FedUpUSA

For those who think that the state mess isn’t going to have a big impact, you need to read this bill.  This, incidentally, is from a state (Florida) that is allegedly one of the best in terms of its public-pension status – those of you in Illinois, New York, California and others are in much worse shape.

Let me recap what this bill does:

• Increases employee contributions for all future hires and many current employees by 1% to the pension plan.
• Actuarial disclosure (and public posting of same) must be regularly performed and corrective steps identified to halt and reverse any unfunded liabilities.
• Pensions are now computed based on the average compensation during the employee’s term of employment, not the last five years, and explicitly exclude any and all overtime or other “cramming” attempts.  Further, the pension paid is capped at that average compensation.  All “hazard pay” riders (e.g. additive amounts for police, fire and similar employees) are ended.  Lump sum payments, annual leave payments (for vacation not taken) and similar are excluded.  In short, only your base salary counts, and the average across your entire term of service is used, ending the abuse of playing games in the last couple of years to “goose” pension returns.
• Retirement ages go up materially.  The minimum retirement age is now typically 60, and with the exception of “special risk classes” (e.g. cops) you now need 33 years of creditable service.  Pension payouts now cannot start before age 62 if retiring before July 1st 2011 and 65 thereafter.  For “special risk” classes the prior 55 year age lifts to 60 as of July 1st, 2011.
• Municipalities can close their defined benefit plan, choosing instead to offer defined contribution plans (e.g. 401k equivalents.)  An existing employee can transfer out of the pension system to that 401k-style system, but if they do they cannot transfer back to the pension system. 
• Finally, there is no grandfathering – this applies to all current and future employees, without exception.

The language also appears to bar double-dipping and other forms of abuse, but I have not yet fully analyzed the impact of these provisions – and whether they can be gamed.

Nonetheless this is a dramatic change and the lack of grandfathering means that there will be much screaming from various “special interests”, especially public employee unions.  This bill is being kept VERY quiet around here – I’ve heard basically nothing in the media.

Frankly, I still think this plan is too generous on-balance – but the fact of the matter is that corrections like this have to happen.  The abuses of public employees in this regard are well-known and endemic, and must be ended.  So too much the common lies told about these funds – this bill forces public and accurate disclosure of the status of all of these plans, including their unfunded liabilities and the process to correct that deficiency.

You can bet this will be bitterly-fought by the public employee folks.  Too bad.  To those who are government employees and believe they should be able to abuse the pension system and stick the people with the bill, my view is that you should all be fired – and lose your pension benefits entirely.

I’m frankly tired of the view, held by many of these people, that the private sector should foot the entire bill for the profligacy and outrageous acts of government over the previous 30 years. 

Government is directly responsible for the political policies that have led to this economic mess through the lack of law enforcement, the failure of government to regulate and control financial entities, county and state governments that have embraced “grow to the sky” fiscal policies that are mathematically impossible and public employees who believe they are God’s Gift to the public and that we must provided whatever the demand.

It is time for these “government tit-suckers” to be held to account, and to bear the costs that have come from their actions.  This bill is a good start, but it goes nowhere near far enough to actually address the issues.

And again, for the second week in a row….

The Mortgage Bankers Association’s index decreased 4.2 percent in the week ended March 19. The Washington-based group’s refinancing measure declined 7.1 percent, while its purchase gauge rose 2.7 percent.

No more HELOCs, no more pulled-forward demand.

Of course people will try to buy before the housing tax credit expires at the end of April – expect reasonably-strong purchase apps for the next month or so.  But then that ends as well, following The Fed’s MBS purchase expiration.

This all adds up to no credit expansion.

We have no evidence of employment expansion of note either.

So…. where is it that durable economic growth is going to come from again?  Government can continue to spend $1.5 trillion a year more than it did prior to 2007 on an indefinite forward basis to prop up GDP?

That’s the bet being made today in the markets.  If you agree with it, you should be long equities or even more importantly, be long in the credit markets.  After all, this fantastic expansion will allow businesses (and even sovereigns) to continue to service their debts.

If, on the other hand, you can’t find a greater sucker who believes in the magical money fairy on an indefinite forward basis…..

* Without credit creation or demand for debt no money is being created.  Every dollar created only exists due to demand for debt/credit.  This my friends, is not inflation.  This is a deflationary credit collapse.

A speech by Kansas City Fed President Thomas Hoenig has raised some interesting points…. interesting in that they tend to mesh well with what I have preached for three years.

When did Thomas get a brain transplant?  Not that it matters when it comes to outcome, but one does wonder – has Mr. Hoenig had a “come to Jesus” moment looking through some of The Fed’s “privileged” information, and does he see what’s now around the bend?

Specifically:

When the markets are no longer competitive, firms become a monopoly or an oligopoly and it matters more who you know than what you know.

That wouldn’t include our former and present Treasury Secretary, would it?

We have seen the formation of a powerful group of financial firms.  We have inadvertently granted them implied guarantees and favors, and we have suffered the consequences.  We must correct these violations.

I would argue that there was nothing inadvertent about it, but other than that, Mr. Hoenig is spot-on.  Indeed, I’d argue that these “favors” and “guarantees” were granted literally at gunpoint, although the “gun” used has alternated between bribery and extortion.

If the top 20 firms held the same equity capital levels as other smaller banking institutions they would require $210 billion in new equity or reduced assets of over $3 trillion, or some combination of both.

Mr. Hoenig does not, however, speak to the even-larger problem – that is, the fact that the supposed “equity capital levels” are fictions that were allowed to come into play as a direct and proximate consequence of the above “extortion and bribery” regime.

This is specifically true in the case of HELOC loans that are behind underwater defaulting first mortgages.  Again, as I have pointed out repeatedly, recovery value on such a loan is essentially indistinguishable from zero.

Second, we must strengthen our supervision of financial firms by returning to simple, well-established rules, such as maximum leverage and loan-to-value ratios. 

Gee, you mean 28/36 (Front/Back end) for mortgage lending and the maximum leverage (14:1) ratio for large financial firms was a bad idea?  Who worked “tirelessly” for the second?  Oh yeah, that was our former Treasury Secretary Henry Paulson, who then argued “too big to fail” and “tanks in the streets unless you fork over $700 billion” when it all blew up in his face.

Mr. Hoenig also endorsed the ending of OTC credit-default swaps for all standardized contracts (and by the way, you can de-construct nearly all custom contracts into two or more standardized ones!) along with ending the “pass-through” nature of funding for things like hedge funds, along with a ban on proprietary trading.

All in all it’s nice to see Thomas Hoenig wake up.  Now let’s see if we can get CONgress to stop opening the bribe envelopes, er, ignore the campaign contributions for a sufficient period of time to actually fix this mess, forcing those “big banks” to get that leverage ratio down to where it belongs, along with marking their assets to the market.

(Yes, I’m well-aware that this means we will have fewer big banks as some will need to be “resolved.”  So be it.  The essence of Mr. Hoenig’s argument is that the smaller, community and regional banks are in fact preferable anyway – simply because competition between more players is to the benefit of the consumer and economy generally over a handful of big, oligopolistic firms.)