January 20, 2010
You've heard it from me...
...now you can hear it from an economist. Current deficits are not a problem and should be far larger. We're in a recession which results in lower taxes at the same time government is spending much more. In fact, it's criminal that the Democrats have allowed the blue dogs and every Republican to browbeat them into spending less than needed to pull the country out the economic abyss.
And yeah, cutting taxes ain't going to do the trick. Sorry. You're as dumb as Debra Medina if you think that. And no, I don't want to hear your theories on the Constitution.
But back to deficit and debt mania. Digby thinks it's all about hurting social security which is pretty accurate considering that it's all coming from the Petey Peterson Foundation which we talked about almost a year ago. Let me save you all a lot of worry and prep you for discussions you may have some of the, shall we say, ill-informed members of your family : we do not have trillions of future liabilities for social security and medicare/medicaid. The reality is that we have an actuarial hole in the funding because people are living longer and there are fewer workers supporting too many beneficiaries. You fix that by increasing the retirement age (which really should have been done 20 years ago) and then by repealing the tax cuts of the last ten years.
The reality of our economic situation is that it's not as dire or disastrous as Peterson and his folks would think. We're running deficits now because of a number of factors...some out of our control and right now deficits are not our biggest concern. It's the economy, stupid, and if we do what Peterson wants, we'll be in the economic toilet for a long time.
Posted by mcblogger at 12:56 PM | Comments (0) | TrackBack
January 19, 2010
Thank you, Kenneth Feinberg
It's always refreshing when something works. President Obama's pay czar decided that some at AIG didn't need to make more than 500k per year. Some of those people wrote him a letter and said they'd resign and pull far more in severance. Feinberg looked them in the eye and said, leave.
So one of them resigned and as of today, the company has not collapsed. As for whether or not she'll get her full severance pay out, that's still up in air. I really hope not... because she wouldn't have gotten it in the event of a bankruptcy (she would have been a WAY junior creditor).
The reality is that none of these people are too valuable to replace
Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University, said no AIG employee was irreplaceable."We have been duped into thinking that these AIG employees have some kind of secret code that no other employee could discover if they were hired to replace them and therefore they are able to basically hold the company ransom," Hurley said.
Goddamn that do sound familiar, don't it? Sorry, couldn't resist the gratuitous high-five with myself from almost a year ago. As if that wasn't enough, here's the kicker to the whole thing (and I'm not really happy about this); Companies can pay more than the limits he sets but they have to do it in stock which really sucks for existing shareholders who are about to get diluted. As it turns out, the folks at AIG don't like the idea either. Why? Excellent question!
Or there was A.I.G.’s behind-closed-doors argument against Feinberg’s directive to pay its top people in large part with A.I.G. stock. The company’s reasoning? That the stock — trading briskly at the time at around $40 on the New York Stock Exchange — was actually worthless.
Reality is always way better than fiction, don't you agree? Wouldn't you also like to see some of these fuckwits out repairing a sidewalk with a sledge? Let them see what real work feels like and pays.
As I write this post, this song popped into my head...
I guess that means I better, you know, stop before I do something rash.
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November 30, 2009
Two data points, one conclusion...
First off, more people were out shopping on Black Friday this year. However, on average they spent less than last year. Not the end of the world and aggregate sales should be higher... but it paints a grim picture of a still distressed consumer.
Next up, banks are taking cheap money from depositors and the Fed and then investing it in US Treasuries. Why? Well, banks survive off fees and spread income. Spread is the difference between what banks pay depositors (or the Fed) and what they get in terms of a return on the money they lend. Since they are essentially paying 1% or less to depositors, they can make a risk free return by investing in long term Treasuries at 3-4%. It's easy because for the foreseeable future, there is no reason for banks to expect short term rates to spike higher which would destroy the spread.
So what to do? One idea is to jack interest rates to 2% which would keep them low and 'force' the banks to stop with the treasury trade. Of course, what it would really do is drive up longer term rates which would stifle the recovery in housing and equities destroying what little of the wealth effect has been rebuilt. So, in other words, that's a stupid idea.
What we need to do is nationalize one of the big banks and Geithner needs to let the others know, in no uncertain terms, they're next if they don't start lending to consumers and businesses. Only then will they finally act to restore credit to the economy.
Posted by mcblogger at 03:41 PM | Comments (0) | TrackBack
November 10, 2009
Questioning the stimulus...
Chris Thorman forwarded me a piece he did on the effect stimulus funds have had on construction jobs. He did a really fantastic job analyzing the data without skewing in one direction or the other. The verdict is that at this stage of deployment, it's clear the stimulus is having a positive impact, albeit a small one. That will likely change on a go-forward basis as more funds are deployed and projects approved and funded enter more labor intensive phases.
This piece is exactly the sort of thing the MSM and bloggers should be writing about, not the process stories involving the he-said, she-said between R's and D's in DC over 'wasting' money and deficit spending. Politicians don't know what the hell they're talking about, especially on the Republican side.
While we're on the subject, it might be good to actually learn a little something about stimulus in an economic decline. Stimulus, and this is what's so confusing to our rightard friends, is a stop gap measure to arrest decline, stabilize and reignite growth. You can do it every time you have a recession, however there's a big difference between monetary (the Fed lowers rates) and fiscal (the government spends money) stimulus. You can only do the latter under limited circumstances when certain monetary factors are in place and the net effect on inflation is zilch. Otherwise, you extend UI bene's, drop interest rates and wait it out. During this cycle, we hit the trifecta... we have tightening of credit due to an asset bubble and collateral overvaluation, we have tons of capital sitting on the sidelines not being being invested in any sort of recovery and a massive write down of assets that functionally eliminated trillions from the economy and caused massive deflationary pressures. In that type of environment, the Fed can't just lower interest rates (monetary stimulus) and we'd recover. The problem, as CR and Krugman have been pointing out, the Fed would have lower rates below zero to promote growth and you can't do that. Thus, you need the government to spend lots of money. Voila! Fiscal stimulus.
Despite what some have lied about, fiscal stimulus is not always the cure for a recession and no one (outside of the rightard spin machine) is saying that, cue Krugman yet again. It's also why some deficit hawks, myself included, have done an about face and said the government should be spending a lot more and borrowing at least another trillion. The key in this type of situation is to think about things in terms of the house on fire metaphor. When your house is blazing, you don't worry about what that water used to put it out is going to cost or fret about how much of it will soak your furniture. So, yeah, inflation is not so much a concern when facing a deflationary death spiral that leads to a nasty depression.
Which takes us back to Thorman's piece and this, also from Krugman. We knew, months ago, that we needed more stimulus and that it needed to be more spending than tax cuts. Instead, the D's (at the urging of the President who either ignored good advice or was given bad, or some combination of the two) cut a deal with R's and gave us a stimulus package that was too small for the crisis at hand. Thus, the jobs saved number has been low and we're still seeing declines in employment. When the book is finally written on the government's response to the crisis, it's going to note that what was done to shore up the financial services industry was laudable with few exceptions (see here and here). However, the government's fiscal stimulus was woefully inadequate and caused unnecessary suffering for Americans as a result of political posturing. If you want someone to blame, look no further than the teabaggers, Limbaugh, Beck, Hannity and Savage. None of them knew what they were talking about yet they pontificated at length on the evils of 'encroaching government' and drove a political movement made up of people who were, in effect, hurting themselves.
Then turn to blame the chickenass politicians who ignored good advice and went with political expediency rather than take on the forces of stupid in a head on PR war. Let this be a lesson for all voters... do not support candidates who are wishy washy and wrong on issues. Support the ones who'll take a stand and fight, the ones who'd rather convince those who disagree with them than compromise with naysayers in some useless gesture.
We have always had issues that the vast majority of people in this country just don't understand. We've had one party who has turned lying to them into a cottage industry which has helped them get elected and re-elected. We have another party who polls incessantly, finds out what people think, and agrees with them. We need politicians strong and bold enough to stand up and say 'I know that's what y'all think, but it just ain't so. The other sumbitch is lying to you and here's why...'.
And yeah, it really is that simple.
Posted by mcblogger at 12:10 PM | Comments (0) | TrackBack
October 15, 2009
Payroll Tax Holiday?
If we need another round of stimulus, I can't think of a better idea...
The Administration and Congress are informing the public that everything is beginning to look good because of the trillions of dollars that they provided to repair the banks. The problem is that they have it backwards; the economy is best fixed from the bottom up rather than the top down.In June 2008, Warren Mosler proposed three ‘bottom up’ policies to fix the economy. The first proposal is for a full Payroll Tax Holiday for both employees and employers. This stops the government from taking approximately $20 billion a week from people working for a living (a total of $600 per month for someone making $50,000 per year) rather than using that $20 billion to keep some bank limping along. The Government would still continue to credit the social security and the Medicare accounts, so employees and employers will never have to pay back the monies they received. The Payroll Tax Holiday would restore income to American workers (and businesses) to help make their loan payments, rents, pay bills, and sustain their households. The real economy would benefit as Americans both reduce debt and resume consumption. Banks will benefit because there will be fewer delinquencies and foreclosures in non fraudulent mortgages, which will also help limit home price declines. The Payroll Tax Holiday would also reduce corporate cost structures and help contain prices and inflation. The payroll tax is regressive (it is not graduated based on income like the income tax), so the Payroll Tax Holiday will benefit those in the lower income levels the most. This “People Power” solution will be far more effective than the Bush and Obama trickle down solution. And the Government can decide to end the Payroll Tax Holiday should the economy become too strong and inflation become a concern.
While the banks did need to be stabilized, the President and the Congress (mostly because of Republicans and Blue Dogs) focused the stimulus more on marginal tax cuts than on real tax cuts to people who would actually spend money.
Of course, Mosler isn't saying anything about wage growth which is the real, far larger problem. Until we fix that, we're going to continue to concentrate wealth at the top and we'll be continuously vulnerable to another economic meltdown.
Posted by mcblogger at 11:18 AM | Comments (0) | TrackBack
October 09, 2009
Once more, Bruce Bartlett
Why Bartlett continues to call himself a Republican is a mystery, especially when he says things like this...
His conservatism starts with the idea that high taxes are no longer the problem, even if complaining about them still makes for good politics. This year, federal taxes are on pace to equal just 15 percent of gross domestic product. It is the lowest share since 1950.As the economy recovers, taxes will naturally return to about 18 percent of G.D.P., and Mr. Obama’s proposed rate increase on the affluent would take the level closer to 20 percent. But some basic arithmetic — the Medicare budget, projected to soar in coming decades — suggests taxes need to rise further, and history suggests that’s O.K.
For one thing, past tax increases have not choked off economic growth. The 1980s boom didn’t immediately follow the 1981 Reagan tax cut; it followed his 1982 tax increase to reduce the deficit. The 1990s boom followed the 1993 Clinton tax increase. Tax rates matter, but they’re nowhere near the main force affecting growth.
And taxes are supposed to rise as a country grows richer. This is Wagner’s Law, named for the 19th-century economist Adolf Wagner, who coined it. As societies become more affluent, people demand more services that governments tend to provide, like health care, education and a strong military. A century ago, federal taxes equaled just a few percent of G.D.P. The country wasn’t better off than it is today.
Yes, that's right kiddos! A conservative who actually understands the Laffer Curve.
Posted by mcblogger at 09:15 AM | Comments (0) | TrackBack
September 09, 2009
I'm gonna keep pounding on this...
...until y'all get how important it is. Yes, that's right... ANOTHER post about income inequality. Quit crying and pull up your big girl panties.
There are two data points here. The first is that income inequality is the highest it's been since the Depression, actually since WW1. It's even higher than 1928. The second is that the top 1% of this country has managed, during the Bush years, to capture TWO THIRDS of the income growth in this country.
What can we glean from this, other than that I think it's important and you should as well? Supply side economic policy doesn't build jobs or a strong economy because of it's irrational focus (in practice) with tax cuts as opposed to fiscal responsibility and tax targeting for desired outcomes. The notion that you can drive expansion of the economy by increasing capacity through preferential tax cuts for the wealthy is, well, WRONG. The rich, rather than invest in new capacity, will invest in existing assets. Or keep the money in cash. The certainly aren't building a new tire plant in Cleveland.
Further, when you combine this information with the doubling of the federal debt and the reality that at some point in the future we'll have to pay higher interest rates due to this debt, you should get pretty pissed about ever believing anyone, Republican or Democrat, who advocates supply side.
In fact, I'd like to punch them in the face.
Posted by mcblogger at 10:27 AM | Comments (1) | TrackBack
September 04, 2009
Income, Taxes and some Wage Growth : What American's Need Now
Let's cut the crap... the way to end income concentration and restore the middle class is taxes, but it's not what you think. Instead of taxing massive corporate salaries and bonuses that are received by individuals, tax the companies giving them. Massively, for any management level salary that exceeds 20x the pay of the lowest paid worker. The second thing that absolutely has to be done is a tax CUT to companies on a scale that increases as the lowest paid worker (no distinction between hourly and salary) gets closer to making more than twice the poverty level. For a family of four.
This incentivizes good behavior, creates real wage growth and has no net negative effect on businesses because they'll get a tax cut just by doing the right thing. The stick there is scrubbing every corporate loophole and making this the only way to reduce tax burden.
I offer this as a solution to income disparity and the lack of strength in employment. If this country is to endure, it's the middle class that must expand. Keep in mind this is coming from someone who makes many multiples of the poverty line. I voted for Obama knowing that my taxes would probably go up either on earned or unearned income.
Some of you will think it's unfair that we tax higher incomes more than lower incomes. Here's the thing... a doctor in Botswanna doesn't make anything close to what a doctor in the US makes. Part of that disparity is that the American doctor was lucky enough to be born in the US. For winning the ovarian lottery, he or she gets the privilege of a prosperous career. This country is the way it is in large part because of those who came before us, who paid their taxes and created an environment where that doctor could prosper. Why shouldn't they help pay to support it for the next generation?
To put it more plainly, someone like myself has a skillset that allows us to make a very comfortable living in the US. In Bangladesh, those skills would be worthless. Being HERE, in this country at this time, affords me the opportunity to live very well. So, no, I don't have a problem supporting the country that enables me to do that.
Neither should CEO's and the other uberwealthy whose only talent was coming out from between the right pair of legs.
Posted by mcblogger at 12:21 PM | Comments (0) | TrackBack
August 31, 2009
Get your Treasuries while you can!
As the economy continues to stabilize overall and even return to growth in some sectors, Treasury's issuance of US debt is going to decline. Sharply.
OK, quit with the laughter, asshat... Here's the thesis:
1) Current deficits are being driven by war obligations (about to be sharply reduced), economic stimulus and infrastructure reconstruction. As the economy stabilizes, stimulus is going to stop as is infrastructure reconstruction (there's a limit to how much we can pump in for infrastructure in one year without causing inflation). The two combined with war obligations will dramatically reduce deficits.
2) Tax receipts will increase because of the economy and slightly higher tax rates. This will close the gap and put us back into surplus.
3) New issuance driven by SS and Medicare long term short falls won't be needed as the government steps up to make actuarial changes to the system to bring long term projections back to par.
As new issuance falls back, there will only be refinancings to look forward to. This may help explain why investors are so eager, despite our allegedly precarious financial position, to buy our debt. It's not just a safe haven, they're looking down the road to severely diminished supply.
Posted by mcblogger at 09:28 AM | Comments (0) | TrackBack
August 13, 2009
Stiglitz on infrastructure
Wednesday afternoon on Bloomberg, Nobel laureate Joseph Stiglitz was interviewed by Carol Massar about the economy and the best thing to do moving forward. While it primarily focused on the banks and the aid to them (Stiglitz wasn't a huge fan of providing the banks with equity without making sure they'd lend money), the discussion veered over to investments in the country as part of the stimulus. He also discussed the 30 years of underinvestment and our need to step it up.
Specifically, he was talking about raising taxes to fund this. We've coasted on the infrastructure (schools, roads, water systems, telecom systems) we built over the 20th century for basically the last 30 years. We've failed to adequately build for a prosperous future and now we have to make up for lost time. Normally, we could borrow and invest but we can't right now because we've been borrowing and spending on tax cuts for years. As it turns out, tax cuts, once again, don't pay for themselves.
So we need taxes, but the good thing is that taxes collected and spent on building things we need helps the economy through employment and increased economic efficiency. In other words, it's not lost down a black hole like a war.
Posted by mcblogger at 02:15 PM | Comments (0) | TrackBack
July 31, 2009
Reversing Reagan...
Yeah, it needs to happen. And we'll all (even the rich) be better off when it does.
The Reagan Revolution didn't help the country, it helped about 7% of this country get very wealthy while income for the other 93% stagnated. If that doesn't reverse, we're headed for a disaster that will make this country weaker than France.
Kuff has more on what's happening on a local level with property taxes in the Houston area. It points out something fundamental... the obsession with ever lower taxes has led our schools, roads and many other basic pieces of infrastructure to deteriorate. As a result, we're now having to cut back on already reduced services. And then people wonder why things are bad.
The fault is just as much with the Republicans as it is with the Democrats and I'm not just talking about the ardent tax cutters. Don't get me wrong, selling the voting public on the free lunch that is a tax cut is cynical and fundamentally traitorous. However, the ones who know this on both sides and say nothing... well, they're even lower.
Posted by mcblogger at 10:26 AM | Comments (0) | TrackBack
July 15, 2009
The Stupid Peter Boockvar
While I like MillerTabak for the most part, I do not like Peter Boockvar. Peter LOVES going on TV to talk about, well, economics and his take on the course we're on. I saw him on Bloomberg this afternoon talking about 'how the economy has to deleverage' which is essentially the same thing he's been saying since before the TARP was put into place.
This afternoon Peter brought up consumer refinancing at lower rates which the Fed and government programs have made possible. Peter doesn't think this does much good because he thinks the debt should be, in a word he's fond of using, extinguished. The mechanism to bring this about remains a mystery as does what Peter expects Americans to do while this delevering is ongoing since it will cause explosive deflation with a concomitant depression (assets decrease in value along with goods and services meaning businesses run constantly in the red and the workforce contracts... basically, the Great Depression on steroids. With an HGH booster).
Here's the thing... whether you are paying off or refinancing debt, you are increasing your disposable income. In this environment, it keeps the consumer basis of the economy from falling off a cliff and increases savings. Savings that, in effect, delevers consumer balance sheets without having to liquidate assets or cause a panic. Employment, while diminished, doesn't implode. Neither do prices for goods and services as everyone is given some breathing room. As banks regain confidence in the performance of their books, and investors in the performance of asset backed securities, credit for expansion becomes available again and asset prices start to increase which in turn takes even more pressure off consumer balance sheets.
The caveat to all this is that income is also dropping which, even with refinancing, puts pressure on the ability of save or spend. However, the rate of decline in consumer spending has decelerated and the savings rate is much higher than the loss in incomes.
What we're going to see next is a pickup in hiring as manufacturers gear up to meet decreased demand (sounds stupid but our demand right now for many items outstrips production. Prices haven't gone up because we have inventories still to sell... that reverses around August). As those workers come back on, they'll start spending again, further driving the economy. In the end, it all comes back to normal over the next two to three years. We would nominally increase GDP to pre-recession levels quickly but we won't this time because of ... the very delevering that Boockvar says is so essential.
I think it's going to be 2011 before we return to 2007 levels of GDP. However, it's going to be a more productive economy with a much stronger balance sheet. But, I'm sure, Boockvar will still find something he doesn't like in it.
Posted by mcblogger at 03:12 PM | Comments (0) | TrackBack
July 14, 2009
It's time to bail out the bailout!
By now I'm sure you've all heard pundits on both sides discussing the bailout. Well, the truth of the matter is we can never know how bad things would have gotten without it. My guess would be, had Bush not acted quickly to save the financial industry (hey, even a broken clock is right twice a day!) and had Obama not acted to pass the first stimulus package, we would be in a deep and dark depression. I would assert that today we'd have 25% unemployment, the financial markets would have ceased to function and we'd have absolute mass hysteria. Instead, we are left with almost 10% unemployment, financial markets that are recovering and yes, still mass hysteria. At this point, the primary problem we face is consumer confidence.
When the first bailout happened, nobody was writing about us being on the edge of a great depression. Nobody realized JUST how close to the edge we really were. So we reacted to avert a major recession. Because things were so bad, instead we GOT a major recession and averted a major depression. Now is the time to help aid our ascent out of this mess and to treat the real problem. Sitting back and doing nothing is negligence at best and absolute meanness at worst (people ARE suffering).
So, how do we do it? Well, we need to spend a bucket of money. On what, you may ask. Well, what's a big problem we are currently facing. Oh, ENERGY. The "cap and trade" bill that passed the House has been watered down so much it is currently USELESS. PLUS, and this is most important, it is a "free market" solution to the problem. However, some problems the state faces are "bigger" than the market can handle. What we need is a NEW solution. The government has the ability, if it so choses, to change the paradigm completely and create unlimited "free" energy. Here's how:
Step one: immediately build wind farms in as many locations as are feasiblle.
Step two: create a tax nullifying the price for businesses and people to install solar panels on their houses.
Step three: contemplate building nuclear facilities in places where wind and solar are not feasible.
Step four: massively upgrade the electric grid to allow for distributed power creation so people can feed into the grid as well as take and, hopefully, the grid can become 100% self sustaining without the use of coal OR natural gas plants.
Step five: GIVE THE ENERGY AWAY. Yes, you heard that right. It's the single biggest business AND consumer "tax cut" EVER. No more electric bill... EVER.
Furthermore, since we have a problem with car emmisions, let's build biofuel "farms" and refineries across this country. Our goal should be to allow algea to COMPLETELY replace oil. Again, GIVE THE STUFF AWAY. Not paying for gas would be the SECOND biggest "tax cut" for businesses and consumers ever.
This plan stimulates the economy now (can you imagine how many jobs would go into all of this building) PLUS gives us a MONUMENTAL comeptitive advantage in the global marketplace in years to come.
Uh oh, what about the boogy man, the national debt. I'll stipulate, it's a PROBLEM. HOWEVER, we will NOT fix the deficit in the short term or debt in the long term by allowing tax revenues to stay as low as they are now by prolonging this recession. If we do this plan, we will ensure in 5-10 years our tax revenues will SKYROCKET as people use this newfound energy independence to increase consumption AND productivity. Plus, combined with nationalized healthcare, we will once again become the single best place to make stuff in the WORLD, thus increasing export revenue. In short, we're taking out a loan today to create a return on investment that pays the loan off PLUS pays off all of the debt we had before. Oh, and it solves for the current Great Recession.
So, congress, DO THIS. DO IT NOW. Don't be wimps! It's time to be BOLD and think BIG. JFK and FDR both did! Why can't you!
Posted by MasterConsultant at 09:49 AM | Comments (1) | TrackBack
July 09, 2009
Fun with unemployment!
The crew over at Three Wise Men have been lamenting the sorry state of employment in the US. The numbers do not look at all good with close to 17% being either unemployed or underemployed. The topline looks bad but underneath things are far worse as the length of time it's taking for the unemployed to find new work is, in many cases, stretching beyond six months.
Which leads to the question, how are we going to dig ourselves out of the hole we're in with reduced industries coming out of this recession?
The answer is not at all simple, but here's a simplistic explanation of what will happen... we'll do it by expanding enterprises already in existence and creating new ones.
Already we're seeing migration of those employed in financial services in New York out of the city and to places like Austin, Kansas City and Dallas where they are staffing up small and medium sized banks. No, the money's not as good but the quality of life is far better. The same thing is playing out in a number of different industries on a very small scale now. Watch as the recovery begins to take hold and it continues to expand.
The reality is that we're going to see a weaker dollar over time. It should be far lower now, but there are issues with the large private and central banks globally that have a lot of their capital tied up in dollar denominated assets. They can't dump dollars without negatively impacting those assets and the capital. So we'll likely be on a long slow slide for a while.
That's bad for imports and good for exports. That, coupled with a weak job market, will bring back manufacturing jobs in the US. And, of course, there is infrastructure reconstruction and the transition to green energy, both of which will require enormous numbers of people.
Over the last thirty years, since the Reagan Revolution, we've seen a decline in manufacturing in this country. That will start to turn and create jobs. There is a chance we could actually see some real wage growth again in this country especially if the tax laws are altered to favor increased payments to labor. This trend could also gain significant strength if China is successful in it's drive to develop a real consumer economy.
Certainly things look bleak now for many. But nothing goes down forever and there is a genuine chance that we'll come through this far stronger than we have been in a long time.
Posted by mcblogger at 08:59 AM | Comments (0) | TrackBack
July 04, 2009
On Krauthammer, Obama and even Bush
Has Obama's Shelf-Life Expired?
These days well-known political commentator and Washington Post op-ed columnist Charles Krauthammer is making the rounds "respectfully" chastising U.S. President Barack Obama and the current administration. Krauthammer is a gifted and intelligent writer and it is apparent that while he respects President Obama's personal and political skills, he questions the President's real focus and objectives. Personally, I think all Americans should question the focus and objectives of each president. However, Americans should find many of Krauthammer's opinions in his recent speech on Obama questionable, if not obtuse.
http://www.wallstreetsurvivor.com/CS/forums/t/30632.aspx
That stated, Krauthammer does make quite a few good points about Obama. In his recent speech and opinion piece "Obama in Bush Clothing" he points out several of Obama's hypocrisies and doing what he refers to as the "Obama three-step", which is to "(a) excoriate the Bush policy, (b) ostentatiously unveil cosmetic changes, (c) adopt the Bush policy."
http://www.washingtonpost.com/wp-dyn/content/article/2009/05/21/AR2009052103680.html
It is true that Obama has performed a "two-step" in front of Americans, by promising to end the war in Iraq and Afghanistan, but instead then increasing military movement in Afghanistan. He also told the public he would close down the prison in Guantanamo Bay, but now is keeping it open. He swore to provide millions of new jobs, but so far has fallen short of his promise.
I am very familiar with Krauthammer's history and writings, and I think the gist of what he is saying is about Obama is incorrect. I can't see how receiving the auto and finance industry bail-out is "a bonus" as Obama continued the Bush policy of providing "bail-outs" to them. Wall Street, the auto industry and special interest unions are NOT going to let Obama & administration manage and operate their sectors. That's just not going to happen.
I also disagree with Krauthammer in that I believe it is a good idea to extend the program of Medicare to all Americans. While Medicare is administrated by the government, it is operated chiefly by private industry who still are making a fortune from it --- not as much as the private sector makes from its private plans, but not too shabby. To be a successful program, some modifications [tweaks] are needed. Paying for it will have to be from taxes, e.g., increasing the Medicare Tax on salaries by employees, have employers pay some of the taxes and provide a Medicare Fund to draw the money as needed. Nobody likes paying taxes; however, the money for health care needs to come from somewhere.
Could Obama lose in the next election? Yes, but it would depend on the results of his current efforts and who the GOP has to run against him. The fact that the current big 3 are Sarah Palin, Mike Huckabee and Mitt Romney does not provide the GOP with a tangible opponent against Obama.
Will a 10-percent unemployment rate kill Obama's chances in 2012? I don't think so because it depends on what he does after that. If unemployment increases even to 12 percent at first, Obama has 3 years to bring down the numbers. By the time he runs for reelection, the unemployment issue will have passed. He is working on providing stimulus packages into the economy, but our government is set up to make changes slowly.
Consequently, the MILLION$ already approved and provided for various industries have not yet actually been dispersed to them, so the economy is getting worse. Once the monies have been received and used by the industries we will see the economy improving, but it still will be a slow improvement. While I don't agree with many of the bail-outs, these were initiated by the Bush administration and Obama has built onto them. I don't see that as "a bonus".
I think a bigger factor in the possible demise of Obama is his stance and management of Iraq, Afghanistan, Pakistan, Iran and North Korea. I think his handling of all those issues can kill his chances of being reelected.
As for Krauthammer, he is a good writer but as all good writers he bends a lot of his so-called facts to underscore his opinion, which may be true or not. Let's not forget that Krauthammer was one the consultants for Bush's inauguration speech.
http://mediamatters.org/research/200501240006
I also disagree with Krauthammer's perspective of how Bush will be remembered for his presidency. He says that Bush kept us safe after 9/11 for 6 1/2 years more than people thought. He also says that Bush will be remembered more for having disabled a hostile Iraq and having that nation turn from a hostile enemy into a world ally. I can see how twisted minds can do that, but in my own opinion, they would be wrong. In many ways our relationship with Iraq and the rest of the world has become more unstable, e.g., those nations I mentioned above with respect to Obama.
http://www.commentarymagazine.com/blogs/index.php/wehner/31541
I know our economy and unemployment are in shaky shape, but I really believe that once the money allocated is directly injected into the economy it will turn around. It has started to stabilize already for the most part. I would like to see more of a focus on creating jobs. I have written to Obama about that. I also believe that in part unemployment and health care are the 2 top issues. Obama knows that as well. I hope he deals with these more quickly, but he also has to deal with a hostile GOP, He is trying to work with GOP party members, but there is a lot of resistance and he needs to do whatever necessary to resolve these issues more quickly --- with or without GOP support.
