Posts Tagged: Illinois

American Society / Banking / Business / Municipal Finance — 0 Comments
14
Jul 10

Distortions

One theme we have explored in past posts is the negative role government has played in the economy.  See e.g., Let it Be and Can You Invest in the US Equity Markets? Government intervention in a capitalist economy distorts economic behavior.  Further, government anoints winners and losers without subjecting market participants to the rigors of a free marketplace.  See Government Intervention and Bowmar Brains.  Interventions occur on both state and federal levels.  Let’s examine some of the recently reported inevitable distortions.

Federal Employment

Andrew Briggs and Jason Wine examine the disparity between federal employee and private sector pay.  Federal employees with the same experience and education as private sector employees make 24% more.  Federal employees also receive generous health and pension benefits.   See The Government Pay Bonus.

In addition to compensation and benefit advantages, federal workers are shielded from layoffs and terminations.  Finally, I have extensive experience working with federal employees.  Do not expect that your phone call will be returned after 5 PM.

State Contractors

Illinois, like many other states, has out of control budget deficits and massive pension underfunding.  Michael Shedlock highlights the overweening sense of entitlement displayed by highway construction workers whose pay scale is determined by the state prevailing wage laws for public projects.  While making $50-$68 per hour, these workers are threatening to strike to increase their wages 5% per year to offset increased health care costs.  In contrast, hundreds of unemployed applicants have besieged Walmart to obtain $9.50 per hour positions in newly opened stores in the Chicago area.

Saving the Favored Banks

Amazingly, the top six banks’ holding companies made $51b in 2009 while the other 980 banks lost money:

Focus hard on this shocking Wall Street reality: The top six bank holding companies earned an aggregate of $51 billion in pretax income in 2009. We’re talking about JPMorgan Chase, Goldman Sachs, Bank of America, Morgan Stanley, Citigroup and Wells Fargo.

All of this pretax income can be attributed to their trading revenues of $59.7 billion. The proprietary trading operations of an oligopoly of banks, saved from disaster by Uncle Sam’s largesse and subsidized with cheap money from the central bank, was the single driving force behind the restoration of their fortunes and the renewed surge in their stock prices.

For those willing to go long when the outlook was the bleakest, they’ve banked a double in JPMorgan Chase, scored a quadruple in Citigroup and nearly a quintuple in BofA.

Some of the other 980 bank holding companies–like Bank of New York Mellon, PNC Financial Services, U.S. Bancorp and M&T Bank–lost an aggregate of $19 billion for the 2009 year. Bank of New York Mellon had the seventh-largest trading revenue–it was just 1.6% of the total. By comparison, Goldman Sachs had 36.2%, Bank of America 18.8%, JPMorgan Chase 15.4%, Morgan Stanley 11.3%, Citigroup 6.9% and Wells Fargo 4.2%. See Six Giant Banks Made $51 Billion Last Year; The Other 980 Lost Money

I suspect that much of the vaunted trading revenue came from Federal Reserve borrowing at 0-.25% interest rates, and then buying higher yielding treasury securities.  Would you call that investing or just “shooting fish in a barrel” courtesy of the US taxpayer?

Government Intervention and Economic Recovery

Distorting economic incentives is one factor retarding economic recovery.  Crony banks are guaranteed profits while eschewing Main Street lending.  Private sector employees face insecurity in the workplace;  that does not translate into robust discretionary spending.  Further, while not currently a problem, and with abundant surplus labor, private sector employers ultimately will compete with government compensation packages 24% higher than the private sector.

This is a smattering of the distorted economic incentives in the world of Obama, Geithner and Bernanke and their state counterparts.   Their constant meddling and direct interference in the private sector guarantees that we will have plenty of distortions  in the future.

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American Society / Justice System / Municipal Finance / Political / Uncategorized — 0 Comments
10
Mar 10

Can We Afford Our Criminal Justice System?

Based on 2007 data, the United States has 7.3 million (up from 2.4 million in 1982) in jail or prison, paroled or on probation. That is, 1 in 31 adults, compared to an earlier 1 in 77.  With the ongoing financial crisis, desperate state and local politicians are looking for any means to reduce these costs, including early release.  A recent New York Times article, Safety is Issue as Budget Cuts Free Prisoners, highlights the dilemma:

In the rush to save money in grim budgetary times, states nationwide have trimmed their prison populations by expanding parole programs and early releases. But the result — more convicted felons on the streets, not behind bars — has unleashed a backlash, and state officials now find themselves trying to maneuver between saving money and maintaining the public’s sense of safety.

