Friday, April 17, 2015

Germany’s Failed Austerity Policies

Financial FAQs

One would think by now the debate has been resolved on which economic model created the better recovery for this Great Recession or Lessor Depression, as P Krugman has called it. But no, Germany’s Finance Minister Wolfgang Schauble keeps pounding the drum for his, and the eurozone’s failed austerity policies.

And this is happening with a new Hitler looming on Europe’s border who is taking advantage of their weakness and threatening to repeat its history.

“The financial crisis broke out seven years ago and led many countries into an economic and debt crisis,” said Schauble recently. “A pervasive set of myths — that the European response to the crisis has been ineffective at best, or even counterproductive — is simply not accurate. There is strong evidence that Europe is indeed on the right track in addressing the impact, and, most importantly, the causes of the crisis.”

Really? One has only to compare Europe to U.S. economic growth since the Great Recession. The U.S. response by the Federal Reserve was to do everything possible to stimulate demand by keeping interest rates as low as possible, as long as possible, to pump more money into the system, rather than hoard it.

It is not even a matter of degree, but orders of magnitude. The U.S. has grown as much as 5 percent in a quarter, whereas Europe has grown no more than 0.3 percent since 2012. (Does Schauble even bother to look at economic data?)

One thinks that most economists should have learned from the 1930’s Great Depression, Roosevelt’s New Deal, etc., etc., that it takes a very active and proactive government to bring back the fallen ‘animal spirits’, as JM Keynes called the loss of confidence that kept consumers in the 1930s’ economy from completely recovering, until WWII government spending brought back fully employed economies.

But no, Schauble, has turned Keynes on his head in maintaining that it is the loss of investors’ confidence, not that of public consumers, which powers 70 percent of economic growth these days. He seems to have absolutely no concept of the meaning of aggregate demand, another Keynesian concept that spells out exactly what drives economic growth.

I.e. investors lose confidence in investing when the demand for their products and services declines, as it did drastically during the past two depressions. It is a basic misunderstanding of how economies work. Consumers ran out of money to spend, due in large part to the record income inequality that happened in 1929, and again in 2008.

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Graph: Mother Jones

When almost all wealth flows to the top, the wealthiest enact policies to prevent it from being redistributed downward to those that spend it, where it would encourage and strengthen a recovery.

Then money is hoarded, rather than spent, as is still happening worldwide (particularly in Germany with the largest budget surplus in the developed world). That’s why economic growth has resumed in the U.S., but not in Europe, Which is currently teetering on the edge of its third recession since 2008.

But isn’t Putin’s Russia threatening war, even a nuclear war, if Europe doesn’t cave in to its demands? That is a wakeup call for Europeans to throw out their austerity policies, if they want to build the strength to oppose him. Europe is fractured because of their poorly functioning economies. Otherwise history is about to repeat itself. Only instead of a Hitler, we have a Putin.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Thursday, April 16, 2015

Expanding Social Security – Decreasing Inequality

Popular Economics Weekly

What, you say? We should expand, not shrink, social security benefits in the face of horrendous budget deficits of late? Elizabeth Warren put into the Senate Budget proposal for 2015 an amendment to protect social security, and even increase its benefits, when conservative pundits and pols have been chanting for years that it would drive the federal budget into bankruptcy. (Her amendment was defeated by the Republican majority, of course.)

And now potential Republican candidates such as Chris Christie are finding other ways to downsize social security, when social security isn’t the problem, and when record income inequality is getting worse during the recovery, not better.

No, what has driven the budget deficits have been concerted efforts by Republicans since R Reagan to cut maximum tax rates from 70 percent to the current 35 percent, while cutting government programs that would boost growth and productivity, such as public infrastructure spending, education, and even Research and Development.

All have proven records of increasing productivity—from our national freeway system, to DARPA’s funding of the Internet. Republicans have even gone so far as to cause a downgrade of sovereign treasury debt from its historic AAA rating by shutting down the government briefly in 2012.

