stephen Colbert, Bill Maher, others, Ignore Extortion, Bribery, Coercion, and Slavery; No One Should Own You!

Right-to-Work is an Unalienable Right

The "right-to-work" is an unalienable right. Unfortunately, Paul Krugman, Stephen Colbert, Bill Maher, Michael Moore and countless others ignore the slavery aspect of this debate because it happens to suit their political goals.

I commend Wisconsin Governor Scott Walker for his brave stand to end slavery in Wisconsin. I also commend Senator Rand Paul's effort in pursuing a national "right-to-work" law.

It is time to abolish slavery once and for all. A properly written national "right-to-work" law would help do just that.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Central Bank Authorized Fraud; Fractional Reserve Lending Problems Go Far Beyond "Duration Mismatch"

Posted: 24 Mar 2011 01:57 AM PDT

Keith Weiner at the Daily Capitalist purports to explain the Fractional Reserve Banking: The Real Story

Weiner makes a case that the problem with fractional reserve lending is one of "duration mismatch". If you don't understand the term "duration mismatch", please don't stop reading. I provide an easy to understand example below.

While "duration mismatch" is a huge problem, it is by no means the only problem. Thus Weiner misses the overall picture.

Fractional Reserve Banking Defined

Before we can state the problems and concerns with fractional reserve lending we need to define the term. Here is the meaning I use for my analysis:

Fractional reserve lending is the act of lending out more money than banks have ownership of. "Ownership" can be temporary.

Clearly, I cannot lend you $1,000 if I only have $1.98.

However, and this may surprise many people, banks can. Moreover, the fact that banks can lend more money than exists is at the very root of the financial crisis we are in today.

It is illegitimate to lend out more money than you have "ownership of".

Legitimate Right-To-Lend

The key question is what constitutes a "legitimate right-to-lend"? The answer involves banks' "right-to-use" deposited money.

CDs provide an easy to understand example of right-to-use. Consider a 5-year CD. A person buying a 5-year CD gives up the right to use his money for 5-years in return for an agreed upon interest rate. The bank then lends the money out for a higher amount of interest.

Keith Weiner complains (and rightfully so), about banks securing funds for 5 years, then lending them out for 30-year mortgages. That "duration mismatch" is certainly a problem, but it is not the only problem as discussed below.

First let's consider a 100% gold-backed dollar.

A 100% Gold-Back Dollar Would Not Stop Lending

Note that a 100% gold backed dollar would not stop lending. One can easily relinquish ownership of gold for as long as one wants (say 5 or 10 years), and at the end of that period the bank would have to return the gold to its owner, plus interest.

Thus a 100% gold-backed dollar would not stop lending as many misguided souls think.

Also note that the commonly attributed meaning of fractional reserve lending is complete silliness in that it fails to address the crucial issue of "ownership"

I suspect this is what led Keith Weiner astray in this admittedly very complicated issue, even though I agree on his central thesis that "duration mismatch" is a huge problem.

Duration Mismatch Schemes Guaranteed to Blow Up

Weiner states ....

Borrowing short to lend long, aka duration mismatch, inevitably implodes. This is not a matter of odds or probability. Like a geological fault line, one can try to assess probability of a destructive event in any given year, but sooner or later catastrophe is certain. When a business knowingly engages in an activity that is guaranteed to cause it to dishonor its obligations, that is acting in bad faith. Such a business has no intention of honoring its obligations over the long term, only in the short term when it is expedient.

Finally, fractional reserve banking is one of those issues where there is a deep misunderstanding in Austrian circles. This is compounded by the dearth of information about duration mismatch (I am only aware of Professor Antal Fekete writing about it, and of course some of his students such as myself) and the proliferation of misinformation about it.

Duration Mismatch Articles

For starters, I have written about Duration Mismatch 17 times since 2007 as the link in this sentence shows. Two of the articles are from 2011.

Here are some of the key posts.

February 16, 2011: The Next Borrow-Short Lend-Long Guaranteed to Blow Up Bank Lending Scheme; Citigroup, Chase, Bank of America CD Ripoff

Borrow-short lend-long strategies have caused more pain and grief than nearly any play in the book. They are virtually guaranteed to blow up given enough time if the duration mismatch and leverage is too great.

For those who do not know what I am describing, a couple of examples below will help explain. The first example is a look at "cost of funds" and guaranteed profits that banks can make. It is not a borrow-short lend-long strategy but will morph into such a scheme as I vary the parameters. ....

February 02, 2007: Central Bankers Cry Wolf

Key GSE Points

Size and leverage of Fannie Mae and Freddie Mac is enormous.
The Fed does not want to be responsible for a blowup at either company.
Both pursue policies that inherently expose the firms to an extreme asset/liability duration mismatch.
Both hold long-term mortgages and mortgage-backed securities financed by short-term liabilities forcing them to synthetically create a duration match via massive amounts of derivatives.
The stocks act as if there is implicit government guarantees. There are no such guarantees.
The lack of market discipline is striking.
The Fed can provide liquidity not capital.
A crisis is not unthinkable. Those that think so need a course in economic history.

November 03, 2009: What is Money and How Does One Measure It?

Given there are no reserves on savings accounts, as much as $4.5 trillion people think is in their savings accounts is not there either. Moreover, the duration mismatch on savings accounts, sweeps, and likely even CDs is massive.

If even 20% of the people tried to get their money out the system would freeze up.

The banking system is clearly insolvent. Such is the folly of fractional reserve lending.

September 10, 2007: Duration Mismatch Causing Severe Stress Everywhere

Duration Mismatch and Leverage

Leverage is a wonderful thing when spreads are moving in your direction. It's now payback time for those who borrowed short and lent long. Short term borrowing costs are rising while the value of long term assets, especially mortgage debt is sinking.