One result: many of the newly released prisoners commit crimes!  How do we keep society safe against the growing cost of incarcerating the bad guys?

The State and Local Financial Crisis

In Where Are We Now? we discussed the budget deficits in 48 of 50 states, while all states but Vermont require them to be balanced.  The situation has deteriorated.  Michael Shedlock (“Mish”) has chronicled these massive budget problems and some state and local responses:

- Illinois – “The state is in utter crisis,” said Representative Suzie Bassi. “We are next to bankruptcy. We have a $13bn hole in a $28bn budget.”The state has been paying bills with unfunded vouchers since October. A fifth of buses have stopped. Libraries, owed $400m (£263m), are closing one day a week. Schools are owed $725m. Unable to pay teachers, they are preparing mass lay-offs. “It’s a catastrophe”, said the Schools Superintendent. See Rep. Suzie Bassi: “Illinois in Utter Crisis, Next to Bankruptcy, $13bn Hole in a $28bn Budget

-   New Jersey – Newly elected Governor Chris Christie found that: In the time we got here, of the approximately $29 billion budget there was only $14 billion left. Of the $14 billion, $8 billion could not be touched because of contracts with public worker unions, because of bond covenants, because of commitments we made accepting stimulus money. So we had to find a way to save $2.3 billion in a $6 billion pool of money.

When I went into the treasurer’s off in the first two weeks of my term, there was no happy meetings. They presented me with 378 possible freezes and lapses to be able to balance the budget. I accepted 375 of them. See Governor Christie: “Time to Hold Hands and Jump Off the Cliff” – Chris Christie For President?

-   California – Last year the state assured markets that it had solved its budget problem.  To meet deficits and cash shortages, the state treasurer is contemplating creditors in state IOUs, delaying payments to school programs and demanding that 80% of state tax be paid before it is earned. See California Delays Payments, Ponders IOUs Again, Demands 80% of Income Tax Paid Before It’s Even Earned

The Prison Industrial Complex

In his 1961 farewell address, President Eisenhower warned Americans against the military industrial complex.  We have created a “prison industrial complex,” with its expensive, unmanageable system of incarceration and monitoring.  One Connecticut study showed an average annual cost of $44k per prisoner.  Public sector unions with high salaries, generous overtime, defined benefit pension plans and retiree health care benefits are hugely expensive, and prison staffs are heavily unionized.

A Way Out

We have suggested in the past that government needs radical reengineering.  See Why Not Reengineer Government? Overhauling the criminal justice system should be a part of that effort. And there are possible solutions:

  • Privatize prisons.
  • Decriminalize certain offenses such as illegal drugs and gambling.
  • Non-violent criminals should pay financial penalties, be confined to their homes, placed in half-way houses or paroled immediately.
  • Community service programs should be re-thought to make best use of talents and skills of otherwise imprisoned citizens.
  • Shorten prison sentences for all but the most violent felons.

Our criminal justice system has mushroomed with little regard to the financial costs to taxpayers. We have over-criminalized non-violent behaviors to all our detriment.  A reform in that system can pay both societal dividends, fewer citizens locked up and a financial dividend, lower taxes.  Perhaps this is one silver lining from the financial crisis.

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Banking / Business / Economics / Financial / International Finance / Political — 0 Comments
16
Feb 10

Where Are We Now?

“Where Are We Now?” is my fiftieth blog post.  The purpose of a political and economic blog is to “connect the dots” looking for coherent patterns.  This post will attempt to do just that, warning you that the emerging pattern is disturbing.

Slow Motion Depressions

Policy makers in Washington and other western capitals are recently smug. They proclaim that, through coordinated monetary and fiscal response, we have averted the Second Great Depression.  More bluntly, all we have done is throw a lot of money at the problem through unprecedented monetary easing and a fiscal policy of bailouts and stimulus bills.  The core financial issue remains:  western countries and the US in particular have too much debt and insufficient income to service that debt.  Depressions have their own timetable. In my opinion, government intervention has only slowed the timetable, but definitely has not averted the event.

