New Onion

Dennis Pitcher of 21square.com gets it:

I see these closures as a reflection of a greater sense of disillusionment which has grown in the community towards politics, not simply the UBP. Far too many people are perpetually stuck in this rut of us vs. them which shows no sign of abating. There is this refusal by many to accept that people could genuninely care about our future and instead most any criticism or deviation from the incumbent party line must be the result of a personal vendetta against the party, not a desire for positive change for all Bermudians. Thus, is it any surprise people wake up and question what the value of being involved in politics at all?

The present financial crisis is a good example. Those in the know have been blowing a horn of warning for quite some time now that we could be headed for dire straights. Yet these calls have continually fallen under the guise of scaremongering and a personal vendetta against the PLP rather than a genuine concern for the future of our island. Thus, one begins to wonder if there is even a point in trying to sound the horn if it falls on deaf ears. Instead, the question does rise as to when does one give up on trying to save those who do not want to be saved and focus on saving one’s self?

From the position of this writer alone, Bermuda is in a very scary position right now that should warrant concern. Concerns which have been raised numerous times for quite some time but have fallen on deaf ears.

Noteablely we should be weary of and should have been weary of:
- the credit crisis
- the potential for legislative changes to US tax law
- the abrupt ending of the construction boom due to the combination of a flood of new office space combined with businesses who are on-shoring back office operations
- the drying up of credit for hotel/construction projects
- the overzealous budget which gives us little to no breathing room
- the horrible savings/lending ratio that banks have been allowed to have which could have caused a housing bubble that may soon pop

These are all things I’ve been thinking of writing about, yet while I used to rush to hammer out long pieces in hopes of convincing people that we should be weary, these days I simply don’t have the motivation. My own blog may not yet have been announced as dead, but for all intensive purposes it remains domant in comparison to what it once was.

Politics.bm appears to have gone the way of LimeyinBermuda.com and I’m pretty much done too. Vexedbermoothes.com is doing a better job than I could anyway.

Getting to say “I told you so.” is not satisfying. Oh well, I did my best.

Thanks for reading.

Good luck and good night.

After my recent posts of relative skepticism about the Bermuda real estate market I think it’s worth outlining the bull case for Bermuda real estate. It can be located right here: Royal Gazette Employment Classifieds.

As long as the government continues to allow population growth then Bermuda’s economy will continue to grow largely independent of the rest of the world, and despite poor government (really terrible government could still cause a local recession/depression). However this population growth fuels the decline in standards of living as more of us are packed into condos/human filing cabinets, and spend more of our lives sitting in traffic. This population growth also shields government from responsibility and side effects of having a government producing large numbers of (mostly black, mostly male) people who are only employed because we are building as fast as we can to provide housing for the growing population, so as long as the government continues to keep the demand side for housing growing by allowing net immigration, and as long as they continue to artificially constrain the supply side through incompetent management of urban planning and building control, then we should see prices remain firm.

Of course, we are building a social house of cards by leaving the lower income Bermudians chronically under-housed, and by keeping prices and rents high are transferring wealth from the young and poor to older (mostly white) home owners.

Anyone who claims the PLP is the party of “social justice” is clueless.

For the record - the real slowdown is just beginning.

From the New York Times:

Some suggest that the banks, spooked by enormous losses, have replaced a disastrously indiscriminate willingness to hand out money with an equally arbitrary aversion to lend — even on industries that continue to grow.

Some have suggested that Ewart Brown is a remarkable alchemist for his ability to make a Platinum era in tourism (he picked occupancy numbers from the week of the Newport Bermuda Race) from tourism numbers that most would consider to be more Talc than anything. I expect that if Brown continues to work his magic in tourism and if the US slowdown becomes a truly widespread credit bust then we could soon be in the “Peat” period of tourism. The only thing that will prevent that is if the government decides to use the taxpayers to subsidize large capital investments in tourism for the benefit of private developers… like the Southlands/Morgan’s Point giveaway and the Club Med giveaway. Either way, the people of Bermuda get screwed.