Warren's recent effort was the product of a long progressive campaign that preceded her election. Pundits, such as the Huffington Post and the New York Times’ Paul Krugman have been pushing for the expansion of retirement benefits for years. In the past decade, left-of-center policy wonks became increasingly worried about retirement security for Americans. Corporate pension plans—many of which offered decent and secure retirement payments—were going the way of the dinosaurs. In 1980, about 40 percent of private-sector workers received such pension payouts; by 2006, that number had dropped to 15 percent.

In general, many retirement plans had shifted to private 401(k) accounts, and these often were woefully inadequate for supporting retirees in a climate of stagnating wages and scant savings. And the recent Wall Street collapse ravaged pensions and personal investments, illustrating that 401(k)s were a shaky foundation for retirement. Progressives and retirement policy wonks began looking for another option. The obvious answer was expanding Social Security.

In March 2012, the AFL-CIO called for "changing the terms of debate by focusing on the crisis of retirement security." Over the next year and a half, progressives policy shops and activists answered the call to arms. In April 2013, the New America Foundation, a progressive think tank, published a plan to expand benefits. "Our main purpose in doing that was to move the goal posts," says Michael Lind, a cofounder of the New America Foundation. Around the same time, two Democratic senators, Tom Harkin of Iowa and Mark Begich of Alaska, introduced bills to expand benefits.

Yet in November 2013, the Washington Post editorial board slammed the expansion push as "liberalism gone awry." It noted that "even the rich have finite resources; government can only go to that well so many times…Unchecked entitlement spending for the elderly crowds out spending" on young Americans and other priorities,” said the Post.

This is utter supidity. The Washington Post is now defending the rich? What “finite” resources we have created have all gone to the wealthiest since the end of the Great Recession. They garnered 90 percent of the income to be precise, while the 90 percent’s income bracket actually declined, mainly because wages and salaries have declined while the financial markets rallied for investors.

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Graph: Seeking Alpha

The result has been anemic growth for the past 2 decades, far below historic growth rates. “In the last two decades, like in the case of many other developed nations, its growth rates have been decreasing,” said Trading Economics. “If in the 50’s and 60’s the average growth rate was above 4 percent, in the 70’s and 80’s dropped to around 3 percent. In the last ten years, the average rate has been below 2 percent and since the second quarter of 2000 has never reached the 5 percent level.”

That’s what happens when all income gains go to the top income brackets, and actual laws prevent wage and salary earners from even bargaining for more, such as Wisconsin’s banning of collective bargaining for its public employees that include teachers and health care workers.

There is good reason to expand social security benefits. There just has to be the political will to pay for it, and given the gains of those who can most afford to, we should be worrying more about growing the economy than a budget deficit that is the result of decades of anti-growth policies.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Tuesday, April 7, 2015

Mortgage Delinquencies Close to Pre-Recession Lows.

The Mortgage Corner

Calculated Risk reports Black Knight Financial Services (BKFS) released their Mortgage Monitor report for February on Monday. According to BKFS, 5.36 percent of mortgages were delinquent in February, down from 5.56 percent in January. BKFS reported that 1.58 percent of mortgages were in the foreclosure process, down from 2.22 percent in February 2014. This is approaching historical lows for delinquencies, and should mean a very good year for housing.

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Graph: Calculated Risk

February’s delinquency rate, while still 17 percent above the pre-crisis norm of 4.6 percent, was down 49 percent from its January 2010 peak of 10.6 percent. And at 1.58 percent, the foreclosure rate remained 175 percent above precrisis norms, but was still down 63 percent from its October 2011 peak, reports Black Knight.

This breaks down as:

· 1,646,000 properties less than 90 days past due, but not in foreclosure.

· 1,067,000 properties that are 90 or more days delinquent, but not in foreclosure.

· 800,000 loans in foreclosure process.

It also means last week’s jump in Pending Home Sales was no fluke, as lower delinquency rates mean more homes with positive equity are increasing housing inventories. The National Association of Realtors Pending Sales Index is at its highest level since June 2013 (109.4), has increased year-over-year for six consecutive months and is above 100 – considered an average level of activity – for the 10th consecutive month.