As for our military focus, we need to get out of the Middle East, but that won't happen. Too many corporations have invested in that area and to withdraw completely will affect their profits and our own economy again. I also don't believe that Middle East nations would sit down together at a table to iron-out their differences, although most, if not all, want the U.S. to leave.
So, while Krauthammer is indeed an intelligent and gifted writer, Americans should question many of his opinions and comments regarding Obama and Bush. As Krauthammer himself often states to others re: Obama, "Don't listen to what he says, watch what he does." Readers have to make up their own minds about Krauthammer in much the same way.
---
Peter Stern of Driftwood, Texas,
Posted by pstern at 04:33 PM | Comments (0) | TrackBack
June 17, 2009
The deficit, debt and a poor understanding of the past
Are you one of the freaks out there worried about the horrible Federal debt and the amount of paper being shoved out into the market? The recent runup in interest rates has been related to a few things...
1) Speculation that the US debt rating will be cut because of (wait for it) a possibility that the US will default (just FYI, there is zero chance that will happen)
2) Speculation that buyers will eventually dry up and no one will be left to purchase the debt.
Notice that both of these issues are based on speculation, not reality. The first issue is just patently ridiculous. The second assumes that there is enough debt issued by other countries for investors to put their money in and that those investors will shun US debt in favor of debt issued by other countries. Which is silly since collectively, there isn't enough fixed income issuance globally right now to soak up all the available cash. Period. Which is why the Treasury auctions have continued to be oversubscribed (more buyers than securities available)... and will continue to be oversubscribed.
Other part of this is that the overall fixed income market, globally, has shrunk pretty dramatically. While the amount of excess capital being generated has slowed due to the global slowdown, it has not disappeared. Which means it's looking for a place to be invested at exactly the same time that there are fewer investments available. That, my friends, leaves Treasury debt in a very strong position. Krugman has more (and a lovely chart) describing the decline and how government borrowing hasn't made up the gap. Which leads me to this piece by Reich about fearmongering regarding the debt...
Odd that it would return right now, when the economy is still mired in the worst depression since the Great one. After all, consumers are still deep in debt and incapable of buying. Unemployment continues to soar. Businesses still are not purchasing or investing, for lack of customers. Exports are still dead, because much of the global economy continues to shrink. So the purchaser of last resort -- the government -- has to create larger deficits if the economy is to get anywhere near full capacity, and start to grow again. ...Even odder that the Debt Scare rears its frightening head just as the President’s stimulus is moving into high gear with more spending on infrastructure. Every expert who has looked closely at the nation’s crumbling infrastructure knows how badly it suffers from decades of deferred maintenance -- bridges collapsing, water pipes bursting, sewers backed up, highways impassable, public transit in disrepair. The stimulus, along with the President’s long-term budget, also focus on the nation’s schools, as well as America’s capacity to reduce emissions of greenhouse gases. These public investments are as important to the nation’s future as are private investments.
Or, to put it plainly, we're in a period in the economic cycle when you are supposed to lard up with debt. Normally, you'd spend accumulated savings at a time like this but we can't do that because of Republicans who spent us into oblivion over the last eight years. All we have left is to borrow and there's more than enough capacity for us to do so. The awesome thing about this is that, unlike Reagan's massive debt accumulation, we're actually spending the money on things that will help the economy grow. Democrats are making some crucial investments in the infrastructure of this country that will make possible dramatic economic expansion which will grow the economy far in excess of our debt/GDP.
But there are some people, we'll call them uninformed, who just don't get it. Take this asshat at the Weekly Standard.
But Obama may have a broader ambition. He wants to be Ronald Reagan in reverse. Running up the debt, creating a host of new budgetary commitments and enlarging the government's role in the economy will take generations to unwind. And the engines of bigger government also require fuel in the form of taxes.Reagan did the opposite. He cut taxes to make government expansion harder. Obama is transposing Reagan. He is growing government to make future tax cuts more difficult.
Wait a second... Obama is running up debt to DO something, Reagan ran up debt and did, well, nothing other than cut taxes which did free up capital since tax rates in the early 80's were pretty far on the right hand side of the Laffer Curve (he also bought some cool military shit which provided a short boost to weapons manufacturing jobs).
Obama, on the other hand, faces tax rates on the far left hand side of the curve and his deficits will actually provide longer term growth. In point of fact, the Democrats CAN raise taxes from here without causing ANY damage to economic growth prospects because rates are so far to the left of the prime spot that the impact is actually positive given that higher taxes means less government debt issuance and capital being returned to debt holders. It also means that speculative money will be pulled out of the economy forcing investors to make smarter long term decisions which always grow the economy MORE than speculation.
The rest of the piece in the Standard is really very silly. You should take a moment to read it if you are in the mood for fact-free opinion thoroughly devoid of any basis in reality. The scariest thing about what conservatives know are the things that just aren't so, to paraphrase Twain.
A few years from now, probably before the 2012 cycle, we'll be out of this mini-depression, the economy will be growing at an aggressive rate and federal surpluses will either be a reality or a reality in the near future. THEN we can worry about paying off the debt. Depending on that election, we may actually get to do that for a while until the country gets fat and happy again... and they decide to elect another compassionate conservative.
Posted by mcblogger at 11:55 AM | Comments (0) | TrackBack
June 12, 2009
Wonder how the recession is impacting families?
Just ask Wal-Mart... apparently, they can tell you everything you need to know.
Food, of course, is high on those lists (discretionary items like clothes and furniture are not). But consumers are cracking their wallets only so far. Many are trading down to private label groceries. At Wal-Mart, sales of refrigerated pizza were up last month compared with a year ago. Lower grades of meat are outselling the higher-grade, pricier cuts. A recession protein hierarchy has emerged, with ground beef trumping steak, and chicken trumping beef. Some consumers are forgoing protein altogether, opting for pasta.“We’re seeing a movement away from protein into carbohydrates,” Mr. Fleming said. “It stretches the dollar a lot further.”
Retailers generally don’t divulge details of their sales by category of goods. But they were willing to discuss trends. One stood out: consumers are discovering there’s no place like home.
“This whole idea of staying home and entertaining at home, we’re seeing that everywhere,” Mr. Fleming said, “from the ‘take and bake’ pizza to the $5 movies.” Ms. Tesija noted that “sales of popcorn poppers and microwave poppers are very strong.”
America, I give you your future look...
Posted by mcblogger at 02:37 PM | Comments (0) | TrackBack
May 17, 2009
In which he drops Phil Gramm in the grease...
Thank you, Prof. Galbraith. While I may disagree with you on the value of reduced documentation loans (which DO make sense in limited situations), this entire piece is largely spot on.
And the Lyceum is retarded for giving Dick Armey a platform to speak. The man is a lunatic and a moron, even more so than the ridiculous Phil Gramm. It's not so much that I mind people who disagree with me as much as I really fucking hate people who are extraordinarily stupid yet speak as though they know what they are talking about.
Posted by mcblogger at 02:24 PM | Comments (0) | TrackBack
May 01, 2009
How much blame does the Fed deserve for the credit collapse?
One of the Fed’s biggest blind spots has been its failure to recognise the problems that huge financial conglomerates would pose for financial stability – including their key role in the current debt overload. The Fed allowed the Glass-Steagall Act to succumb without appreciating the negative consequences of allowing investment and commercial banks to be put together. Within two decades or so, financial conglomerates have come to utterly dominate financial markets and financial behaviour. But monetary policymakers failed to recognise that these behemoths were honeycombed with conflicts of interest that interfered with effective credit allocation.Nor did the Fed recognise the crucial role that the large financial conglomerates have played in changing the public’s perception of liquidity. Traditionally, liquidity was an asset-based concept. But this shifted to the liability side, as liquidity came to be virtually synonymous with easy borrowing. That would not have happened without the marketing efforts of large institutions.
My second major concern about the conduct of monetary policy is the Fed’s prevailing economic libertarianism. At the heart of this economic dogma is the belief that markets know best and that those who compete well will prosper, while those who do not will fail.
How did this affect the Fed’s actions and behaviour? First, it explains to a large extent why the Fed did not strongly oppose the removal of Glass-Steagall restrictions.
Posted by mcblogger at 02:33 PM | Comments (0) | TrackBack
April 27, 2009
How much could we lose on TARP?
BW has a nice little gut-check piece to freak you out a little about potential losses in TARP.
Ethisphere, a research think tank that examines whether companies can benefit from using ethical practices, created a TARP Index in December to track losses taxpayers are taking under the TARP program. Since TARP's inception on Oct. 7, 2008, the government has lost $104.2 billion (as of Apr. 10). The Treasury Dept. did not respond to questions about the losses so far.The index was created out of skepticism about a remark by Senator Judd Gregg (R-N.H.) that TARP would turn out to be profitable for the government. "It rang hollow for us. [Gregg] was taking into account the imputed interest averaging across these investments," says Alex Brigham, Ethisphere's executive director. "You can get paid interest, but if you don't get your principal back, who cares?"
The biggest losses under TARP as of Apr. 10, Ethisphere estimates, are $30 billion for AIG (AIG), $25 billion for Citigroup (C), and $2.4 billion for Wells Fargo (WFC). These loss calculations are based on stock price declines and each company's financial condition, says Stefan Linssen, managing editor of Ethisphere magazine and one of the lead research analysts for the TARP Index. The largest estimated gains under the program are $3.9 billion for Morgan Stanley (MS), $1.0 billion for Goldman Sachs (GS), and $125.2 million for Financial Institutions Inc. (FISI). These gains are based on those companies' higher stock prices, Linssen says.
Now, ultimately, once regulation is restored and a measure of confidence returns, it's likely the government will recover a substantial amount of it's investment in AIG either by spinning it back to investors or selling it off in chunks. But will we get all of it out? Nah. The frictional cost of all this will be $100 bn or more. In the grand scheme of things, it's minor compared to a collapse in the economy. However, it still hurts.
I still have some hope that government will end up making something off all this. However, I'll be satisfied with us just not going through another depression.
Posted by mcblogger at 08:35 AM | Comments (0) | TrackBack
April 25, 2009
Speaking of taxes...
Here are a few things you may have missed...
6. "We have a patriotic duty to stand up against Washington taxes!" Just the opposite. We have a patriotic duty to pay taxes. As multi-billionaire Warrent Buffett put it, "If you stick me down in the middle of Bangladesh or Peru or someplace, you'll find out how much this talent is going to product in the wrong kind of soil. I will be struggling thirty years later." President Teddy Roosevelt made the case in 1906 when he argued in favor of continuing the inheritance tax. "The man of great wealth owes a particular obligation to the state because he derives special advantages from the mere existence of government."An acquaintance from law school, now a partner in one of Washington's biggest and wealthiest law firms, explained to me one day over lunch how he and his partners use tax rules to create offsetting taxable gains and losses, and then allocate the gains to the firm's foreign partners who don't pay taxes in the United States. That way, they keep the losses here and shelter their income abroad. I noticed he had an American flag lapel pin. "You're supporting our troops," I said, referring to his pin. "Yup," he replied, entirely missing my point.
True patriotism isn't cheap. It's about taking on a fair share of the burden of keeping America going.
Matthew Yglesias notes that Tom DeLay is under the strange misapprehension that Texas is rich thanks to its low taxes and lack of regulation.Just one minor issue: you really shouldn’t use median income, which can be distorted to the extent that inequality differs across states. You should instead use income per capita. As it happens, the comparison is even more striking. Texas, with its glorious free market regime and deeply incentive-creating 25 percent rate of health uninsurance, has a per capita income of $37,187; nanny-state New Jersey, with its oppressive taxes and regulation of everything (what it takes to get permission to cut down a dying tree … ), has a per capita income of $49,194.
And that, really, is what should piss you off about the Republicans in Texas. They've made us fall behind NEW JERSEY.
Posted by mcblogger at 12:58 PM | Comments (0) | TrackBack
April 22, 2009
Pity the bankers...
As many of you know (because I've gone to great lengths to beat you over the head with the knowledge), I have little respect for the managerial class and even less for those in that class who run or work at money center banks. From the investment bankers all the way down to the trading floor, these are a group of people who've always been, in my opinion, far overpayed relative to the intrinsic value they bring to the table.
Seriously, you tell me why I should be paying a 22 year old fresh faced BBA 7 figures to trade with my money? It just never made sense to me, especially now that we know those profits were all illusion (or in the case of AIG's Financial Products division, actual insurance fraud).
Of course, there are some who just can't get used to the new world. Take this wife of a Wall St. CEO whose company received TARP funds. They've seen their nestegg disappear as most of it was in company stock. But, even more shocking, there is no remorse for the shareholders who trusted her husband to take care of their capital. And who are now broke, without the salary her husband still enjoys.
Or these scheming little bitches in this article about the dry-up of bonuses and increased taxation. Here's a jewel from it...
“No offense to Middle America, but if someone went to Columbia or Wharton, [even if] their company is a fumbling, mismanaged bank, why should they all of a sudden be paid the same as the guy down the block who delivers restaurant supplies for Sysco out of a huge, shiny truck?” e-mails an irate Citigroup executive to a colleague.
None taken, DBag. I would like to point out though that the guy who delivers shit for Sysco actually makes money for his company. All you've done is lose money. Without the government, your hard work would have resulted in Citi's bankruptcy. Unarguably, the delivery guy provides far more to GDP than you.
Oh, and on behalf of Citi shareholders around the world, you can go fuck yourself. Thanks for losing their goddamn money, asshole.
Their anger takes many forms: There is rage at Obama for pushing to raise taxes (“The government wants me to be a slave!” says one hedge-fund analyst); rage at the masses who don’t understand that Wall Street’s high salaries fund New York’s budget (“We’re fucked,” says a former Lehman equities analyst, referring to the city); rage at the people who don’t “get” that Wall Street enables much of the rest of the economy to function (“JPMorgan and all these guys should go on strike—see what happens to the country without Wall Street,” says another hedge-funder).
To the hedge fund analyst, speaking in hyperbole makes you look stupid. Now, run along before I ram a copy of Atlas Shrugged up your ass. This country enabled you to succeed and make money. Just like the rest of us, you'll pay your taxes to support it. As for the other hedge-funder, absent the government there wouldn't be a JP Morgan. As for what would happen to the country without Wall Street, as if you're all heading to a gulch somewhere with perpetual motion machines, don't flatter yourselves.
With the advent of real time information services, talent no longer needs to be tied to lower and midtown Manhattan. Nor do we need the folks in Greenwich, CT. In Dallas, LA, Houston, Austin, SF, Portland, Seattle and Chicago there are tons of talented people who are ready to step up to the plate to provide financing to the people of this country. And they work cheaper than you do anyway. From community banks and credit unions to regional and superregional investment houses, we can replace all the supposed talent that got us into this mess. Not to mention, the B-schools nationally are churning out ever higher numbers of BBA's and MBA's.
No, really, you won't be missed. Especially by shareholders who will be infinitely better off without you.
Posted by mcblogger at 01:03 PM | Comments (0) | TrackBack
April 18, 2009
FRB-SF President Yellen - Lehman was a mistake
While much has been said about the stupidity of letting Lehman Bros go into BK, Paulson and Geithner have never actually admitted that LEH's BK actually dramatically worsened very crisis they were trying to end.
Until Janet Yellen finally said something. And no, there's isn't anyone still buying the stupid "we didn't have the legal authority" bullshit. Barclays was on the hook until the government refused to give them the same guarantees they gave JPMorgan Chase when it purchased Bear Stearns.
Posted by mcblogger at 12:15 PM | Comments (0) | TrackBack
April 02, 2009
The bailout(s)
CNN has a nice little table of the different facilities, guarantees and other elements of the overall effort to bailout the economy. And, while the overall number is large, we've only used about 25% of what's been set aside.
Looking at this, the only thing that's obvious is that the government has allocated close to 75% of GDP to fix this. Given that, it would seem pretty stupid to bet against it. Because, simply put, even if they fuck up on certain things they are putting enough money in that eventually, even blindly, it will stabilize the economy.
That's not to say I think the stock market is all good. What we're seeing now is a bear market rally and yeah, I'm selling a little into it. I want to see a retest at or near the lows. I want to know we're done.
Posted by mcblogger at 12:35 PM | Comments (0) | TrackBack
April 01, 2009
Enjoy your extra $33 or $66
This month, the oh-so-good withholding tax miniholiday takes effect. I still don't know what kind of effect an extra $33-66 is supposed to have, but I sure hope it's not what we're hanging our hats for recovery on.
I think I will use mine to buy a bottle of the scotch I like. I will, of course, have to put a little of my own money with it.
Posted by mcblogger at 03:48 PM | Comments (0) | TrackBack
Securitization isn't the problem
Krugman wrote something about securitization being the big problem. Ritholtz wrote a nice piece taking him to task.
Do not forget that Securitization had been around for decades without major problems. And over the entire period of time in question, credit card loans, auto financing, and student loans were securitized without incident (other than expected cyclical recessionary downturns).The same can be said about derivatives. Handled properly, they are tools that serve a function. Let loose with no regulation/supervision/transparency/reserve requirements, you have the making of a disaster . . .
We can even say the same about Mortgages. Would you draw the conclusion that because the lending industry made so many bad loans, that mortgages were the problem, and therefore we should do away with them? You have to look at the context in which the loans took place.
Securitization is no different.
Under normal circumstances, it works fine. And if we tweak a bit around the edges — make sure that securitizers cannot shed liability as easily as they have, and adjust incentive compensation away from the current hit & run style of faux profits but real bonuses, Securitization will work just fine.
Like him, I frequently agree with Dr. Krugman, especially during Our Most Recent Financial Crises, brought to you by the folks who told you government wasn't the solution, it was the problem. Much like those folks, though, Paul is blaming the tools and not the users.
Posted by mcblogger at 09:50 AM | Comments (0) | TrackBack
March 31, 2009
Oh yes! Let's see what systemic risk looks like!
This little column in Time makes a retarded case for letting AIG go down the tubes. Considering how WELL that went with Lehman, I say let's just call this fucker an idiot and move on down the road.
Posted by mcblogger at 02:13 PM | Comments (0) | TrackBack
March 30, 2009
I LOVE Paul Volcker
As for China’s criticism of the U.S., Volcker was unsympathetic. “I think the Chinese are a little disingenuous to say, ‘Now isn’t it so bad that we hold all these dollars.’ They hold all these dollars because they chose to buy the dollars, and they didn’t want to sell the dollars because they didn’t want to appreciate their currency. It was a very simple calculation on their part, so they shouldn’t come around blaming it all on us.”
Click the link for more.
Posted by mcblogger at 01:31 PM | Comments (0) | TrackBack
Frontline does the meltdown
Honestly, it's a good piece and you should take about an hour to watch it.
As part of the piece, this interview stuck out for just how mind numbingly clueless almost everyone was regarding the collapse of Lehman. It was the decision by Paulson to let Lehman collapse that almost brought down Goldman Sachs, Merrill and Morgan Stanley. It directly caused the problems at AIG.
Here's an excellent article on the collapse of Bear Stearns. While Bear had problems they, like Lehman 6 months later, were undone in much the same manner... a crisis of confidence. It was, simply, a run on the bank but instead of depositors storming the lobby, removing the deposits that commercial banks depend on, it was the creditors that floated them the billions they needed daily to operate.
Once it was clear that the government actually would let the investment banks fail, all the creditors of every other investment bank (and I'm including some of the larger integrated commercial banks since they were using the repo markets for cheap short term funding) ran for the door. That caused the system to seize up completely as no one wanted to accept any bank as a counterparty.
So, brass tacks... how does this affect you. If you use credit cards, buy cars, buy a home...if you buy anything on credit, you're part of the structured finance market. When that froze up, it effectively removed 50% of the capital the US needs on a daily basis and the reverberations were global.
So, yeah, this stuff effects even you.
Posted by mcblogger at 09:05 AM | Comments (0) | TrackBack
March 25, 2009
Really, this is it?
Yeah, I watched some of the hearings yesterday. I wasn't terribly impressed and didn't even find it very funny, except for Michelle Bachmann quizzing Geithner and Bernanke on the constitutionality of their actions (I guess she was absent the day they discussed the commerce clause in law school). But other than that, I'm pretty much at a loss.
First off, this is Paulson's original TARP plan, but doing now doesn't make as much sense to me. For one thing, the Fed has the ability through already created mechanisms to help industry digest these assets. For another, the gap between what the market is offering on these assets and what the banks need them to be worth to maintain solvency is VERY large. Given that, why wouldn't the banks temporarily offload some of their assets to the Fed in intermediate term repo's and then use the money to grow fully marketable assets, shaving off a few points per transaction until the holes in the balance sheets can be filled?
The funniest thing about this is the defense of it and how it's fair. Austan Goolsbee, who is about half an economist at best, takes on Krugman regarding his criticism of the plan. To say it's an epic fail for Goolsbee you have to ignore his takedown by Tanta a few years ago. In the scheme of things, this is really just another foot-in-mouth fuckup for him, kinda like the one Larry Summers had, also with Krugman.
What positives are out there seem to be of the 'well, it's what we've got' variety. I think that's bullshit since, in the end, it probably will work. And yes, some already rich folks will get a lot richer. What I'm curious about is what happens to the institutions that are forced to sell some of these assets below their carry value? When those big holes in their balance sheets become realized losses, what happens then? Do we buy still more stock in those companies to shore them up or do we go ahead and, you know, nationalize and wipe out the equity holders?
I said earlier that this was basically Paulson's original idea for TARP. What bound him up was the inability to value the assets which are currently worth far more than the market will pay because of irrational fear and some quite legitimate uncertainty. Pay too much and it's crony capitalism and a waste of taxpayer funds, too little and you leave the problem unfixed. Geithner's plan gets around these issues neatly by subsidizing (and that's what this IS, boys and girls) private investors to perform price discovery (with government money) and to create a market where the assets can trade (made liquid with government money).
It also busts, like a pinata hit with a stick, the idea that the market has money, it's just nervous. The fact is these investors are somewhat cautiously in the market now, picking up things on the cheap. They're willing to pay more than they are now IF they get cheap government money that doesn't need to be repaid if they default.
Which leads me to believe this plan is bullshit, the price discovery will be in a vacuum and in the end you'll end up nationalizing the banks anyway. What we need is a solid valuation model and then government can buy the assets to hold. My way saves taxpayers money... Geithner's way makes a lot of rich people, richer, with our money and we risk losing a lot.
Oh, both plans will work. My way just socializes the risk and the reward. Geithner's socializes the risk completely and only partially socializes the reward.
Posted by mcblogger at 01:16 PM | Comments (0) | TrackBack
Galbraith tags Geithner's plan
Honestly, it's not a bad piece for Galbraith. A little heavy, but he's got a good point... the best way to get valuations on the so-called toxic assets is to break them apart and look at the performance of the underlying credits. Either that or use a discounted cashflow model based on the income in aggregate which would be a lot faster but not nearly as thorough.
Still, either way works better than the Fed's loaning money (non-recourse) to hedgies so they can pay whatever they want.
Posted by mcblogger at 09:03 AM | Comments (0) | TrackBack
March 23, 2009
No, Matt Taibbi... you DON'T know what you're talking about
Over at Rolling Stone, Matt Taibbi has a really frustrating piece of journalism about the credit crisis, underlying causes and what's happening now to fix it. It's the last part where Matt goes off the goddamn rails and proves just how hard this stuff is to understand.
Grayson pressed on, demanding to know on what terms the Fed was lending the money. Presumably it was buying assets and making loans, but no one knew how it was pricing those assets — in other words, no one knew what kind of deal it was striking on behalf of taxpayers. So when Grayson asked if the purchased assets were "marked to market" — a methodology that assigns a concrete value to assets, based on the market rate on the day they are traded — Kohn answered, mysteriously, "The ones that have market values are marked to market." The implication was that the Fed was purchasing derivatives like credit swaps or other instruments that were basically impossible to value objectively — paying real money for God knows what."Well, how much of them don't have market values?" asked Grayson. "How much of them are worthless?"
"None are worthless," Kohn snapped.
"Then why don't you mark them to market?" Grayson demanded.
"Well," Kohn sighed, "we are marking the ones to market that have market values."
In essence, the Fed was telling Congress to lay off and let the experts handle things. "It's like buying a car in a used-car lot without opening the hood, and saying, 'I think it's fine,'" says Dan Fuss, an analyst with the investment firm Loomis Sayles. "The salesman says, 'Don't worry about it. Trust me.' It'll probably get us out of the lot, but how much farther? None of us knows."
Here's the thing... just because something doesn't have a mtm price doesn't mean it's worthless (and Rep. Grayson's a fucktard). There's discounted cashflow and other valuation methods, for example, so despite what the loser from Loomis Sayles (where the not too bright go to die) says, it's not about trust. It's about hard data and the Fed EXISTS for just this type of market breakdown. Meanwhile, to Matt, it looks like the goddamn crooks are out to steal from us again, which was, not coincidentally, exactly what he was trying to pound into the reader for graff after tedious graff.
Don't get me wrong, he nailed the stuff about deregulation and the fact that the largest banks are growing far too large at the expense of smaller competitors who don't enjoy the use of taxpayer capital. And the portrait of AIG's Cassano was brilliant.
But the breathless, they're-stealing-everything tone was far better suited to Rush Limbaugh... or Michelle Malkin.
Posted by mcblogger at 09:42 AM | Comments (0) | TrackBack
March 15, 2009
The huevos on some people
AIG last week said it was paying out some phat bonuses to the very people who put AIG (and taxpayers) in the position it's in today. Treasury said not so much. AIG CEO Liddy said he was doing it anyway...
A.I.G., nearly 80 percent of which is now owned by the government, defended its bonuses, arguing that they were promised last year before the crisis and cannot be legally canceled. In a letter to Mr. Geithner, Edward M. Liddy, the government-appointed chairman of A.I.G., said at least some bonuses were needed to keep the most skilled executives.“We cannot attract and retain the best and the brightest talent to lead and staff the A.I.G. businesses — which are now being operated principally on behalf of American taxpayers — if employees believe their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury,” he wrote Mr. Geithner on Saturday.
Still, Mr. Liddy seemed stung by his talk with Mr. Geithner, calling their conversation last Wednesday “a difficult one for me” and noting that he receives no bonus himself. “Needless to say, in the current circumstances,” Mr. Liddy wrote, “I do not like these arrangements and find it distasteful and difficult to recommend to you that we must proceed with them.”
First off, while AIG is nominally an ongoing concern, it would be bankrupt were it not for taxpayers. That alone would have wiped out the bonuses because a BK judge would never have approved them. ESPECIALLY since 'the best and brightest' were the very folks who put the company in the position it's in now. And what did the best and brightest do? They wrote insurance policies on financial assets (CDS) at bargain basement prices and without adequate reserves against losses. That's it, boys and girls... that's what the best and brightest were up to.
These bonuses were based on illusory profits on fundamentally unprofitable business.
It's time to finish the wipeout of AIG and for the government to begin liquidating it totally. It's clear that current management is willing to be 'legally bound' to a contract that no one in their right mind would pay out. The company, on the whole, simply needs to be scrubbed out and the taxpayers need to be made whole. Enough with the half measures and bullshit.
Seriously, there are 100,000 people in the world who can do the unwind on the derivatives that these fucks are being paid to do. As an added bonus (no pun intended), most of them are now unemployed and would be willing to work for far less.
Posted by mcblogger at 11:46 AM | Comments (0) | TrackBack
March 13, 2009
Let's buy a hooker for Paul Volcker!
This guy is Paul Volcker. He's well known in business circles as one of the few things that President Carter did right. He's also the guy who ended up making Reagan look good. President Obama has now tapped him to head up a team on fixing the economy. Needless to say, he's hella busy with a ton of stressful business.
Wouldn't it be nice if WE could do something for him? Like get him a REALLY good hooker?
Seriously, is it just me or are you also thinking that would be a hell of a lot nicer than a thank you card?
Posted by mcblogger at 02:17 PM | Comments (0) | TrackBack
Things that act like Hedge Funds (but shouldn't)
I've been trying to really get a grip on a few things. First, there was this article in Vanity Fair about the disastrous decision by Iceland to turn itself into a hedge fund in 2003.
Just after October 6, 2008, when Iceland effectively went bust, I spoke to a man at the International Monetary Fund who had been flown in to Reykjavík to determine if money might responsibly be lent to such a spectacularly bankrupt nation. He’d never been to Iceland, knew nothing about the place, and said he needed a map to find it. He has spent his life dealing with famously distressed countries, usually in Africa, perpetually in one kind of financial trouble or another. Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’ 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history. “You have to understand,” he told me, “Iceland is no longer a country. It is a hedge fund.”
Now, what on earth could have caused a nation of rational (Bjork aside), well educated people to have made such a bad decision? Easy. Mr. Deregulation himself, Milton Friedman, whose teachings were very popular... especially with poets who found themselves running a country.
