Freddie Mac, the taxpayer-owned mortgage giant, has placed multibillion-dollar bets that pay off if homeowners stay trapped in expensive mortgages with interest rates well above current rates.

Freddie began increasing these bets dramatically in late 2010, the same time that the company was making it harder for homeowners to get out of such high-interest mortgages.

What makes this story particularly galling is the following:

Freddie Mac, along with its cousin Fannie Mae, was bailed out in 2008 and is now owned by taxpayers. The companies play a pivotal role in the mortgage business because they insure most home loans in the United States, making banks likelier to lend. The companies’ rules determine whether homeowners can get loans and on what terms.

In addition to being an instrument of government policy dedicated to making home loans more accessible, Freddie also has giant investment portfolios and could lose substantial amounts of money if too many borrowers refinance.

Hence, the seeming need to hedge their portfolio by placing bets against the very homeowners they're supposed to be supporting!

Freddie Mac's trades, while perfectly legal, came during a period when the company was supposed to be reducing its investment portfolio, according to the terms of its government takeover agreement. But these trades escalate the risk of its portfolio, because the securities Freddie has purchased are volatile and hard to sell, mortgage securities experts say.

"We were actually shocked they did this," says Scott Simon, who as the head of the giant bond fund PIMCO's mortgage-backed securities team is one of the world's biggest mortgage bond traders. "It seemed so out of line with their mission."

The trades "put them squarely against the homeowner," he says.

"More than three years into the government takeover, we have Freddie Mac pursuing highly levered, complicated transactions seemingly with the purpose of trading against homeowners," says Columbia University real-estate economist, Christopher Mayer. "These are the kinds of things that got us into trouble in the first place."

But why would they make these risky trades? Hmmm....could it be this?

Even though Freddie is a ward of the state, top executives are highly compensated. Peter Federico, who's in charge of the company's investment portfolio, made $2.5 million in 2010, and he had target compensation of $2.6 million for last year, when most of these leveraged investments were made.

Ring the bell! These executives are raking it in at the expense of homeowners trapped in high interest rate loans, who can't re-finance these loans at a lower rate because Freddie Mac won't let them!

It's disgusting and outrageous, although apparently The Fed tried to do something about this last year:

In a recent white paper on remedies for the stalled housing market, the Federal Reserve criticized Fannie and Freddie for the fees they have charged for refinancing. Such fees are "another possible reason for low rates of refinancing" and are "difficult to justify," the Fed wrote.

A former Freddie employee, who spoke on condition he not be named, was even blunter: "Generally, it makes no sense whatsoever" for Freddie "to restrict refinancing" from expensive loans to ones borrowers can more easily pay, since the company remains on the hook if homeowners default.

One last question would be: where's the government oversite?

The Federal Housing Finance Agency (FHFA) effectively serves as Freddie's board of directors and is ultimately responsible for Freddie's decisions. It is run by acting director Edward DeMarco, who cannot be fired by the president except in extraordinary circumstances.

The trades raise questions about the FHFA’s oversight of Fannie and Freddie. But the FHFA is not just a regulator. With the two companies in government conservatorship, the FHFA now plays the role of their board of directors and shareholders, responsible for the companies’ major decisions.

Under acting director DeMarco, the FHFA has emphasized that its main goal is to limit taxpayer losses by managing the two companies’ giant investment portfolios to make profits. To cover their previous losses and ongoing operations, Fannie and Freddie already had received $169 billion from taxpayers through the third quarter of last year.

The FHFA has frustrated the administration because the agency has made preserving the value of the companies’ investment portfolios a priority over helping homeowners in expensive mortgages. In 2010, President Barack Obama nominated a permanent replacement for acting director DeMarco, but Republicans in Congress blocked him. Obama has not nominated anyone else to replace DeMarco.

And why did the Republicans block his replacement? Hopefully we'll find out in the next installment.

In the meantime, check out the story for all the gory details on the trades Freddie Mac made. It's a pretty astonishing story, indeed.

As the housing bubble entered its waning hours in 2006, top Federal Reserve officials marveled at the desperate antics of home builders seeking to lure buyers.

The officials laughed about the cars that builders were offering as signing bonuses, and about efforts to make empty homes look occupied. They joked about one builder who said that inventory was "rising through the roof."

But the officials, meeting every six weeks to discuss the health of the nation's economy, gave little credence to the possibility that the faltering housing market would weigh on the broader economy, according to transcripts that the Fed released Thursday. Instead they continued to tell one another throughout 2006 that the greatest danger was inflation -- the possibility that the economy would grow too fast.

