FedUpUSA

Archive for July 25th, 2010

Nathan’s Economic Edge

Like most politicians, Treasury Secretary Tim Geithner likes to talk out of both sides of his mouth, generally saying contradictory things in sound bites that may sound reasonable at first glance, but look idiotic upon closer inspection.

For example please consider Private sector must drive economy: Geithner

During an interview on NBC’s “Meet the Press,” Geithner also said the government has big plans for reforming Fannie Mae and Freddie Mac, the housing finance giants that now stand behind most of the mortgages in the U.S. after being bailed out by taxpayers during the 2008 financial crisis.

Geithner said Sunday that he doesn’t expect a double-dip recession, citing encouraging signs in the economy. “The most likely thing is you see an economy that gradually strengthens over the next year or two,” he said. Watch Geithner on Meet the Press.

Businesses are still “very cautious” and are trying to get as much productivity from current employees as possible, Geithner explained.

“They are in a very strong financial condition though. I think that’s very promising because there’s a lot of pent-up demand and there’s a lot of capacity still for them to step up and start to invest and hire again,” he added. “The government can help but we need to make this transition now to a recovery led by private investment.”

There’s a “good case” for the government to support small businesses, the unemployed and help states keep teachers in classrooms, but the transition to growth led by the private sector must happen, Geithner said.

Still, he stressed that the current system of housing finance has to change.

“We’re not going to preserve Fannie and Freddie in anything like their current form. We’re going to have to bring fundamental change to that market,” Geithner said.

There’s still a good case for the government preserving some type of guarantee to make sure that people can finance a house even in a very damaging recession, he explained.

“We’re also going to have to take a look at the broad set of policies we put in place to help encourage home ownership and particularly help low income Americans get access to affordable housing,” Geithner said. “We’re going to take a very broad look at how best to do that.”

No Pent Up Demand

For starters Geithner is wrong about pent up demand. The only pent up demand is in the opposite sense Geithner suggests.

Pent Up Demand Reality

• There is pent up demand for baby boomers to save more
• There is pent up demand for baby boomers to downsize
• There is pent up demand for banks to dump shadow housing inventory on the market and that will further suppress housing
• There is pent up demand for anyone with credit card bills to pay them down given outrageous interest rates banks charge for revolving credit vs. what one can make in CDs.

Although those are all necessary, nothing in that list remotely have anything to do with a private sector recovery in the manner Geithner presumes. Indeed, I expect a Expect Second-Half Housing and Durable Goods Crash.

The key reason is consumer spending plans have crashed as noted in Consumption Inflection Point – No One Wants Credit; Consumer Spending Plans Plunge

Thus, in regards to pent up demand Geithner is a fool, is lying, or both.

Geithner Hypocrisy

If that was not bad enough, we have to suffer with Geithner talking out of both sides of his mouth. While I certainly agree that the private sector needs to drive the economy, note his many statements to the contrary.

• “The government can help but we need to make this transition …”.
• “There’s a good case for the government to support small businesses …”
• “There’s still a good case for the government preserving some type of guarantee to make sure that people can finance a house even in a very damaging recession …”

How long is the “transition”?

Geithner does not say, so I will offer a translation: Forever.

Geithner is a clueless Keynesian clown who has no idea how the economy works. Not only do we have to put up with his blatant lies, we have to deal with his hypocritical never-ending government solutions.

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

Unless the U.S. Congress acts, there is going to be a massive wave of tax increases in 2011.  In fact, some are already calling 2011 the year of the tax increase.  A whole host of tax cuts that Congress established between 2001 and 2003 are set to expire in January unless Congress chooses to renew them.  But with Democrats firmly in control of both houses that appears to be extremely unlikely.  These tax increases are going to affect every single American (at least those who actually pay taxes).  But this will be just the first wave of tax increases.  Another huge slate of tax increases passed in the health care reform law is scheduled to go into effect by 2019.  So Americans that are already infuriated by our tax system are only going to become more frustrated in the years ahead.  The reality is that the U.S. government will soon be digging much deeper into our wallets.

The following are some of the tax increases that are scheduled to go into effect in 2011…. 

1 – The lowest bracket for the personal income tax is going to increase from 10 percent to 15 percent.

2 – The next lowest bracket for the personal income tax is going to increase from 25 percent to 28 percent.

3 – The 28 percent tax bracket is going to increase to 31 percent.

4 – The 33 percent tax bracket is going to increase to 36 percent.

5 – The 35 percent tax bracket is going to increase to 39.6 percent.

