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Archive for March 16th, 2010

The Weakest Bang for our Wilting Dollar – How we Overpaid for the Bailouts and were left with a Wilting Economy Propped up by Government Spending. Paying $446,000 Per Loan Modification and $43,000 for Homes that were already going to be Purchased.

Posted by mybudget360

So much horrible policy has occurred since the economy entered recession that the majority of Americans are shell shocked with each day of news.  It used to be that a billion dollars in toxic assets was enough to garner some movement out of the market.  Now, we talk about trillion dollar deficits as if they were normal.  Take for example the ridiculous home buyer tax credit.  Let us set aside for a second that massive home buying and speculation led us into this financial crisis in the first place.  The home buyer tax credit was basically a gift to people for doing something they were already going to do.  Keep in mind that even without the tax credit, people were going to buy homes.  But this is what we are left with:

“(Las Vegas Sun) It’s awful policy,” says Andrew Jakabovics, associate director for housing and economics at the liberal Center for American Progress. “It’s incredibly expensive. It’s not well targeted.”
…
“We paid $8,000 to at least 1.5 million people to do something they were going to do anyway,” Jakabovics says.
…
“A heck of a lot of people would have bought the house anyway,” says Ted Gayer, an economist at the Brookings Institution.
…
The tax break, due to expire at the end of November, is on track to cost $15 billion, twice what Congress had planned. In other words, it will cost $43,000 for every new homebuyer who would not have bought a house without the tax break.”

This is policy gone bad like milk left out on a hot sunny day.  In many parts of the country $43,000 will buy someone a home or a condo.  Instead, we will blow through $15 billion to encourage people to buy something they were already going to buy.  This is the kind of policy that we have had for decades.  But the game is hitting a massive wall.  For the first time in record keeping history household debt has contracted on a year over year basis:

Much of this comes from American households pulling back on spending but also, banks refusing to lend.  In fact, the bailouts have done nothing that they were promised to do.  First, the banking bailout was quoted as a necessity to keep liquidity in the system.  To the contrary, liquidity is being pulled out of the system.  Wall Street and their corporate public relations machines would like to convince you that banks are now having to be tighter with their lending given market conditions.  It is amazing how in midsentence banks are able to shape-shift their position to always maximize their own profits but only after they have secured taxpayer money.  If we really wanted to increase liquidity why don’t we just send each family $10,000 to get the economy going?  Is this any less preposterous than paying $43,000 for someone to buy a home they were already going to buy?

If you think that spending more and more and financing each purchase with debt is good for the long-term health of our economy, just look at the following:

Over the last 25 years the U.S. dollar has been cut in half and U.S. households are feeling the effects of this.  We would have felt this earlier in 2000 if it weren’t for the massive housing bubble that was ignited by the Federal Reserve and its spawn investment banks.  All of a sudden, instead of spending money we had and protecting home equity houses became ATMs:

Source:  Center for Retirement Research, Boston College

So even though incomes were stagnant for the decade, the average person on the street thought they were experiencing prosperity but all they were enjoying was a lease on a lifestyle that was no longer supported by underlying fundamentals.  Most Americans are now dealing with this as they see credit card access shut down and access to home equity is gone since home prices have collapsed.  Yet the only sector that seems to be back on its feet is the banking sector.  Or to clarify, the too big to fail banking sector seems to be fine.  Underemployment is still over 17 percent, credit is still pulling back, and states are still seeing faltering revenues:
 

Source:  The Nelson A. Rockefeller Institute of Government

Tax collections are a good indicator of the economy since they are derived from working people.  Looking at the stock market is like looking at someone who just hit blackjack 10 times in a row.  At a certain point it needs to reflect reality.  Yet the way we structured the bailouts was as absurd as the three page memo former Treasury Sectary Hank Paulson handed to Congress requesting $700 billion to clean up the toxic assets.  That price tag now sounds cheap!  And guess what?  The toxic assets are still here which is only more proof that banks are two-faced liars that will siphon off every penny from the productive sector of the economy.  As it turned out the $700 billion figure was simply pulled out of thin air by dividing ten percent of GDP ($1.4 trillion) in half according to the former interim Assistant Treasury Secretary Neel Kashkari:

“(WaPo) In Washington, he used his BlackBerry to determine the bailout sum presented to Congress. His arithmetic: “We have $11 trillion residential mortgages, $3 trillion commercial mortgages. Total $14 trillion. Five percent of that is $700 billion. A nice round number.”