An interesting article in the paper today: Car sales concerns.

With car sales dropping 24 percent in May alone, dealerships said it was hard not to notice a lack of customers.

This is not only an indication of economic weakness, but it’s also going to show up somewhere else where it hurts. The government takes a large tax on every car sold. Fewer sales means less tax revenue.

Since our government has presided over massive increase in spending which have not been fatal thanks to almost matching gains in tax revenue, we can expect nothing good from the combination of poor financial control, economic slowdown, and a Finance Minister who would have been fired if she was a company CFO.

Edit: Changed the link from a duplicate of the car sales story to Bob Richards’ response to the audit.

Since Bermuda’s government is picking up on the American right-wing’s penchant for outsourcing of government functions it’s probably worth it to start asking the question: Are government contractors more efficient than the civil service?

From the Wall Street Journal opinion section a somewhat slanted view:

One fact about government outsourcing is settled: It sure doesn’t save money. A Washington Post reporter who scrutinized Katrina reconstruction contracts in 2006 found that “the difference between the job’s actual price and the fee charged to taxpayers ranged from 40 percent to as high as 1,700 percent.” To cover damaged roofs with tarps, certain contractors billed the government $1.50 per square foot of roof covered; some of the people who actually did the work got under 10 cents per square foot. Guess who kept the difference.

The issue in my books are incentives - what are the incentives we create when we contract out government functions?

Disclaimer: The following is speculative. I have no non-public information on current banking conditions whatsoever and am very likely wrong, or at least I hope the worst does not come true.

The Royal Gazette picked up a real estate story… just in time for me to finish another - somewhat speculative piece about real estate markets of the future.

The value of a bond is dependent on the amount of the regular interest (coupon) payments and the prevailing interest rates. When interest rates rise the interest payment amount of a bond stay the same, but it’s possible to get new bonds that make a higher interest payment, so the value of the old bond falls.

So for real estate: if interest rates rise, the amount that can be borrowed falls for any given payment amount.

The more that debt is used as a tool to buy property, the more that property will behave like a bond, rising as interest rates fall and falling as they rise. With increasing use of 100% financing and other “innovative” financing methods this part of what happened in the United States. Incidentally, this is why we should be very wary of any government initiative that simply serves to increase the amount of debt that consumers are able to take on to buy a property, such as giving away down payments. They tend to raise house prices in the short run, but if house prices fall and someone has borrowed all the money to buy it then the lender has immediately lost money. If the lender is the government then it’s the taxpayer who is in trouble - which in the USA is exactly what will happen as the US government is ultimately backing much of the mortgage industry.

What I missed is that the lender’s use of Mark to market accounting adds another dimension to the dynamic. And was the driver of the first waves of the credit crisis. Banks are highly leveraged - they often have leverage of on the order of 15:1, which is to say they have large amounts of assets and debt that are based on a fairly small amount of equity. When the value of their assets falls they then have to reduce their lending or raise capital to return their leverage (which they call “reserve ratio”) to more normal levels. As the credit crisis continues it is now appearing quite likely that some major financial players will (or already have) reached the point where their liabilities (debts) exceed the values of their assets, making them effectively insolvent. The US Federal government is then going to start to take these risks onto its balance sheet – as has begun with Fannie Mae and Freddie Mac, both of which would otherwise be sliding into bankruptcy, and if the Fed is not able to stem the decline in confidence those two will in all likelihood be joined by a variety of other financial institutions.

Bloomberg link.

U.S. banks can lend $12 for every dollar raised through the securities, so $100 million of the preferred shares may become as much as $1.2 billion in credit, based on Basel I banking rules.