6 – In 2011, the death tax is scheduled to return.  So instead of paying zero percent, estates of $1 million or more are going to be taxed at a rate of 55 percent.

7 – The capital gains tax is going to increase from 15 percent to 20 percent.

8 – The tax on dividends is going to increase from 15 percent to 39.6 percent.

9 – The “marriage penalty” is also scheduled to be reinstated in 2011. 

It is being estimated that the total cost of these tax increases to U.S. taxpayers will be $2.6 trillion through the year 2020.

Ouch!

But wait, there are even more tax increases coming.

The “health care reform law” contains over a dozen new taxes that will be implemented in stages over the next decade.  When you add all of these taxes to the taxes that were mentioned earlier, the result is going to be absolutely devastating.  According to an analysis by the Congressional Joint Committee on Taxation the health care reform law will generate $409.2 billion in additional taxes by the year 2019.

Double ouch!

So is it any wonder why the public has such a low opinion of the U.S. Congress?

Every single major poll done on the topic shows that approval ratings for Congress are at record lows.

For example, Gallup’s 2010 Confidence in Institutions poll found Congress ranking dead last out of the 16 institutions rated this year.

Of course there are a whole host of reasons why the American people are upset with Congress, but one of the big ones is the fact that we are literally being taxed to death.

However, it is not just federal income taxes that are killing us.

In a previous article entitled “Taxed Enough Already!”, we listed just a few of the taxes that Americans have to pay each year….

Accounts Receivable Tax

Building Permit Tax

Capital Gains Tax

CDL license Tax

Cigarette Tax

Corporate Income Tax

Court Fines (indirect taxes)

Dog License Tax

Federal Income Tax

Federal Unemployment Tax (FUTA)

Fishing License Tax

Food License Tax

Fuel permit tax

Gasoline Tax

Gift Tax

Hunting License Tax

Inheritance Tax

Inventory tax IRS Interest Charges (tax on top of tax)

IRS Penalties (tax on top of tax)

Liquor Tax

Local Income Tax

Luxury Taxes

Marriage License Tax

Medicare Tax

Payroll Taxes

Property Tax

Real Estate Tax

Recreational Vehicle Tax

Road Toll Booth Taxes

Road Usage Taxes (Truckers)

Sales Taxes

School Tax

Septic Permit Tax

Service Charge Taxes

Social Security Tax

State Income Tax

State Unemployment Tax (SUTA)

Telephone federal excise tax

Telephone federal universal service fee tax

Telephone federal, state and local surcharge taxes

Telephone minimum usage surcharge tax

Telephone recurring and non-recurring charges tax

Telephone state and local tax

Telephone usage charge tax

Toll Bridge Taxes

Toll Tunnel Taxes

Traffic Fines (indirect taxation)

Trailer registration tax

Utility Taxes

Vehicle License Registration Tax

Vehicle Sales Tax

Watercraft registration Tax

Well Permit Tax

Workers Compensation Tax

Are you dizzy yet?

The reality is that the American people are being drained in dozens and dozens of different ways.

But what did you expect?

Did you think that our politicians would pile up the biggest debt in the history of the world and never ask you to pay for it?

Did you think that we could run deficits equivalent to about 10 percent of GDP without ever seeing tax increases?

The truth is that the U.S. government needs a whole lot more money than even these new tax increases will bring in.

After all, it is being projected that the U.S. government will be spending $2 trillion on the interest on the national debt alone by the year 2020.

To put that in perspective, the entire budget for the U.S. government is less than $4 trillion for 2010.

Are you starting to get the picture?

In the years ahead the IRS is going to be digging deeper and deeper into our pockets and a gigantic chunk of that money is going to go directly into the pockets of those who own our debt.

But very few Americans wanted to listen when this problem was actually somewhat fixable 20 or 30 years ago.

So now we are all going to pay the price – literally.

The Economic Collapse

Last Friday seven more banks failed bringing the total bank failures to 103.

U.S. bank failures this year have surpassed a bleak milestone of 100 as regulators shut down banks in Georgia, Florida, South Carolina, Kansas, Nevada, Minnesota and Oregon.

The seven bank seizures announced Friday bring to 103 the failures so far in 2010. The pace of bank closures this year is well ahead of that of 2009, which saw a total of 140 banks shuttered amid the recession and mounting loan defaults. That was the highest annual tally since 1992, at the height of the savings and loan crisis.

The number of banks on the FDIC’s confidential “problem” list jumped to 775 in the first quarter, from 702 three months earlier, even as the industry as a whole had its best quarter in two years.