Looking back, he says, he is more confident about the two-by-sixes.

“Seven hundred billion was a number out of the air,” Kashkari recalls, wheeling toward the hex nuts and the bolts. “It was a political calculus. I said, ‘We don’t know how much is enough. We need as much as we can get [from Congress]. What about a trillion?’ ‘No way,’ Hank shook his head. I said, ‘Okay, what about 700 billion?’ We didn’t know if it would work. We had to project confidence, hold up the world. We couldn’t admit how scared we were, or how uncertain.”

So what a shocker that GDP increased by over 5 percent when all was said and done.  It would have been a surprise if it hadn’t.  Yet where did the money go?  The vast majority into the stock market casino.  Was there any massive targeted effort for job creation?  Or what about reforming the financial industry that led us here?  None of that was accomplished.  So today, we have spent or committed $13 trillion on the financial sector with no strings attached.  It is the biggest bank robbery in history and it is happening under our noses.  In fact, people are pulling $700 billion out of thin air apparently just like Goldman Sachs needed every penny from AIG.

Most are familiar with the GDP equation:

GDP = private consumption + gross investment + government spending + (exports ? imports)

Right now the biggest factor boosting GDP is government spending.  Yet as we have seen with the home buyer tax credit, other programs have been a waste as well.  Take the HAMP program as well backed by $75 billion.  So far, only 168,000 permanent loan modifications have occurred.  So run those numbers:

$75 billion / 168,000 = $446,428 per modification

Now of course, the program still has money left for additional modifications and other gifts to the banks like aiding in short sales.  But do that math.  With $75 billion we could have bought 750,000 homes for $100,000 each.  Policy is so bad right now, we’d be better off just giving the money directly to the people to do whatever they wanted.  Ironically this would stimulate the economy more than continuing down a road of expensive policy that is merely a method of transferring wealth to the banking elite.

The weaker dollar is a symptom of a bigger problem.  The inefficient bailouts are a symptom of a bigger problem.  Our government being controlled by Wall Street is merely the ultimate conclusion of four decades of egregious mismanagement and corporate welfare.  If the government won’t do what is obviously right to reform the system then average Americans are left to wonder who is going to reign in Wall Street?

Useless Regulation: Dodd Bill “Empowers” Fed To Do Nothing

In what amounts to a dog and pony show without dogs and without ponies, Dodd Bill Empowers Regulators to Limit Size of Financial Firms.

U.S. Senator Christopher Dodd, the Connecticut Democrat who chairs the Senate Banking Committee, speaks about overhauling U.S. financial regulation. Dodd, speaking at a news conference in Washington, unveiled a plan to overhaul financial rules and empower the Federal Reserve to break up large firms that pose a “grave threat” to U.S. economic stability.

Seriously, does anyone think Bernanke would act on this? Hell, Bernanke did not see a housing crisis or a recession. Bernanke thought he could put a floor on interest rates at 2% by paying interest on reserve. No one was more useless than Bernanke.

Take a look at Goldman Sachs. It is preposterous that a hedge fund, (and that is all Goldman Sachs is), can borrow money from the Fed at absurdly low rates and speculate in whatever the hell it wants.

Is this a systemic risk? Of course it is.
Does Bernanke or the Fed want to do anything about it? Of course not.

Beyond absurdities in lending arrangements, Goldman Sachs routinely trades against advice it give its clients. Where is the separation of duties? I think giving advice to clients and trading against it is fraudulent, at the very least it is unethical.