"We think the fundamentals of the expansion going forward still look good," Timothy F. Geithner, then president of the Federal Reserve Bank of New York, told his colleagues when they gathered in Washington in December 2006.

Some officials, including Susan Bies, a Fed governor, suggested that a housing downturn actually could bolster the economy by redirecting money to other kinds of investments.

Yet the most egregious part of this story is that many of the same folks are still in positions of power and pontificating that all's well on the economic front. Hello, Tim Geithner!

Krugman's got something to say about this, as well:

Two puzzling things: first, the housing bubble was the clearest thing I've ever seen in my professional life. How could they ignore even the possibility of a severe bust?

Second, some of the same people you read in these transcripts dismissing risks to the real economy and worrying wrongly about inflation are still making policy pronouncements, in which they … dismiss risks to the real economy and worry wrongly about inflation.

You should be scared...very...very ...scared.

"The boom, not the slump, is the right time for austerity at the Treasury." So declared John Maynard Keynes in 1937, even as F.D.R. was about to prove him right by trying to balance the budget too soon, sending the United States economy -- which had been steadily recovering up to that point -- into a severe recession. Slashing government spending in a depressed economy depresses the economy further; austerity should wait until a strong recovery is well under way.

Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover from the slump that followed the financial crisis. And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.

Indeed they have. At the expense of all of us.

This sums it all up:

We entered 2011 amid dire warnings about a Greek-style debt crisis that would happen as soon as the Federal Reserve stopped buying bonds, or the rating agencies ended our triple-A status, or the superdupercommittee failed to reach a deal, or something. But the Fed ended its bond-purchase program in June; Standard & Poor's downgraded America in August; the supercommittee deadlocked in November; and U.S. borrowing costs just kept falling. In fact, at this point, inflation-protected U.S. bonds pay negative interest: investors are willing to pay America to hold their money.

Why are we even discussing whether Keynes is correct or not? The evidence is irrefutable.

Four months after Standard & Poor's stripped the U.S. of its AAA credit rating and said the world's biggest economy was no longer the safest of borrowers, dollar- denominated financial assets are doing nothing but appreciating.

Government bonds have returned 4.4 percent, the dollar has gained 8.7 percent relative to a basket of currencies, and the S&P 500 Index of stocks has rallied 1.7 percent since the U.S. was cut to AA+ from AAA on Aug. 5. The cost for the nation to borrow has fallen to record lows since S&P said the U.S. was no longer risk-free, with the average monthly yield in November on 10-year notes below 2 percent for the first time since 1950.

How's that for a big fat DOH!

For nearly a decade, Ms. Schultz and her colleagues have been rooting through the minutiae of accounting regulations, government filings and corporate retirement plans to expose how many of the largest American companies have systematically plundered their employees pension funds, at once robbing their workers of hard-won benefits and enriching their own profits. Her work has led to Congressional hearings, to a Washington investigation or two and to numerous journalism awards.

Now, inevitably, comes the book. In "Retirement Heist: How Companies Plunder and Profit From the Nest Eggs of American Workers." Ms. Schultz herds all her journalistic cattle into a single corral, laying out by what any measure is a damning indictment of the broken pension promises too many American corporations have made to their workers.

The following goodies are detailed as Ms. Schultz reveals how companies:

* Siphon billions of dollars from their pension plans to finance downsizings and sell the assets in merger deals * Overstate the burden of rank-and-file retiree obligations to justify benefits cuts while simultaneously using the savings to inflate executive pay and pensions * Hide their growing executive pension liabilities, which at some companies now exceed the liabilities for the regular pension plans * Purchase billions of dollars of life insurance on workers and use the policies as informal executive pension funds. When the insured workers and retirees die, the company collects tax-free death benefits *Preemptively sue retirees after cutting retiree health benefits and use other legal strategies to erode their legal protections.

Just a little holiday reading for your upcoming vacation!

Saturday November 5th was Bank Transfer Day, the day on which Americans were urged to switch their accounts from the big banks to credit unions. For a grassroots movement started by art gallery owner Kristen Christian on Facebook, it garnered a lot of media attention.

It also spurred activists from #OccupyWallStreet to take to the streets across the country:

But how effective was it?

On Tuesday, the Credit Union National Association (CUNA) said that more than 40,000 people joined credit unions on Bank Transfer Day itself, bringing with them $80 million in assets. One credit union in Georgia reported a 60-percent jump in new accounts on Nov. 5.