See Duration Mismatch to Bankruptcy (in one week flat) for the saga that caused Sentinel to go bankrupt in short order once their mismatch mattered.

The issue is not whether it's absurd for Lehman or Bear Stearns debt to be trading at a discount to Columbia, the issue is how much leverage Lehman (LEH), Bear Stearns (BSC), Merrill Lynch (MER), Goldman Sachs (GS), Citigroup (C), Morgan Stanley (MS) are using as well as the timing and size of needed debt rollovers.

It was a huge mistake for corporations to assume they could perpetually roll over short term debt at good prices. If you stop and think about it, many homeowners over leveraged in homes have a similar mismatch problem. Incomes have not risen as expected but short term financing costs have gone through the roof with no way to roll over the debt.

Duration Mismatch Not the Only Problem

Fractional reserve lending go far beyond duration mismatch. Here are few key points.

Fraudulent lending (banks lending more than they have ownership of) pushes up assets prices and favors those with first access to cash (banks and the wealthy). The housing bubble was a result of such fraud.

The existing fractional reserve system allows lending of money that is supposed to be available on demand. Lending of money banks have no ownership of is outright fraudulent.

Excessive credit backed only by artificially inflated asset prices is simply another form of fraud. Moreover, such lending also sends false signals to the market about the true state of the economy.

In the ensuing and inevitable busts, the central bank inevitably punishes savers by artificially holding rates too low.

Central Bank Authorized Fraud

Point number two above involves sweeping of checking deposit accounts into saving deposit accounts by banks, unbeknown to customers, then lending the money out.

Greenspan authorized sweeps in 1994 as a way of allowing banks to put "idle cash" to use. There are no reserve requirements on savings accounts.

Thus, money that is supposed to be available on demand isn't. People think that money in their checking accounts is sitting in banks. It most assuredly isn't. It has been "swept" away nightly into savings accounts that banks can lend out. Bookkeeping says the money is there. Physically it isn't.

Lending of money in "available on demand" checking accounts is purposeful fraud. Greenspan authorized the practice, but that that simply makes it central-bank authorized fraud.

Savings Accounts Fraudulent as Well

With savings accounts, customers do relinquish control of deposits, at least in theory. For example, customers deposit money in a savings account and receive an agreed upon interest rates. Everyone understands their banks will lend that money out.

Nonetheless, should someone walk into the bank the next day and request to pull money out of "their savings", it will be given to them. Unfortunately, control of "their savings" was relinquished to the bank who then lent the money out.

It is illogical (and fraudulent) for money that is already lent out to be available on demand. Thus savings accounts are nothing but another form of "have your cake and eat it too" fraud.

Whether the loans are backed by assets or not is irrelevant.

Problems Measuring "True Money Supply"

It is this very savings account debate that has caused two Austrian economic camps to split into two camps as to how to measure "True Money Supply".

The TMS2 camp says that money in savings accounts is available on demand and thus needs to be factored into money supply figures. Meanwhile the TMS1 camp that I am in says that the right-to-use the money was transferred (whether it is fraudulently available on demand or not) and thus should not be counted in money supply figures.

For further discussion, please see Money Supply Divergence - TMS1 vs. TMS2 vs. M2 - What does it Mean?

The above link also contains a discussion of sweeps and how they distort money in checking accounts.

Regardless of the "correct" measure of money supply, both the TMS1 and TMS2 camps generally believe the practice of lending of savings accounts while simultaneously making the money available on demand is fraudulent.

Reflections on "Legitimate" Right-To-Use

Some argue that as long as customers agree to these various banking schemes it is OK. That line of thinking says as long as it's in the agreement for banks to sweep money from checking accounts to savings accounts and lend it out, then it's OK for banks to do so.

However, it's not OK because such lending is nothing more than a gigantic kiting scheme. Moreover, it affects others by cheapening the value of money, pushing up asset prices for the benefit of those with first access to money, the banks and the wealthy.

Logically, two people cannot have the right to use the same money at the same time, whether they agree to such a scheme or not!

Money Multiplier Theory

Compounding the issue, money that is lent out then redeposited in another bank, can be lent again and again and again. In theory, the same money can be lent an infinite number of times (10 times if you prefer, with each bank keeping 10% in reserves). This is the "money multiplier" theory of fractional reserve banking.

However, such analysis is further complicated by the fact that in a fiat-credit based banking system, lending comes first and reserves come second.

Thus, money multiplier theory as commonly understood is simply wrong.

For a discussion of the "money multiplier" issue please see Fictional Reserve Lending And The Myth Of Excess Reserves

Complicated Issue

Clearly, money is a complicated subject involving numerous competing definitions of money. Fractional reserve banking and invalid money multiplier theories greatly compound understanding.

Unfortunately, Weiner adds to the confusion with analysis that suggests that duration mismatch is the only issue in regards to fractional reserve lending.

Fractional Reserve Lending is Fraudulent and Must Stop Entirely

Lending what you do not have "ownership of" is the issue. Duration mismatch is a form of that problem, but it is not the only form of that problem. Numerous complications arise when multiple people have immediate access to the same money at the same time.

Housing and credit lending bubbles constitute unmistakable proof that fractional reserve lending in any form is fraudulent and must stop entirely.

The solution is to abolish the Fed, institute a 100% gold-backed dollar, and disallow banks to ability to lend money they have no legitimate right-to-lend.

Addendum:

At the Suggestion of James Turk I made a quick change to my definition above

From Fractional reserve lending is the act of lending out more money than banks have a legitimate right-to-lend

To Fractional reserve lending is the act of lending out more money than banks have ownership of.

That was the way I originally wrote it, but changed it at the last moment. "Ownership" of course can be temporary. I made a few other changes of "right-to-lend" to "ownership" as well to make it more clear.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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