Does the Fed want to do anything about that? Of Course not.

What about off balance sheet assets at Citigroup and JPMorgan?
Does the Fed want to do anything about that? Of Course not.

What about the Pay Option ARMs mess at Wells Fargo?
Does the Fed want to do anything about that? Of Course not.

Dodd’s bill, assuming it gets passed, is much ado about nothing.

If Congress really wanted to do something it would require physical (not logical, within one company) separation of duties, it would prohibit trading against clients, and it would prevent off balance sheet accounting. Instead, Dodd’s bill “empowers” the Fed to do nothing. And “nothing” is exactly what the Fed will do.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
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Misconceptions about Money and Velocity

Inquiring minds are interested in velocity and money. John Mauldin discusses both in The Implications of Velocity. Unfortunately, Mauldin perpetuates three widely believed myths in his article.

Misconception #1: Money Supply Needs To Grow

“Now, there is no exact way to determine the right size of the money supply. It definitely needs to grow each year by at least the growth in the size of the economy, the population, and productivity, or deflation will appear. But if money supply grows too much then you have inflation.”

Reality #1:

Money supply most assuredly does not need to grow each year by the size of the economy, by increases in population, or anything else as is widely believed.

An increase in money supply confers no overall economic benefit whatsoever. Over time, money simply buys less and less.

Please consider a few re-ordered sentences of Rothbard’s classic text: What Has Government Done to Our Money?

Money is a commodity used as a medium of exchange.

Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its “price” in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People “buy” money by selling their goods and services for it, just as they “sell” money when they buy goods and services.

Money is not an abstract unit of account. It is not a useless token only good for exchanging. It is not a “claim on society”. It is not a guarantee of a fixed price level. It is simply a commodity.

What Is The Proper Supply Of Money?

Continuing from the book …

Now we may ask: what is the supply of money in society and how is that supply used? In particular, we may raise the perennial question, how much money “do we need”?

Must the money supply be regulated by some sort of “criterion,” or can it be left alone to the free market?

All sorts of criteria have been put forward: that money should move in accordance with population, with the “volume of trade,” with the “amounts of goods produced,” so as to keep the “price level” constant, etc.

But money differs from other commodities in one essential fact. And grasping this difference furnishes a key to understanding monetary matters.

When the supply of any other good increases, this increase confers a social benefit; it is a matter for general rejoicing. More consumer goods mean a higher standard of living for the public; more capital goods mean sustained and increased living standards in the future.

[Yet] an increase in money supply, unlike other goods, [does not] confer a social benefit. The public at large is not made richer. Whereas new consumer or capital goods add to standards of living, new money only raises prices—i.e., dilutes its own purchasing power. The reason for this puzzle is that money is only useful for its exchange value.

[Thus] we come to the startling truth that it doesn’t matter what the supply of money is. Any supply will do as well as any other supply. The free market will simply adjust by changing the purchasing power, or effectiveness of the [monetary-unit] gold-unit .

The online book is a great read and I highly recommend reading it in entirety.

Misconception #2: Falling Velocity Causes Economic Activity to Decrease, Requiring an Increase in Money Supply to Maintain the Status Quo

“If velocity does slow by another 10%, then money supply (M) would have to rise by 10% just to maintain a static economy.”

Reality #2:

Falling velocity is a result of an increased demand to hold money as opposed to a desire to expand productive capacity or borrow to make purchases. In other words, banks do not want to lend and consumers and businesses do not want to borrow. The Fed can print, but it cannot determine where the money goes, or indeed if it goes anywhere at all.

If the Fed increased money supply by 10%, the most likely consequence would be for money to sit or perhaps make its way into non-GDP producing financial speculation. Thus, GDP would not rise by 10%, instead velocity would plunge.

Congress can get into the act by giving away money, as it does with various stimulus plans but that has encouraged little lasting economic activity. Unemployment checks maintain spending on food and essentials but those are low-velocity activities. And as boomers head into retirement, peak spending behind them, velocity is highly likely to continue its downward slide.