When prices fall, the bank’s risk of loss in a foreclosure increases. Under the old paradigm with a 20% down payment on a house, it’s rare for banks to take a bath and the bankers are far less sensitive to downturns in the real estate market. This has previously been especially true, where large down payments and substantial discounts on valuing rental income have kept Bermuda banks safe from market declines. However, with first time buyers in Bermuda now being offered the ability to borrow more than 100% provided they live in a property for period, the banks have essentially made an economic loss the instant they write these mortgages (they have origination expenses). Accounting rules determine if banks need to show a loss on their income statement/balance sheets, and so the dynamic in Bermuda may be different if the banks don’t need to start taking huge write downs when prices do start do decline.

The problem is that the sale price of real estate is dependent on the bank’s ability to lend.

*cue ominous music*

Once a bank starts to lose money as house prices decline and credit starts to be constrained then they can’t lend as much so house prices decline and credit becomes more constrained so the banks can’t lend as much so house prices decline… and so on. A vicious cycle. The newest and most greatest loan/value ratio mortgages lose money first - and as prices decline successively older vintage mortgage holders find themselves underwater.

That’s essentially what has been happening in the USA. As house prices have declined mortgage rates have gone up, reflecting the unavailability of credit, which has effectively increased the cost of ownership.

In the US (and to a vastly lesser degree in Bermuda) bankers have decided to abandon risk controls because they have been in an almost generation long bull market for real estate that began with the taming of inflation in the early 1980s and which last had a major shakeup almost 20 years ago. The world has changed and there’s a very real risk that the USA will face massive financial stress as layers of debt unravel, what began with sub-prime mortgages issued by 22 year old Las Vegas mortgage officers has now spread because the growth of the US economy has for most of the past 6-8 years been dependent upon debt creation. The crisis has the potential to be truly crippling for America as the US Federal Government is in terrible financial shape after years of neo-Keynsian policy under Regan and Bush II and may be unable to produce a policy response to restore confidence, which in a worst case scenario will result in a truly spectacular recession and possibly a depression.

In theory, we in Bermuda should have been taking note and creating a sovereign wealth fund during the boom times instead of abandoning financial control in the government and spending hundreds of millions of dollars on farcical projects, and we DEFINITELY should not be spending like drunken sailors now.

Some time ago Bank of Bermuda head Phil Butterfield remarked in his sweeping style that “We have never lost money on Bermuda mortgages.” Sorry Phil, you have lost money on mortgages before and you’re about to again. However, the margins are so large on Bermuda mortgages that we probably don’t have to fear the kind of financial mass destruction that is happening in the United States (all bets are off for Bermuda banking if some major insurers go bankrupt, the government starts talking about exchange control, and a hotel or two closes at the same time).

Many people complain that political parties are essentially the same - but there is a meaningful long-term difference. This book will be looking at the difference between economic performance of American Presidents.

Some say Reagan produced the fastest growth, or the biggest debt, others say it was Clinton. But for the most part, these often widely held and contradictory opinions are wrong. We take a look at what actually happened (and why) by looking the data on over 40 different series people care about from Ike’s term to the present. We use colorful graphs and a bit of humor, and we stick to the facts. We rank each president on a variety of issues. At the end of the book, we give you an overall ranking based on how each President did on all the issues we look at. Results will be surprising to many people. They will also be contentious. But most importantly, they are based entirely on objective data.

A new blog by Doug Decouto.

Welcome to the club.

Other bloggers have already sounded off with their thoughts on the Music Festival.

I think the music festival spending is pretty minor in the context of the things to actually complain about, especially if it breaks even. In my view there are a few fundamental issues:

1. How do they not know if it will make a profit or not? They know what revenues will be, and should have a good handle on expenses, so why can they not make a financial projection?

2. The festival is only the latest in a long string of public works whose returns accrue primarily to the party insiders in the form of an image boost and direct payment of taxpayer money, and is borderline vote buying.

3. How many of those “overseas” tickets are actually Bermudians with foreign friends/families fronting for them?

For the record: I have a history of assuming mere poor decision making when the actual issue is abject corruption.