So what will happen in 2015? Mortgage applications have also jumped, particularly purchase applications, as we said last week. "There was a broad based increase in mortgage applications last week (April 1) relative to the week prior. The increase in purchase volume was led by a nearly 6 percent increase in both conventional and government markets, perhaps signaling that households are finally ready to begin the home-buying season," said Lynn Fisher, MBA's Vice President of Research and Economics.

But that is largely because of still record low interest rates. The Fed wants to begin to raise interest rates sometime this year, but growth has slowed recently, due to the another severe winter, and a soaring dollar value that hurts exports. So the latest words from the Fed Governors are that low interest rates should be around for a while longer.

New York Fed Governor William Dudley said as much recently. “…as Chair Yellen remarked in her most recent press conference, removal of “patient” from the statement does not indicate that we will be “impatient” to begin to normalize monetary policy.  Rather, the timing of normalization will be data dependent and remains uncertain because the future evolution of the economy cannot be fully anticipated.”

The housing market will have a very good year, according to Core Logic’s 2015 housing forecast. “The U.S. economy is poised to grow by close to 3 percent in 2015, generating a 3- to 3.5-million-person gain in employment,” said Core Logic chief economist Frank Nothaft. “This job growth, coupled with very low mortgage interest rates and some easing in credit access, is expected to propel both owner-occupant and rental housing activity this year. This heightened level of housing demand should translate to the best home sales market in eight years.”

Let us hope the Fed remains patient for first-time homebuyers that require affordable loan rates, in particular, and are just now entering the housing market.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Friday, April 3, 2015

A Lousy Jobs Report?

Popular Economics Weekly

At first glance it looks like a lousy jobs report. It’s true the labor market has softened in several aspects. Payroll jobs increased just 126,000 in March after increases of 264,000 in February and 201,000 in January. January and February were revised down a net 69,000. Market expectations for March were for a 247,000 increase. And the unemployment rate held steady at 5.5 percent. The labor force participation rate edged down marginally to 62.7 percent from 62.8 percent in February.

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Graph: WSJ Marketwatch

It is a 15-month low, say economists, that could be because of a number of factors. Winter is still freezing out the midwest and east, while the oil and mining industries have already lost 30,000 jobs in 2015 due to plunging oil prices. And governments have added back just 128,000 of the 630,000 jobs lost during the recession.  But overall wages are now rising faster than inflation—0.3 percent—and 3.1 million jobs were created in the past 12 months.

So it’s still a hopeful report, given the circumstances. This should mean Janet Yellen’s Federal Reserve will not be so hasty to raise interest rates in June. Not while inflation is still negative in Europe, close to zero in the U.S., and falling in other parts of the world.

There are still too many workers out of work, in other words, and most of the jobs being created are in the service sector, the lowest paying jobs in general. The professional and business services sector was the big jobs winner with 40,000 jobs added in March. This is not surprising, given that the largest businesses are in the computer and software industries—such as Facebook, Microsoft, Apple (now the largest corporation in stock valuation in the world), and so forth.

Actually the professional, scientific, and technical services sector is now our fastest growing business sector, comprising establishments that specialize in performing professional, scientific, and technical activities for others, such as attorneys, accounting, bookkeeping, and payroll services; architectural, engineering, and specialized design services; computer services; consulting services; research services; and other professional, scientific, and technical services, says the U.S. Bureau of Labor Services.

But low inflation is still a problem, particularly in Europe with its ongoing austerity policies that has kept the unemployment rate in the 11 percent range, and Greece still threatening to leave the Eurozone.

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Graph: Trading Economics

The Eurozone is suffering from falling prices, and so the expectation of growth. This hurts the 25 percent of U.S. exports that flow to Europe. It is a situation Europeans have brought on themselves, as their policy makers refuse to infuse more economic stimulus spending, while their budget deficits soar. They are still in full-blown austerity mode, in other words, protecting themselves from non-existent inflation that cuts off government revenues and increases budget deficits.