Then came Bernanke's admission the AIG was functionally a hedge fund attached to an insurance company. With even dumber management insuring far too much risk for far too little money.
In Iceland's case, as in America, the culprit was a belief that greed would override stupid decision making, in effect, faith in people to make rational, well informed decisions. In Iceland, the entire economy was changed overnight from safe and steady to 'how much risk can I lard on?'. In the case of the US, over the last thirty years we have dismantled the regulatory framework it took a generation to put into place after the last major financial calamity, the Great Depression.
We did this to ourselves and now it's time we suck it up and realize that the market CAN'T self regulate. Actually, most of us already knew that but we're throwing our lot in with you folks who are just now coming to the conclusion that Ayn Rand and Milton Friedman really were full of shit.
Finally, I'm forced to agree with Stevie Forbes. Of all goddamn people. Which makes me want to vomit blood.
Posted by mcblogger at 12:24 PM | Comments (0) | TrackBack
March 04, 2009
Mortgage Writedowns... I'm THRILLED
... Jane is pissed as hell, mostly because she doesn't get the long term impact. Nor does she understand THAT THE HOMEOWNERS BEAR JUST AS MUCH RESPONSIBILITY AS THE BANKS.
I'm TIRED of the 'the-banks-screwed-everyone, now-let's-screw-them' bullshit. Not only because it's based on a patently false assumption (that banks engineered loans for foreclosure), but also the fact that it fails to acknowledge the long term impact to the financial infrastructure of the US that will be caused by the judiciary being given arbitrary authority to write down debt on hard assets.
People need help. I have no problem helping them. But fucking over banks in the process fucks us all, more slowly and over a longer period of time.
Posted by mcblogger at 10:49 PM | Comments (0) | TrackBack
February 27, 2009
THIS is why tax rebates are stupid
Posted by mcblogger at 01:34 PM | Comments (0) | TrackBack
If Congressmen don't understand...
... is it little wonder that people don't understand. From Rep. Culberson's Twitter feed...
-- A surplus is a TAX SURPLUS and should be refunded to those who paid it
No, not really, Congressman. A tax is the price we pay to live in the greatest nation on Earth; Our contribution to maintaining the government that we all depend on. A surplus is what we'll be using to pay off the massive debt we accumulated while Culberson and his cronies were running things. Possibly, we'll be able to make some investments that will benefit the entire country. However, we gotta pay off our past excesses.
This is, sadly, all moot since we're far from running surpluses.
It would be nice to report Rep. Culberson was the only asshat in the bunch. Unfortunately, he's not... I give you Senator Liarson.
Uhm... Senator, if you're going to talk about tax policy and revenue it would be AWESOME if you knew something about it. What you and every other Republican doucher is referring to is the Laffer Curve and we're on the wrong side of it for tax cuts to equal revenue. Or, just go on and read this.
This is a time when there is a definitive right answer and a definitive wrong answer. And it appears that Republicans are going to continue to piss into the wind.
Senator Hutchison... you really need to rethink your desire to run for Governor next year. The someone like Sen. Van De Putte will beat your ass.
Posted by mcblogger at 10:44 AM | Comments (0) | TrackBack
February 26, 2009
This is why you don't cram down loans...
As it turns out, the investors who buy the securities that are backed by the loans don't like their money being crammed down. Who knew?
Hideo Shimomura, chief fund investor in Tokyo for Mitsubishi UFJ Asset Management Co., told Bloomberg Friday that “there is still a concern that there is no guarantee” of agency debt and securities, even after the Obama administration has said it will sink as much as $400 billion in increased funding to backstop the operations of the GSEs, as part of its Homeowner Affordability and Stability Plan, or HASP.“Looking at the risk, [GSE bonds are] not so attractive,” he told the news service. “We need a guarantee before we’ll buy.”
Simplistically, this is all about whether or not the government will backstop Fannie and Freddie. But it's more complicated than that and it falls right down to whether or not we'll honor the money these people invested. Foreclosure is one thing; cramming down is a quite another.
Posted by mcblogger at 01:28 PM | Comments (0) | TrackBack
Texas Leaders Send a Clear Signal
But will Texans get the message?
More than ever it is apparent that Gov. Rick Perry, Lt. Gov. David Dewhurst, Attorney General Greg Abbott and many legislators "don't give a hill of beans" about hardworking and hardly-working Texans.
For the past decade Texans have watched helplessly as their daily living costs have sky-rocketed to oblivion:
o Property taxes
o Home insurance
o Higher education tuition
o Electricity
o Loss of jobs
o Toll roads
o Fees and penalties
o Utilities
o Gas
o Food
o Other goods and services.
Texas leadership has done little to lessen the financial burden on most residents. In fact, all too often they have been the cause of higher costs.
Now that the federal government has provided additional "stimulus" money to provide some relief for most Americans, Texas leaders are refusing to accept the money.
Our leaders have NOT been paying attention to the needs of most Texans. They say the first thing that is needed to get a stubborn mule moving is to get its attention by hitting it with a 2X4. Would it work on Texas leaders?
Posted by pstern at 08:21 AM | Comments (0) | TrackBack
February 25, 2009
Trade Surplus/Defict : The Animation
This a really cool graphical representation of US trade deficits and surpluses with some of our trading partners. And yeah, it'll surprise you.
Posted by mcblogger at 10:19 AM | Comments (0) | TrackBack
February 24, 2009
Then there's nationalization and information flow
The threat of nationalization is what's weighing on the market. What's making me continue to buy? This
"We witnessed the collapse of the financial system," Soros said at a Columbia University dinner. "It was placed on life support, and it's still on life support. There's no sign that we are anywhere near a bottom."His comments echoed those made earlier at the same conference by Paul Volcker, a former Federal Reserve chairman who is now a top adviser to President Barack Obama.
Volcker said industrial production around the world was declining even more rapidly than in the United States, which is itself under severe strain.
"I don't remember any time, maybe even in the Great Depression, when things went down quite so fast, quite so uniformly around the world," Volcker said.
I'm kinda surprised Volcker and Soros, two very brilliant minds, don't see what's happening. It's information flow. We don't live in a world where news takes weeks to travel. We live in a world where one bit of data can drive down the US markets in 10 minutes and all the other dominoes fall as well. And the one thing no one is talking about is that, in this type of environment, what drives you down can just as quickly drive you higher.
What's funny to me are the folks out there who think this is the end of capitalism. It's not. It's the end of this particular experiment with laissez faire. Relatively soon people are going to get that. Until then, I'm happy to buy the securities you're dumb enough to sell at a loss.
Today, Bloomberg had a chart up of the Dow showing volume. It's increasing as the market goes down.
Posted by mcblogger at 09:43 AM | Comments (0) | TrackBack
February 19, 2009
Rep. Cantor and feathering your own nest
Hypocrisy is a motherfucking pain. As it turns out, Rep. Eric Cantor's vote for TARP has ended up supporting the very bank his wife works for. I say work, but the reality is no one is really sure what she does
Diana Cantor runs the Virginia branch of Emigrant's wealth-management division, called Virginia Private Bank & Trust, which targets an ultra-rich clientele. ... The Virginia Private Bank & Trust, a satellite opened this spring, is still getting off the ground. On Thursday, when ProPublica visited its small Richmond office in an office park not far from the Cantors' home, a sheet of white paper taped to the door served as its sign. One of the two employees there said the office had yet to serve a client since it opened last spring. She referred further queries to the bank's main office.
Of course, after his wife's bank got their bailout, Cantor voted against TARP 2. And the Stimulus package for the rest of the county. It's good to know that his integrity is literally as deep as a shallow puddle.
(Love to Digby and FDL for getting this out)
Posted by mcblogger at 12:09 AM | Comments (0) | TrackBack
February 18, 2009
Class Flight
After busing began to desegregate public schools, the middle class left cities for the suburbs. Now it looks like the cities are forcing out the rest of the middle class that moved back or remained and replacing them... with the rich. The trend is most pronounced in NYC.
Posted by mcblogger at 01:13 PM | Comments (0) | TrackBack
February 16, 2009
Munger Speaks
Charlie Munger, the Vice-Chair of Berkshire Hathaway and a Republican, wrote a brilliant op-ed piece in the WaPo covering the need for strict rules and enforcement to govern the financial system...
Our situation is dire. Moderate booms and busts are inevitable in free-market capitalism. But a boom-bust cycle as gross as the one that caused our present misery is dangerous, and recurrences should be prevented. The country is understandably depressed -- mired in issues involving fiscal stimulus, which is needed, and improvements in bank strength. A key question: Should we opt for even more pain now to gain a better future? For instance, should we create new controls to stamp out much sin and folly and thus dampen future booms? The answer is yes.Sensible reform cannot avoid causing significant pain, which is worth enduring to gain extra safety and more exemplary conduct. And only when there is strong public revulsion, such as exists today, can legislators minimize the influence of powerful special interests enough to bring about needed revisions in law.
My FAVORITE part, especially since it comes from a Republican...
Moreover, rationality in the current situation requires even more stretch in economic thinking. Public deliberations should include not only private morality and accounting issues but also issues of public morality, particularly with regard to taxation. The United States has long run large, concurrent trade and fiscal deficits while, to its own great advantage, issuing the main reserve currency of a deeply troubled and deeply interdependent world. That world now faces new risks from an expanding group of nations possessing nuclear weapons. And so the United States may now have a duty similar to the one that, in the danger that followed World War II, caused the Marshall Plan to be approved in a bipartisan consensus and rebuild a devastated Europe.The consensus was grounded in Secretary of State George Marshall's concept of moral duty, supplemented by prudential considerations. The modern form of this duty would demand at least some increase in conventional taxes or the imposition of some new consumption taxes. In so doing, the needed and cheering economic message, "We will do what it takes," would get a corollary: "and without unacceptably devaluing our money." Surely the more complex message is more responsible, considering that, first, our practices of running twin deficits depend on drawing from reserves of trust that are not infinite and, second, the message of the corollary would not be widely believed unless it was accompanied by some new taxes.
Moreover, increasing taxes in some instances might easily gain bipartisan approval. Surely both political parties can now join in taxing the "carry" part of the compensation of hedge fund managers as if it was more constructively earned in, say, cab driving.
The entire piece is well reasoned and well written which makes is very surprising that I would find it so compelling. Of course, I'm also really good at listening to people far more intelligent, educated and successful than myself.
Posted by mcblogger at 12:57 PM | Comments (0) | TrackBack
February 13, 2009
Junio John Speaks
The stimulus bill is not going to work, mostly because of the tax cuts/rebates, which Junior John now says don't work. Which is kinda funny since part of the reason he's voting against it is because it's not 100% tax cuts.
He also conveniently ignores the fact that the overweight toward tax cuts in the bill are the result of compromises to Republicans. Then he mentions a CBO study that says this bill will eventually crowd out private investment. Which is hilarious since this bill isn't even a tenth of the size of the US economy.
Finally, Sen. Cornyn flat out lies about the efficacy of tax cuts vs. spending saying that spending is about half as effective.
It's never been more clear than now that we need a real Democrat in the Senate representing Texas. I don't know that either Sharp or White are that guy. I have no idea what they think about fiscal stimulus in a deflationary environment. I can tell you this, listening to Cornyn makes it clear that we can not afford to elect another ideologue more committed to politics than actually governing.
Which means, Sharp and White camps, you better get some goddamn good people to tell you what to say or I'm going to rain shit all over you both.
Posted by mcblogger at 02:59 PM | Comments (0) | TrackBack
Sen. Corynyn on Bloomberg
In about 15 minutes, Junior John will be appearing on Bloomberg TV to discuss his vote against the stimulus and the lies that make up the bulk of his reasoning to oppose it.
Speaking for Texans, we'd like to apologize for not getting rid of this cocksucker last year. Please just ignore him and realize that we find him terribly embarrassing.
Posted by mcblogger at 02:35 PM | Comments (0) | TrackBack
There's dumb and then there's the AEI
The AEI has a critique up regarding the report from the G30 on financial services regulation. Here's a brief excerpt
A good summary is that bank-like regulation would be spread beyond the banking industry. But there’s a problem: banks have been tightly regulated for years, both in the United States and Europe, and of all the institutions hurt by the financial crisis, they are in the most trouble.
It gets worse from there. I suppose it's worthless to mention to the author that much of this regulation was unenforced (which the report didn't fully address, but that's another problem) and that the current crisis is almost entirely attributable to the push for (and subsequent) deregulation of financial services. That's what allowed firms like Bear Stearns to lever up 30 to 1. That's what allowed Citi, one of the largest depository institutions in the country, to dump hundreds of billions into SIV's and leave themselves, ultimately, on the hook for those SIVs, not to mention the leverage in them.
And the solution is less regulation? According the author who then goes on in his little critique to indicate that the report's recommendations were written entirely without analysis and the validity of them rests only on the credentials of the authors.
Let's see... while the critique author was a special counsel to President Reagan, one of the guys who wrote the damn report was the chairman of a little organization called the Federal Reserve. He also happened to the guy who actually broke the stagflation of the 1970's. Credibility aside, there's also the issue of solvency (which the banks, thanks again to deregulation, would lack were it not for TARP) not to mention the crisis of confidence thanks to people like Madoff(who, it should be noted, wasn't regulated) and the collapse of many of the IB's on Wall Street. It's amazing to me that these morons really don't understand that part of what makes America work is the confidence people have in banks due to... wait for it... REGULATION.
Peter Wallison and the other pathetic losers at the AEI would do better to keep their mouths shut given that they're all political hacks with little talent and even less skill. Better to be thought an idiot, don't you know...
Posted by mcblogger at 01:20 PM | Comments (0) | TrackBack
The Stimulus Plan as a picture
(WaPo)
And there it is, the inadequate fiscal stimulus, the best that could be obtained from the ridiculous centrists who predicated their support for the plan not on economic reality but on their own ideologies and political strategies. Which, thanks to their hard work, won't help as much as the plan the House passed. No, the centrist supported plan will create several hundred thousand fewer jobs.
We knew all this a while back, but they still carried forward with stupid tax cuts. Sen. Cornyn even sent out a whiny email LYING about how many jobs the Republican plan would have created and about the ultimate cost of stimulus. Junior John, far smarter and better educated people than yourself have conclusively shown that you are, in fact, lying. As if that wasn't enough, we also have empirical evidence from our last tax cut rounds that they don't grow the economy.
Meanwhile, the bad economy finally starts to hit Texans. And Governor Perry, it should be noted, has publicly stated that just might return stimulus money. And our two Senators voted against it. Makes you long for the days when Republicans worked with Democrats for the good of the country instead of playing politics with people's jobs and the greater economy.
Posted by mcblogger at 10:46 AM | Comments (0) | TrackBack
February 12, 2009
Spot on, Robert Reich
Playing politics with economic stimulus is like arguing over what started the fire while the house is burning.
Yet at this very moment, Senate Republicans are seeking to strip the President's stimulus package of many of its spending provisions and substitute tax cuts. Part of this is pure pander: They know tax cuts are more popular with the public than government spending, even though spending is a far more effective way to stimulate the economy (more on this in a moment). Another part is pure partisan politics: Republicans are emboldened by Obama's willingness to court Republicans (taking three Republicans into his cabinet, bringing Republican leaders into the White House for consultations, putting all those business tax cuts into the stimulus bill in order to gain Republican favor) without getting anything at all back from the GOP. House Republicans snubbed the bill entirely. So, Senate Republicans say to themselves, what's to lose?Plenty. Millions more jobs and a full-fledged Depression, for example.
Posted by mcblogger at 09:36 AM | Comments (0) | TrackBack
February 11, 2009
Two takes on Geithner's TARP, Part 2
Krugman and then David Kotok.
Of course, additional details are going to come out related to mechanisms for price discovery (using discounted cashflows, probably) for illiquid assets and the stress test designed for the banks. It's the latter that's going to be most interesting to me (the increase in the Fed's balance sheet was going to happen regardless... and, frankly, should be happening in this environment. That's WHY we have the Fed) especially because, at it's core, it's going to depend on asset valuations which leads us straight back into (oh, you had to see it coming) price discovery.
You could also call it short circuiting FASB.
Posted by mcblogger at 04:34 PM | Comments (0) | TrackBack
The Economy : Stimulus, Deflation and more
From Ritholtz
Back to the planned US rescue packages, and specifically Bill King’s comments: “The main problem plaguing the US economy is too much debt has been accumulated on gratuitous spending and the papering over of declining US living standards. Solons espouse a monstrous surge in debt to fund even more consumer spending. The toxin is not the cure. Inducements to save and invest in production are the remedy. But the welfare state and its ruling class are trying a last grandiose socialist [Keynesian] binge in the hope of salvaging their realm.”
OK, this guy's over the edge of the cliff with the Keynesian=socialist bullshit. That's not why I put up the quote, though it is fun to poke at the deranged thinking coming out of economists on the right. No, I posted it because he's got something down perfectly... the decline in living standards. What he means to say is the decline in real wages but he'd sound like a real economist then and the nutters would pull his membership card and parking privileges. Part of the reason we've been burying ourselves in debt is that it was the only way we could afford the standard of living to which we'd become accustomed. The trigger that collapsed the credit markets (built on the house of cards that was the CDS 'market' and levered banking) was higher than usual defaults on home loans which were caused by two factors... higher energy prices and interest rate resets on some sub-prime ARMs. When wages aren't increasing but the cost of living is, there is always going to be a breaking point.
The solution? That's going to take some people smarter than me. I think it's a fundamental shift in tax policies that have favored short over long term gains that will do the majority of the heavy lifting. It's also paying more for the lowest levels of jobs. Just like many Americans have enjoyed cheap crap from China, they've also enjoyed paying lower than reasonable prices for real work. That's gotta change because you can't have a stable long term economy that sees people at the top making an unbelievable amount of money while a vast number at the bottom make less in a year than those people make in a day.
And, just for fun, we're already in deflation and the only thing holding us up is the Fed and Treasury.
All this is as a backdrop to this post over at Greg's Opinion that's spot on. Especially the takedown of new RNC Chair Steele who apparently hasn't seen that more than half the jobs Bush 'created' have disappeared.
There is something else worth noting regarding the comparisons between now and the Depression, especially the notion that government spending didn't do the trick. Those on the right with just enough knowledge to be dangerous are fond of pointing out that in 1940 unemployment was still high. What they don't tell you was that in 38 and 39 the government tried to balance the books by slashing spending and increasing taxes. Which sent the economy back down again. In other words, there wasn't enough stimulus. Click here if you don't believe me.
It should also be noted that even that high level of unemployment in 1940 was still about far better than the absolute worst level in the Depression (about 25% vs 16%) which also kinda deflates the ramblings of the new economic theorists on the right who are just now discovering fiscal responsibility. The problem with them, as usual, is that their timing is awful. Simply put, the government has access to money that is functionally free and the economy needs that money since it's not going into the private market.
Think about it this way... it's analogous to worrying about what started the fire and how much it'll cost to put it out when the house is burning. And you're sitting in the living room.
Oh, and just in case you were wondering, while the press may love the Republicans and their retarded antics, the polls are showing that the majority of Americans are OVER it. Just look.
Posted by mcblogger at 12:25 AM | Comments (0) | TrackBack
February 10, 2009
Note to Rep. Neugebauer
Dear Rep. Randy... you really shouldn't talk about the economy. Or how to pull us out of recession. Or how to keep us out of a depression. Or adding federal debt (which, by the way, there is a tremendous demand for) to finance stimulus.
Randy, buddy, I gotta tell you your ignorance of basic finance and market dynamics is pretty scary. You know the old saying about keeping ones mouth shut?
Quit using talking points and playing politics. There is more at stake here than playing asshole in a stupid attempt to rebuild your moribund party.
Hate you lots,
McB
Posted by mcblogger at 08:07 AM | Comments (0) | TrackBack
Deregulation FAIL
In 1999, Texas deregulated the retail electricity market. Austin kept it's municipal power company and remained regulated. Since 1999, rates have increased by 25% in Austin. In the deregulated parts of Texas, rates have gone up 64%. The industry wants to blame it on increases in natural gas prices but other states that are dependent on natural gas saw far lower increases in prices.
The best part of the Statesman piece was this from Senator turned industry lobbyist David Sibley...
The Legislature passed a sweeping deregulation law in 1999 that sought to break down electric company monopolies and remove strict government control over retail electricity rates. The idea was to allow competitive market forces to drive down prices. The sponsor of the legislation, former Sen. David Sibley, acknowledges that rates have gone up but said he still considers the law a success.Sibley, who now lobbies for power companies and others, blames the hikes on increased natural gas prices. He said Texas is far too dependent on natural gas and would see lower rates if it diversified to coal, nuclear and other energy sources.
"The fuel mix is a problem," Sibley said. "We're building nothing but natural gas plants."
But the report found that even when compared with neighboring states that are also heavily dependent on natural gas, Texas has higher rates. Oklahoma and Louisiana, for example, are big users of natural gas but did not deregulate their markets as Texas did, the data show.
So, David, you told us that deregulation would save us money. Now, while working as an industry lobbyist, you want us to believe another of your lies? Sure thing. But first, would you mind setting your hair on fire?
Texans will see lower electricity rates when we reregulate the market. Let's be honest, markets work best when someone is looking over industry's shoulder.
Posted by mcblogger at 06:49 AM | Comments (0) | TrackBack
February 09, 2009
Our Future?
This is what will happen to the US if we don't take solid steps now to end income stratification and turn tax policy to investments and building jobs, not taking profits.
Posted by mcblogger at 01:11 PM | Comments (1) | TrackBack
February 06, 2009
RPT: "We're fucking the stimulus plan!"
Seemingly proud of the Republicans in Congress from Texas who decided to vote against the stimulus package, the RPT sent out this nice little email
Just last night, President Barack Obama put on the full-court press for the Democrat stimulus package. In his interviews with each major network anchor, he called on Senators to support this almost $1 trillion plan. Then his political committee sent an email to their list of over 13 million emails a few hours ago.You can see what tremendous pressure is being exerted as the Senate faces a showdown vote any day now. That's why it's so important for our Republican Senators to stand strong in opposition to this gigantic bailout full or pork-barrel projects and earmarks.
Every single GOP congressman voted against the package last week, and our two Texas Senators are speaking out against it right now!
Your support is needed to help these courageous Republicans stand against the onslaught of attacks coming their way.
The onslaught of attacks? You mean the onslaught of well deserved attacks, don't you? As for the pork and earmarks, roads in cities and counties all over Texas are PORK?!?!?! Not so much because, and this will come as a shock, GOVERNMENT SPENDING IS STIMULUS. Every time the government spends money to buy something, someone has to make it, sell it and ship it. Those people will have jobs and money to then spend to churn back into the economy and pay their mortgages.
The tax cuts ARE pork since they won't achieve the goal, but hey, that's what Democrats are having to give up to get some of you assholes on board. I don't think they should but it seems pretty clear they're as spineless as you Republicans are stupid.
As for the full-court press, I must have missed that. I only caught how Republicans were holding things up.
Posted by mcblogger at 11:21 AM | Comments (0) | TrackBack
TARPing me to death...
Elizabeth Warren is one of the few lawyers (Harry's the other) I actually trust. Her work on the abuses of credit card companies has been essential to shed light on and stop their most egregious packages. Her committee's report on TARP is out and the result is that that US got back $66 for every $100 it invested in these entities. Which conflicts with other reports.
Oh, and it makes me mad as hell.
Now, these aren't actual loses and the government is already receiving dividend payments. So the question becomes, why is the discount so high for the government? There is a simple explanation that the media are mostly ignoring, mainly that yelling fire in a crowded theater is dangerous. This money had to go to weak players and strong players on roughly equal terms. If that hadn't happened, people would have known easily which banks were weak and which were strong, leading to runs on banks that would have resulted in the US taking over some large banks and paying out far more than TARP.
My personal opinion... I would question this valuation based on risk, especially since there is no way government can lose on this. If the banks default, government takes them over and privatizes them down the road. Government always wins. This is, of course, independent of the fact that Buffett won't get tax payments in perpetuity. Government has an incentive to keep these firms afloat.
And we all have a pretty big incentive to keep the banking system working.
While I have no real problem with the government making something on these investments, I want them closer to breaking even than massive profits. I know there will be those who disagree with me, but take a moment, set aside your hatred for bankers, financiers and investors and think about what it would be like to have your government acting like a merchant bank or vulture investor with your tax dollars.
Posted by mcblogger at 10:39 AM | Comments (0) | TrackBack
February 05, 2009
Is Summers marginalizing Volcker?
Straight from Bloomberg...
Paul Volcker has grown increasingly frustrated over delays in setting up the economic advisory group President Barack Obama picked the former Federal Reserve chairman to lead, people familiar with the matter said.Volcker, 81, blames Obama’s National Economic Council Director Lawrence Summers for slowing down the effort to organize the panel of outside advisers, the people said. Summers isn’t regularly inviting Volcker to White House meetings and hasn’t shown interest in collaborating on policy or sharing potential solutions to the economic crisis, they said.
While Summers, a former Treasury secretary, oversees the official White House economic policy apparatus, Obama tapped Volcker for a new Economic Recovery Advisory Board charged with injecting fresh, outside ideas into policy debates.
“When you have two strong, highly accomplished, driven people, it’s not unusual that there is going to be a battle over turf,” said James Cox, a professor at Duke University Law School in Durham, North Carolina. “I would hope that Obama doesn’t lose Volcker’s counsel. They need someone to help them think outside the box.”
The contretemps shows the difficulties Volcker, perhaps the world’s most respected economist, may encounter as an outside adviser charged with providing policy alternatives to the president, said William Silber, a finance professor at New York University’s business school.
This is a time to take a moment and remember two things...
1) Paul Volcker is brilliant.
2) Larry Summers is not so much brilliant as he is middling.
Larry Summers, let's not forget, is one of the people inside the Administration who hates infrastructure and, if rumors are correct, is pushing internally the tax cuts the Republicans want. Even though most sane people say they won't do the trick to jolt us out of recession.
We can only hope that the President will slap down Larry and move Volcker to front and center.
Posted by mcblogger at 12:44 PM | Comments (0) | TrackBack
Circling the goddamn drain...
I read this yesterday...
I used to be optimistic about the capacity of our political leaders and central bankers to avoid the policy mistakes that could turn the current global recession into a deep and lasting global depression. Now I’m not so sure.
I'm not quite as worried about some of Buiter's concerns, least of all protectionism (mostly because there's going to be so much demand from China's infrastructure stimulus that basic materials are going to rebound sharply, even in the US). However, I AM concerned about the weakness in Washington. And the more I think about it, the more I'm ready to say, simply, FUCK IT. I can do that. I have money and I can survive a two year depression. Most of you can't.
In fact, a real depression would probably be good for me as it would allow me too pick up some great assets at 90% off their real value. Hell, I might just bail and leave you all here to rot. Maybe I'll be back when you fucks get your heads screwed on right.
Why am I saying all this? Because the public has turned against the stimulus bill. Democrats are actively working against their party and their President with the Republicans on more of this tax cut nonsense. The Republicans are easy... any failure of this bill will lead to a lot of economic pain and Democrats are going to get blamed. The Democrats working against this? They're harder to explain... I think it has something to do with a fundamental inability to understand economics and how to maintain a capitalist economy. I also think they're as goddamn stupid as this guy. Or this idiot who seems to think TARP was a bailout for the wealthy. Guess he wasn't paying attention nor does he seem to care that's it's left the Treasury with actual assets. Because he and those like him never understood TARP or TAF, they've been beating a political drum about it for a while. Now that beat has started to poison the Stimulus Bill.
It's kinda understandable, especially since the media is doing such a bang up job explaining all this to the American people. It almost makes me want to embrace what I see happening, the impoverishment of whole swaths of the country.
All the while our President sits on the sidelines, going on TV, seemingly content to let the whole thing go down the drain while the partisan bitterness he refuses to engage in consumes the Capital. Of course, he could step in and really decimate the Republicans. Maybe he will. But I certainly doubt it. My question, for now, is the same as this one... WHY ON EARTH WOULD OBAMA HAVE EMPOWERED THE GODDAMN STUPID REPUBLICANS??!?!?!?!?!?! Or, WHY THROW THEM ANY BONES IN THE FORM OF TAX CUTS THAT DON'T WORK? Has it occurred to anyone other than myself that President Obama and the Democrats are wasting our money on Republican ideas we know damn well won't work?!?!?!
Maybe, just maybe, the CHANGE we could believe in was nothing more than ineptitude. Not that asshat McCain would have been any better. I'm thinking more along the lines of Clinton or Edwards. God knows either of them would have already passed a much better bill and they would have browbeat the Republicans to do it.
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February 03, 2009
Stupid people saying stupid things
EOW pointed to an article at TPM regarding the lack of traction on the stimulus plan...