The Magic Act

Politicians and central bankers are a bit like magicians.  While an observer is firmly focused on the right hand we miss the left hand’s activities, which are hiding in plain sight.   Just look at current economic and financial trends:

  • Increasing Risk of Sovereign Debt Default – In late 2009 a problem arose with the financial solvency of Dubai.  Much like the subprime crisis in the US, financial pundits assured the public that the Dubai default was minor and self contained.  Yesterday, credit protection for Dubai rose to a record high exceeding the November peak. See Dubai CDS Hits 652, Ploughs Through November Highs As Gold Jumps.   Greece too is on the verge of sovereign debt default and is seeking a European Union bailout.  Portugal, Ireland, Italy and Spain are reportedly in dire financial trouble as well.  The United States, Japan and United Kingdom are not immune from talk of default.
  • Crisis at the State Level – The Center for Budget and Politics has projected 48 of 50 states will have budget deficits.  Cumulatively, the Center estimates an $180b shortfall for this fiscal year.  All states with the exception of Vermont have a balanced budget requirement.  Some assistance to the states has been proffered through the American Recovery and Reinvestment Act, but it is questionable whether this aid can continue. See Recession Continues to Batter State Budgets; State Responses Could Slow Recovery. It is more likely that states will follow the lead of newly elected Republican Governor Chris Christie.  Recognizing that the state is on the edge of bankruptcy, Christie has declared a fiscal “state of emergency” and intends to slash $2.2b from the budget. See Chris Christie Declares Fiscal ‘State of Emergency,’ Paving Way for NJ Spending Cuts. The crisis in municipal finance portends trouble in the municipal bond markets.  The unsuspecting public has purchased municipals in search of yield and instead may receive an unpleasant surprise.
  • National Fiscal Irresponsibility – President Obama signed into law a $1.9t increase in the debt ceiling, raising it to $14.2t. As the administration has predicted deficits out to 2020, this ceiling will rise each and every year. Also, it does not include the Christmas Eve bailout of Fannie Mae and Freddie Mac which provided “unlimited financial assistance” to these two entities. We will likely exceed our previous limit of $400b on financial assistance under emergency bailout provisions.  See US Promises Unlimited Financial Assistance to Fannie Mae and Freddie Mac.  Moreover, how can we continue to finance these deficits without an increase in interest rates?  However, such an increase in interest rates could put the US in a “doom loop,” as interest payments become the dominant budget line item crowding out other federal spending programs.
  • China – Recently China has made a number of financial moves that do not bode well for the US and world economy. First, China has ordered its currency managers to withdraw from any US dollar denominated risk assets, such as corporate bonds, equities and only invest in US guaranteed assets.  Second, it has raised its reserve requirements on its own banks to dampen an over-inflated domestic real estate market.   Speculation in Chinese real estate has reached the point that Jim Chanos, a respected investor, predicts an economic collapse.  See Jim Chanos: China Bubble Ready to Burst. Given the size of our deficits, the US desperately needs China to continue purchasing US government securities. The world needs China as a growth engine to continue world trade and prevent a second leg of the recession.

Harbingers of the Economic Unraveling

Before the next phase of an economic crisis there are often clues to impending problems. Some harbingers to consider:

  • Junk Bonds – The Greek crisis has spurred investors to sell junk bonds, highly risky assets, at the fastest rate since 2005.  As a result credit spreads are widening between treasury and higher risk corporate bonds. See Junk Bond Spreads Widening: A Canary in the Coal Mine.
  • Problems in a Treasury Auction – Last week’s US 30-year Treasury bond auction was considered a failure.  Indirect bids, that is, foreign buyers, dried up and the government had to offer a yield of 4.72% compared to an expected yield of 4.687%.  See Dismal $16b 30 Year Auction
  • Credit Card Problems – Capital One, a major credit card issuer, reports that in January delinquencies rose and that expected unrecoverable loans have risen to 10.41% from 10.14% in December. See Capital One: Credit -Card Delinquencies Rose in January.
  • State and Municipal Finance –In its upcoming July 1 fiscal year budget, California expects a $20b shortfall.  Illinois has a $61b pension shortfall, and is borrowing to make contributions.   Harrisburg, Pennsylvania, is contemplating a March 1 bankruptcy filing.  These stories are the proverbial tip of the municipal finance debt iceberg. See Illinois Pension Fund $61b Underwater; State Borrows Money for 2010 Contribution; California $20b in the Hole Again.

Reality

Till now the policy direction of the Obama administration and other western leaders has been to “extend and pretend:”  we will ignore economic realities by permitting banks to suspend “mark to market accounting” and we will send various administration spokesmen to spread the fairy dust of “green shoots” to pacify an anxious public.  Essentially, we have an economic policy of faith and hope that willfully ignores reality.  Economics does respond to the laws of mathematics.  Like a termite that silently eats away the wooden supports of a house, excessive debt has eaten away the structure of the world economy.  There will be more troubled countries like Dubai and states like California before this Depression has run its course.

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