More Failures Coming

The FDIC is now deep in the red and the situation is getting worse every week. The situation would be even worse were it not for widespread “extend and pretend” tactics that keep woefully insolvent banks in business.

FDIC Shell Game To Hide Bad Assets

To address the situation, the FDIC is going to start selling U.S.-guaranteed FDIC senior certificates. However, it has no Congressional authority to do so according to former thrift regulator William Black.

Unlimited Taxpayer Bailout

Black claims an “unlimited taxpayer bailout” of the FDIC is on the way.

Barrons discusses the situation in Uncle Sam Rides Again: Banking on a Bailout?

BEFORE THE FINANCIAL CRISIS is unwound, the Federal Deposit Insurance Corp. expects to have taken over some 300 failed banks. The rapid closures have drained the agency’s cash reserves.

The FDIC must sell assets to continue the closings. It has about $37 billion of bad-bank assets to sell, but the stockpile would bring only 10 to 50 cents on the dollar.

Enter the FDIC’s Securitization Pilot Program, the sale of U.S.-guaranteed FDIC senior certificates. This enables the FDIC to push much of the losses off its books, thanks to the U.S. guarantee of principal and interest. The program starts with a $500 million issue.

“They aren’t really selling the bad assets. They’re selling the equivalent of a Treasury bond without congressional approval,” says William Black, a former thrift regulator. “It hides the economic substance of what’s really happening—an unlimited taxpayer bailout.”

The FDIC contests the characterization, saying it doesn’t expect a claim on the guarantee because of an equity cushion to absorb the losses, and the use of only performing mortgages in the pools. The agency says a lot of resources stand between it and the taxpayer.

Foot in the Door Ploy

Notice how the $500 million start gets the FDIC foot in the taxpayer’s door. At some point Congress will probably grant authority to the FDIC just as the Fed got unlimited funding for Fannie Mae.

President Obama and the Democrats are making matters worse by permanently upping the FDIC limit to 250,000 in the financial reform legislation that just passed.

Moral Hazards

FDIC is a moral hazard. Many banks that failed were able to stay in business because of taxpayer deposits at above market rates. For example, no one in their right mind would have had deposits at Corus Bank, a bank with many troubled loans to Florida and Nevada condo developers.

Corus bank would have failed long before it did, without the FDIC guarantee. Not only was the bank able to attract funding by offering above market rates, Corus contributed to the enormous property bubble in Florida and other places.

Instead of preventing risky bank practices in the first place, or upping the insurance rate on risky bank practices to cover excessive risk, the FDIC is about to get an unlimited taxpayer sponsored bailout by selling U.S.-guaranteed FDIC senior certificates, even though it has no authority to do so.

FDIC Legacy

As a result of the inept policy decisions by the FDIC, instead of having small bank failures widely spread out over time, we have had concentrated bank failures in a short period of time.

Taxpayers will be the ones to pay the price. This is the legacy of FDIC and its failed moral hazard policies.

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

I recently had a conversation with a retired neighbor, a former Navy vet who worked most of his life at a local grocery store.  I wouldn’t call him wealthy but he has his financial house in order; he paid off his home in the early 1990s, has no other debts, and lives well below his means.  His big source of income comes from Social Security.  We talked about the current economy and the strain we are facing.  It was a good conversation and ultimately the mathematical problems we are facing for the working and middle class become extremely obvious when confronted face to face.  We both conceded that government retirement programs will have problems in one or two decades (doesn’t help many who are still working).  The economic issues faced between the generations will cause many hard decisions down the road.

First, we should examine income levels in the U.S.:

Source:  Bankrate

The bulk of American households bring in $65,000 a year or less.  The current tax rate for FICA (Social Security and Medicare taxes) comes in at 7.65% with the remainder paid by the employer.  So the family making $65,000 a year is paying roughly $5,000 a year into FICA.  With the employer match, this figure comes out closer to $10,000 going into the system.  If we look at the current amount paid out to Social Security beneficiaries it is roughly the same per year:

The average monthly benefit paid out is $1,067.  Over 53 million Americans receive some form of Social Security benefits.  The working and middle class have had an implicit agreement with the government that if they work for many decades that in the end there will be some sort of safety net to protect them.  Yet the system was designed at a time when people died at earlier ages and we had many more workers than we had beneficiaries.  The math now is tipping in a very unfortunate direction:

As of today, nearly 19 percent of all Americans receive some form of Social Security.  Compare this to 1970 when only 12 percent of all Americans received some form of Social Security.  The above chart is merely going to grow even faster as many more baby boomers enter into retirement.  For those in the working to middle class the prospect of a secure retirement is looking more and more remote.  It would be one thing if people had the ability to trust in Wall Street and invest into the market.  Yet Wall Street with no real reform is largely a predator casino as we have seen with flash crashes and large hedge funds making billions of dollars betting on the failure of Americans.