And last week the CUNA released figures that an estimated 650,000 people had joined credit unions since Sept. 29 (the day Bank of America unveiled its now-rescinded $5 monthly debit card fee) compared to only 80,000 people on a normal month and more than the total of all people who switched in 2010, and had added an estimated $4.5 billion to new savings accounts at credit unions, both from new and existing members. ABC recently released a report which called the mass migration a "bank revolt," emphasizing the seriousness of the movement and the public awareness it has bred.

There are numerous online tools to help you make the switch. Start here at Institutional Risk Analytics' "Move Your Money" tool. Then go over here at aSmarterChoice.org to locate a credit union near you.

Or better yet, just go to MoveYourMoney's Credit Union finder:

http://moveyourmoneyproject.org/find-bankcredit-union

Finally, support the movement by visiting the "Move Your Money" project after you watch the following video...then Move Your Money!:

After-tax income for the highest-income households grew more than it did for any other group. (After-tax income is income after federal taxes have been deducted and government transfers—which are payments to people through such programs as Social Security and Unemployment Insurance—have been added.)

CBO finds that, between 1979 and 2007, income grew by:

** 275 percent for the top 1 percent of households,
** 65 percent for the next 19 percent,
** Just under 40 percent for the next 60 percent, and
** 18 percent for the bottom 20 percent.

This chart says it all:

And these statistics are particularly troublesome:

The share of income going to higher-income households rose, while the share going to lower-income households fell.

** The top fifth of the population saw a 10-percentage-point increase in their share of after-tax income.
** Most of that growth went to the top 1 percent of the population.
** All other groups saw their shares decline by 2 to 3 percentage points.

You can read this very important study in .pdf form here: "Trends in the Distribution of Household Income between 1979 and 2007"

NextBillion.net is a website and blog bringing together the community of business leaders, social entrepreneurs, NGOs, policy makers and academics who want to explore the connection between development and enterprise. It is a discussion forum, networking space and knowledge base for individuals and organizations interested in the "next billion". Our goal is to highlight the development and implementation of business strategies that open opportunities and improve the lives of the world's approximately 4 billion low-income producers and consumers.

While development aid and political reform are essential components in poverty eradication, equally important are business models that engage low-income communities as producers and consumers in their own robust economies. Successful business models - inherently versatile, innovative, and driven by the profit motive - can sometimes tackle development challenges more quickly and effectively than government and aid mechanisms. Innovative models that bring together the objectives of business and development to create sustainable, market-oriented approaches are the focus of NextBillion.net.

Make sure to visit NextBillion.net on a regular basis!

** The poverty rate in 2010 was the highest since 1993 but was 7.3 percentage points lower than the poverty rate in 1959, the first year for which poverty estimates are available. Since 2007, the poverty rate has increased by 2.6 percentage points.

** In 2010, the family poverty rate and the number of families in poverty were 11.7 percent and 9.2 million, respectively, up from 11.1 percent and 8.8 million in 2009.

** The poverty rate and the number in poverty increased for both married-couple families (6.2 percent and 3.6 million in 2010 from 5.8 percent and 3.4 million in 2009) and female-householder-with-no-husband-present families (31.6 percent and 4.7 million in 2010 from 29.9 percent and 4.4 million in 2009).

At what does it take to be classified as living in poverty?

As defined by the Office of Management and Budget and updated for inflation using the Consumer Price Index, the weighted average poverty threshold for a family of four in 2010 was $22,314.

The fact of the matter is, though, that poverty has been rising in America for much of the past decade, as the following chart illustrates:

It's very clear that the number of Americans in poverty increases under Republican presidents dating back to Ronald Reagan. Is that a coincidence?

The United States government offers tax incentives to companies pursuing medical breakthroughs, urban redevelopment and alternatives to fossil fuels.

It also provides tax breaks for a company whose hit video game this year was the gory Dead Space 2, which challenges players to advance through an apocalyptic battlefield by killing space zombies.

Those tax incentives -- a collection of deductions, write-offs and credits mostly devised for other industries in other eras -- now make video game production one of the most highly subsidized businesses in the United States, says Calvin H. Johnson, who has worked at the Treasury Department and is now a tax professor at the University of Texas at Austin.

All told, the federal government gave $123 billion in tax incentives to corporations in 2010, according to the Joint Committee on Taxation, with breaks for groups and people as diverse as Nascar track owners, mohair producers, hedge fund managers, chicken farmers, automakers and oil companies.

So if you ever wondered what is really supporting all of those lobbyists and fundraisers, it's that $123 billion industry in Washington, D.C.

Sure, some tax incentives make sense. But what makes sense about subsidizing video games?