ThinkProgress has admirably demonstrated that the cable networks continue to tip the scales in favor of Republicans by booking like twice or even three times as many Republicans as Democrats to discuss the Stimulus Bill. But that only tells us what we already know, which is that the Washington press establishment is still wired for Republicans. But there is a Democratic president. And he does have the bully pulpit. And he needs to make this argument, which he's not. Absent that, we can't be surprised and the Democrats are not in much of a position to complain if the vacuum is filled by a bunch of Republicans making statements that are either demonstrable nonsense or just lies.Look at what people are talking about and you wouldn't get the sense that we're actually in the midst of a major economic crisis that will likely send unemployment well into double digits if nothing is done quickly -- and a crisis that is in large measure the result of the economic policies that the Boehners and Cantors and McConnells are telling us, all the evidence to the contrary, will now save us. Everyone who's taking this situation seriously realizes that spending is the pivotal part of what the government needs to do to stabilize the economy in the face of this crisis. The multipliers for spending versus tax cuts simply leaves no question about that. Ask McCain economic advisor Mark Zandi. The solid critiques from the right aren't about whether spending is needed but which types are most efficient.
At the core, this is going to have to be us talking it up since President Obama and Co. can't manage to do a goddamn thing right since taking office. Oh, I'm sure some of you will point to Gitmo and say THERE but it's the big ticket stuff, like actually VETTING Cabinet noms that they seem to be fucking up nicely.
The economy needs this. I've worked in various parts of the banking industry for more than a decade and can tell you, this is BAD. The situation we're in is precisely the result of greed coupled with a lax regulatory structure and weak legal enforcement. In short, this is the ultimate economic paradise that the policies of Boehner and Cantor and McConnell (not to mention our own Junior John) have already led us to. Only in their idiotic world would more of the same be good. I don't know why I should be surprised since the only one out of the three that's ever held a real job (Boehner) was a salesman. For a packaging company that didn't actually make anything, they just sold what was made by others.
In other words, what these morons have to say about regulation and the efficacy of fiscal stimulus is questionable. At best. Especially in light of the fact that they've been saying the same thing for decades, they got what they wanted and we're all enjoying the ruin where it was destined to lead.
It is not enough any more to support our plan. That time has passed and the Republicans simply will NOT let it go. All that's left is for us to attack THEM. THEY caused this. WE'RE going to fix this.
And it's time the President get geared up and get into the fight. A CHANGE would be a President that actually did something right.
It's time to give old school, knock the other into the dirt and kick him when he's down, politics one last spin.
Say it with me, boys and girls, "TAX CUTS AS STIMULUS DON'T WORK". They didn't work last year, they won't work this year. TARP has started to work to stabilize the financial system. We need this to the economy itself working again and put people back to work. It would also be nice if Geithner would step on the banks to start lending again.
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January 29, 2009
Two takes on Inflation/Deflation
First, there's the 'OMG! There's too much money in the system! Inflation!' argument, followed by Mish's elegant and short takedown.
Honestly, Hamilton's argument is dependent upon ignoring the fact that credit and cash (M0) are both measures of liquidity (which Mish points out) and that velocity is a massive consideration in determining if there really is too much money in the system. In the end, the only thing that's clear from Hamilton is that he's blithely ignoring some very critical pieces in his analysis.
I will bite on one point, that we've seen a real shrinkage in supplies of goods and services... just on it's face, anyone who has been shopping in the last two months knows that's not true. There's a true deflationary case to be made in terms of oil because there has actually been real demand destruction. And it continues which sets up an aggressive case for a lack of inflationary pressure.
Posted by mcblogger at 09:12 AM | Comments (0) | TrackBack
January 27, 2009
Nationalization gets a second look
via NYT
Only five days into the Obama presidency, members of the new administration and Democratic leaders in Congress are already dancing around one of the most politically delicate questions about the financial bailout: Is the president prepared to nationalize a huge swath of the nation’s banking system?Privately, most members of the Obama economic team concede that the rapid deterioration of the country’s biggest banks, notably Bank of America and Citigroup, is bound to require far larger investments of taxpayer money, atop the more than $300 billion of taxpayer money already poured into those two financial institutions and hundreds of others.
But if hundreds of billions of dollars of new investment is needed to shore up those banks, and perhaps their competitors, what do taxpayers get in return? And how do the risks escalate as government’s role expands from a few bailouts to control over a vast portion of the financial sector of the world’s largest economy?
The Obama administration is making only glancing references to those questions. In an interview Sunday on “This Week” on ABC, the House speaker, Nancy Pelosi, alluded to internal debate when she was asked whether nationalization, or partial nationalization, of the largest banks was a good idea.
“Well, whatever you want to call it,” said Ms. Pelosi, Democrat of California. “If we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization.
“I’m not talking about total ownership,” she quickly cautioned — stopping herself by posing a question: “Would we have ever thought we would see the day when we’d be using that terminology? ‘Nationalization of the banks?’ ”
I talked about this last week and I'm not exactly opposed to it, I'm not in favor of it either. For one thing, the issue isn't any longer recapitalizing the banks. The issue is restoring liquidity to consumers and businesses which is what the banks should have been doing. As for their continued write downs, this is kind of a shell game. For one thing, they've now got really nice tax writeoffs and they get to keep the written down assets. Which means when people start buying again, they're going to sell and realize some really nice gains.
That's the dirty little secret as to why the banks aren't selling. There are some bids coming back into the market but they're no where near what you'd get in a fully functioning market.
If nationalization of a bank is what's required to get things moving again, then may I suggest Bank of America. It's got a lot of money, a good business and lousy management that should be removed. Which makes this part of the article so damn funny...
Some of Mr. Obama’s advisers have asked who the government would get to run the banks. Many of the most experienced executives are tainted by the decisions they made during the age of excess. And how would the government attract the best talent if it demanded that they take minimal pay — a political reality in the current environment?
This REALLY makes me laugh considering that our universities are churning out B-school grads semester after semester that, frankly, are a lot cheaper than current management and probably far more competent. The best part? They don't need millions in salary and stock options. Hell, most of the folks who come out of this program make fractions of Ken Lewis's salary.
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January 23, 2009
The bottom?
According to long term price charts, it looks like we've reached the bottom on the stock market.
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January 20, 2009
This week in the Credit Crunch
It was foolishly easy credit that got us into this mess. A government-mandated return to such lending is not a viable solution.Ordering the bankers to make loans is both simple and satisfying. But it will not fix the economy or the financial system.
Now, I've seen my share of stupid pap in the NYT. Even Krugman's been guilty from time to time. However, this is just pure bullshit. NO ONE is asking the banks to return to their old bad habits. All anyone is asking is for them to get back to work lending to good credits, WHICH THEY AREN'T DOING. For example, last Friday my company and several others were forced to increase fees on conventional loans related to 'elevated' risk. However, this is so broad based that it hits every credit class and loan to value ratio. This flies in the face of Treasuries intention to buy MBS in the open market to increase demand to the level that rates fall into the mid-4% range.
In other words, while rates might be falling, fees are increasing scrubbing out the net gain for the consumer.
In the late 1980's there was a joke going around in Texas about a company called North Carolina National Bank which had taken over several insolvent thrifts. The logo was NCNB which was jokingly said to be an acronym for No Cash (for) No Body. The successor bank to NCNB is Bank of America which is sitting on a ton of government money.
It is absolutely critical that credit be loosened for companies. It IS the only thing that will keep the recession from deepening. The bankers say they'll lend when the economy turns. What they don't seem to understand is that it can't turn without credit.
What irritates me most is the assumption that people are staying out of bank stocks because of possible nationalization. If that's such a damn concern, why aren't these bankers doing everything in their power to make sure that doesn't occur? Frankly, not to put too fine a point on it, we the people delegate to the government the responsibility to charter and regulate banks to create a financial system that will benefit us all. Banks are not operating in good faith and, frankly, stocks be damned, it would be a good idea to put some fear into them by nationalizing one of them.
Finally, while it's true you don't fix the sins of the past by continuing the bad behavior, you certainly don't go overboard and cut off the good behavior as well. The credit crunch, despite all the crap, is ongoing mostly because some chickenshit bankers are overreacting on the downside just as they did on the upside. In short, incompetent men and women like Ken Lewis at Bank of America are, in fact, making a bad situation a great deal worse.
First off, I love Roubini but I think this is really offbase. Let's take derivatives off the table since most of the contracts have been unwound. So, you're left with the bad loans... now, with a bad credit, you will still have an underlying asset. Usually, in liquidation, you will recover up to 80%. Let's say recovery is only 50%. That means Roubini thinks that up to $7.2 trillion, about a third of all loans outstanding, will go bad. Which could happen if the economy really went into a tailspin. Problem is, it isn't. Commodities prices are in freefall which is lowering the cost of living creating a net wage increase for all those still employed. Unemployment stands, right now, most likely around 10% and may decay another 1% but not much beyond that. We have a stimulus plan which, while not much, WILL drive a return to growth and when that happens you'll see more of the money pour into wages and paying debts which will stem losses.
Without those write downs, stability will return to the marketable assets and the balance sheets of the banks (that is, of course, if they start rebuilding their book of business by lending again) which effectively put a cap on further losses. To this point the banks have written down more than $1 trillion, mostly on paper losses unrealized due to market conditions. I think the losses will wind down this quarter and will cap at around $1.3 trillion.
“We are very pleased the Treasury Department determined our organization an attractive investment opportunity,” said Jeffrey Nash, president and CEO of Treaty Oak Bancorp and Treaty Oak Bank. “Our bank continues to grow requiring additional capital. We had not initially anticipated participating in the CPP Program but given our appetite for capital and the attractive terms of this issuance it was an easy decision for our board of directors when Treasury informed us they had selected our bank.”
Posted by mcblogger at 11:05 AM | Comments (0) | TrackBack
January 15, 2009
Tollway traffic down in Centex
Oh, Jesus H. Christ, Ben. This is a short term blip based on a temporary recession. This was the funny part
Aside from any financial troubles existing roads might experience, does this tepid revenue mean that toll authorities in Austin might have trouble securing loans for the five other roads approved last year?"I don't think so," said Michael Walton , who holds the Ernest H. Cockrell chair in engineering at the University of Texas and is a transportation consultant. "I don't believe it's a significant long-term problem because we're in the early stages of development on those roads. As they become more of the economic fabric, then utilization will continue to grow."
We ALL acknowledge we need roads and people are using the tollways. Granted not as much as the rosy projections may have led investors in the bonds to believe, but they are using them and that will increase over time. BECAUSE THEY ARE THE ONLY OPTION. The IB's LOVE these deals and they aren't going away any time soon, even if they have to be put on the backburner for a while due to the credit contraction. After all, where else can Goldman Sachs or Morgan Stanley get a government guaranteed high yield return? Certainly not in Treasuries.
What Ben missed, again, was the central issue : How do we pay for the infrastructure we need? The argument has ALWAYS been about funding our infrastructure. Do we want tolls that soak a relative few or gas taxes that are affordable by many and more evenly distribute the cost of infrastructure to ALL beneficiaries of improved infrastructure?
Some will tell you that it's unfair for the people in the central city to pay for infrastructure for rich suburbanites. You'll have to forgive them for not knowing that the average home sales prices in suburban counties are usually lower than those in the cities and that people live out there because it's what they can afford. Some of them, just FYI, don't even come into the city, while those in the city frequently drive out there (I'm one of them). Others will bitch and moan about congestion pricing as if it's some kind of panacea that will make traffic go away. Which it won't. It certainly hasn't improved the 405 in OC which, despite all the bullshit flying around in Austin, is still clogged like a fat guy's arteries.
Frankly, I'm sick of the fucking debate and ready to let you poor people sit in goddamn traffic while I enjoy the Lexus lane. It's clear to me you're too goddamn stupid to get that you're voting against your own self-interest. It's also obvious that a lot of Democrats are in love with public private partnerships that are really more about government backstopping the losses of private investors who, in effect, put nothing at risk. Some of you electeds are so dazzled by the bankers from Goldman Sachs and Morgan Stanley that you're oblivious to the fact that these folks, though they did better than the people at Bear Stearns and Lehman, are only around because of the Government. They aren't wizards or geniuses. In fact, many of them were about two weeks from being bankrupt and unemployed.
Posted by mcblogger at 08:49 AM | Comments (0) | TrackBack
January 14, 2009
Chase decides to fuck consumers and taxpayers
At a time when the US economy needs as much liquidity as possible, Chase has decided to freeze out 60% of the home lending market and take it over. The official announcement (PDF) discusses the WaMu purchase and details that they now have retail or consumer direct access to 70% of the US market.
Here's the thing. This is a strategic move by a firm which has received TAF and TARP funds to dramatically reduce consumer access to credit and reduce consumer transparency in the mortgage market because Chase retail doesn't have to disclose NEARLY as much to consumers as brokers do. And it reeks of desperation.
If you have money at Chase, this might be a good time to remove it.
Posted by mcblogger at 08:58 AM | Comments (0) | TrackBack
January 10, 2009
Real wage growth, or, What's needed now
There are a bunch of you who are probably tired of me talking about real wage growth. I've been doing it for a while so it's understandable. It's really good to see others talking about it...
I think the big thing I'd add to that is growth in median incomes. One way or another, there's really no way for the economy to grow strongly and consistently unless middle-class consumers spend more, and they can't spend more unless they make more. This was masked for a few years by the dotcom bubble, followed by the housing bubble, all propped on top of a continuing increase in consumer debt. None of those things are sustainable, though. The only sustainable source of consistent growth is rising median wages. The rich just don't spend enough all by themselves.
And there it is, trickle down failed much like my effort to quit smoking in March. And June. And again in November.
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December 30, 2008
Why you spend like a drunken sailor...
...in an environment like the one we're in. This is a great piece from John Mauldin discussing the velocity of money, how much it's dropped off and how much more money you have to put into the system in order to compensate and stop deflation.
This is why all of you who may be worried about inflation really better wise up and understand that the much larger problem, especially right now, is deflation. In other words, get off Washington's back. They really ARE doing what needs to be done.
And yes, it's long. Sometimes things worth knowing can't be condensed into a paragraph.
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December 29, 2008
Missing the point at the NYT
This is one of the dumber articles on the credit crisis I've seen published so far. In this one, it's all about Bush's focus on expanding homeownership.
Of course, that had little if anything to do with it. His desire to expand homeownership and the increase in it was more coincidence than result of a detailed and well thought out plan. Further, the article completely misses the ability of the IB's to lever to infinity on short term debt that, when it dried up, froze their access to funding. Without that funding, their capital structures and leverage were unsustainable and they collapsed. As they collapsed, it constituted a credit event which triggered counterparty claims on CDS and triggered (for example) AIG's need to raise collateral which would have forced them to sell already depressed securities into an already depressed market.
All this was because someone lied about their income? Or bought more house than they could afford? No, the credit markets collapsed because no one ever reserved for losses and a bubble was created by cheap money, largely unregulated. Not to mention the fact that many people paid A credit prices for C credit risks, a poor proposition in the best of times.
This was, purely and simply, a lack of regulation and common sense on the part of regulators and the players, many of whom are taking home large bonuses even this year. It was in that environment that a few defaults can lead to more and more defaults and ever larger, more robust losses that eventually overwhelm an individual bank or even an economy.
It would be AWESOME if some members of the so-called financial press would actually, you know, get it right.
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December 17, 2008
The Economy : What's next?
This is gonna have to be somewhat short due to a meeting this AM and far too many things to do.
First up, the Fed's decision to drop the Funds rate to 25 bps is not unexpected but it is a little irritating and tells me two things:
1) Paulson is a pussy
2) Bernanke is a cunt
You do this, if you're the Fed, to provide liquidity to the banks so they can rebuild their balance sheets (we're about 60% of the way there) and start lending again. Of course, that's what the Fed and Treasury have been doing this entire time, with every rate cut and TARP purchase and TAF usage. And banks have, in turn, decided to continue to tighten the screws on businesses and consumers. As a result, unemployment is rising sharply, consumers have frozen spending, businesses are pulling back (they couldn't get capital now anyway) and we're staring at a very deep recession. I guess we should be happy it's not going to be a depression, right?
Wrong. If the banks don't move off dead center, all that has transpired will be pretty worthless. Which means the Fed and Treasury need to do one of two things...
1) Nationalize as many big banks as it takes to turn the spigot back on. This, honestly, is my favorite because it has the potential to squeeze the hell out of these glib CEO's. Call Citi and BofA and tell them, "You either lend or we wipe out your equity. And your pay package. And you can sue the Federal Government."
2) Inflate the money supply but not by issuing debt. Just print more. This one is dangerous like a motherfucker because it leaves nothing on the table and devalues the dollar. Depending on what happens overseas, that could lead to a flight from dollar denominated assets leaving us with far higher rates over time. It would boost export income and would alleviate our real BOP issues (we're selling more overseas and paying off past debts with nominally cheaper dollars). However, there are already so many dollars out there that when asset prices stabilize and increase, we're going to have (in effect) the same issue. This is, in effect, like pouring gasoline on the fire. Krugman and Mankiw think it can be managed. I think they're crazy.
Neither Krugman or Mankiw would be especially comfortable with option one because both are operating under the illusion that you can, through elegant measures like printing money, bully the banks. I prefer the more direct approach that creates real consequences. Neither understand that the 'free market' is functionally dead. We're back to managed capitalism in the US because it's clear that greed overrides common sense. We're not heading toward socialism but our latest flirtation with laissez-faire has failed, just like the others. The laws R's and some D's have spent the last three decade dismantling, as it turns out, were absolutely necessary. Who knew?
Mankiw's uncomfortability with admitting error is especially clear in light of his disdain for new federal spending as it will burden our children. Please. Greg, in the abstract, is absolutely right. However, this is about stimulus and infrastructure investment. Personally, I don't think we need stimulus I think we need to spur the banks to loosen guides and lend some of this cheap money they've been given. They can then rebuild their balance sheets with the spread income, consumers will lower debt burdens and business will have the operating and expansion capital they need. That's why I like Option 1. Option 2 leads to a banana republic.
As for Mankiw's dislike of other federal spending, I have only this to say... BITCH, WE NEEDS US TRANSPORTATION INFRASTRUCTURE. If you're so worried about the debt burden on your damn kids, think about how much more expensive building these roads will be in 2020 or 2030. We spend a trillion dollars and for that money we modernize our infrastructure for the next 20 years? It's a bargain and you should be looking at it that way, especially since all this debt being issued to finance it is functionally free.
Right now, Housing is starting to turn. We still don't have a solid loan mod platform but prices are beginning to stabilize and the refi market has gone through the roof, mostly because the Fed and Treasury have been buying MBS dropping interest rates on home loans for consumers. Those rates got passed through because there are alternatives to banks for mortgages. Not so with most other types of borrowing. Given that, it's time the Fed and Treasury start acting like they have a pair and beat the fuck out of morons like Ken Lewis.
Posted by mcblogger at 09:55 AM | Comments (0) | TrackBack
December 16, 2008
How does it feel?
This was passed along over the weekend by Carl Whitmarsh.
I have a question for all those working-class Democrats -- especially the ones employed directly or indirectly by the U.S. auto industry -- who in the 80s became so-called "Reagan Democrats" and voted Republican for the next 20 years. The question is this: Given the "fuck you" attitude being contemptuously displayed by Senate Republicans where it concerns a rescue plan for your industry, your job, your life, how do you feel now about your abandonment of the Democratic Party? Huh? Got an answer? Nothing deep. Just a quick sentence or two would do. I mean, how does it feel to have spent all those years voting your bigotry and your willful political ignorance and your sheep-like need to be manipulated by the thugs who infest right-wing talk radio, and now that your whole life is collapsing because of the policies of these Republicans (who never gave a shit about you anyway) you get to watch and listen as they kick you and your family to the curb and say, naw, we don't think the "taxpayers" wanna bail out the auto industry; we don't care if another three or four million more families head for the homeless shelters and food stamp offices.
There's more at the link. Yes, it's harsh but it is spot on. People need to really think before they go into a polling place.
Posted by mcblogger at 11:50 AM | Comments (0) | TrackBack
December 10, 2008
Vitter, Ensign, Coburn and Shelby are in a bus...
... wouldn't it be great if the bus went off a cliff? Metaphorically speaking, that was what happened in their press conference today opposing the auto bailout.
What these bitches are talking about is union busting. And none of them know what the hell they are talking about, in so far as a bankruptcy filing. Americans will NOT buy cars from a company in BK, period. This isn't conjecture, it's fact. Add in that no one will carry the debtor in possession financing and you have a recipe for disaster if these companies have to declare BK.
It shouldn't surprise me that Republicans are this stupid. But it does. What's most galling is Shelby, who is obviously shilling for the automakers who call his state home, Mercedes-Benz, Hyundai, Toyota and Honda. He has a vested interest in seeing the big three go down the tubes. It'll mean his foreign constituents will make more money since they'll have less competition.
And where, pray tell, are OUR Senators Hutchinson and Cornyn? Where are they to fight for the GM plant in Arlington?
I'm all for reorganizing these companies and for basically eliminating the top four layers of management. Because that's the kind of restructuring these companies need. What the R's want is for the unions to be broken in Bankruptcy court and that isn't the way to fix these companies. This is a microcosm for what's wrong with this county with lousy management never getting fired while ordinary workers end up taking a beating. And they want to rape the pension funds?
And now Max Baucus comes out and says he's opposed to the auto bailout which just makes me so mad. Why won't anyone in the Capitol on the D side take on Ensign and that moron Shelby? They are intellectual pygmies hellbent on their own self interest rather than what's best for the country.
Am I thrilled about the auto czar? No. However, I also know that if we're going to do this, we need someone to oversee taxpayer investment. And we do need to do this. This is a tipping point and a bunch of southern Senators are hell bent on taking us over the edge.
Posted by mcblogger at 11:49 AM | Comments (0) | TrackBack
10% delinquent or in foreclosure
Not good. While 31% of US homeowners have no mortgage, of those that do, around 10% delinquent.
Now, before you panic, this includes everyone from those 30 days late to those in foreclosure. And no, this isn't anywhere near as bad as the Great Depression.
And this certainly didn't help... especially since this number is understated by around 2-3%.
Posted by mcblogger at 09:29 AM | Comments (0) | TrackBack
December 05, 2008
Oil : How low do we go...
This is one of the best pieces written on the oil market and the current position. The reality is that speculation was driving up prices (we talked about this) in concert with the weak dollar. I wrote that piece in May assuming that the world wouldn't fall apart and that demand wouldn't deteriorate as fast it did.
Let me be frank... anyone who claims the drop in oil prices happened exactly as they predicted is lying to you. NO ONE anticipated demand destruction on the level we've seen this year with year over year declines of 5-10% in aggregate demand. That is a huge number. And while that depressed prices and deflated the bubble, the rest of the decline is purely related to the rise in the dollar. In my piece from May I thought that would only happen with restored fiscal policy. Turns out, all we needed was a collapse in the financial sector and a flight into dollars and dollar denominated assets to bring the dollar back up and drop the hell out of oil prices.
Now, with supply high and demand unlikely to rise up to meet it as people continue to transition to cars and trucks that require less oil, the likelihood of a quick rise (despite the prognostications of commodities permabull Jim Rogers) is non-existent save speculation or a dramatic deterioration of the dollar. Even those may not be enough to return prices to the 90's/bbl. The reality is that the runup in prices was more about our dependence on oil than our demand for oil coupled with a speculative frenzy. The frenzy drove prices up and our dependence kept us buying because we couldn't reduce demand fast enough to compensate. The problem with demand destruction is that it takes longer to play out than a price spike... which means the demand fundamentals are going to continue to drop.
At least we were right about one thing... once speculation was broken, the price did collapse. That being said, even we are stunned by this decline.
Posted by mcblogger at 12:38 PM | Comments (0) | TrackBack
Assigning blame
Digby has Limbaugh's take on the Big Three's trip to Washington. Limbaugh is, of course, blaming the Democrats.
I have some questions. You know, Pelosi, Reid, that crowd, they sent the auto execs home yesterday and they said, "You come back with a plan. We don't have the votes and you're not going to make us look bad. It sends a bad signal to the American people. We don't have the votes. So you come back with a plan. You tell us what you want for the $25 billion." Okay, I have some questions for the people like Pelosi and Reid and these other liberal hacks, just tough questions for you to ponder. With gasoline prices now under two bucks in most places and dropping, and the price of oil (I checked it right before the program) below $50 now ($49 a barrel it was earlier today.) So with the gas price under two bucks and oil plummeting, what would you say, Pelosi and Reid, if the car companies could become profitable by selling SUVs or go broke by turning out the green cars that you're going to demand they make? What would you say, Pelosi and Reid, if the best auto executive in the world could come in and fix the Detroit problem but he demands a hundred million dollars a year in income? Would you insist that they hire somebody who has no clue what they're doing and earns less than $400,000?
Lookit, Limbaugh and his ilk have always found it easier to carp than offer real solutions. They have none which is par for the course with the unimaginative who refuse to think. Instead, they offer criticism and angry commentary that, frankly, is nigh unto incoherent. The problem with the auto industry has never been that they were making what Washington demanded, the problem was their planning and long term strategy was wrong. As oil prices increased, they never shifted gears. As the market transitioned to a recession, they never altered to more affordable cars or sought out cheap long term debt to bolster their capital structure. Now the problem is very dramatic as wages are cut, incomes drop and fewer people are buying cars.
Their failure was a failure of management. For 30 years, they underfunded their pension plans. For thirty years they've been losing business to competitors who are just as large but far better at designing, building and selling what the market wants. Their failure is not the failure of liberal ideology, it's the failure of their leaders to adequately build for the future. They can blame CAFE, unions and anyone else they want but the failure is theirs.
Despite having some of the best paid managers and CEO's in history. So, no, I would say that managerial talent is not worth $100mn per year. I'd put it at about $500k. Limbaugh is clearly a very poor businessman if he'd overpay THAT dramatically. But then again, people like Limbaugh often do things like that when it's not their money.
There's one ally Democrats in Congress have on CEO pay and that's the millions of small investors like myself (those with net worth less than $1mn) who wholeheartedly agree with caps on CEO pay. In fact, we'd like to see caps on ALL executive and managerial pay. Unions and low level employees aren't bleeding us, as owners, dry. It's the management that is always to blame.
And I'm all for creating problems for those parasites like Carly Fiorina who is best known for making Hewlett-Packard shareholders poor.
Limbaugh's rant blaming the Democrats is not unlike the one being circulated by some in the media regarding the cause of the mortgage crisis. From the WSJ to the WaPo, there has been a lot written about the CRA being to blame which isn't even remotely true.
While the issues are complex and ongoing, the bottom line is that a lack of regulation allowed people to create securities which hid the underlying risk. Subprime credits were packaged and credit enhanced to turn them into A credits. Investors looked the other way because whether it was A paper or subprime, they thought they were safe as houses since people always pay their mortgages. Well, they do as long as they have a wage. When all the equity they had accumulated has been used to offset the fact that borrowers wages hadn't really grown, they stopped paying their bills.
The CRA requirements, for the last damn time, CAN NOT be satisfied with subprime loans. This isn't a point of disagreement I have with the WSJ, this is me saying they are completely wrong.
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December 02, 2008
PSA : Speaking Authoritatively
As part of our ongoing series of PSA's, we'd like to offer the following...
Now, where did George Will go wrong? Possibly not having a full command of the economic history of the Great Depression? Maybe having a worldview driven less by reality and more by ideology? Using that worldview to draw conclusions that don't fit facts?
If you answered all of the above, you're absolutely right. If you're going to speak authoritatively, it helps to know what the fuck you're talking about. And don't quibble with Nobel winners. If you are right, they'll never admit it anyway.
Posted by mcblogger at 03:15 PM | Comments (0) | TrackBack
December 01, 2008
Obama's Economic Team
The WaPo has a good article up about the economic team that the President-elect is setting up and to be honest, I'm blown away by the quality of the people. Even Larry Summers.
To fashion the government's response, Obama has turned to people who have been associated with more market-oriented approaches. Timothy F. Geithner, 47, Obama's choice for Treasury secretary, is president of the Federal Reserve Bank of New York and has been a key player in negotiations aimed at saving some of the nation's largest financial institutions.Lawrence H. Summers, whom Obama tapped to direct his National Economic Council, served eight years in the Clinton administration, including a year and a half as Treasury secretary. He has argued that the economic boom enjoyed during much of Clinton's presidency was largely a consequence of shrinking federal deficits.
Both Summers and Geithner are proteges of Robert E. Rubin, Summers's predecessor as Treasury secretary and current Citigroup director and counselor, whose views in favor of free trade, deregulation and reduced deficits have come to define the economic approach of the Clinton years.
Christina D. Romer, an economics professor at the University of California at Berkeley who is an expert on tax policy and the nation's recovery from the Depression, has been selected to lead Obama's Council of Economic Advisers. "She has the principal required characteristic of a CEA chair: the ability to clearly explain unpleasant and somewhat complex truths about the world to powerful people without making them mad," said Bradford DeLong, another Berkeley economist.