The original Social Security Act was signed in back in 1935.  The initial design was to help the old, widows, and children of the poor to have at least some basic safety net.  It was never designed as a long-term retirement program.  Today, over 50% of those that receive Social Security benefits in retirement use it as their primary source of income.  With Americans living longer, the strain on the system is largely taken on by the working generations.

Here is an interesting chart showing the progressive growth of the tax over the century:

Initially, the amount taken out of a typical worker’s paycheck was 1 percent.  Today it is up to 7.65 percent (not factoring in the employer’s portion).  It is also the case that SS is capped at a certain income level so the wealthy actually stop paying above a certain level (as of 2010 this level is $106,800).  Going back to a previous chart, you see that nearly $57 billion was paid out in May alone.  The demographics of the system only point to larger and larger monthly payouts:

The above chart is similar to charts in Europe although not as extreme.  But we see a shift to more and older Americans.  By default, many of these people will start drawing more and more on the already strained Social Security system.  And younger workers in our current economy are facing a much deeper impact of the current recession.  Even before the collapse of the system, the young were already losing ground:

The median net worth of Americans from 25 to 34 has consistently dropped since 1985.  There was a big drop from 2000 to 2004 and I would imagine the trend has accelerated in the current recession.  Yet how were people able to continue buying more and more?  It was all fueled by access to debt.  It was largely a debtor mirage that kept the economy going in the last decade.  In fact, the median amount Americans have saved in a retirement account (those still working) is $2,000:

Source:  BLS

The fact that the mean is $50,000 tells us we have massive income disparities in the system and it also helps to point to the fact that most stock wealth is concentrated in the hands of a very few.  Another deceiving factor that was brought into the net worth equation was the net worth figure used housing values during a bubble to calculate net worth:

A giant part of net worth was pulled from housing equity that has now largely evaporated.  The fact that half of U.S. households only have $2,000 in retirement accounts tells us that many are close to a zero net worth after the housing bubble burst:

“(National Review) The macroeconomic consequences of this shift toward low-equity homeownership are visible in research from the Federal Reserve that examines the assets and liabilities of U.S. households. In the first quarter of 2001, U.S. households’ home equity stood at $7.7 trillion, or 61 percent of the value of all residential real estate. By the third quarter of 2008, it had declined to $7.6 trillion, even as outstanding mortgage debt increased by $5.6 trillion over the same period. By the first quarter of 2009, home equity was $1.35 trillion lower than it had been in 2001. Put another way: Despite the housing boom, the portion of residential real estate actually owned by households declined. This means that the increase in homeownership rates (and the subsequent rise in housing prices) was entirely debt-financed.”

In other words, say someone bought a home in 1998 for $100,000 and took out a $95,000 loan.  At purchase, they have a net worth of $5,000 (assume no other assets).  Fast forward to 2006 at the peak of the bubble and the home is now “worth” $250,000.  Seeing that they now have $155,000 in equity, they decide to pull out $75,000 pushing their total loan amount to close to $170,000.  The money is used to buy goods, take a vacation, and generally injected into the economy.  The housing bubble explodes and the home is now worth $150,000.  Yet they have $170,000 in outstanding loans.  This family went from having a $155,000 in equity (net worth) to suddenly going to a negative equity position of $20,000.  Today, one out of three U.S. homes with a mortgage is underwater.  This is why actual wealth is a better measure of financial well being than simply looking at home values especially in a bubble.

The higher unemployment for younger generations is making it harder to put more money into the Social Security money funnel. The low savings from the working generations tells us that many simply cannot save given the current economy.  Ironically, this means that many more will be dependent on government programs.  The calculus is troubling.  There are no easy answers to this.  A few of them include raising the cap to tax higher incomes or cutting benefits.  Seeing how powerful groups like the AARP are, it is doubtful benefits will be cut.

As I think back on the conversation with my neighbor that has served our country proudly in combat, how can you begrudge him?  He is living modestly, paid off his house, and let us be honest, $1,100 a month isn’t exactly Donald Trump territory.  Yet as I go out to work with millions of others, we wonder how things will be in one, two, or even three generations.  Having a paid off home and no debt actually sounds like the apex of a good retirement given our current financial predicament.

MyBudget 360