Many tax policy analysts say the breaks for the video game industry -- whose domestic sales of $15 billion a year now exceed those of the music business -- are a vivid example of a tax system that defies common sense. Most times, subsidies begin as a way to nurture a fledgling industry that will not be profitable for years or to encourage a business activity deemed to have a broad benefit to society, like reducing pollution or improving public health.

But it's a lot easier to create a tax break than to eliminate it. That leaves a generous assortment of tax incentives available to all types of companies, like Electronic Arts, with skilled accounting departments.

Read on if your stomach can take it.

Charity apps are nothing new. But the concept of giving with no money from the user has only recently built steam. The idea takes its cue from CauseWorld, which began in 2009. Users check in to common shops and grocery stores to earn "karma" points, which are later donated to dozens of select charities of the user's choice, like the National Breast Cancer Foundation or the American Red Cross. Sponsors like Kraft, Citi and Proctor & Gamble match the karma with money.

Each time someone checks in to a Hard Rock Cafe in the United States using Facebook Places, Hard Rock International donates a dollar to WhyHunger, a charity fighting global poverty and hunger. The effort continues through the end of the month, or up to $100,000.

Bill Ayres, a talk radio host who is executive director and a founder of WhyHunger, said the development was an exciting for charities like his.

"This promotion signifies a new direction for organizations like ours to embrace social technologies and reach a wider audience with an easy way to get involved and give back," he said.

And it seems to be catching on in a big way:

Other check-in apps have proved fertile ground for charitable partnerships. Melanie Mathos, a manager at Blackbaud, which provides fund-raising technology to about 24,000 nonprofit groups, pointed to Foursquare's efforts at last spring's South by Southwest music and film festival in Austin, Tex. Each time someone checked in on Foursquare from any business in Austin, or sent a specific hashtag on Twitter, Microsoft and PayPal 25 cents combined together donated 25 cents to Save the Children's Haiti relief effort.

Within two days, the effort counted 371,804 check-ins, saw 2,683 Twitter messages and raised $15,000.

Now that's an efficient use of Twitter, eh?

Amid all the debt hysteria, it's worth taking a look at the actual arithmetic here -- because what this arithmetic says is that the size of the deficit in the next year or two hardly matters for the US fiscal position -- and in fact the size over the next decade is barely significant.

Start with interest rates. What matters for debt sustainability is the real interest rate, since what matters is keeping real debt, not nominal debt, from growing. (World War II debt never got paid off, it just eroded in real terms to the point where it was trivial). As of yesterday, the US government could lock in 30-year bonds at a real interest rate of 1.25%. That means that a trillion dollars in extra debt would mean $12.5 billion a year in additional real interest payments.

Meanwhile, the CBO estimates potential real GDP in 2021 at about $18 trillion in 2005 dollars, or around $19 trillion in 2011 dollars.

Put these together, and they say that an extra trillion in borrowing adds something like 0.07% of GDP in future debt service costs. Yes, that zero belongs there. The $4 trillion S&P said it needed to see clocks in at less than 0.3% of GDP.

These are not, to say the least, make or break numbers. So what are we talking about here?

America does have a long-run fiscal problem, driven by the combination of rising health costs, an aging population, and the unwillingness to raise taxes to pay for the programs we already have. If we don't come to grips with that problem, bad things will happen. But what happens to the deficit in the medium term is almost irrelevant to the question of whether our long-run finances will get under control.

Yet S&P (and others) obsess about those medium-term numbers, without ever explaining why. Maybe they think there's some critical level of debt -- but they don't know that. Maybe they think that fiscal austerity over the next decade will somehow guarantee good behavior further out -- but that didn't work in the 1990s. Or maybe they're just pulling stuff out of regions I can't mention in the Times.

The point is that while S&P may try to give the impression that it's just doing the math (incompetently, too!), the math doesn't at all support its position.

Egg-zactly...

One year ago, Testwell Laboratories, a concrete testing company, and two Testwell officials were found guilty of falsifying results on major public works projects. On Thursday, the owner and five engineers at the company chosen to replace Testwell surrendered to face charges that they did the same thing on some of the same projects and hundreds of others.

They are accused of falsifying thousands of tests at Yankee Stadium, the Second Avenue subway, public schools and private buildings.

A 29-count indictment charges the six men and the company, American Standard Testing and Consulting Laboratories, under the state racketeering law. It accuses them of a money-making scheme that included falsifying the results of tests required by law to measure the strength and quality of concrete poured on projects in New York City and Westchester County and on Long Island. The decade-long scheme also included falsifying documents to get city licenses and manipulating government programs to get jobs for which they were not entitled, according to the charges.