By the way, when figuring velocity is it correct to use M1, M2, MZM, Base Money Supply, Austrian Money Supply, or True Money Supply? Obviously the measure of velocity differs widely depending on what definition of money one uses. In general, the broader the measure of money, the lower the resultant velocity.

Misconception #3: In a normal scenario, banks take money and lend it out 9-10 times over.

“And now we come to the policy conundrum for the Fed. They have pumped a great deal of money (liquidity) into the economy. Normally, banks would take that money and multiply it by lending it out (through fractional reserve banking at a potential 9-times factor), increasing velocity and the overall money supply.”

Reality #3: Lending Comes First, Reserves Come Second

Australian economist Steve Keen and I have emphasized reality number 3 on numerous occasions. Please consider Fictional Reserve Lending And The Myth Of Excess Reserves for a lengthy rebuttal to the idea that the Fed expands money supply then banks lend it 10 times over.

Those are three widely believed misconceptions. Unfortunately they continually make the rounds. By the way, John Mauldin is a friend of mine and his columns are usually worth a look.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Middle Class Americans Losing Financial Ground on Retirement – As Stock Market Rebounds more Middle Class Americans Have Less Money and Fewer Jobs. How is Health Care Spending Boosting GDP a Good Thing?

Posted by mybudget360

As more and more data is released on this Great Recession it is becoming abundantly clear that we have two tracks people are following.  On one track where most travel, we have middle class Americans dealing with the highest unemployment in a generation while seeing their net worth dissolve.  On the other side of the road, the one lane highway for the tiny percent of the extremely wealthy, we see an extraordinary jump in wealth since the depth of the crisis in March of 2009 when the S&P 500 touched that unholy number of 666.  It must seem like a cruel joke that with the stock market being up nearly 70 percent since that low point in 2009, the vast majority of Americans are wondering why they don’t feel much of that rally when they open their wallets.  The reality is that most Americans are not invited to this resurgence and in fact, the destruction of the middle class is partly a reason for this stock market rally.

Take for example what Americans are saving.  A recent survey from the Employee Benefit Research Institute’s annual Retirement Confidence Survey found some startling data:

43% of workers in the survey stated they had less than $10,000 in savings while an amazing 27% of workers said they had $1,000 saved.  Many of these Americans are one illness or a job loss away from being broke (many are called the working poor).  It is no surprise that the survey found that only 16% of those who responded felt comfortable about retiring, the lowest rate in a generation.  What this survey highlights is that more and more middle class Americans are going to struggle in their retirement.  Thanks to the Federal Reserve artificially slamming interest rates lower, many Americans on fixed incomes or Social Security will see no cost of living adjustments even though their daily cost of living items will increase in price.  This is targeted destruction of the middle class.

And keep in mind this survey is comparing 2009 and 2010.  What happened to the rally here?  Workers clearly did not participate in the stock market rally.  Why?  Because a large part of the rally also hinged on “productivity gains” which is a nice euphemism for laying off people and making current workers juice out more production.  So this translates to great profits for the Wall Street elite while unemployment in the last year has done this:

Source:  BLS

It might be hard to save for retirement if you are getting fired.  And that is what millions of Americans experienced in 2009 as the stock market went on a massive rampage as Wall Street was fueled by taxpayer bailout money and decided to load into stocks.  Keep in mind that many of the large multinational companies are making a boatload of their profits internationally.  This is great for those companies but as most Americans know, small business is the juice of the American economy and most small businesses sell to domestic clientele.  A clientele that is increasingly poorer and unemployed.  We used to call this group the middle class.  This isn’t lost on some:

“(RR) Companies in the Standard&Poor 500 stock index had sales of $2.18 trillion in the fourth quarter, up from $2.02 trillion last year, and their earnings tripled. Why? Mainly because they’re global, and selling into fast-growing markets in places like India, China, and Brazil.

