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It’s a huge problem that our fiscally reckless government  has been kicking down the road for decades.  It’s the bankruptcy of social security, which everyone knew was going to happen, but government economists were saying would not happen until 2017.  But now thanks to a deep recession, and probably also due to incorrect government calculations, the day has come 8 years early.

From the Associated Press article on Social Security, is the following:

Big job losses and a spike in early retirement claims from laid-off seniors will force Social Security to pay out more in benefits than it collects in taxes the next two years, the first time that’s happened since the 1980s.

The deficits — $10 billion in 2010 and $9 billion in 2011 — won’t affect payments to retirees because Social Security has accumulated surpluses from previous years totaling $2.5 trillion. But they will add to the overall federal deficit.

Applications for retirement benefits are 23 percent higher than last year, while disability claims have risen by about 20 percent. Social Security officials had expected applications to increase from the growing number of baby boomers reaching retirement, but they didn’t expect the increase to be so large.

What happened? The recession hit and many older workers suddenly found themselves laid off with no place to turn but Social Security.

But there is a huge flaw in the AP article, mainly in their statement that “Social Security has accumulated surpluses from previous years totaling $2.5 trillion”.  This is only partly true, and its related to the demographic trend of the population.  When social security was created there were far more workers paying into the system than pulling out of the system, resulting in decades of accumulated social security surpluses.  Normally this would not be an issue, if social security were a true trust fund.  But politicians have been raiding the surpluses nearly since social security’s inception, counting the surpluses in the same bucket as general income tax revenue, and every penny of the surpluses has already been spent.  To that point, consider the following snapshot of the current total outstanding government debt of the United States, directly from the source, the United States Treasury website.

As of September 24, 2009, the total national debt of the United States is nearly 11.771 trillion dollars.  Of that total, 7.46 trillion is held by the “public”, which represents the current total ownership of U.S. government bonds.  The other portion of the national debt – some 4.31 trillion dollars – is the money borrowed stolen raided from retirement funds – social security retirement funds and other government worker retirement funds.  I haven’t verified the $2.5 trillion figure from the AP article, but one thing is certain.  Regardless of the true figure of social security “surpluses” built up over the last few decades, it is more than accounted for in the $4.3 trillion dollars already borrowed and spent.  Social Security is now officially bankrupt.

Also see:

• The United States Has Not Had A Balanced Budget Since 1957!
• Obama Flip Flops On Fiscal Discipline And National Debt
• Santa Demands Bailout
• The United States National Debt Limit Has Become A Joke

Amherst Securities Group, a “leading dealer and market maker in mortgage-backed securities (MBS), agency securities and select fixed-income investments”, just published a housing report with more details on the huge overhang of shadow inventory.  The full report is not readily available on their website, unfortunately, but there is a good summary of the findings by Bloomberg in this article.  A few excerpts follow.

The crash in U.S. home prices will probably resume because about 7 million properties that are likely to be seized by lenders have yet to hit the market, Amherst Securities Group LP analysts said.

The “huge shadow inventory,” reflecting mortgages already being foreclosed upon or now delinquent and likely to be, compares with 1.27 million in 2005, the analysts led by Laurie Goodman wrote today in a report. Assuming no other homes are on the market, it would take 1.35 years to sell the properties based on the current pace of existing-home sales, they said.

“The favorable seasonals will disappear over the coming months, and the reality of a 7 million-unit housing overhang is likely to set in,” they said.

Also see:

• Mark To Model Reason For Not Foreclosing
• Seattle Housing – Microsoft Layoffs And Mortgage Walk Aways
• Time Magazine On Las Vegas – Then And Now

The Housingstorm blog had an interesting take on why the banks are reluctant to foreclose on delinquent borrowers.  But before going into housingstorm’s take, consider the case of Mr Microsoft, whose own foreclosure case (or lack thereof) was depicted in this article.  The value of Mr. Microsoft’s condo, according to recent listing and sales data, has declined by over 40 percent.  Mr Microsoft has not made a mortgage payment for almost a year, and although the bank initiates contact with him regularly, they have yet to foreclose on his severely underwater mortgage.  Why are banks not foreclosing?

According to the housingstorm article,

Banks don’t care about home prices. They care about not losing money. Because the government changed mark-to-market accounting rules, the link between low prices and losing money is broken.

Banks make more money by NOT foreclosing on homes. Banks are dragging out the foreclosure process for their own selfish reasons. Until the day they foreclose, the amount of money owed to them is an asset…sure, it’s an asset that isn’t paying interest payments…but it is still an asset. The day they foreclose, a $400,000 asset could become a $150,000 asset and a $250,000 loss.

Multiply that loss by 10, 20, or even 30 times leverage and there are several million dollars worth of new loans that the bank can’t make.

Faulty government programs and doctored accounting rules have produced the fiasco before us: There are roughly 4 million homes that should be foreclosed on but they won’t be any time soon. This enormous can is continuing to get kicked down the road.

Economists are predicting a recovery. They say that our various programs are making an impact. In reality, all they’ve done is kick our can of reckoning a little further down the road.

With so much shadow inventory being held back from the market, can any sane person possibly think this is a good time to buy a home?

Julian Robertson, founder of Tiger Management, has a bleak perspective on the enormous debt load of the United States.  CNBC recently interviewed him and summarized his take in this article, the excerpts of which are below.

The US is too dependent on Japan and China buying up the country’s debt and could face severe economic problems if that stops, Tiger Management founder and chairman Julian Robertson told CNBC.

Robertson said inflation is a big risk if foreign countries were to stop buying bonds.

“If the Chinese and Japanese stop buying our bonds, we could easily see [inflation] go to 15 to 20 percent,” he said.  “It’s not a question of the economy. It’s a question of who will lend us the money if they don’t. Imagine us getting ourselves in a situation where we’re totally dependent on those two countries. It’s crazy.”

China and Japan are still the largest foreign holders of U.S. debt.  Check out the latest report from the treasury department website to see the trends of their purchases and sales.  The image below is a subset of the data from the treasury website.

It was pretty obvious in 2008 that Warren Buffett had lost his investing touch. The financial world was showing its dirty, stinky underbelly for what is what – a giant fraud. Meanwhile, Berkshire Hathaway was accumulating shares in these turd infested companies such as Moody’s.  Moody’s sole purpose during the entire credit bubble was to stamp AAA ratings on everything that crossed their desks – including the million dollar home loans for every unemployed derelict on the planet – , and collect large advisory fees during the process.

It’s not clear if Warren Buffett has got his magic touch back, but today it was announced that he finally came to his senses on Moody’s, dumping 800,000 additional “worth less” (as Warren calls it) shares on some other poor saps.  From Yahoo Finance:

Billionaire Warren Buffett’s company has sold another 794,388 shares of Moody’s Corp. stock, leaving it with control of 16.6 percent of the credit rating agency.

Berkshire Hathaway Inc. revealed the sales in documents filed with the Securities and Exchange Commission on Thursday.

Earlier this summer, Berkshire sold nearly 8 million shares of Moody’s stock.