And low wages are still a problem for U.S. workers, but that may be about to change, says Nobelist Paul Krugman in his latest NYTimes Oped: “On Wednesday, McDonald’s — which has been facing demonstrations denouncing its low wages — announced that it would give workers a raise. The pay increase won’t, in itself, be a very big deal... But it’s at least possible that this latest announcement, like Walmart’s much bigger pay-raise announcement a couple of months ago, is a harbinger of an important change in U.S. labor relations.”

“Suppose that we were to give workers some bargaining power by raising minimum wages, making it easier for them to organize, and, crucially, aiming for full employment rather than finding reasons to choke off recovery despite low inflation. Given what we now know about labor markets, the results might be surprisingly big — because a moderate push might be all it takes to persuade much of American business to turn away from the low-wage strategy that has dominated our society for so many years.”

For it is such low wage increases, and economic policies that have discouraged collective bargaining in the 29 right to work states (red states with the poorest economies), that have held down economic growth and spawned theories of a ‘new normal’, slower growth, economy.

That doesn’t have to be, if our austerians would only wake up and realize that giving employees the same rights as their employers will create more prosperity for all.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Thursday, April 2, 2015

Housing In Recovery-Pending Home Sales Soar

The Mortgage Corner

February Pending Home Sales Index, a forward-looking indicator based on contract signings, rose 3.1 percent to 106.9 in February from a slight downward revision of 103.7 in January and is now 12.0 percent above February 2014 (95.4). The index is at its highest level since June 2013 (109.4), has increased year-over-year for six consecutive months and is above 100 – considered an average level of activity – for the 10th consecutive month.

This is while new U.S. homes sold at an annual rate of 539,000 in February to mark the best month of sales in seven years, the government reported Tuesday. The pace of sales for January was also revised up sharply to 500,000. It's the first time annualized sales have hit 500,000 or more for two straight months since early 2008, as we said last week.

NAR chief economist Lawrence Yun, says demand appears to be strengthening as we head into the spring buying season. “Pending sales showed solid gains last month, driven by a steadily-improving labor market, mortgage rates hovering around 4 percent and the likelihood of more renters looking to hedge against increasing rents,” he said. “These factors bode well for the prospect of an uptick in sales in coming months. However, the underlying obstacle – especially for first-time buyers – continues to be the depressed level of homes available for sale.”

In fact, the 30-year conforming fixed rate is in the mid-3 percent range today in California, and hovering near its all-time low.  Even better news is, according to NAR’s monthly Realtors® Confidence Index, the percent share of first-time buyers increased slightly for the first time in February since November 2014, up to 29 percent from 28 percent in January. But such good news may not last, as the depressed level of inventories is continuing to boost home prices, making homes less affordable for those first-timers.

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Graph: Calculated Risk

The Case-Shiller Home Price Index reports that home prices are firming as the Case-Shiller composite-20 index rose 0.9 percent in January following a 0.9 percent gain in December and a 0.8 percent rise in November. This is the strongest streak for this report since late 2013, and gives us more evidence of the need for more inventory. Year-on-year, however, prices are still on the soft side, up only 4.6 in January and only fractionally higher than the prior two months.

The increase in mortgage applications is another sign that home sales may be increasing this selling season, probably due to the low interest rates. The seasonally adjusted Purchase Index increased 6 percent from one week earlier. ... The unadjusted Purchase Index ... was 8 percent higher than the same week one year ago.

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Graph: Calculated Risk

“There was a broad based increase in mortgage applications last week relative to the week prior. The increase in purchase volume was led by a nearly 6 percent increase in both conventional and government markets, perhaps signaling that households are finally ready to begin the home-buying season,” said Lynn Fisher, MBA’s Vice President of Research and Economics.

The rise in the share of first time home buyers is not a huge change but may predict more millennials of the Generation Y cohort aged 18-36 years, entering the housing market that have been renting until now. “Several markets remain highly-competitive due to supply pressures, and Realtors are reporting severe shortages of move-in ready and available properties in lower price ranges,” adds Yun. “The return of first-time buyers this year will depend on how quickly inventory shows up in the market.”