"These are great choices," said Doug Roberts, chief investment strategist for ChannelCapitalResearch.com, an investment research firm. "Right now, economics is the key thing. He is looking for experienced technocrats, despite the fact that some come from the right or the left."
What's even more heartening are the specifics. No more bullshit about how raising the minimum wage will kill jobs (It never does. It gets the marginally employed back to work). Massive infrastructure spending to repair our existing roads and build new ones, not to mention dramatically expanding public transportation, providing not only a jumpstart to job growth, but the foundation for the next leg of economic expansion.
I still think the job growth targets are weak. However, I'm feeling a little better about the direction in which things are heading, especially with Paul Volker taking on a leadership role.
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November 24, 2008
Democrats are much better Republicans
This is a GDP growth chart under different Administrations over the last 70 years from Brad DeLong's blog. Actually, he has a bunch more charts over there that are very interesting in so far as pointing out that Democrats are far better for the economy than Republicans.
Over at Slate, there is a great article about sub-prime lenders who are still in business. We call them the good guys. Their down payment guidelines are very lax but everything else is just as tight as tight as A paper. And their default ratios are even lower.
See, I keep telling y'all I know more than Larry Kudlow. He was wrong on who's best for the economy and the CRA.
Posted by mcblogger at 09:03 AM | Comments (0) | TrackBack
November 21, 2008
It's Geithner. We hope.
The rumor floating around is that President-Elect Obama has chosen NY Fed President Timothy Geithner to be Secretary of the Treasury. We, like the market, could not be happier.
Well, we could but it would take Bob Rubin to do that. While he may not have been the staunchest of supporters for regulation, his focus on fiscal responsibility was perfect. And he's come around on regulation, too. However, since he decided he'd had enough, we're pleased Geithner will be picked as opposed to Larry Summers.
Posted by mcblogger at 03:12 PM | Comments (0) | TrackBack
This crazy market
Seriously, I don't know what else to say. When the CDS market is saying Berkshire Hathaway is more likely to default than Citi, then people have just gone out of their damn minds.
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Why yes, Mr. Cheney, deficits DO matter
This is a video for IOUSA. It's well produced and eye opening for those of you who may not understand federal spending, the national debt and our future obligations. Yes, we've talked about this a number of times, however, you could always do with a refresher course.
Sure, there are a number of holes, however the gist (the US needs to make some changes) is spot on. So what's to be done?
While the issue is complex it's far from intractable. And we can deal with it. First off, there have to be caps on Federal spending. For one thing, our defense spending is just out of control and has to be scaled back dramatically. Cutting DoD by 50% would functionally eliminate the deficit without any changes to tax policy. Even then, we'd still be spending dramatically more on defense than many of the largest countries on the planet. Combined.
Next up, we need some rationality on SS. The bottom line is that with health care most Americans live far longer than they did when the program was created. It's time to raise the retirement age to 68. That step alone will go a long way to eliminating the long term funding gap in SS and that age needs to be increased over time to compensate for people living longer.
As for Medicare, it's more of a problem and will probably be fixed as part of a national reform of health care. Part D, the horrendous drug benefit, can be dramatically improved just by allowing the government to negotiate prices.
Now we come to taxes. Income taxes are going to have to go up, mostly on the wealthy and upper middle class. It doesn't need to be a dramatic increase (as the movie suggests). Frankly, the closer you get to a 50% marginal rate it depresses the capacity of the economy grow. Ideally, you don't want to see a top marginal rate above 45%. Combine that with eliminating the cap on SS and many of our problems get fixed.
There are a couple of things on which we need to spend money and before we can get to the good times (running surpluses again), we have to make some substantial investments in alternative transportation fuels (cutting the money we send overseas) and in infrastructure like schools, roads and public safety. Even if we have to run massive deficits (I'm thinking at least $1 trillion in new debt), this money will provide us with the infrastructure and energy solutions for the next leg of economic growth. That will complete the balance and should help finally reignite wage growth.
All this can, of course, very easily be undone in about eight years with the return of fiscal irresponsibility. For 30 years people like Dick Cheney, George Bush, Sarah Palin, Rick Perry and Ronald Reagan have told Americans that tax cuts will pay for themselves. They don't and they never have.
This is the reckoning and it's time we all stood up and made those who would return us to fiscal insanity are always shouted back down.
Posted by mcblogger at 09:01 AM | Comments (0) | TrackBack
November 18, 2008
About GM
Well, there's no shortage of opinions today out about GM. WhosPlayin' has a good (if simplistic) piece. Andrew Sorkin's article over at DealBook is beating the hell out of the unions and advocating the elimination of management as the US forces the company in bankruptcy.
While this may surprise you given my vocation, I'm with Sorkin. Chapter 11 is necessary.
First, let's head back to WP as it neatly points out that in the case of the automakers, things aren't as cut and dry as we'd like.
More important still is the opportunity cost of saving the automakers. It is suggested that millions of jobs might be lost if the firms folded. That may well be true, but those workers would not remain unemployed forever.
While this is true, the intermediate term pain will be very heavy and the effects cascade through the economy. You can't just scrub out the automakers and their payroll without causing dislocation nationally. For instance, the Big Three dealerships here in Central Texas provide for sales and property taxes, revenue that would have to be replaced if the companies were liquidated. That's just one of the effects from liquidating the automakers. Don't forget up to 10% of our workforce out of work as a result. That, plus our already high unemployment, would be a one two punch taking us directly into depression.
Nah, the best thing to do is for the government to force them into a Chapter 11 re-org. But with a catch... 40% of the equity when the company returns to the public markets must be reserved with 20% to current shareholders of record on the date of the bankruptcy and the remaining 20% to the pension plans to make certain there is no cut to pensions. This will make it easier for workers to take the necessary cuts in benefits (sorry, you'll have the same crappy health insurance we all have) and slight cuts in pay to stabilize the company. Allowing existing shareholders to benefit post restructuring will make sure that pension funds nationally that carry GM stock will be able to benefit from a resurgent auto industry.
Then, it's gotta be restructured.
I'm all for merging GM and Chrysler but the brand strategy Sorkin lays out is incomplete...
Both companies would have to jettison brands — lots of them. In the case of G.M., frankly, the only ones worth saving are Cadillac, Chevy and Buick. (Buick? Yes. Despite its lackluster sales and fuddy-duddy image in the United States, it’s a huge seller in China.)That means Saturn, Pontiac, GMC and Saab would all disappear. Deutsche Bank estimates that reducing G.M.’s brands from eight to three would bring down the company’s cost base by $5 billion annually. If you’re able to shut the dealerships too, lop off another $4 billion. Chrysler is an even sadder situation: the only brand with any value is Jeep. Its Dodge Ram truck lineup could be merged with Chevy, which would also pick up pieces of the GMC business. And Chrysler’s minivan business could be combined into the Chevy brand as well.
Saab and Saturn should be merged and model numbers reduced. Saab is, oddly enough, a great brand. As for Chrysler, Pontiac and Dodge? Kill them.
Some of you will no doubt think I'm crazy with only 'slight' paycuts. For one thing, this is temporary measure to boost earnings to pay off debt and rebuild the pension plan and you don't have to make massive cuts to achieve that objective when you're not paying a dividend. Once the company is restructured, with new management in place and a manageable debt load, you take it public again and with the money raised overfund the pension plan to 105% of obligations assuming a 5% asset growth rate. If there's any left over, cut pay down debt. GM has gotten itself into this mess in part by ignoring the pension plan that it's been underfunding for 30 years. But that's just part of the problem... the rest of it is management.
For them, there should be nothing.
Posted by mcblogger at 10:54 AM | Comments (2) | TrackBack
November 17, 2008
Economy : More fun to come
Over the last four years, hedge and private equity funds have taken on a lot of debt they've used to buy companies to which they've then transferred that debt. And a lot of it is coming due fairly soon, during the worst credit freeze since the Great Depression.
“The dangling other shoe is now about to drop,” said Jeffrey A. Sonnenfeld, senior associate dean of the Yale School of Management.When the economy was booming, the firms made huge profits by cutting costs at their new acquisitions, improving operations and then turning around and selling them. In 2007, at the height of the bubble, such deals totaled $796 billion, or more than 16 percent of the $4.83 trillion in all the deals made globally that year, according to data from Dealogic.
Firms like the Blackstone Group and Kohlberg Kravis Roberts & Company, faced an image problem at the height of the bubble for excessive compensation and beneficial tax treatment, but their returns were so high that even investors like pension funds were drawn in. Now these firms, built on enormous amounts of debt, are being forced to go back to the financial markets just as those markets have nearly frozen up.
If history is any guide, the worst may be yet to come. Steven N. Kaplan, a professor at University of Chicago Graduate School of Business, found that nearly 30 percent of all big public-to-private deals made from 1986 to 1989 defaulted.
Without access to credit, many of these companies will be unable to pay their existing creditors, constituting a default event which will probably force them into bankruptcy where the funds will lose their equity. While this may seem like a wonderful solution, that equity really belongs to shareholders IN those funds. Pension funds, university endowments, insurance companies and the list goes on and on of the organizations that ostensibly invest for the future of ordinary people that will be hurt if these companies go under.
Now, maybe, would be a good time to start regulating private equity?
Posted by mcblogger at 08:56 AM | Comments (0) | TrackBack
November 07, 2008
The Economy, or, From the toilet to the sewer
The unemployment rate in the US has now reached levels not seen since 1994 and is expected to continue to climb. The White House, for it's part, is still not real comfortable confronting reality...
On Friday, a spokeswoman for President Bush, Dana Perino, called the employment numbers “a stark reminder of how critical it is we keep focused on utilizing” the programs that Washington has put in place, including a $700 billion bailout of the financial system.“We know what the main problems are — tight credit and housing markets — and we have the tools to solve them,” Ms. Perino said. “The programs we’re putting in place will improve the flow of credit to consumers and businesses that will spur economic growth, job creation, and stabilization of our financial markets.”
A year ago, that was the problem. What has been put in place doesn't prevent a recession, it merely prevents a widespread collapse and a resulting depression. We're out of the woods there. However, we're entering a very dangerous time with unemployment creeping ever higher. Of course, these rates HAVE been high for years. We just haven't seen them because BLS has been politicized and the numbers were massaged.
Typically, unemployment is a lagging indicator. First you see credit tightening, then businesses pulling back, then consumers, then layoffs and escalating unemployment followed by renewed growth. In other words, this is the crescendo. However, this doesn't mean things won't get worse before they get better. To wit...
Many economists expect this picture to worsen as the consequences of the global financial crisis ripple out to businesses and households. Though the $700 billion taxpayer-financed bailout has staved off fears of an imminent collapse and restored some order to the financial system, it has not persuaded banks to lend freely. Credit remains tight for businesses and homeowners.
OK, one way or another we have to get money back into the economy. If banks won't lend, then the government may do well to start lending itself or do a far larger stimulus package to reinflate the economy and kick start growth. We can worry about the resultant inflation once we are past the risk of deflationary death spiral. Inflation is easy to cure compared to deflation.
My personal preference is to dump $1.5 trillion over 5 years into infrastructure. Schools, roads, public transport, etc. all need improvement and those improvements are expensive. For one thing, it lessens the budgetary constraints on the states and munis. For another, it drives job and wage growth from the lowest levels which creates a solid base from which to expand the economy dramatically over the next 20 years. Given the global financial crisis, the government can obtain this funding at very attractive interest rates.
The long term prescription is wage growth at the bottom which will, in turn, drive up savings rates. Which is why tax policy at the corporate level needs to change dramatically.
Posted by mcblogger at 12:01 PM | Comments (0) | TrackBack
November 03, 2008
BUT WHAT ABOUT ME?!?!?!?!?
According to the NYT, some of you morons are upset that people are getting help to keep their homes.
An airline pilot who lives outside Norwich, Conn., Mr. Lawrence has a traditional 30-year mortgage that he has no trouble paying every month. But, thanks to the plunging real estate market, he owes more on his house than it is worth, like millions of other people.If the banks, which frequently lent irresponsibly, and many homeowners, who often borrowed irresponsibly, are getting government assistance, Mr. Lawrence says he believes sober souls like himself are also due a break.
“Why am I being punished for having bought a house I could afford?” he asked. “I am beginning to think I would have rocks in my head if I keep paying my mortgage.”
OK, Mr. Lawrence... here's THE DEAL. Your credit is good. THAT'S what you get for not needing this bailout. More than likely, you won't have to give up a percentage of your equity. AND, while you're underwater now, if this keeps up and we don't start helping some of the people hardest hit, you're going to go a lot more underwater and probably lose your job. You dumbass, it's not like this solves just one problem. It takes care of a myriad of problems.
MEMEMEMEMEMMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMEMMEMEMEMEMEMEMME.
THAT, my friends, is one of the biggest problems with this country. A focus on selfishness to the exclusion of all else, even thought you'll clearly benefit from being a little less self-absorbed. Watch Mr. Lawrence's airline lay people off and see how long it takes him to start asking for help.
Posted by mcblogger at 02:39 PM | Comments (0) | TrackBack
Feeling the economic pinch?
We're here to help. Well, actually, UrbZen is here to help. Well, when you really dig down to it Apartment Living is here to help but UrbZen made some brill comments.
3. Trade things you don’t want with friends, neighbors, relatives. Like your wife.9. Paper towels are expensive. Use washable cloth dish towels instead.
Toilet paper is expensive, too.16. Consider cutting your family’s hair yourself.
Because they don’t hate you enough already.24. Learn about the many bargains at ‘no frills’ discount stores.
Like the guy who sells Prada out of his van in Riverside.
Posted by mcblogger at 09:09 AM | Comments (0) | TrackBack
October 16, 2008
Paul's economic advisor speaks
Ron Paul's economic advisor, Peter Schiff, has a great piece up at the WaPo. Well, at least part of it is wonderful. This part...
Amid the chaos of recent days, as the federal government has taken gargantuan steps to stabilize the financial markets, realigning the U.S. economic system in the process, comes a nearly universal consensus: This crisis resulted from government reluctance to regulate the unbridled greed of Wall Street. Many economists and market participants who were formerly averse to government interference agree that a more robust regulatory framework must be constructed to cage the destructive forces of capitalism.
Sounds good, right? Just like what we've been saying for a while, no? Well, it is. However, he goes on to blame the government for PROMOTING HOMEOWNERSHIP AND NOT REGULATING WALL ST. which is bizarre. Why? Because it was the libertarian philosophies of Schiff and those like him that said the market would self regulate and that we needed to get the nanny state off our backs. Meanwhile people like me were screaming about what had become SOP at all the investment banks... lever 'til it hurts, baby! You guys won the battle of who could eliminate regs. But, as it turns out, my side wins the war because we're the only ones who still have money.
Never mind the fact that the entire economy almost fell off a cliff.
The part of the piece that really struck me was this...
Real credit can be supplied only by savings, so artificial steps to stimulate lending will only produce inflation.
Would someone, you know, take a moment to discuss monetary aggregates with Peter and that deflation is now a far larger concern than inflation considering that more than $ 4 trillion has evaporated from the economy?
Posted by mcblogger at 10:04 AM | Comments (0) | TrackBack
October 10, 2008
I'm voting for you, Rick
...but this was politics, it's shitty and you're a goddamn braindead simp for saying it. Cornyn has done soooo many things wrong that there are tons of issues to attack on. Instead, like any other craven politico, you attack him on the right decision on an unpopular issue that the mouthbreathers out in the hinterlands don't understand (but just so happens to be the one thing that might keep them from abject poverty).
You could have beaten him up for supporting the very deregulation that created this mess. You could have gotten him on supporting the very lack of oversight that allowed companies to offer mortgages at insane rates to borrowers who were clearly not qualified.
"We can't believe anything that we hear out of Washington, D.C., any more," Mr. Noriega said in a debate broadcast statewide on public television."This decision was made in haste," he said, adding that the stock market's negative reaction shows the bailout wasn't well thought out.
"It didn't have the accountability," Mr. Noriega said. "Quite frankly, we need to see that people go to jail.
WOW. Where to begin... the first sentence is just stupid. THIS WASN'T COMING FROM WASHINGTON YOU ASSHOLE. This has been rolling downhill all over the planet for a year. Just because you only recently became aware of it doesn't mean it wasn't out there and it wasn't just as big as many of us said.
The second point shows nothing of the sort. This is about redemptions and people panicking, it's hardly the market passing judgment on the TARP. TARP hasn't even been started. That's analogous to saying that a miscarriage was God's way of saying that he didn't want someone to be a mother.
As for sending people to jail, for what? Doing stupid, but legal, things? Wanna make changes to the law and regs retroactive?!
That's fucked up, hermano. As someone who has supported you from the Draft movement on, it's absolutely shameful to me that you would politicize what is in fact a very real disaster. If this really is how you feel, then I have serious doubts about your temperament and capabilities. If I were to tally up good vs bad decisions under both you and Cornyn, I'd have to say that you're still solidly beating the hell out of Cornyn. And I'm still voting for you.
But I'm no longer voting FOR you. I'm now simply voting for the lesser of two evils and despite the fact that you're dumb enough to box yourself in on this, you're still the lesser of the two which ain't saying much.
Thanks a lot, Prick.
Posted by mcblogger at 11:30 AM | Comments (3) | TrackBack
Shut up, Asshole
Bush goes on TV and the Dow falls 200 points.
We've got, what, a little over three more months of this nebbish? God in heaven, can't they just lock him in a broom closet?
Posted by mcblogger at 09:32 AM | Comments (0) | TrackBack
October 09, 2008
Poll shows 60% of Americans are dummies
You know, this would have been helpful a week ago Monday when all you morons thought we weren't in any real trouble. And now that we've got things somewhat stabilized, you think the world is about to end.
Maybe, just maybe, it's because they're reading shit like this. My favorite part:
There is trouble here. In the absence of a functioning market, how can the bureaucrats at the Fed figure out the right prices/yields to charge? This is the same problem as valuing level 3 assets, but without a profit motive to aid in focusing the efforts of the businessman.
Ahem.
Point 1 - The Fed can rather easily determine the right prices by cashflow and performance analysis. That price then becomes the new mark to market (see Point 2). For example, if someone is trying to sell a CDO to the Treasury, with a face value of $1 bn, Treasury will do an analysis of the projected yield to maturity taking into the account the performance of the CDO. If 25% is not performing, then a baseline is $750 mn, less the already paid out portion. In general, you'd probably see a discount of 10-20% which would give a price of, say $600 mn. Granted, I'm not breaking out the math and some of these securities are a great deal more complex. However, that's essentially how this works.
Point 2 - The price the Fed pays for one security can be cross applied to a similar security (it only takes one trade to make a market price). Thus, the null valuation for level three assets goes away and suddenly bank balance sheets look a lot better.
Point 3 - The Fed and Treasury are likely to strip these pools apart and separate the good from the non-performing. The NP will then be sold off to loss mitigation folks. The rest of it will be insured and sold back into the market. Why will the market buy it?
Point 4 - The market will buy it because every minute someone sits in cash costs money. It's not just inflation, it's opportunity cost. How long can they afford to sit this out? A month. Maybe.
What's being missed is that this isn't 1929. Things move at speeds that would be unimaginable to the people of that era. The crash was long, drawn out and excruciating. This one has been short, deep and very painful. The recovery took a decade. Now, if it takes a year I'd be surprised.
Could things spin out of control? Sure. Get over it. Simply, it's like worrying about dying. Sooner or later, it'll happen. It's worthless worrying about it.
And quit watching Suze Orman.
(h/t to KT)
Posted by mcblogger at 09:18 AM | Comments (1) | TrackBack
October 07, 2008
The Nightmare and Oil
More than a year ago, I wrote this about the nightmare scenario. We've experienced spot shutdowns in CP for more than year which has squeezed the investment banks. Unfortunately, it's now spread to a systemic problem which prompted the Fed to step in this AM to become the lender of last resort for commercial paper.
A year ago I said an event like this could well cause the dollar to lose 30% of it's value. That flawed analysis was based on a breakdown mostly in the US. However, as the freeze in the capital markets has spread worldwide and as write downs have basically eliminated $2-3 trillion from the money supply, there is a flight to the perceived quality of US Treasuries.
Voila! Instant dollar appreciation vs. other major currencies.
What's the net effect? Well, for the $4-5 trillion on the sidelines, it's a wakeup call that the Fed and Treasury, working in concert with other central banks, will not let the entire global system go down the drain. Further, it lets them know that there are safe risks. Finally, they have got to get this money to work and were charging exorbitant rates to borrow. Now they have an absolutely massive competitor which will have a cooling effect on credit cost increases. This should accelerate a return to normalcy.
This was the bogeyman in the closet. Now that it's come out, we realize it's not carrying a chef's knife. It's carrying a plastic potato peeler. And we have gun.
This doesn't mean all is rosy. Unwinding AIG and Lehman will be very difficult and probably will cause temporary shocks in certain areas as distressed assets are sold into weak markets. This is unavoidable but it's not fatal.
But all the news is not bad. Some buyers are stepping back into the market. Take Wells Fargo's offer for Wachovia. And Citi's subsequent lawsuit. The bottom line is that Wachovia, even with it's problems, is worth a lot of money. By Citi's estimate, $60 bn. Which means shareholders won't get screwed in the ultimate sale because a buyer is going to have to pony up some money... they won't walk away with it for free (as Citi tried to do).
One positive? With demand dropping and dollar strengthening, oil prices have fallen through the floor at $90/bbl. As the picture in financial securities begins to clear up, look for more and more speculative money to come out of oil and other commodities, dropping them still further. I do not think oil will drop much below $60-67 range which will leave intact the transition to biofuels and more efficient vehicles.
Still, wages are slack and unemployment is climbing. That's the official number. The unofficial one is far higher. All that aide, we're heading for a recession. Which is a relief considering what we were looking into last week.
Posted by mcblogger at 12:30 PM | Comments (0) | TrackBack
October 03, 2008
Recap bill passes the House; Republicans still spouting the stupid
In spite of dippy little retards like Michelle Bachmann, the recap bill passed the House. The Republicans, even though we all know their ideology and philosophy of unfettered commerce were abject failures, are still sticking to their knitting and now, in the case of the aforementioned Bachmann, actually have the temerity to declare this was all the result of TOO MUCH regulation.
Michelle, here's exhibit A in the proof of just how absolutely wrong you are.
The 2004 decision also reflected a faith that Wall Street’s financial interests coincided with Washington’s regulatory interests.“We foolishly believed that the firms had a strong culture of self-preservation and responsibility and would have the discipline not to be excessively borrowing,” said Professor James D. Cox, an expert on securities law and accounting at Duke School of Law (and no relationship to Christopher Cox).
“Letting the firms police themselves made sense to me because I didn’t think the S.E.C. had the staff and wherewithal to impose its own standards and I foolishly thought the market would impose its own self-discipline. We’ve all learned a terrible lesson,” he added.
Michelle, this was a failure of the central tenet of your ideology... that the market can police itself. It can't. And when individual players make imprudent decisions, it can cause a systemic failure. This was a failure of cooler heads to regulate in a sensible way. And you're an idiot tax attorney who thinks she knows better. Tell you what, Michelle... why don't you let those who actually know something about banking handle this. We'll call you if we need advice on tax treatments.
Whatever you do, don't repeat that lame argument that this was because of CRA or Fannie and Freddie. CRA didn't require Bear to leaver AS A FIRM to 33:1. It also didn't require them to fund loans to borrowers who could only prove that they were breathing.
Moron.
(And, Michelle, just in case you're wondering... it was your appearance on Bloomberg that prompted this post. A word of advice, better to be thought an idiot than to open one's mouth and remove all doubt. Get me?)
Posted by mcblogger at 01:40 PM | Comments (5) | TrackBack
October 02, 2008
Senate Passes Recap Plan
This may be the only time that I will ever find myself in agreement with how Sen. 28 Gauge voted and not agreeing with Sen. Feingold. The Senate passed the plan. The House may vote on it on Friday.
As for the real world effects, this is just a taste. This is happening to small businesses now. Just imagine what would happen if this occurred to consumers who suddenly fund their credit cards cut off?
And this, my friends, is what I was trying to tell you. It's page four that's the most important. I want y'all to read it. Then read it again. I want it to sink in fully so that you'll understand exactly the kind of disaster scenarios that have been going through my mind and the level of frustration I've felt from the ridiculous bullshit on both sides. Your political wrangling, fear mongering and STUPIDITY damn near drove us over the edge.
Frankly, it may still.
From now on, remember that I don't panic easily. And it would be nice if, in the future, you'd give me the benefit of the goddamn doubt before sending me emails about freaking out over nothing.
Posted by mcblogger at 01:54 AM | Comments (2) | TrackBack
October 01, 2008
Laboring under the delusion that everyone is as smart as you
With all the crazy cow crap flying about as if in a West Texas windstorm, you'd think the recapitalization plan would already be DOA. That WAS the goal of the Laborers' International Union. Until someone figured out that they could lose their jobs if the banking system collapses.
A touch of earthy fatalism from the Laborers' President Terry O’Sullivan: "We probably will have to hold our nose, grab the barf bags and do this because unfortunately we've got ourselves stuck on the same ship as those who caused this crisis and if they sink, working people sink too. But a bailout cannot just be another no-strings Bush raid on taxpayers. We need real protections to keep this from happening again and a stimulus package that creates jobs by building America."
Couldn't agree more! What kind of stimulus package did you have in mind?
The 500,000-member construction union, which endorsed Obama, wants $100 billion to go for a massive infrastructure program instead."Investing in America has an immediate impact on our economy. The U.S. Department of Transportation estimates that 47,500 good jobs can be created for every $1 billion investment building America," a spokesman wrote in a statement.
For one thing, unlike many of you mouthbreathers (on the right and left), these folks really understand the real world impact of scuttling this. They lose their jobs. Just like many of us will.
And where they are WAY OUT in front of many of you (again, on the right and left) is that we NEED infrastructure. These folks, with this one little thing, just became the smartest people I've read about in weeks.
Posted by mcblogger at 02:09 PM | Comments (0) | TrackBack
September 29, 2008
Recap vote is failing and the Dow is falling UPDATED
The US House of Representatives is holding the vote on the financial services recapitalization plan and it's currently failing. The Dow had fallen more than 600 points but has paired losses to just shy of 500.
Thinks this stuff doesn't matter? If this doesn't go through, take a look at your retirement account in a few days.
I'd like to take a personal moment to thank all the idiots, within the Democratic and Republican parties, who are voting against this (not to mention all the pressure from outside groups put on them). When the books are closed on this era of American history, you'll all be remembered as the people who collapsed our economy.
UPDATE - Boehner is on TV whining that the R's voted against the bill because of what Nancy Pelosi said. Blunt is saying the same thing. The reality is that 75% of his folks voted against this bill. Of course, as Rep. Cantor (who flipped on his support for the bill from against to for) pointed out, NINETY FOUR DEMOCRATS voted against this.
I can't wait to hear their individual reasons, other than being gutless trash (and basically Republicans).
UPDATE 2 - Pelosi is saying that D's were to bring half and the R's were to bring half. It appears that the D's followed through and it was the R leadership that failed. Apparently there were 94 Dem's who just didn't like the fact that it was an improved Administration bill. So, the deal was made... the D's bring more than half and the R's just need to balance it out. Apparently, the R's were 12 short.
UPDATE 3 - I love me some Barney Frank. He just said when asked about Boehner's comment that he simply could not believe that 12 Republicans would disregard the imminent peril to our country, to ordinary Americans, because they got their feelings hurt. He then offered, if the R leadership would give him the names of the people, to go to talk to them 'uncharacteristically nicely' if it would help. The press corps died laughing.
Now it's Rahm Emmanuel. And he SUCKS BALLS as a speaker at a press conference. He looks and sounds twerpy.
As of right now, the US Equity Markets alone have lost more than ONE TRILLION DOLLARS since this failed. Thanks a bunch, R's.
Posted by mcblogger at 12:58 PM | Comments (1) | TrackBack
September 26, 2008
Gas pains
As part of the 'Ike Tours Texas' fallout, refiners on the Gulf are still shut down which is causing spot shortages in Atlanta (which sucks anyway) and in Tennessee. And, apparently, Dallas. Here's what caught my eye (and keep in mind the effected refiners account for 20% of US capacity)
U.S. crude oil refinery inputs averaged 11.5 million barrels per day during the week ending September 19, down more than 1.7 million barrels per day from the previous week's average. Refineries operated at 66.7 percent of their operable capacity last week. Gasoline production fell last week, averaging about 8.0 million barrels per day. Distillate fuel production decreased last week, averaging nearly 3.3 million barrels per day. (EIA)
So, refineries effected by Ike account for 20% of US refining capacity and we're down to 66%??!?! That seems strange at a time where wholesale gasoline recently spiked to $5/gal.
Then I saw this and start to think maybe there is something going on.
SO, we have a massive crude and gasoline supply disruption as a result of a hurricane. Combine that with newfound regulatory zeal from governments around the world, all of whom are looking to strangle speculation and suddenly refiners have decided to artificially (for 'repairs') reduce the gasoline available in the market?