Because we relied on a private company, who's sole purpose is to maximize profit, we are left with hundreds of sites around the New York City metropolitan area with possible weak concrete. Those who claim that market forces will cure our ills and provide safety mechanisms for our citizens are only left with one answer to this problem: the market will punish this company by putting them out of business. Voila! Problem fixed! Except that the rest of us citizens are left to clean up their mess (and be exposed to possible physical harm or death):

Concrete testing, such as the kind that is the subject of the charges against American Standard and Testwell, is a basic safety measure at construction sites, and investigators found irregularities in companies' work at the new Yankee Stadium, One World Trade Center and hundreds of other sites.

None of the nearly 3,000 test reports that prosecutors seized from the company contained legitimate results, according to one person briefed on the investigation. Among other projects for which tests results were falsified were: the Lincoln Tunnel, the air traffic control tower at La Guardia Airport, the Javits Convention Center; a building at the Memorial Sloan-Kettering Cancer Center and the Intrepid Sea, air and Space Museum (italics ours).

The person briefed on the inquiry said there were cracks in the concrete at the airport and at the Javits Center, but they did not represent a serious structural threat.

Alice McGillion, a spokeswoman for the New York Yankees, said the testing irregularities had caused no dangers at the stadium.

"The stadium is safe," she said, and stressed that the new indictment, like the 2009 charges against Testwell, grew out the investigations that the Yankees themselves had conducted.

Let's hope no one gets hurt.

Play ball!

This whole post is worth a response since most people don't have a very good understanding of where federal revenue comes from and where it goes. But the basic figures are all easily accessible from the OMB and a few other sources, so here's a quickie summary:

** Social Security: Roughly speaking, Social Security is self sufficient. So yes, we can assume that even if the debt ceiling isn't raised, incoming payroll taxes will be enough to keep the program going.

** Medicare: Medicare gets about half its financing from dedicated payroll taxes and premiums. However, the non-hospital portion, which costs about $250 billion per year, comes out of the general fund.

** Defense + Veterans Benefits: Using the narrowest definition of national defense, this costs about $900 billion per year.

** Interest on the debt: About $200 billion per year.

So excluding the parts of Social Security and Medicare paid for out of dedicated payroll taxes, here's what comes out of the general fund: $250 + $900 + $200 = $1,350 billion.

Now for taxes. Excluding dedicated payroll taxes for Social Security and Medicare, here's roughly where our money comes from:

* Individual income taxes: $950 billion.
* Corporate income taxes: $200 billion
* Other taxes: $200 billion

That comes to $1,350 billion. In other words, aside from payroll taxes, our entire tax base -- income taxes, excise taxes, estate taxes, customs duties, everything -- is just barely enough to pay for our military, the non-hospital part of Medicare, and interest on the debt. Finis. If you want to fully fund those parts of government, as most tea partiers do, and if you also want to force a balanced budget by not raising the debt ceiling, as most tea partiers do, you literally have to zero out the entire rest of the federal government. No Medicaid, no FAA, no border patrol, no FBI, no embassies, no highways, no disaster relief, no SEC, no court systems, no prisons, no national parks, no CIA, no school lunches, no medical care for children, no SNAP, no flood control, no student loans, no medical research, no nothing. You get Social Security, Medicare, the military, and interest on the debt. That's it.

Capiche?

Yes...it's crystal clear, hombre, to those who are paying attention.

TalkingPointsMemo has the story:

On Wednesday, the Congressional Budget Office released its updated long-term budget forecast, which looked surprisingly like the previous version of its long-term budget forecast.

It showed, as one might expect, that if the Bush tax-cuts remain in effect and Medicare and Medicaid spending isn't constrained in some way, the country will topple into a genuine fiscal crisis -- not the fake one the Congress is pretending the country's in right now.

Republicans, of course, seized on that particular projection, and claimed (a bit ridiculously) that it proved the government must adopt their precise policy views: major spending cuts, particularly to entitlement programs.

While all this -- from the findings to the politicization of them -- is perfectly expected, the forecast also presents another opportunity to remind people that the medium-term budget outlook is perfectly fine if Congress adheres to the law as it's currently written. That means no repealing the health care law, for one, but more significantly it means allowing the Bush tax cuts to expire, and (unfathomably) allowing Medicare reimbursement rates for doctors to fall to the levels prescribed by the formula Congress wrote almost 15 years ago. In other words, no more "doc fixes."

The solution to fixing this mess is crystal clear. Unfortunately, our elected leaders on Capitol Hill have smoke in their eyes and seem incapable of doing what's right.