So still record low interest rates have to be a major reason both refinance and purchase loan activity has picked up. Conforming 30-year fixed rates are as low as 3.375 percent in California for 1 origination point. This is the rate that prevailed during the Fed’s QE purchase program more than one year ago. It has to be thanks to Fed Chairwoman Janet Yellen who has been unrelenting in her opposition to any interest rate increases until she sees sustainable growth and rising wages.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Monday, March 30, 2015

Why Doesn’t Government Want Fannie, Freddie to Succeed?

The Mortgage Corner

At a time when the housing market is just beginning to recover, the US Treasury wants to close down Fannie Mae and Freddie Mac, the two GSEntities under government conservatorship.

Counselor to the Secretary for Housing Finance Policy Dr. Michael Stegman, speaking at Monday’s National Council of State Housing Agencies Legislative Conference, said, "I know that many of you want to know where we are on housing finance reform. On this subject, let me be clear: the Administration stands by our belief that the only way to responsibly end the conservatorship of Fannie Mae and Freddie Mac is through legislation that puts in place a sustainable housing finance system that has private capital at risk ahead of taxpayers, while preserving access to mortgage credit during severe downturns."

But Timothy Howard, chief economist and a senior Fannie Mae executive for 23 years, says “Fannie Mae never experienced a threat to its solvency because of difficulty rolling over its maturing debt, nor did it need to sell assets at depressed prices to survive.  The company never experienced a market crisis.  At the time it was put into conservatorship, Fannie Mae’s capital significantly exceeded its regulatory minimum.” 

So dissolving Fannie and Freddie makes no sense for several reasons. There is no financing model that has yet been created to replace both their securitization structure that in effect guarantees almost all conforming and Hi-Balance conforming loans, which account for more than 60 percent of loan originations today.

And, they are generating immense profits for the US Government that has commandeered all of their profits since a 2012 amendment to the 2008 conservatorship agreement. “As of last December, the Treasury had received a total of $225.4 billion from the companies,” says NYTimes Gretchen Morgensen in a recent column. “An additional $153.3 billion in receipts from Fannie and Freddie could be generated through fiscal year 2025, according to estimates in the 2016 budget offered by the president.”

So why does the government want to close them down when their sometimes too strict underwriting standards have brought loan default rates back to historical levels, and Fannie Mae has repaid more than the $186 billion lent to them?

The quick answer is that our government fears they may have to bail out the GSEs again, putting taxpayers at risk, with their current structure as stock holding corporations, but with an implicit government guarantee that they can’t fail.

Treasury officials (and the banking lobby) maintain it gives them an unfair interest rate advantage that has enabled them to keep lower capital reserves, and thus a lower expense overhead, therefore impeding the development of so-called “private-label” mortgages generated by commercial lenders, but not guaranteed by the GSEs.

Morgensen highlighted the ongoing debate on whether Fannie and Freddie should be re-privatized in describing a lawsuit by a major stockholder of the GSEs whose stock is in effect worthless, unless the government allows them to rebuild their equity.

“The problem with the apparent involvement by Treasury and White House officials in the decision to commandeer Fannie’s and Freddie’s earnings is that by congressional statute, the F.H.F.A. is supposed to be an independent agency, tasked by law to protect the safety and soundness of the companies. Letting the companies’ profits flow to the Treasury had the opposite effect. Allowing them to rebuild their capital with profits after they repaid the taxpayer seems more like it.”

So the only danger to taxpayers seems to be that created by the U.S. Treasury and FHFA, in not allowing them to rebuild capital as a cushion against a future housing downturn. Even if there was another housing crisis, Fannie and Freddie today would not be allowed back into the subprime market that guaranteed loans from such as Countrywide Financial that was in turn bailed out by Bank of America.