Methinks this is a pretty clear cut case of supply manipulation. They can't play with the price since the speculators (those still left in the business now that LEH is gone and MS and GS are under scrutiny) have had to cut back. So they energy companies themselves have decided to create an artificial supply constraint by shutting in capacity unaffected by Ike.
Ain't it nice that the oil companies care so much about their customers?
Posted by mcblogger at 04:13 PM | Comments (0) | TrackBack
September 25, 2008
Doubling down (craving crow with seconds)
So this morning I wake up to this story.
Really? Why, I never. How dare the Bush administration demand concessions it can probably get from this Congress...for reasons COMPLETELY INEXFUCKINGPLICABLE considering the mood of the electorate.
Go ahead, bitches. I dare you. Sack up and take on the 19% bogeyman or else go suck on Karl Rove's subpoena and stop sending me fundraising letters.
Crow is best served as a two-course meal. Damn I'm craving some.
Posted by hbalczak at 01:30 AM | Comments (0) | TrackBack
September 24, 2008
May you live in interesting times...
This financial crisis is finally waning. They always end when buyers finally realize that the firesale won't last forever and they dip back into the market to buy deeply discounted assets. We got a big boost of this yesterday.
Until now, Mr. Buffett, who has navigated the stock market with legendary prowess, has largely refrained from investing in the stricken financial industry, saying repeatedly that things could get worse.Thousands of people on and off Wall Street follow Mr. Buffett’s moves, so his decision to invest in Goldman immediately heartened investors. After falling nearly 1.5 percent during the day, the Standard & Poor’s 500-stock index erased half its loss in after-hours trading Tuesday evening on news of the investment.
“Buffett is saying he’s confident,” said Brad Hintz, an analyst at Sanford C. Bernstein & Company.
Mr. Buffett’s conglomerate, Berkshire Hathaway, unveiled the move only days after Goldman, long the premier investment house on Wall Street, embarked on a radical plan to transform itself into a traditional bank to ensure its survival. Goldman, which examined various options over the last week as its shares tumbled and some clients abandoned the firm, also said Tuesday it would sell at least $2.5 billion of common stock to the public.
The difference between Buffett and others is that HE can afford to hold something for decades until BRK makes a profit on it. Even if he dies, there is management at BRK that thinks exactly like him. And his success has not been the result of luck, it's research and thorough analysis. It's making the right decision.
Be fearful when others are greedy. Be greedy when others are fearful.
Last night and this morning I posted a couple of emails to Carl Whitmarsh in Houston regarding something he'd sent out on his massive email list. The first article was this from George Will. Now, George has never been a big fan of McCain. However, that's not the meat of the article. It's the craptastic analysis of the US falling into socialism. Here's what I sent to Carl:
It's funny to me that McCain would attack Cox for not regulating the very securities that McCain voted to keep unregulated.I LOVE the way conservatives have decided that this is socialism, as if the entire
capital market is now under the absolute control of the Treasury and Fed. Their
plan, buying assets that the free market has assigned zero value to, is absolutely
sound. Why? Because occasionally the market goes crazy and won't buy something
that's worth a dollar even if it's discounted to 10 cents. The market, in short, is
not always right.The Fed was CREATED to avoid panic and provide liquidity in times of market
dislocations. Which is exactly what we have now.That being said, Paulson's plan, as presented on Sunday, is a thoroughgoing mess.
There will have to be oversight. There will have to be caps on CEO compensation.
However, the basic idea to add liquidity to our deflated economy is a good one.
The second comment was related to a piece Harvey Kronberg ran from Royal Masset
I love Royal but he's wrong on what's happening in the financial industry. This is a panic, pure and simple, and it should wake people up to the reality that markets are far from perfect.Markets are nothing more than buyers and sellers. Period. They are dependent on
humans and their imperfect decision making. The idea that markets self regulate with
minimal impacts is ALWAYS wrong. They do self regulate and in the process create
what can charitably be called distress.Regulation and enforcement, while imperfect and sometimes overreaching, is a hell of
a lot better than mass unemployment and starvation.That's the lesson most of the 'free market' Republican's have never learned.
Of course, there are number of others who have problems with buying assets. They see another solution, lend directly to the banks.
Here's why you can't just lend money to banks, allow them to take the losses in selling these assets, and then repay the debt over time. For one thing, these losses are going to (in many cases) wipe out all the equity in banks, rendering many insolvent. You can't replace that equity with debt owed to the government. Debt is Debt. For another, the market is so freaked out and dislocated (not to mention fearful) that no one wants these securities at any price. It's not that these securities aren't worth something. After all, the vast majority are A paper mortgage credits. It's that investors can't see the value and won't take ANY risk.
What is needed is a prime mover to get these assets moving, worked out and restore the market. That prime mover is the only entity capable of operating for the long haul, the Federal Government.
The issue is that these assets, when marked to market, have no value because the market is buying and selling NOTHING. However, the loans underneath are STILL performing. On a cashflow basis, many are performing exactly as predicted. We may now need to look at discounted cash flow as a value model to fall back on when MtoM fails. Which it is prone to do when the market seizes up. Which it, of course, does from time to time despite what the Republicans say.
We have to stabilize home prices which means we need people with jobs who can buy homes with mortgages. Unfortunately, as this crisis deepens, it begins to effect employment AND the ability of people to secure financing for homes. Without a market, the value of homes continues to drop. In the end, we fall into a Depression. THAT'S the end result of doing nothing.
Finally, there are some lesson we all need to take from this experience...
1) Regulation and enforcement are not obstacles to the success of the market. They are ESSENTIAL to the success of the market.
2) Capitalism has not failed. What failed was our obligation to oversee it and make it work for the majority.
3) Just because something is valued at nothing right now, it doesn't mean it's worthless.
One last point... one that everyone needs to understand unequivocally, if we don't do this the whole damn country fails. THAT'S the reality and all the whining about taxpayers footing the bill (which is a load of crap) isn't going to change it.
Posted by mcblogger at 03:10 PM | Comments (0) | TrackBack
Methinks they doth protest well enough (and that's what has me worried)
So if we're to believe our eyes and ears, the Administration's bailout proposal sure has everyone on the Hill all frothing at the mouth.
I don't know about you folks, but it makes me real nervous-like when the Democratic congressional leadership rails this loudly about a Bush proposal this feculent. Because all too often, the squallin' and wall-eyed fits give way to The Big Cave-In [see, e.g., FISA, reauthorization of Iraq War funding, domestic spending levels, etc.].
At times, it seems as if this sort of rending of garments and gnashing of teeth is almost a kind of obligatory theatrical foreshadowing of a preordained tragic climax wherein vile douchebaggery and bitchassedness prevail over courage and righteousness. For you English majors out there not yet done with the metaphor, I suppose the denoument would be the part where said players engage in post hoc bitching about how the executive branch has usurped all the power and singlehandedly ruined the country and that's why only our side can provide the bold, gallant leadership the nation needs, bleh bleh bleh.
(And I type this while aiming Ye Olde Stinkeye in your direction, Nancy, Steny and Harry.)
Hopefully, things will be different this time. Maybe Democrats on the Hill will say, in one, big, loud unified voice, "I'm Rick James, bitch!" and imprint the Will of the People upon the forehead of Connecticut-native George W. Bush with the almighty knucklebling of Article One power. Maybe instead of handing a blank government check to the Gamma Beta House and hoping they'll notice the phrase "public service project" written on the memo line, Congress will pass some completely pinstriped-ass-whuppin' legislation and rock the nation with a new number one hit single, "Smells Like CEO Comeuppance."
Lord, I hope that happens. But I know better than to emotionally invest in that prospect. Kind of like how I learned, as a kid, to tense up any time I saw Charlie Brown on television hauling ass toward Lucy holding a football.
You know, a big heaping plate of pungent raw crow sure would taste good right about now.
Posted by hbalczak at 01:26 PM | Comments (0) | TrackBack
September 23, 2008
Rewriting history, with Kevin Hassett
Bloomberg is carrying some rather odious commentary from Kevin Hassett of the American Enterprise Institute, the right wing institute which provides little in the way of real information and research but is LONG on commentary.
According to Kevin, this is all the fault of the Democrats because they wouldn't reform Fannie and Freddie. What Kevin doesn't point out is that the bill in question would have so severely curtailed Fannie and Freddie that it would have eliminated them as real competitors and an effective counterbalance to the banks. Kevin claims, stupidly, that the failure of Bear Stearns was caused by... Fannie Mae.
30 to 1 leverage in a CDO of CDO's had NOTHING to do with it, right Kev? Neither did Bear's never ending hunger for riskier and riskier sub-prime garbage that was priced inadequately for the inherent risk, I'm sure. Of course, I understand how you can make mistakes, Kev. After all, it's easy when you ignore reality.
Kevin also points out that FNMA is holding $388 bn in sub-prime and Alt A credits. That's true. Considering that at the height Wall Street was issuing $600-700 bn PER YEAR in sub-prime issues, it kinda dwarfs Fannie Mae's holdings. I'd also like to know just who issued those sub-prime credits on Fannie's books. I'd be willing to bet some of them show Lehman Brothers, Bear Stearns and Credit Suisse as the vintners.
Of course, Kevin leaves all that out and points out his own ignorance of structured finance and the house cards by alluding that AIG was also collapsed (as if by magic) by Fannie Mae. AIG is even easier than Bear... they wrote too much insurance, too cheaply and when the call came for more collateral from counterparties, they couldn't sell assets fast enough... because they were carrying some the same assets they were insuring against default.
Brill business strategy, especially for an insurer.
Of course, Kevin can be excused for not knowing any of this. He is, after all, a political moron and (again) completely ignorant of finance. His only real work experience in business is at the AEI and as a McSame campaign adviser. Which puts him right up there with other economic luminaries like Carly Fiorina and the crew of lobbyists that McSame calls his close friends and advisers.
Posted by mcblogger at 10:26 AM | Comments (0) | TrackBack
September 22, 2008
The fallout...
First off, for a moment, take a look at this again. Specifically point one. Think about that every time you read something from one of the chicken little's on the right (or left) who are bleating on about toxic securities.
One more time, there is no such thing as a toxic security. There is only a toxic price. In other words, be rational about the prices you pay for assets and you'll be happy. The market for credits got very frothy and people overpaid either because they were dumb or they didn't really understand the securities they were buying. Now people have gone the opposite way and are unwilling to buy these assets at any price.
As the old saying goes, be greedy when others are fearful. Be fearful when others are greedy.
Unfortunately, it looks like many investors are going to take a pass on these assets. Which leaves the Fed's and the few willing and smart enough to jump into the fray (like JPM). First off, I'm pleased as punch about the government getting involved since the 'free' market has completely gone off the rails. However, Paulson's plan is still the wrong way to go.
We're also mostly on the same page (though I, unlike Stirling, don't subscribe to conspiracy theory) except for a few highlights...
1) Cramdowns - Basically, this is a modification for mortgages in markets with declining values. It's also useless. What about the homeowner who is making their payments EVEN though their home is worth less than they paid? There's really no need for this unless you're talking about doing a workout on someone who really can't afford the mortgage and the value has declined dramatically. However, I don't like the government getting a piece of the inevitable increase in value down the road through some kind of hitherto unknown lien position. If you're going to help people, help people.
My advice : Don't do this with anyone who has had a greater than 50% decline in value. That's what you'll get on a foreclosure. Anyone more underwater needs to just walk away with a wipeout on the mortgage history so they don't have an adverse hit on the credit report.
Last thing... change the tax laws to benefit workouts rather than foreclosures. It's easy... if a company does a workout that results in the loss of loan balance (say, from $200k to $150k) then they can take that as a loss against ordinary income immediately. If they foreclose, they have to take the loss on that against income over THREE years. Either way, you have to alter the law to keep these companies from 1099ing the people effected for the difference.
2) Not so much with a national emergency and rationing. Let's look at changing tax policy to increase wages for ordinary people. That'll take care of commodities inflation and our negative savings rate. And that whole petroleum thing can be easily fixed with biofuels. Actually, it WILL be fixed fast as long as oil is over $50/bbl.
I'm fine with expanding FDIC and LOVE what Obama is hitting on. Plus, as many of you know, I've always hated excessive levels of executive compensation. I say go for it, Congressional Democrats! Take this time to make this a real solution, instead of another Paulson bandaid.
Now, onto what's happening today. Obvs, the market loved the Paulson/Bush/McCain plan as much as we did. The Dow is down around 3% and oil has shot back up to $120/bbl as investors pull out of equities and dump speculative money into oil.
Needless to say, we ALL apparently want something other than another silly gimmick. Except for Michelle Malkin who has turned this into yet another attempt to divorce herself and her Party from responsibility for this problem.
Robert Novak called attention to Paulson’s Democrat DNA last October. It’s worth reminding you of Paulson’s instincts and the liberal allies he has installed at the Treasury Department
No, no, Bitch. Paulson's one of yours. And quit quoting that sad, old alcoholic. As for him bringing in 'libruls', the problem is that all your financial guys suck balls. They all end up going broke.
Posted by mcblogger at 03:16 PM | Comments (0) | TrackBack
September 21, 2008
A special invitation to the Secretary of the Treasury
Seriously, THIS is what you came up with? A massive expansion of the Executive Branch, no help for homeowners and absolute power with a blank check?
It's clear to me now that Paulson has got to go and we need Bob Rubin back at Treasury. Larry Summers is wrong for the job (honestly, he's a dumbass anyway) and Rubin is the only one with the kind influence in financial and political circles to get something done. He's also far smarter than Paulson which should help.
We need to re-regulate commodities and derivative trading (fuck you, Phil Gramm, you dirt leg moron) and begin requiring a lot more capital be held by companies wishing to operate in the securities industry. No more of this 30 to 1 leverage bullshit. But I don't see that it this little 'plan'. I also don't see anything to help expand efforts already proceeding to pull borrowers out of bad mortgages. No, I'm not talking about a cram down and share the wealth plan (seriously, why even bother, Ian? You gonna give everyone who's upside down on a car note a bail out, too? Just get them outta the bad loan and regular appreciation will work out the gap), just a reworking of underwriting guidelines and insuring to allow people to get into affordable mortgages.
We needed real solutions and an indication of some sort of contrition. Instead, we get a brazen attempt to steal still more power for an out of control President.
Congress should act. The Democrats should write one hell of a bill and tell the President to sign it or we'll let everything go down the tubes.
Enough bullshit and politics. And Chairman Frank should immediately demand Paulson's resignation.
Posted by mcblogger at 04:37 PM | Comments (0) | TrackBack
September 03, 2008
Cypress to shut down Fab 2
Cypress Semiconductor has decided to shut down Round Rock based Fab 2, the facility where it has produced semiconductors for more than 22 years. The shut down will result in the loss of more than 200 jobs...
The company informed the Workforce Commission that it will close the plant in four stages, eliminating 211 engineering, administrative and operator jobs. In the first stage, the company will cut 67 jobs between Oct. 27 and Nov. 11. Then it will cut 57 jobs between Nov. 10 and Nov. 23, followed by more job cuts between Dec. 8 and Dec. 21. The final 45 job reductions are planned to occur in early 2009.Cypress said that the Round Rock plant used older manufacturing process technology to make less advanced chips.
"It is simply more cost-effective to shift manufacturing elsewhere than to retool Fab 2," said Shahin Sharifzadeh, the company's manufacturing vice president, last year.
One has to wonder if Cypress received any 'incentives' and how much Round Rock has benefited from them. As for me, good riddance Cypress. You're kind of a loser any way. While it hurts to let jobs go, hopefully Samsung or another company will pick them up. They seem to be doing well.
Posted by mcblogger at 02:15 PM | Comments (0) | TrackBack
August 19, 2008
Having it GOOOOOD (if you're a corporation)
The WaPo decided to take some time out of it's busy schedule sucking up to McCain and his outrageously stupid staff to rain a little dookie on Senator Obama and his plan to stop offshoring American jobs and make sure corporations pay taxes on income earned by overseas divisions. Which is interesting in light of the recent report from the GAO that using loopholes, two-thirds (that's 66% for those of you who don't do fractions so well) of US and foreign corporations operating in the US didn't pay taxes between 1998 and 2005. In fact, 25% didn't pay a dime to the US Treasury on more than $1.1 TRILLION in revenue in 2005 alone.
Some of course think this is great...
I see it completely differently. First of all, corporations don't really pay any income taxes at all. People do. Every time a company decides to sell something to you, the price depends on a lot of things, including how much it costs to make the item, how much profit the company wants to make, and how high the company's tax bill is. You, the consumer, end up paying the corporate income tax with higher prices. And you want more of that?
This is, of course, untrue. Whether a company makes a dollar or $1 billion, it should pay taxes on those profits. Consider it the cost of doing business in a country with a strong consumer base, a tradition of the rule of law (at least so far as commerce is concerned) and a fantastic (though deteriorating) infrastructure. Not to mention, police and fire protection and an education system that spits out workers that are easily trained. You don't get that in many other countries, especially not in those with lower taxes.
Further, from an economic perspective, this is utter nonsense. For one thing, companies have competitors who offer similar products and servicesm not to mention a little something called demand elasticity. When consumers are gouged, they look for a cheaper alternative. Which means that it's hard to drive up prices arbitrarily, say to make more to pay your taxes as the author (a CPA) suggests.
No, these taxes hit shareholders. As a shareholder in a number of companies, I'm fine with that. After all, in other countries, my stake could be arbitrarily taken away. Not so here. In point of fact, I'm happy to pay taxes... it means I made money and am doing my part as an American to maintain the country that has allowed me to prosper. You see, I'm a true conservative who believes fundamentally you pay for what you get. Sure, I don't want government waste but at the same time I don't want private sector waste, either. And the private sector is way more wasteful. I want efficiency and despite what some supposedly conservative ideologues would like to believe, GOVERNMENT IS THE ANSWER IN CERTAIN SITUATIONS.
Finally, let's talk about corporations as people. The fact is, according to a number of SC rulings and interpretatins of the 14th Amendment, corporations ARE people. Why on earth shouldn't they pay taxes like the rest of the people?
Krugman has his take on it and takes on the argument that poor US companies are taxed too high. Actually, as a percentage of GDP, American corporations are taxed at a rate that's middle of the road for first world countries. Only Germany and French corporations pay less as a percentage of GDP, something that will no doubt infuriate those who hate these allegedly socialist countries.
The most striking thing about this debate are the ends to which some will go to dissemble. To wit...
First, while it is true that 60 percent to 70 percent of companies in the study paid no tax in a given year, there was a big qualification. The study focused on an Internal Revenue Service tax database that included millions and millions of companies. The vast majority of firms in the study were tiny mom- and-pop enterprises.Why did the tiny mom-and-pop enterprises pay no taxes? Because they didn't make any money! The study reported that was the reason about 80 percent of the firms in the sample avoided taxes in a given year. How terrible of them.
If the GAO issued a report that added together data for nine hot dog stands and General Electric Co., and found that 90 percent of companies didn't pay any tax, it would be a harmless and silly thing to do. But if the Democrats then rush to the microphones and insinuate to the general public that 90 percent of companies are tax dodgers, the stakes change.
The author of the above is from the American Enterprise Institute and his focus was on the Democrats rightfully politicizing this. And, in case you were wondering, what he says above is utter bullshit. The focus of the study was on corporations with more than $50 mn in revenues and/or $250mn in assets. How many hot dog vendors do you think fall into that class? How many mom and pop Ebayers have more than $250mn in assets?
Of course, the author didn't bother to leave his arguments there but instead decided to reiterate the tired assertion that US corporate tax rates are the highest in the western world. Which is true if you're looking at published tax rates. What he should be looking at is the actual tax burden which is composed of the actual taxes paid by companies in the US. That number is among the lowest in the world which rather neatly rains dookie all over the argument that our poor corporations are overburdened with taxes. Want more proof? See the Krugman link again.
Leona Helmsley was often quoted as saying that only the poor pay taxes. They can't, after all, afford accountants to find exotic loopholes in the tax code and they certainly can't afford attorneys to defend them in the event of an audit.
Posted by mcblogger at 02:03 PM | Comments (0) | TrackBack
August 18, 2008
Globalization and the Credit Crunch
The past four years have brought India economic growth of seemingly unstoppable momentum, often 9 percent a year, helped along by big inflows of foreign investment. Rising incomes and low interest rates enabled many middle-class Indians to realize the dream of owning a home, even while still in their 30s.But economists warned that the economy was overheating, producing inflation and speculative bubbles in real estate and the stock market. So government policymakers moved to cool things down by raising interest rates and tightening the rules for home loans. Taken along with the general global slowdown and spiraling fuel costs, the measures have had the intended effect.
On Wednesday, the government projected the growth rate would fall this year to 7.7 percent, compared with nearly 9 percent last year. Industrial output slipped to its lowest in six years, growing 5.4 percent in June, compared with 8.9 percent in the same month last year.
ad_iconTrapped in debt, many middle-class Indians are struggling to cope. Raina's monthly mortgage payment has gone up by 12 percent. "I have to cut corners now, or I may not be able to pay back my loan before retirement," he said. Payments on some loans have doubled since 2004, when interest rates were at a record low.
"The boom of the last four years mesmerized them to live beyond their means," said Deepak Raheja, a therapist who runs a support group called the Hope Foundation. "In the past ten weeks, I am getting five to six new patients every week with financial worries about mortgages, loan repayments and credit card bills. All in the age group of 25 to 40. They exhibit anxiety, helplessness and depression. Some even contemplate suicide."
No longer are financial shocks localized. We saw the beginnings of that in the late 1990's and it's continued to develop which points out one negative of globalization, bad policy and laws lead to a collapse in one country that can effect consumers on the other side of the planet.
Posted by mcblogger at 09:47 AM | Comments (0) | TrackBack
August 02, 2008
Think the economy is good?
Take a look at this... then tell me you're doing OK.
Posted by mcblogger at 08:55 AM | Comments (0) | TrackBack
July 30, 2008
You're looking a little desperate...
The EIA report came out this morning and had some interesting numbers. So far, the traders see it as bullish. So do the talking heads on Bloomberg, save one who picked up on the seasonal adjustment as refiners begin the shift to fall and winter formulations.
But there's another issue as well... people aren't using as much. Margins on gas are tight. Therefore, refiners have been producing less which is why the dramatic drawdown in inventories. Refiners, simply put, are putting more emphasis on higher margin products like distillates. Now, want me to give you some back up numbers? How about this...
Crude oil supplies declined 81,000 barrels to 295.2 million barrels last week, the report showed. A 1.3 million barrel drop was forecast in the Bloomberg News survey.Distillate Supplies
Inventories of distillate fuel rose 2.4 million barrels to 130.5 million barrels last week, the report showed. A gain of 2.05 million was forecast, according to the median of 12 analyst estimates.
So, Oil inventories dropped much less than expected (bearish for oil prices) and distillate inventories rose far more than expected. Everything fits... still, Goldman and the traders are focusing on gasoline inventories and bidding up oil. Goldman, for it's part, has dropped it's $200/bbl by the end of the year projection and replaced it with $149/bbl.
Lehman is going in the opposite direction. Honestly, seeing the evidence and not really being prejudiced one way or the other, I'm going with Lehman.
Posted by mcblogger at 02:09 PM | Comments (2) | TrackBack
July 29, 2008
Right. And Wrong.
The NYT Ed team spent Sunday congratulating Democrats for stopping retarded R efforts to drill in ANWR and the OCS. Then they congratulated the R's for keeping the Demo's from enacting legislation to restrict speculation in commodities.
While speculation is not the only thing driving oil prices, it IS a substantial component. Failure to acknowledge that fails to acknowledge the nature of markets and momentum players in them. For another, oil has steadily trended higher on rumor and, wait for it, speculation about events around the world. Why, for instance, Nigeria and production problems there have been the reason for fully $10 of the rise in oil at a minimum. Which would be understandable if Nigeria WASN'T PRODUCING ANY OIL.
Like all commodities, demand is an issue. However, the primary talking point regarding the case for no speculative bubble has been (mostly from people in NYC) that gas demand hasn't fallen despite the historic high price. Of course, what's left unsaid is that refiners haven't been able to pass THAT price, NYMEX spot, onto consumers. And that demand destruction is, in fact occurring.
The Ed Board at the Times apparently thinks that speculation is only someone trying corner the market. It's not. It's money chasing money regardless of fundamentals. While I wasn't a big fan of the D plan (I'd have rather seen short term cap gains taxes, realized in less than a year, drilled up to 70%) it would have at least done something. Of course, as the Times points out, it would have hurt hedging operations for airlines.
I guess the bright folks up there don't realize that there are other ways to hedge. And that absent speculation, there isn't as much of a need TO hedge.
Posted by mcblogger at 11:46 AM | Comments (0) | TrackBack
July 28, 2008
Oh, Paul... notes on the Housing Bill...
Usually, I find myself agreeing with Krugman 90% of the time. This piece is absolutely spot on. As he astutely points out, financial regulations and statutes from the 1930's need to be updated for a 21st century global financial reality that includes 30 to 1 leverage and derivatives with notational values in the trillions.
Basically, one firm going belly up can freeze the entire system. Thus, the need for the Fed and Treasury to step in because private firms went a little too wild and larded on too much risk. So much, in fact, that it stands to effect the 300 million of us who aren't investors in these firms. With that kind of reach, it's absolutely necessary that there be enhanced regulation. And Phil Gramm can go fuck himself.
HOWEVER, I'm sick of the talking point, when referring the housing crisis, that this was all the fault of brokers.
Mortgage originators didn’t worry about the solvency of borrowers, because they quickly sold off the loans they made, generally to investors who had no idea what they were buying.
Uhm, Paul, originators can't originate a loan for which there aren't guidelines and a sales channel. In other words, for a loan to be originated there has to be someone willing to buy it and they set the rules. The people who bought and securitized these loans (like Bear Stearns and Lehman) knew exactly what they were getting.
Think I'm wrong? Call an originator in the phone book, any originator, and ask for a 95% NoDoc loan with no MI for the purchase of a non-owner occupied property. They'll calmly explain that the product doesn't exist.
Because the people who wanted them are either dead, dying or on life support. And that's not the fault of the originator. It's the fault of the moron bankers in the mortgage practice who thought these were such awesome credits that they should receive a premium price.
Posted by mcblogger at 03:34 PM | Comments (0) | TrackBack
July 25, 2008
Really, Bill Poole?
Nothing would make me happier than never seeing another ideological simpleton from the Friedmanite school of disaster capitalists ever having another job in government or private industry. Why? Because they have ideological blinders on that keep them from accurately assessing a situation and determining a proper course of action.
Case in point, former St. Louis Fed President Bill Poole. Though he now likes to go by William, many of us know and remember him as Bill, Chairman Greeenspan's favorite echo chamber. Poole is all bullshit, all the time. His solution to this current crisis? Let's privatize Fannie and Freddie.
One shouldn't bother Bill with details and facts. For one thing, he doesn't want to hear that taxpayers aren't going to pay a dime for any of this. These companies will, as the government is only providing liquidity for currently illiquid securities, guaranteeing that the system will continue to function and loss mitigation procedures can run their course. But Poole's a Friedmanite and they love them some shock to get things moving. Unfortunately for him, the Democrats in Congress aren't prepared to hand over Fannie and Freddie to private interests (screwing existing shareholders) for pennies on the dollar.
What Bill doesn't want to acknowledge (here again, that pesky ideology) is that THE MARKET BROKE DOWN. The only thing anyone wants to own are credits backed by the government. And THAT'S the free market reality.
Absent the GSE's and their implicit government guarantee, the mortgage market would have ground to a halt, interest rates would be 3% higher (at a minimum) and home sales would have dropped to zilch. In turn, the loss mitigation and clearing of home inventory would have collapsed leading to a downward spiral that would have made the 30's look like the 50's.
Humans are imperfect. Humans in a market, whether for equities, commodities or debts, can act irrationally. They can bid up prices far beyond real value... and sell prices far below book value. That's why we need stop gaps. If you can't see that or think it would be just wonderful to return the pre-Fed, gold standard world, you're ignorant of the past and wholly unready to face the future.
Posted by mcblogger at 03:02 PM | Comments (0) | TrackBack
July 21, 2008
What matters most
Last week there was this in the WaPo regarding the criticism of a bailout by the Fed's of Fannie Mae and Freddie Mac. At the end of the day, the question is not whether IT is right or wrong; The question is whether or not it will do the trick.
As for Fannie and Freddie, nobody would be particularly happy if it became necessary for the Treasury to inject some fresh capital into the mortgage giants, in exchange, say, for newly issued preferred stock that could be sold back at a profit when the mortgage market recovers. But even the editorialists at the Wall Street Journal acknowledged yesterday that this wee bit of socialism might be the most effective and least costly way to keep the mortgage market functioning and prevent a meltdown in global credit markets.A financial crisis is not a morality play. What matters most isn't the precedents that are set, the amount of taxpayer money that's implicated or whether people are made to suffer fully for their financial misjudgments. In the end, what matters most is that we get through it as quickly as possible with an economy and a financial system intact.
Friday I had the opportunity to sit through the Subprime Lending panel at Netroots Nation. Honestly, I expected much more mostly because I have a tremendous amount of respect for the people on the panel. Even Rep. Miller who seems, though well intentioned, very unwilling to understand the impact of what he wants to do.
For one thing, Rep. Miller has a real problem with mortgage brokers. ALL MORTGAGE BROKERS. Working in the industry I can tell you from first hand experience that there are far more great brokers than mediocre or even bad ones. Rep. Miller makes no distinction between the two groups. In fact, he really doesn't understand the difference, apparently, between brokers and bankers. Nor does he seem to realize that the end effect of his legislative agenda will not be to kill an industry or to stop abusive lending practices. It will be to convert brokers to bankers.
Both Miller and Mark Griffith really seemed to come alive at the notion of new regulations and laws restricting what they considered to be unfair lending products. They are operating from the mistaken assumption that some of these products were engineered to create default or, worse, continual refinancing. I say mistaken because neither of them are apparently aware of the fact that loans that pay off early end up costing investors money and banks hate foreclosures, mostly because they end up costing more than a loan that just pays off. But I digress... the point was new laws and regulations. Which aren't really needed because the ones that are ON the books now would have gone a long way to preventing the current crisis. However, they weren't enforced. Griffith and Miller live in that fantasy world where people always follow the law and there's no need to fund the people who look over their shoulders. I guess neither of them have ever driven on a freeway.
Hale Stewart made some excellent points and, having worked in the securitization side of the industry, had a great command of the subject matter. He made a comment that 20% of Countrywide's non-prime portfolio (made up of deep subprime and Alt A credits) was delinquent. That's true, but the actual default rates are the key and they aren't near 20%. Countrywide hasn't disclosed them, but industry estimates put the number at close to 5%. While Cwide didn't price these credits for the underlying risk (they booking these loans at far too low a coupon), the default estimates are inline with what you would expect for loans of this type.
There was one minor point that made regarding Hale about securitization and elimination of risk. Some investors, the same ones who are panicked right now, never understood that home loans can go bad. Even the ones with really high credit score borrowers and big down payments. Securitization was a way of balancing risk and creating fungible product that could be traded like a bond. Hale was spot on in that investors panicked when they discovered that securitization didn't mean complete and total safety.
The panel, on the whole, presented about half and half in terms of correct information vs. incorrect information. It was the stuff that was bad that got me since it wasn't just wrong, it was REALLY wrong. For instance, Griffith claimed there aren't subprime borrowers, only subprime loans. While this may fit an progressive ideological frame, it does not fit reality. The reality is that some people have credit that is significantly worse than others, people who have shown a history of paying slow or not at all on even the most minor debts. Should these people receive the same terms and interest rates that people with fantastic credit get? If so, how exactly do you plan to compensate lenders for the substantially higher risk of default you're asking them to assume? That thought apparently had not occurred to Griffith.
Griffith also discussed the right wing talking point that CRA REQUIRED subprime lending. He's right and wrong in saying that's not true. While CRA did not require 2/28 ARMs and Pick A Pay, it did lead to the creation of subclasses on the prime side represented by products like Freddie Mac's Home Possible and Fannie Mae's My Community. Both of these products required minimal or no down payment (a high risk factor), had income limitations (usually no more than 100% of area median income unless the property to be used as collateral was in a designated census tract for renewal), were aggressively priced and the mortgage insurance on them was far lower than the coverage on comparable prime products. To add to the risk on the loan, these products were extended down to credit classes that would ordinarily have been unacceptable on the prime side. The end result is that the loans having the most problems on the prime side are these, vintage 2006 and 2007 when the guidelines were loosened so dramatically that damn near anyone could get a loan as long as they could prove income.
The panelists were unclear as to what to do to fix the problem of abusive originators. So, I'd like to offer a few suggestions that will actually work... these are geared toward cleaning up and standardizing origination. The larger problem in the industry right now, liquidity in the market and solvency of the firms, is being addressed and should be considered a separate issue. You'll note that I'm using originator exclusively in this... these rules should apply to EVERYONE in the market, whether banker or broker.
1) National licensing for all originators. The state by state foolishness has to stop and there needs to be a national program in place to regulate.
2) Eliminate prepayment penalties. My peers will hate me for this, but the reality is that these penalties end up not producing stability in a portfolio which is why they were put in place. Period. Therefore, it makes sense to scrap them altogether and price loans appropriately for a payoff in 4 years or less.
3) End bait and switch... this happens infrequently but often enough that it's a problem. The best way to do it is to eliminate all advertising which bears an interest rate. These are teasers and only available to those with superb credit and 20% or more to put down. Needless to say, that doesn't remotely represent the majority of the borrowers in the market. Further, eliminate all disclosure of rate at initial application. Most of the time, when a borrower first applies for a loan, they don't even have a house selected yet. No underwriter has seen the file to determine if the borrower meets credit guidelines. In that condition, there is no way for an originator to disclose rate and they shouldn't be doing it. Rate should not be disclosed until the loan has been through initial underwriting and a house has been selected. At that time an originator should fully disclose a locked rate and the money they are making on the end sale of that loan.
What no one on the outside realizes is that an interest rate must be locked prior to closing a loan. Every one that 'falls out' (doesn't close) ends up costing money. No one comes after the borrower for this. However, we expect originators to commit to an interest rate BEFORE knowing the risk on the loan which is absolutely insane.
4) There need to be definitive metrics for originator performance. Offering 'the best rate' is not enough since not everyone is entitled to the same rate or terms. What these metrics might be are fairly simple. For example, if a borrower wants to refinance their home without cashout, does the new loan meet a net tangible benefit to the borrower in saving them money? If so, then the originator has fulfilled their obligation to the borrower. Does the borrower have the wherewithal to make payments on the house in the event of a job loss or other financially damaging event? If no, the originator should have the responsibility to terminate the transaction.
There also need to be some easy to understand disclosures to the borrower that if they change properties they'll lose their rate lock. If they decide to materially change the terms, the rate may change. Borrowers have to understand that their decisions and delays in providing necessary documentation can put their loan in jeopardy.
5) Absolute ban on all payments by originators to Realtors under any circumstances and a complete ban on any Realtor having an ownership interest of any kind in an originator. While we're at it, lets just go ahead and ban cross ownership by people or businesses in the industry. Realtors shouldn't own appraisers or title companies. Originators shouldn't own credit companies, etc. Every piece must be independent from the others to maintain the integrity of the system. And throw in the builders as well. They don't need to subsidize their primary business with mortgage lending because it has a real impact on the true value of the collateral.
6) Restrict, either through legislation or Fed regulatory guidance, the use of limited or no doc products. These are FANTASTIC products... for a self employed borrower with 10% or more to put down, fantastic credit and who can prove low payment shock (i.e., not jumping from $800 per month in rent to $3500 per month in mortgage). These are not loans for W2 wage earners who are trying to buy more home than they can realistically afford. The panel on Friday addressed this and they were SPOT on. However, there seemed to be agreement among them that these products were de facto bad and it's simply not the case. The problem is that they were handed out like candy to people who frankly didn't require them. Not to mention the fact that, again, they weren't priced appropriately for the underlying risk of default which was substantially higher than a full doc Fannie/Freddie loan.
7) Eliminate all option ARM and Pick A Pay loans. Really, do I need to go into this? A home loan with credit card-like repayment terms is just a bad idea and a prescription for default.
8) SEVERELY restrict home equity lending. It frankly should not be so easy to pull equity out of your home. Further, you should not be able to pull out more than it's worth. This is not only to protect homeowners but banks as well. Texas has some very restrictive home equity laws that could serve as a good starting point.
9) Mandate disclosure of YSP/SRP at time of rate lock. This disclosure should explain to the borrower that the low out of pocket costs for their mortgage are being covered by this fee paid by the lender to the originator and that the money represents the profit to be made off servicing that loan until it pays off. Brokers are already required to do this. Banks will throw a fit. However, if you want to level the playing field and make things transparent, then this is the way to go.
As for YSP, it's time to note something. I have originators here in Austin that I work with who write mortgages at basically par rates. They provide no real customer service and they only accept applications with extremely good credit and at least 20% down. Obviously, this is a very narrow segment. I have others who charge more and price their loans at higher coupons. However, they deliver superior service to their borrowers. They also work with borrowers who the other originators wouldn't touch. Both groups are still, on average, cheaper than retail banks.
Banking is, at it's core, a service. No service is free and people should be compensated for the work they do. This has got to be understood. When I originated I had an extremely loyal client base. I still talk to most of them. Some of them could have found better rates somewhere else and they knew it. However, they came to me because I answered their questions, worked with them on their plans and gave them the options they had available. To them that was worth an additional 12.5 basis points (1/8th of a point on the interest rate).
For a more readily understandable example, I have been going to the same lady for haircuts for 7 years. I don't go to her because she's the cheapest. I go to her because she does a great job and she's a blast.
10) FUND REGULATORY AND INVESTIGATIVE BODIES. Rules and regulations are worthless without enforcement and I, among many, have been begging for it for years.
Most of these ideas would be supported by the industry wholeheartedly. Well, except for maybe banning prepayment penalties but that's just a cross they'll have to bear. As for the budding consumer advocates, you're never going to kill payments of YSP. PERIOD. All you're going to do is force brokers (who have to disclose YSP) to bankers who don't have to disclose. The solution is to make everyone disclose and make the disclosure easier to read so people can really compare apples to apples. As a side note, there is an element of stupidity in the let's ban YSP movement. In ANY market there are going to be some providers of a good or service who charge more than others. Be a savvy shopper and really think about the level of service you want and are willing to pay for. I don't shop at Neiman Marcus because it's the only place that has clothes, I shop there because I want my ass kissed when I go to spend money. That and my experiences buying clothes online have been something of a dismal failure.
In the final analysis, ideological blinders, whether Democratic or Republican, are absolutely worthless. Demonizing whole industries, especially when it's clear you don't understand them, is counterproductive and stands a good chance of digging us deeper into the hole. Make an effort, policymakers, to understand the industries you are trying to regulate and work with the people in them on rational solutions. Those of us in the industry would do well to make necessary changes now.
Posted by mcblogger at 01:56 PM | Comments (0) | TrackBack
June 25, 2008
No. Really? You're Kidding me. Stop.
Welcome to George Bush's economy... and just FYI, don't feel too bad for some of the poor, especially the rural poor. They've been voting Republican and they'll keep voting Republican.
Actually, screw that. Feel bad for them anyway. You try to feed a family of four on minimum wage. I wouldn't wish that on my worst enemy.
And thanks to the Statesman for pointing out the mind numbingly obvious. Really. I never would have guessed that someone would have problems surviving on a wage that, hourly, barely pays for a gallon of unleaded.
Posted by mcblogger at 05:42 PM | Comments (0) | TrackBack
June 24, 2008
Winning the stupid olympics, pt 3
REALLY. That's enough with the stupid, Republicans. I'm so sick of hearing all the lies coming from y'all. Well, it's either lying or just rank stupidity.
Maybe I should call John McCain's spokespuppy and find out which.
1) There's not enough oil to really make a dent in demand.
2) You can't bring what's there up fast enough to have a real impact on prices without stomping on speculation.
3) Bush could end high oil prices in an afternoon by starving speculators.
4) Did I mention there's not enough oil down there?
But the biggest one is that there isn't enough equipment for offshore drilling available. Because it's already being used in the areas where you CAN drill offshore. Which also, it just so happen, is where 80% of the total oil available on the continental shelf (for those of you who've been voting R, 'right off the coast') is located. In other words, anyone that tells you we're missing out on some kind of oil panacea in the deep water is lying to you. But hey, it's not the first time Bush has lied.
There is no doubt that a lot of people have been discomfited and genuinely hurt by $4-a-gallon gas. But their suffering will not be relieved by drilling in restricted areas off the coasts of New Jersey or Virginia or California. The Energy Information Administration says that even if both coasts were opened, prices would not begin to drop until 2030. The only real beneficiaries will be the oil companies that are trying to lock up every last acre of public land before their friends in power — Mr. Bush and Vice President Dick Cheney — exit the political stage.
To those who rise in support of expanded drilling I tell you earnestly that it is better to be silent and thought a fool than to open your mouth and remove all doubt.
Hava Goodun!
Posted by mcblogger at 08:02 AM | Comments (0) | TrackBack
June 04, 2008
TXDOT, Tolls and riding off into the Sunset
Some interesting things floating 'round the sphere...
"While I am looking forward to addressing this issue [transportation] when the Legislature meets in 2009, " Perry said, "the state cannot afford to repeat 2007. Members of the Legislature must understand that 'no' is not a solution to this challenge. It is an abdication of responsibility." Perry made clear his determination to defend the renting of state right-of-way to private companies in exchange for a fee and building and operating a toll road.
Actually, you ridiculous twerp, selling off your roads IS AN ABDICATION OF RESPONSIBILITY. Not only that, but you and your appointees are so incompetent or corrupt that you didn't even get us a good price. Probably because you're, again, either too incompetent or corrupt to calculate the present value of a revenue stream over time.
This preceded their new Statement on Toll Projects which I'll take a moment to summarize and explain.
1) Not selling the tolls roads... This is pretty dumb since a 50 or more year lease is widely considered a functional sale. In my industry, we call it a leasehold.
2) No roads will be owned by foreign entities. No, but the leases will be held by them.
3) We'll have a way to buy back the roads. Sure, but at what price? I don't expect the crack team at TXDOT to do a good job negotiating this. They're completely out of their element, just as former Commissioner Williamson clearly was.
4) Tolls will be initially set by TXDOT, with formulas and government input for increases. Input isn't control. Nice try, Deidre, but only an idiot would fall for that turn of phrase.
5) No restrictions or non-competes? I'll believe it when I see it, Deidre.
6) Freeways not converted... but if we shrink down the freeway lanes to add a lane, we'll call that added capacity and we'll toll it
This, my friends, is the translation. If you're dumb enough to fall for ANYTHING from this Commission, then you really don't deserve any spot at the table.
All in all, this pretty solidly leaves corporate welfare proponents in the drivers seat and continues to ignore the most cost effective solution, which Burka NAILED.
At the end of the day, this is so transparently a 'Let's give a perpetual revenue stream to a campaign contributor (ZACHRY)' that it surprises me so many 'fiscal conservatives' are in favor of it. Wonder if they're getting paid by Zachry as well. I already know 39% is.
Hava goodun!
Posted by mcblogger at 10:04 AM | Comments (1) | TrackBack
June 02, 2008
...And sometimes, the press is REALLY stupid
Here's a dreadful piece of journalism from R. A. Dyer of the Fort Worth Star Telegram. He leaves out...
1) Deregulation has failed Texas consumers
2) The excuses, regarding fuel costs, are irrelevant. If the standards to market entry are set so low that retailers end up being financially unable to manage their businesses (and, you know, HEDGE THEIR RISK) then clearly there is something wrong.
3) This is related to excessive speculation in the energy market coupled with the decline in the dollar which is setting prices high for ALL natgas, even that produced domestically since we don't produce enough to meet domestic demand.
4) The cheapest, most dependable electricity in the state is in two markets, SA Metro and Austin Metro. Neither deregulated.
5) The price spikes are clearly indicative of market manipulation.
Dyer, if you're going to write about something at least learn about it.
Posted by mcblogger at 10:03 AM | Comments (0) | TrackBack
May 29, 2008
Inflation and the next big bull market
First off, the bad news. Inflation, using historical calculations, is running at 11%. That's pretty bad. What's worse is that high inflation tends to kick up interest rates dramatically. So get ready to pay more for those credit cards.
The good part? High inflation periods usually depress the cost of financial assets, especially equities. And it's always a buying opportunity. For one thing, high commodity prices lead to periods of rapid growth in the supply of those commodities either through new technologies or expanded production. ALWAYS. Humans adapt and grow around constraints.
Nothing lasts forever, boys and girls, frankly I'm thrilled at the prospect of being able to buy some good stocks at a nice discount. You should be as well.
Posted by mcblogger at 03:45 PM | Comments (0) | TrackBack
May 28, 2008
Good to see OUR politicos aren't the only stupid ones
Remember that dumbass idea to drop the gas tax? Remember how dumb we thought our politicos were for thinking up such a stupid idea? Remember when we longed for those intelligent and urbane European electeds who would never propose something so crass and stupid?
As it turns out, they're just as dumb. Or at least, French President Sarkozy is.
Pandering has now made the great leap over the Atlantic!
Posted by mcblogger at 09:06 AM | Comments (2) | TrackBack
March 18, 2008
Perception is reality
Take a balance sheet weakened by the non-marketability of assets on it. Add in doubts from counterparties and an unwillingness to take the other side of a trade to, for example, assume interest rate risks. Combine with client uncertainty and top it all off with the loss of access to the critical commercial paper market (the financial lifeblood of all the large non-depository banks) and you have the perfect financial storm that destroys an investment bank.
That, in short, is what happened to Bear Stearns. Was Bear in trouble? Sure. The fact that the company made some horrendous bets on some very toxic MBS, mostly filled with Alt A and Sub-Prime credits. Then they dumped them into CDO's, in which interests were sold to investors. Just to add another layer of risk, they then borrowed heavily against the shit credits in the CDO to, wait for it, buy still more shitty credits to juice the return. The CDO could borrow cheaply so the spread income was very good and helped Bear come in with extremely good profits. As long as no one doubted the value of the credits in the CDO. When those became unsaleable, creditors called loans and there was a run on the bank.
And that last bit is what killed Bear. You can't pay off $100 Billion in loans with $20 Billion in equity, for example. If you can't float that $100 Billion with constant funding, you're effectively bankrupt. Well, that's actually putting it mildly. You're a cautionary tale. The fact that the assets you've acquired with that debt are worth less than 1/10 what you paid just seals the deal on the tragedy.
Though the underlying event was different, something very similar happened to Salomon Bros. in 1991. Then, a white knight was able to step in, restore confidence and, by extension, the funding. No such luck this time with JPMorgan Chase. The only question that remains is were their actions deliberate. Consider this...
The swiftness of Mr. Dimon’s decision to buy Bear is remarkable given that he has not been an aggressive acquirer since he joined the firm after selling it BankOne, where he was chief executive. He has cautioned patience about making acquisitions, though he had suggested in recent months that the firm might be ready to make a major deal.Earlier this month, the co-chief executive of JPMorgan’s investment bank, William T. Winters, said on a conference call with investors: “If a special opportunity came up to acquire a prime broker at a decent return, we wouldn’t hesitate. We’ve always said, ‘Boy, if there was one for sale, we’d love to look at it.’ ”
A deal needed to be reached quickly to protect the business from collapsing entirely. With most if not all of its clients stopping trading with the firm, its days were numbered.
One has to wonder if maybe the crisis of confidence was, if only in part, exacerbated by JPMC. Of course, we'll probably find out. That's what lawsuits are all about.
Posted by mcblogger at 11:59 AM | Comments (0) | TrackBack
March 11, 2008
Are you hungry?
Apparently, so is the rest of the world.
Farmers the world over are producing flat-out. American agricultural exports are expected to increase 23 percent this year to $101 billion, a record. The world’s grain stockpiles have fallen to the lowest levels in decades.“Everyone wants to eat like an American on this globe,” said Daniel W. Basse of the AgResource Company, a Chicago consultancy. “But if they do, we’re going to need another two or three globes to grow it all.”
In contrast to a run-up in the 1990s, investors this time are betting — as they buy and sell contracts for future delivery of food commodities — that scarcity and high prices will last for years.
If that comes to pass, it is likely to present big problems in managing the American economy. Rising food prices in the United States are already helping to fuel inflation reminiscent of the 1970s.
UGH. Why is it that an article about tight commodities markets always has the doom and gloom quote from some guy who thinks the future is going to look a lot like Soylent Green? There's never the quote from the fella who points out that, historically, times of limited supply and relative scarcity have always been of relatively short duration and are always followed by long periods of overabundance?
As for needing two or three earths? Not at all. What we need is for the rest of the planet to start farming like us. Well, maybe not with all the pollutions and problems of the past but instead with the best practices of today. Let's see some modern farming in Africa instead of the poor ass subsistence farmer plowing a field with technology from the 1860's.
When you read the article, please note how much Nigerians love them some toast.
Posted by mcblogger at 10:35 AM | Comments (0) | TrackBack
March 07, 2008
It ain't just subprime...
...that's roiling the capital markets, it's also all the bond guarantees for tolling projects that are failing to meet their projected traffic estimates. Sal has more about FGIC which, like AMBAC and MBIA, is having problems meeting it's obligations to bondholders who hold paper they guaranteed. Why? Poor projections from the same people who've been fucking up traffic projections for years, URS.
Posted by mcblogger at 09:47 AM | Comments (0) | TrackBack
March 06, 2008
Silicon Valley turns to the sun
Want to know what the next big technology trend sweeping the venture community is? Click here.
Given the valley’s tremendous success in recent years with such down-to-earth products as search engines and music players, tackling solar power might seem improbable. Yet some of the valley’s best brains are captivated by the challenge, and they hope to put the development of solar technologies onto a faster track.There is, after all, a precedent for how the valley tries to approach such tasks, and it’s embodied in Moore’s Law, the maxim made famous by the Intel co-founder Gordon Moore. Moore’s Law refers to rapid improvements in computer chips — which would be accompanied by declining prices.
A link between Moore’s Law and solar technology reflects the engineering reality that computer chips and solar cells have a lot in common.
“A solar cell is just a big specialized chip, so everything we’ve learned about making chips applies,” says Paul Saffo, an associate engineering professor at Stanford and a longtime observer of Silicon Valley.
Financial opportunity also drives innovators to exploit the solar field. “This is the biggest market Silicon Valley has ever looked at,” says T. J. Rogers, the chief executive of Cypress Semiconductor, which is part-owner of the SunPower Corporation, a maker of solar cells in San Jose, Calif.
Mr. Rogers, who is also chairman of SunPower, says the global market for new energy sources will ultimately be larger than the computer chip market.
“For entrepreneurs, energy is going to be cool for the next 30 years,” he says.
Optimism about creating a “Solar Valley” in the geographic shadow of computing all-stars like Intel, Apple and Google is widespread among some solar evangelists.
“The solar industry today is like the late 1970s when mainframe computers dominated, and then Steve Jobs and I.B.M. came out with personal computers,” says R. Martin Roscheisen, the chief executive of Nanosolar, a solar company in San Jose, Calif.
Remember when laptops weighed 10 lbs , had 7" screens and costs upwards fo $4,000? That's the stage we're at with solar right now. Just wait... give solar ten years and you'll see a similar trend.
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March 05, 2008
The Shock Doctrine : The Movie
It's only 7 minutes long so you can totally take the time out of your day... it's well worth it.
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March 02, 2008
The oil may get low sooner than we think
For all the talk about drilling our way to energy independence, which is little more than than rambling by ridiculous little people with ridiculous little ideas, there is one inescapable fact. The well will always peak and from there on out that oil is going to get more and more expensive to the point of production costs going asymptotic, mostly because the reservoir pressure drops to the point where you are spending more and more to lift the next barrel of oil. It's happening in Mexico in the Cantarell field and in the Ghawar in Saudi Arabia.
The other inescapable fact is that as oil increases in value, those states that produce it will find themselves more and more affluent. And affluent people tend to become rabid consumers, especially when gasoline in 7 cents a gallon.
The economies of many big oil-exporting countries are growing so fast that their need for energy within their borders is crimping how much they can sell abroad, adding new strains to the global oil market.Experts say the sharp growth, if it continues, means several of the world’s most important suppliers may need to start importing oil within a decade to power all the new cars, houses and businesses they are buying and creating with their oil wealth.
Indonesia has already made this flip. By some projections, the same thing could happen within five years to Mexico, the No. 2 source of foreign oil for the United States, and soon after that to Iran, the world’s fourth-largest exporter. In some cases, the governments of these countries subsidize gasoline heavily for their citizens, selling it for as little as 7 cents a gallon, a practice that industry experts say fosters wasteful habits.
“It is a very serious threat that a lot of major exporters that we count on today for international oil supply are no longer going to be net exporters any more in 5 to 10 years,” said Amy Myers Jaffe, an oil analyst at Rice University.
The best part? Consumers in these countries care less about pollution than the rest of the world...
In Mexico City the other day, a bricklayer named Jaime Guerrero arrived at a local Chevrolet dealership. His extended family cried “bravo!” as he signed the papers for his first car.“To have a new car in my name is a dream transformed into reality,” said Mr. Guerrero, 26. He and his family piled in and weaved through the chaotic traffic of the capital, hunting for a priest to douse the car with holy water.
“I don’t worry about the climate or shortages of oil in the world,” Mr. Guerrero said. “I just worry if gasoline prices go up.”
Frankly, it's a little hard for me to criticize Mr. Guerrero because he's representative not only of people in Mexico, but of people in the US and around the world. Given that, it's damn time we give him a cheaper, cleaner, long-term alternative.
And just FYI, no damn interior decorator is going to do that. It's going to take someone like Dale Henry.
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February 27, 2008
THIS makes me so mad!
As unbelievable as it sounds, there are some really stupid people working at the Dallas Fed, namely W. Michael Cox and Richard Alm. Well, maybe calling them stupid is too harsh. They are more like idiot savants, so narrowly focused on one piece of data that they ignore the fact that their research is largely pointless.
Cox and Alm hypothesized that the gap between rich and poor isn't that large in terms of of per person consumption. And they've proved it!
Richer households are larger – an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1. The average person in the middle fifth consumes just 29 percent more than someone living in a bottom-fifth household.To understand why consumption is a better guideline of economic prosperity than income, it helps to consider how our lives have changed. Nearly all American families now have refrigerators, stoves, color TVs, telephones and radios. Air-conditioners, cars, VCRs or DVD players, microwave ovens, washing machines, clothes dryers and cellphones have reached more than 80 percent of households.
They do acknowledge that the gap in income is 15 to 1. They also acknowledge that people in the lowest fifth of wage earners (also known as more than 30% of this country) are basically living on double what they earn. They explain this a number of ways...the poor are selling assets (because everyone knows that the poor are very asset rich), cashing in insurance policies (because everyone knows the poor are loaded in terms of fully vested insurance policies) and living off their savings (because everyone... you get the gist, right? On this one though, I have to ask these two idiots, When, exactly, were the poor supposed to build up positive balances in their bank accounts while spending more than they make?).
Ok, so I lied. These are two of the DUMBEST economists on the face of the planet. Seriously, they lump in here the working poor, retirees and people who are taking time off from work (or are between jobs). Now those people do have disposable savings and non-taxable sources of income. However, even these folks aren't living on 9k per year. But, let's think in terms of averaging. What do you do about the massive number of people in this group who are making the average or less and have nothing to fall back on? Obviously, they aren't living beyond their means. What is THEIR level of consumption? These two brill economists make no attempt to even consider that. Nor do they even bother to analyze the fact that at a certain level of consumption, income becomes largely irrelevant. Which is the most interesting bit of data that can be used to refute the claims of certain 'conservatives' who think if you pay the poor an actual living wage all they'll do is spend every dime. This data supports the progressive idea... the poor would actually build savings just like those in the middle fifth and above income groups if they actually made enough TO SAVE.
This data could have been very useful in terms of talking about wage inequality and the need for living wages. Instead, the two economists from the Dallas Fed choose to make it all about buying stuff. Nice work, guys.
For another excellent counterpoint, click here.
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February 26, 2008
Finally! The Hedgies start to cave on taxes!
We've talked before about hedge fund managers who pay only 15% of their income in taxes. Via the NYT comes an article about Peter Peterson of the Blackstone Group acknowledging that it's time for the private equity flippers should start paying normal taxes. Just like you and me.
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February 14, 2008
Just how BIG is DoD's Budget?
BIG. In point of fact, it is just a few billion shy of being more than what the rest of the ENTIRE PLANET spends on defense. And brings up a good point... Instead of raising taxes, the Republicans have just run massive deficits. Which drives up the cost of borrowing. Which in turn makes it more expensive for consumers to buy cars, houses, everything. Which acts as a drag on the economy, not just in higher borrowing costs but in terms of a weaker dollar. A weaker dollar means dramatically more expensive energy prices which leads to inflationary increases in the prices of EVERYTHING. The end result, if we're lucky, will be a mild recession.
If we're not lucky... well, read The Grapes of Wrath.
The reality is that our infrastructure and social safety net are crumbling. It's not just the roads and medicare/medicaid, it's schools, police, fire depts, community colleges and universities. By spending an inordinate amount on defense, we're sacrificing our economic prosperity now and in the future. Food for thought for all the 'strong on defense' hawks.
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February 04, 2008
Earmarks in perspective
Recently, we made reference to Bush's complaints about 'earmarks'. We stated that he was complaining about 1% of the Federal Budget.
We were wrong. It's actually less than that. It's .55% of the Federal Budget that Bush wants Congress to pass. $3.1 trillion and they are complaining about not having enough money to public education and infrastructure projects?
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January 29, 2008
The supply side fallacy
Once more, the real world results of supply side economics are deficits and economic recession. Period. The Republicans have been talking about the declining deficits. However, they aren't declining anymore. Even before the fiscal 'stimulus' package is added on, the deficit was expected to hit around $250 bn this year.
Even without the stimulus package, the Congressional Budget Office is forecasting the deficit for 2008 will jump to $219 billion, up from last year's $163 billion. And CBO said its new estimate did not include still unapproved outlays for the wars in Iraq and Afghanistan, which will probably push the deficit to around $250 billion.
Which makes Bush's whining about less than 1% of the Federal budget (earmarks) less than genuine given that it's mostly his off the charts military spending that is driving up the federal deficit. Not the projects that Members of Congress put in the federal budget to do something for their districts.
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January 22, 2008
Bush proposes plan, markets react badly
It's not all that surprising, given how stupid Bush's plan is, that the futures on all the major indices are way down right now ahead of tomorrow's trading. Overnight, oil closed around $88 which is great but a definite sign that markets are counting on recession. And joblessness. Which Bush's plan will do nothing to fix.
The reality is that giving myself a tax cut isn't going to do anything other than exacerbate the trade deficit. If one really wanted to jump in and save the economy, implementing the cap gains tax increase we've talked about would be a great first step in stabilizing prices and cutting of rampant speculation, without inefficient price controls. Then, increase taxes dramatically on corporations that have a wide disparity between those at the lowest end of the wage pool and those at the top. Sure, it'll cut corporate tax income a little, but it will more than make up for it with an increase in real wages (and the taxes paid on wages) and spur a consumer led economic boom.
Finally, any program that involves deficits MUST be used for things here. Build schools. Build roads. All of that puts real money into the economy and produces things we desperately need to keep the economy going.
But Republicans won't be interested in that. The only thing they seem to be good at is collapsing the economy.
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January 07, 2008
$200 a barrell for oil?
Not yet and not likely barring some unforeseen event. Like the well heads in the Gwahar field being fused and shut off. Oh, and a nuke being dropped on the export facilities throughout the Persian Gulf.That's not stopping some speculators from bidding up futures on oil with a $200 strike...
Options to buy oil for $200 on the New York Mercantile Exchange rose 10-fold in the past two months to 5,533 contracts, a record increase for any similar period. The contracts, the cheapest way to speculate in energy markets, appreciated 36 percent since early December as crude futures reached a record $100.09 on Jan. 3.While analysts at Merrill Lynch & Co. and UBS AG say the slowing U.S. economy will lead to the biggest drop in prices since 2001, the options show some traders expect oil to rise for a seventh straight year. Demand will increase 2.5 percent in 2008, according to the International Energy Agency. U.S. inventories fell to a three-year low on Dec. 28. Production from Mexico is declining and Saudi Arabia is behind schedule in opening its newest field.
``One hundred dollars a barrel is actually 14.9 cents a cup, so we're still talking about oil being remarkably cheap,'' said Matthew R. Simmons, chairman of Simmons & Co. International, a Houston-based investment bank that focuses on energy. Inventories ``are tight as a drum and I don't see how we get out of this box,'' he said in a Bloomberg television interview last week. ``Demand clearly isn't starting to slow down.''
Simmons was one of the VERY few people in the late nineties talking about oil over $50/bbl when it was in the $20's. He was predicting a production peak in this decade and he may have been right. No, the current price is related more to weakness in the dollar and geopolitics than peak oil. Still, it is the reason oil should be between $50 and $60 just based off supply and demand.
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January 02, 2008
Just how good has the economy been?
We've known for a while that the economy hasn't been on all that great for the vast majority of Americans. The reality is that supply-side economics does exactly what it was always supposed to do... concentrate income and, as a consequence, wealth at the top. Here's a breakdown of the economic gains made from 2003-2005...
Bottom quintile: 2%
Next quintile: 2.4%
Middle quintile: 3.9%
Fourth quintile: 3.7%
Top quintile: 16%
Top 10%: 20.9%
Top 5%: 27.7%
Top 1%: 43.5%
71.2% of the income available in the United States went to 5% of the population. While no one ever said capitalism was fair, it has historically been a good way to create and distribute wealth across a large population. However, what we functionally have now isn't really capitalism, it's a form of pseudo-fascism with incredible amounts of government cooperation with industry, especially in terms of military spending. Whether the Republicans realize it or not, they've engaged in economic manipulation and a redistribution of wealth that is functionally impoverishing the vast majority of the people in this country.
The total income of the top 1.1 million households was $1.8 trillion, or 18.1 percent of the total income of all Americans, up from 14.3 percent of all income in 2003. The total 2005 income of the three million individual Americans at the top was roughly equal to that of the bottom 166 million Americans, analysis of the report showed.The report is the latest to document the growing concentration of income at the top, a trend that President Bush said last January had been under way for more than 25 years.
Earlier reports, based on tax returns, showed that in 2005 the top 10 percent, top 1 percent and fractions of the top 1 percent enjoyed their greatest share of income since 1928 and 1929.
I suppose it's purely coincidental that the 'trend' toward a concentration of wealth at the top has run along with the rise of 'conservatism' and supply-side economics. And now, it's time to put the brakes on in a big way. This isn't about socialism, this is about re-regulating the 'free' market to stop the abuses, not impose restrictions on profits or make it difficult for people to make a living. It's about recreating the progressive tax system that helped make this country an economic powerhouse and created the middle class.
Now's the time for aggressive moves from the Democrats.
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December 11, 2007
Breaking : Fed cuts Discount, Funds rate 25 bps
Statement:
US financial prospects continue to decline as a result of fallout from the mortgage industry. Concerns are biased toward inflation (which is why the cut was only 25 bps). The US economy overall continues to be strong despite the problems in the financial sector.
The surprising thing is that the discount rate (the Fed to bank lending rate) was only cut 25 bps and not more. The real problem in financial services right now is the lack of liquidity on banks' balance sheets as most of the majors have been forced to move mortgage assets from level one to level three capital. A cut in the discount rate would have allowed banks to leverage off the Fed's balance sheet with oversight. Which would have freed up liquidity and helped liquefy the market.
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December 07, 2007
Economy : No! Don't.Say.The.R.Word!
'Advanced Manufacturing' is something that Labor Sec'y. Elaine Chao is really excited about. We used to call it final assembly, but Frank Luntz has been hard at work helping the Bush Admin to spin this pig of an economy. Elaine thinks this will save the US economy. Of course, by the time it's clear it won't, Elaine will be off on to a consulting gig. And trust me, no one on Wall St. will miss her or her pollyanna economic analysis.
Here's what's out today
But what about the subprime fix-it from Treasury Sec'y Paulson? Too little, too late. To paraphrase Senator Durbin, you have people drowning 20 feet offshore and the Bush Admin just tossed them a 10 foot rope. Not to mention the onerous guidelines for the freeze that are even tougher than those for an FHA loan. Then you throw in what this will do to the debt maket...
``If the government goes in and changes contracts it will definitely have a chilling effect on the securitization of mortgages,'' said Milton Ezrati, senior economist and market strategist at Lord Abbett & Co. in Jersey City, New Jersey, which oversees $120 billion in assets. ``When the government comes in and says you have contracted to have this arrangement and you can no longer have it, I think it opens the door for lawsuits.''
Don't get it? Let me put it this way... you pay a premium for a bond that will deliver dependable principle and interest payments over time. Then the government steps in and renegotiates the contract, giving you less income. Sound fair, right?
The bottom line is that a freeze isn't going to work, especially not with the economy spiralling the drain. What's needed to actually help people is to refinance them out of these mortgages. FHA Secure was a good first step, but what we need is FHA Modernization which is trapped in the Senate by some Republicans. Because of the perception that it will hurt the private mortgage insurance companies.
Thanks, Sen. Dole! Way to put your own narrow interests ahead of the rest of the country.
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December 03, 2007
Two takes on $100/bbl oil
Friedman over at the NYT has a brill piece about how much a $1.00 increase in the gas tax would have helped the economy and started the long process of weening us off oil.
“Think about it,” says Phil Verleger, an energy economist. “We could have replaced the current payroll tax with a gasoline tax. Middle-class consumers would have seen increased take-home pay of between six and nine percent, even though they would have had to pay more at the pump. A stronger foundation for future economic growth would have been laid by keeping more oil revenue home, and we might not now be facing a recession.”As a higher gas tax discouraged oil consumption, the Harvard University economist and former Bush adviser N. Gregory Mankiw has argued: “the price of oil would fall in world markets. As a result, the price of gas to [U.S.] consumers would rise by less than the increase in the tax. Some of the tax would in effect be paid by Saudi Arabia and Venezuela.”
But U.S. consumers would have known that, with a higher gasoline tax locked in for good, pump prices would never be going back to the old days, adds Mr. Verleger, so they would have a much stronger incentive to switch to more fuel-efficient vehicles and Detroit would have had to make more hybrids to survive. This would have put Detroit five years ahead of where it is now. “It’s called the America wins program,” said Mr. Verleger, “instead of the petro-states win program.”
We simply cannot go on being as dumb as we wanna be. If you hate the war in Iraq, then you want a gasoline tax so you can argue that we can pull out of there without remaining dependent on an even more unstable region. If you want to see us negotiate with Iran, not bomb it, you want a gasoline tax that will give us some real leverage by helping to reduce the income of the ayatollahs.
This piece dovetailed nicely with this one in the WaPo regarding the geopolitics of $100/bbl oil. Not surprisingly, he thinks that part of this would be solved with higher energy taxes. Because from what we've seen in Europe and Japan, that's what you need to start people on a path to conservation.
At some point, higher prices will dampen demand; changes in the weather and business cycle could also lead to lower prices. Still, a major turning point has been reached. Until now, oil's main geopolitical threat lay in the concentration of reserves in the unstable Persian Gulf. Supply disruptions (1973, 1979-80, 1990) coincided with wars and revolutions. Otherwise, surplus capacity cushioned losses from accidents and weather. Now, most of that surplus has vanished. The pivotal year was 2004, when global demand, propelled by China, rose about triple the expected rate, says Larry Goldstein of the Energy Policy Research Foundation.So the tightened gap between supply and demand has shifted power to producers. "Will competition for scarce resources lead to political or even military clashes among major powers?" asks a report by the National Petroleum Council. "Will bilateral arrangements among nations become common as governments attempt to 'secure' energy supplies outside of traditional market mechanisms?"
Here is what we might do: Raise fuel economy standards for new cars and trucks; gradually increase the gas tax (possibly offset with tax cuts) to induce people to buy those vehicles; expand oil and natural gas production in Alaska, the Gulf of Mexico, and off the Atlantic and Pacific coasts. These steps would, with time, temper the power of oil producers while also checking greenhouse gases. But many liberals, conservatives and environmentalists oppose parts of a sensible compromise. The stalemate hurts mainly us.
We have absolutely got to find a way out of this mess and we're not going to do it with new drilling and exploration, despite the idiotic opinion of a certain interior decorator who fancies herself knowledgeable about the oil and gas industry.
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November 30, 2007
Draining the life out of us
Two posts caught my eye and both are interrelated. One was from BlueBloggin' detailing the rise in oil prices as a function of commodities traders. Most of you know already that there is a substantial amount of the price of oil that has been increased by speculation. The author is right in that there there is no theoretical limit to how high oil can go with speculators in control.
There's only one problem... speculators NEVER remain permanently in control. They will always lose eventually and the trade will go in the opposite direction. The only question is whether or not the economy and the middle class can endure until that breakdown occurs. Which is where this post from Eye on Williamson comes in. The middle class in the US has been under attack for 30 years, coincidental with the rise of the Republican 'conservative' movement that is anything but. Though the author of the piece doesn't talk about it, the middle class is itself in part to blame. They've kept electing these people cycle after cycle even though the economics work better for the rich than they do for the middle class.
The sad reality is that the Democratic party and it's image consultants over the last 30 years are also to blame because for a time they abdicated the mantle of protectors of the middle class to the Republicans by allowing them to paint themselves as better on economic issues. That's starting to change which is why the polls look sooo bad for Republicans.
It's about time people finally realized their economic well being and security is more important than whether or not the gays and lesbians can marry. And the price of oil is the most obvious indicator.
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November 28, 2007
Frustrated douche to leave Bush Administration
Al Hubbard, director of President George W. Bush's National Economic Council for almost three years, will step down by the end of the year and be replaced with Hubbard's top aide, Keith Hennessey.``Al came to the White House after spending nearly 30 years as a successful entrepreneur and business leader,'' Bush said in a statement. ``He brought to the White House his capacity for hard work and creative thinking, and fostered an open, cooperative working environment.''
Wait. This guy has been present for the creation of the problems currently leading us into recession? WOW. Sounds like getting rid of him isn't such a bad thing. 30 years as a successful entrepreneur? The guy ran a chemical company in Indiana. Other than that, it appears that damn near every one of his jobs has been related to politics. Which gives him a similar career track to the massively incompetent Dick Cheney. He also went to Harvard with W. What the hell? Was it just an extraordinarily bad year?
Hubbard informed Bush of his plans this morning, press secretary Dana Perino told reporters at the White House. Hennessey, the current deputy director of the National Economic Council, is ``as prepared for the challenge of this job as anyone could possibly be,'' Perino said.
'... As prepared for the challenge...' Well, that inspires a great deal of confidence. I'm sure Mr. Hennessey will be as much of a loser as Mr. Hubbard. He'll likely spend hours staring at charts trying to figure out how their brill economic strategies forced the country off the rails. They'll blame the Democratic controlled Congress who, though in power for less than a year, have clearly 'fucked everything up'. Except for the economy and, well, everything else.
So why is Hubbard leaving? Apparently, he doesn't like not be able to get his way anymore...
Hubbard expressed ``huge frustration'' with the Democrat- controlled Congress last month, saying lawmakers were resisting Bush initiatives that would help the economy. `I came out of the private sector, I'll go back to the private sector, and my orientation is getting things done and Washington is really gridlocked,'' he said in a Nov. 13 interview.Hubbard also said ``there would be a lot more cooperation with the Democratic Congress and unfortunately, the Democrats -- who control Congress -- have not been oriented towards getting things done.''
Democrats were resisting Bush's stupid plans? Holy shit! You mean they are DOING WHAT THE AMERICAN PEOPLE HIRED THEM TO DO??!?!?? Why, that's unheard of! During Hubbard's time in government, the American economy saw massive stratification and little real growth. Wages stagnated and inflation is once again a top concern of Americans. Great job there, pal.
On last thing caught my eye...
Before coming to the White House in 2002, Hennessey was a top budget aide to Senator Trent Lott, Republican of Mississippi and also was an aide on the Senate Budget Committee, Perino said.
He worked for Lott? And Lott is also retiring? Interesting... maybe they were both involved in the same scandal. Or maybe they were LOVERS?!?!?!?!
I know, sometimes I gross even myself out.
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November 19, 2007
Level 3 assets and the SIV backup fund
Two weeks ago we talked a little about the next part of the meltdown in the credit markets, what will soon be the furor over level three assets. Now comes word that the nations big banks and investment houses have structured a fund that might actually help alleviate the problem. By creating a buyer of last resort in an illiquid market...
Officials from Bank of America, Citigroup and JPMorgan Chase reached agreement late Friday, settling on a more simplified structure than had been proposed, said this person, granted anonymity because he was not authorized to talk for the group.Bank participants, money market investors and even some managers of the troubled investment vehicles that would benefit most had considered previous versions of the fund to be infeasible, casting doubt over a final plan. Discussions had been taking place since early fall, when the Treasury Department convened a meeting.
Now, the proposed fund could begin operating by the end of December, this person said. The banks could begin asking roughly 60 financial institutions to contribute to the fund by Friday or early next week.
Of course, this is kind of a backdoor way for the banks to take some pressure off their balance sheets from all the level 3 assets they've been forced to salt away. Look at it this way... you have a bunch of assets you can't sell because no one wants them. So, you create a company that will buy certain of those assets, creating a market value for them. It's self dealing, analogous to what our good friends at Enron did. However, unlike Enron, this is real capital the banks are having to cough up out of their equity. Frankly, it has to work or many of our largest banks are going to have to access their lender of last resort, the Federal Reserve, to remain solvent.
Which is a nice way of saying US taxpayers.
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HR 3915 passes and other mortgage news
Yes, HR 3915 has passed the House and is off to what one can only hope will be a rocky reception in either the Senate or with, God forbid, President Bush.
Seriously, we need reform. The market needs regulation and consumers have to be protected. This doesn't do that AND it cripples the marketplace. Do you have any idea how depressing it is not only to see your party fuck up brilliantly but to be forced into agreement with douchebag's like Kenny Marchant and Patrick McHenry? I hate those guys.
Still, they were right on this one. I guess it had to happen. Even a broken clock is right twice a day.
In other mortgage related news, FHA Modernization was stalled out in the Senate by Tom Coburn, a Republican from Oklahoma (doesn't that make him a double retard?)
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November 12, 2007
Bill Gross sees the future
PIMCO bond fund manager Bill Gross recently said that the Fed can not afford to let the housing industry go down the tubes...
The Federal Reserve "cannot afford" to let U.S. housing prices fall sharply and will have to cut interest rates aggressively to prevent that from happening, said the manager of the world's biggest bond fund on Monday."A Fed cannot afford to let homes go down by 10 to 15 percent like we saw in Japan," said Bill Gross, chief investment officer of Pacific Investment Management Co. or Pimco, on CNBC Television.
Already, the housing market is facing turmoil in so-called subprime loans made to borrowers with shaky credit. Delinquencies are rising on subprime mortgages and defaults are piling up at record rates as home prices sink, pressuring consumers' desire to spend.
What does all this mean? The Fed will likely drop rates because a collapse in housing is the worst possible outcome. When that happens, the dollar will collapse still further making oil even more expensive and inflation a real concern. Which is why Gross is spending so much time buying assets denominated in anything other than the dollar.
Gross manages more than half of a trillion dollars for PIMCO.
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Ouch! It hurts! or Rising oil price impacts around the world
The WaPo has a great piece up about the impact of $100/bbl oil around the globe. It's not really surprising that exporters are doing well and importers are doing badly. What caught my eye is what's happening in Brazil...
In Brazil, the region's largest economy, high oil prices have had a different political effect. Last year, the country became a net oil exporter, thanks to major increases in domestic oil exploration and the country's broad use of sugar-based ethanol as a transport fuel.
Actually, Brazil doesn't produce much oil, less than the US in fact. However, they do use sugar cane ethanol for just about all their transport fuel with the remainder coming from soya diesel. Brazil's economy is soaring thanks to their independence from petroleum.
Anyone who tells you that we can't move to biofuels in the US is lying. The Brazilians did it with sugarcane and we're a decade ahead of them in refining capacity thanks to all our work to render inefficient corn into ethanol. There really aren't any excuses. This is something that's not just good for the environment, it's the right thing to do for the economy.
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November 07, 2007
Lying about the economy
We talked about inflation last month, basically how the numbers were a load of crap and that any true measure of inflation must take into account food and energy prices. Now Bonddad has some more. And charts!
I love me some charts!
And for those of you who think inflation doesn't matter, the dollar has been hitting all time lows against foreign currencies, oil is hovering near $100/bbl and gold is $845/ounce. True, commodity inflation in terms of dollars has been extreme and is being caused by geopolitical issues and risks as well as inflationary monetary policy here in the US. However, the move is so extreme and so fast that it neatly points out exactly how wrong supply side theory in a low tax environment is.
Finally, we haven't even hit round three of the credit crunch which will be closely tied to revaluations of level 3 assets and liabilities on corporate and bank balance sheets. Forbes has more on this here with a specific look at Citi. Here's the 10 cent explanation...
On November 15th new FASB rule will alter the valuations than can be placed on level 3 assets and liabilities? What are level 3 A's and L's? Simply, they are assets and liabilities that do not trade in a liquid market environment, like a stock exchange. These are normally specialized assets tied to specific securities or risks that involve, in some cases, multiple counterparties one or more of whom may not be financially solvent. Which means that no one wants to buy the asset from you (they have no marketable value) and you may never collect from the counterparty should the trade turn your way.
What's happening now is that CDO's (a group that included mortgage backed securities) are being moved from level 2 to level 3 assets since there is, in many cases, no liquid market for them. The cool thing about level 3 assets is that they are literally worth whatever you say they are worth. Oh sure, there are some complex financial models that tell you what they're supposedly worth. However, the models all depend on information. If there isn't any, then you're working off best guess and your financial model may as well be a coin you flip.
Citi now says it has more than $140 bn in level 3 assets. Which, right now, effectively means that there is a $140 bn hole in Citi's balance sheet.
When these assets get revalued it's going to suck conservatively $500 bn out of the US economy. Which will help stabilize the dollar at least. I just feel bad for the shareholders who are about to lose a lot of value because of more bad decision making by the management teams that run their companies.
Posted by mcblogger at 02:02 PM | Comments (0) | TrackBack
November 01, 2007
I don't care about the Fed...
Yes, I know the Fed cut the funds and the discount rate. Yes, this cut was already factored in and for the most part bonds have been moving in the opposite direction. No, I don't care about it other than to tell you unequivocally that when oil goes above $100/bbl, you'll know who to thank.
Posted by mcblogger at 09:29 AM | Comments (0) | TrackBack
October 19, 2007
Inflation schmation
Oh, I agree with ELLN and Bonddad...
So -- why am I focusing on these two paragraphs rather than the headline number? I am personally having a really difficult time believing the "headline" inflation number largely because my personal experience just isn't jibing with an "inflation is benign" scenario. Here's why. I go shopping every 4-5 days. Over the last year or so I have seen chicken increase from about $4-$5 to $7-$8. Milk is now almost $4/gallon when it use to be $2.99/gallon. Simply put, the numbers just aren't adding up. While I don't know what is wrong exactly with the BLS' calculations and/or methodology, it simply isn't tracking what I am seeing at the retail level. Now I realize that the prices above are for food which isn't part of "core" inflation. This also illustrates how incredibly stupid the Fed's reliance on "core" inflation is. Core inflation is a great measure if you don't consume food or energy. For that small minority of the population that actually does consume food and energy, total inflation is a hell of a lot more relevant to daily life.
The CPI ex food and energy has never made much sense to me since inflationary pressure in those two sectors tend to hold down inflation in core prices because, simply, there is less money to purchase core items. This gives a false impression of the strength or weakness of the economy.
Of course, if the Fed started taking total CPI into account along with money supply, short rates would be in the 8-9% range. That would break inflation in energy costs rapidly.
Finally, the most irritating thing about all this is that wage growth is still non-existent. The reality is that when you take into account total CPI, more than 95% of the people in this country have seen their purchasing power erode since the Supply-side/Trickle-down Revolution began. How's that for a successful economic policy?
Posted by mcblogger at 12:16 PM | Comments (0) | TrackBack
October 12, 2007
Friedmanite utility dereg fails. Officially.
Again, we're talking about utility deregulation. This time, from an analysis in the late to the party Chron (via Kuff)
[T]he very structure of Texas' deregulated market exposes customers to the full impact of rising natural gas prices more than in other states, or even in parts of Texas still served by regulated electric companies, municipally owned utilities or electric cooperatives.The 25 percent of Texans living in those regulated markets generally pay less than rates available in markets that have been opened to competition.
Houston residential consumers use an average of 1,130 kilowatt hours a month. Bills for that much power would range from $125.43 to $163.85 based on rates available in Houston at the end of September for a one-year, fixed-rate plan. The average rate available in Houston would produce a monthly bill of $142.95.
The same amount of electricity would cost $97.41 in San Antonio and $105.32 in Austin, both served by municipally owned utilities.
Deregulation supporters say its success should not be judged just on price, and point to the variety of electricity service options available to customers. But they have been slow to take advantage of the choices.
The variety of service options? Like what? 12/12 plan that keeps my power on only for 12 hours a day and pulls me off the grid for the 12 that I'm at work/stuck in traffic? What difference does it make if the kWh is still more expensive than the pinko's in Austin are paying?
Pretty sad when the widely derided most liberal city in Texas has better and cheaper utility service than the capitalist powerhouses of Dallas and Houston. But at least Dallas and Houston people have their choice from a 'variety of service options'.
Variety of service options... You can stick that up a variety of assholes.
Posted by mcblogger at 09:12 AM | Comments (0) | TrackBack
October 11, 2007
Draw your own conclusions...
Naomi Klein has written a thoroughgoing indictment of Milton Friedman and his Chicago School of economic theory which is functionally supply-side with a penchant for what Friedman called 'economic shock treatment'. Basically, you create the conditions that allow the economy to get sooo bad that the people will accept a change, any change, that promises to fix the problems. In theory, it should expand services and create wealth across every economic level. In practice, it creates massive stratification and does little to fix or create critical services. It also makes everyone not already wealthy destitute...
Klein argues that Friedmanian free market rules do exactly what they were designed to do: they don’t create a perfectly harmonious economy, complete with the much-lauded “trickle-down” effect, but rather, turn the already wealthy into the super-rich and the organized working class into the disposable poor. Further, she describes these orchestrated raids on the public sphere in the wake of catastrophic events, like war, as exciting marketing opportunities or “disaster capitalism.”
So, why even mention this? Simple. This is about to happen to us and you might as well be prepared for it. Since the supply-side revolution Reagan ushered in more than 26 years ago, we've seen economic stratification climb to alarming levels not seen since the Gilded Age. Despite the fact that it doesn't really help anyone other than those already rich.
Which brings us to the tax issue we mentioned yesterday. The supply siders will tell you that cutting taxes will increase economic growth and create surplus revenues. That's actually not true since it's dependent on the Laffer Curve and even it is subject to the law of diminishing returns. What's needed is a balance in marginal tax rates and efficient use of the money by the government, not endless deficits, mounting debt and low taxes for the already rich. That and the fact that tax policy has less of an impact on business conditions than interest rates.
Think, for a second, about our crumbling infrastructure, our rising deficit, underfunded entitlement programs... it's all leading up to a situation in which things will spin violently out of the control. Of course, when that happens, then we'll be ready for shock treatment.
Think it can't happen here? Cause a massive economic disruption in the US and people will accept anything that will fix it.
They elected Reagan, didn't they? Think of that as a dry run.
One other note about investments and taxes... I'm a HUGE fan of massive capital gains taxes, especially on gains realized in less than two years. Why? Because I hate traders and speculators. I'm a long term investor...THAT more than anything done by private equity companies actually provides long term stability and growth in businesses. It also stabilizes the retirements of hundreds of millions of people.
Posted by mcblogger at 03:15 PM | Comments (1) | TrackBack
Draw your own conclusions...
Naomi Klein has written a thoroughgoing indictment of Milton Friedman and his Chicago School of economic theory which is functionally supply-side with a penchant for what Friedman called 'economic shock treatment'. Basically, you create the conditions that allow the economy to get sooo bad that the people will accept a change, any change, that promises to fix the problems. In theory, it should expand services and create wealth across every economic level. In practice, it creates massive stratification and does little to fix or create critical services. It also makes everyone not already wealthy destitute...
Klein argues that Friedmanian free market rules do exactly what they were designed to do: they don’t create a perfectly harmonious economy, complete with the much-lauded “trickle-down” effect, but rather, turn the already wealthy into the super-rich and the organized working class into the disposable poor. Further, she describes these orchestrated raids on the public sphere in the wake of catastrophic events, like war, as exciting marketing opportunities or “disaster capitalism.”
So, why even mention this? Simple. This is about to happen to us and you might as well be prepared for it. Since the supply-side revolution Reagan ushered in more than 26 years ago, we've seen economic stratification climb to alarming levels not seen since the Gilded Age. Despite the fact that it doesn't really help anyone other than those already rich.
Which brings us to the tax issue we mentioned yesterday. The supply siders will tell you that cutting taxes will increase economic growth and create surplus revenues. That's actually not true since it's dependent on the Laffer Curve and even it is subject to the law of diminishing returns. What's needed is a balance in marginal tax rates and efficient use of the money by the government, not endless deficits, mounting debt and low taxes for the already rich. That and the fact that tax policy has less of an impact on business conditions than interest rates.
Think, for a second, about our crumbling infrastructure, our rising deficit, underfunded entitlement programs... it's all leading up to a situation in which things will spin violently out of the control. Of course, when that happens, then we'll be ready for shock treatment.
Think it can't happen here? Cause a massive economic disruption in the US and people will accept anything that will fix it.
They elected Reagan, didn't they? Think of that as a dry run.
One other note about investments and taxes... I'm a HUGE fan of massive capital gains taxes, especially on gains realized in less than two years. Why? Because I hate traders and speculators. I'm a long term investor...THAT more than anything done by private equity companies actually provides long term stability and growth in businesses. It also stabilizes the retirements of hundreds of millions of people.
Posted by mcblogger at 03:15 PM |