America’s biggest companies are also showing fat profits and productivity gains because they continue to slash payrolls and cut expenditures. Alcoa, for example, had $1.5 billion in cash at the end of last year, double what it had on hand at the end of 2008. Sounds terrific until you realize how it did it. By cutting 28,000 jobs – 32 percent of workforce – and slashed capital expenditures 43 percent.

The picture on Main Street is quite the opposite. Small businesses aren’t selling much because they have to rely on American – rather than foreign – consumers, and Americans still aren’t buying much.”

One of the disturbing trends especially when it comes to retirement is the massive increase in health care costs.  It is absurd to use health care costs (i.e., premiums, etc) to inflate GDP but that is exactly what is happening:

Source:  BEA

It is absurd that in 2008, as the economy was flying off a cliff and other service industries were contracting health care still managed to pull in 0.31 of the 0.32 gain in the entire year for this sector.  Take a look at 2009.  What service sector did the best in another troubled year?  Health care.  So to say that gouging Americans like the 39% hike in premiums in California is good for GDP is nonsense:

“(ABC) Reports that Anthem Blue Cross is raising premiums on some customers by 39 percent on March 1, have prompted the Secretary of the Department of Health and Human Services, Kathleen Sebelius, to write a letter to the company, Golden State’s largest private insurer, asking the company to “provide a detailed justification for these rate increases to the public.”

“Additionally, you should make public information on the percent of your individual market premiums that is used for medical care versus the percent that is used for administrative costs,” Sebelius wrote, noting that the profits of Anthem Blue Cross’s parent company, WellPoint Incorporated, have soared.”

Ask any middle class American about their health care costs and the likely story is that prices have gone up consistently over the last decade as incomes have gone stagnant.  How is this good especially when many baby boomers are now reaching retirement age with little savings as we have seen and are now going to shift a larger portion of their income to health care?

In many ways the health care industry is much in line with how Wall Street banks have operated for the last forty years.  They’ll gouge and exploit the middle class until every dollar you earn is either yanked by bank bailouts, health care costs, or taxes.  Let us run the numbers on a hypothetical family in California to see how this plays out.  We’ll use a family making $61,000 a year (Census 2008 data):

Now the above is merely a hypothetical budget.  I welcome people to comment on different items one way or another.  The above is a two adult household with no children with two cars.  This is very typical for California but I’m sure for other states as well.  But as you can see from the above, given that this household is at the median there isn’t much room for large amounts of flat screen TVs, expensive nights out on the town, or leased BMWs.  Yet many across the country lived like this and clearly that was on borrowed time and was all a ruse usually magnified by credit cards.  Now as many near retirement they are realizing that the only game in town is Wall Street and that has now become a large casino.

I know many people scream personal responsibility.  I’m the first to agree.  But there is this massive amount of cognitive dissonance when people blame the middle class and working class for this mess when Wall Street who created the financial instruments of destruction, not only got away with the biggest transfer of wealth in history, they are actually getting richer because of bailouts.  This is like putting a bank robber in prison for stealing $100 to feed his family while letting that same banker go to Wall Street and rob millions of Americans for billions of dollars and not only letting him go, but putting structures in place to make him richer!  Is it any wonder why there is so much anger festering in America?

Retirement is getting harder and harder for many middle class Americans.  What use is $1,000 a month in Social Security when your out of pocket costs for medicine is going to cost you $300 to $500 per month?  How did we do it before?  Stable banking that allowed people to pay off their mortgages and allowed people to live securely in their homes once they retired even with a small Social Security check.  But now, many have tapped out their equity and mortgaged their future.  Unlike Wall Street Americans don’t have access to the Federal Reserve.  Massive part-time employment, weak worker protection, a corporatocracy raiding the workers, and a disappearing middle class.  Get ready to work longer America because Wall Street needs that money to fund their bailouts and billion dollar bonuses for wrecking the economy.

Senator Kaufman Throws Down The Gauntlet

Posted by Karl Denninger

Inside The Collapse Part 1

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Inside the Collapse Part 2

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