“Intervention in support of banks was done in response to sudden and uncontrollable liquidity crises that required immediate government assistance to keep the companies from failing, and involved actions and tools intended to achieve that result (not always successfully),” says Howard.  “The act of placing Fannie Mae and Freddie Mac into conservatorship was not a response to any imminent threat of failure but rather a policy decision initiated at a time of Treasury’s choosing, and involved actions and tools intended to make and keep the companies insolvent.”

Former Fannie Mae exec Timothy Howard also thinks Fannie and Freddie can still function as viable institutions. “There is no credible basis for the oft-repeated contention that they are a “failed business model,” he said.  “Even after Fannie Mae and Freddie Mac made unwise decisions to lower their underwriting standards to try to compete with private-label securitization, their loans acquired between 2005 and 2008 still performed four times as well as loans from that period financed through private-label securities, and more than twice as well as loans made and retained by commercial banks during that time.”

“The argument for bringing Fannie Mae and Freddie Mac out of conservatorship and using an amended version them as the basis of the future mortgage finance system is extremely straightforward: their credit guaranty mechanism is low-cost, efficient and effective, and has a proven track record of success.”

Need we have any other reason to break the gridlock that has kept the GSEs in conservatorship, now that the housing market is recovering? Their model works, and without them the housing market would be in far worse shape.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

Saturday, March 28, 2015

New Home Sales Surging

The Mortgage Corner

New U.S. homes sold at an annual rate of 539,000 in February to mark the best month of sales in seven years, the government reported Tuesday. The pace of sales for January was also revised up sharply to 500,000. It's the first time annualized sales have hit 500,000 or more for two straight months since early 2008.

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Graph: Calculated Risk

“This is 7.8 percent above the revised January rate of 500,000 and is 24.8 percent above the February 2014 estimate of 432,000," said the Census Bureau. And it reduced the for sale inventory to a 4.7 month supply, which is low considering the pent up demand for housing sales sure to grow this year, with low inflation and rising employment.

Low inflation should be a factor in housing sales this year, if oil prices stabilize, since it boosts householders’ take home pay. Price rises moderated last year. The Federal Housing Finance Authority just reported that same-home prices of homes with conforming loans rose 5.1 percent in January, down slightly from 5.4 percent in December. But we are in mid-winter, so look for more price rises as the spring selling season kicks in.

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Graph: Econoday

Overall CPI inflation was unchanged in February, which is better than the negative -0.1 percent drop in January. Oil prices have stabilized around $50/barrel for Brent Crude at the moment, but who knows what this year will bring with so much unrest with major oil producers in the Middle East, and even Russia?

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Graph: Trading Economics

CNBC’s Diana Olick reports that lack of existing-home inventory is the real problem. “Lack of supply of existing homes is pushing prices again, up 7.5 percent year over year to a median sale price of $202,600 in February, according to the NAR, that reported slower February existing home sales,” she says. “And don’t blame it on the weather, according to NAR chief economist Lawrence Yun.

“He calls this reacceleration of price gains, "unhealthy," per Olick. “Affordability had been helping the housing recovery inch along, but now it is weakening and fast becoming a roadblock to homeownership. Still-rising rents are contributing to the problem, keeping first-time buyers from being able to save for a down payment.”

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, rose 1.2 percent to a seasonally adjusted annual rate of 4.88 million in February from 4.82 million in January. Sales are 4.7 percent higher than a year ago and above year-over-year totals for the fifth consecutive month.

Lawrence Yun, NAR chief economist, says although February sales showed modest improvement, there’s been some stagnation in the market in recent months. “Insufficient supply appears to be hampering prospective buyers in several areas of the country and is hiking prices to near unsuitable levels,” he said. “Stronger price growth is a boon for homeowners looking to build additional equity, but it continues to be an obstacle for current buyers looking to close before rates rise.”

The median existing-home price for all housing types in February was $202,600, which is 7.5 percent above February 2014. This marks the 36th consecutive month of year-over-year price gains and the largest since last February (8.8 percent).

Hence those rising prices and low inventories should spur more new-home construction this year.  But housing construction is barely in recovery mode, and has a long way to go to approach the 800,000 to 1 million unit per year average of past decades.

Harlan Green © 2015

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen