Posts Tagged: Obama

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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27
Jan 10

We Can Handle the Truth

“You can’t handle the truth!” Col. Nathan R.Jessep in A Few Good Men

After his election President Obama had the opportunity to educate the public on the causes of the financial crisis and the necessary steps to help us emerge from it.  Over this past year, he has squandered this chance, and in so doing has created the political backlash that is occurring today.

Policy Making and the Truth

With great fanfare, we inaugurated President Obama against the backdrop of the greatest financial crisis since the Great Depression.  In any new Administration, policy making is never easy and advisors at times seem to operate in virtual echo chambers, hearing only themselves.  They presented Obama with a range of options: nationalize the banks; let them fail and let the bankruptcy courts sort it all out; continue the Bush/Paulson bailout policies.  From the beginning, Obama advisors took the middle of the road policy to continue the bailouts.  As voters and participants in a democracy, we can now see the missing piece in this scenario. President Obama owed the public an explanation of this policy choice.  My guess is that his advisers warned against candor.  I would further conjecture these advisers felt that candor would have made the crisis worse.  Elites always worry about scaring the masses. This was confirmed at today’s Congressional hearings on AIG.  AIG was viewed by both Timothy Geithner and Henry Paulson, as the “end of the financial world as we knew it.”  The Administration and we are now suffering the consequences of this subterfuge.

Back to the Future

President Obama could have made a few simple points that would have educated the public, built a consensus for his policy choice and left open future policy options if the bailout approach failed.

President Obama could have made these simple and direct points:

  • We are facing the greatest financial crisis since the Great Depression
  • We got into this problem by borrowing too much, and producing and saving too little
  • At the center of this crisis are the large money center banks and Wall Street investment firms
  • Using inappropriate levels of borrowing and creating non-transparent products, derivatives, which could not be accurately valued or traded, these banks and firms gambled with our money.
  • Banks, however, are the transmission mechanism for getting money into the economy through check clearing, making loans and other services.
  • We are going to provide enough support for the banks to continue their necessary and transparent functions.
  • There will be a consequence to any bank for needing this ad hoc and unusual government support.
  • Shareholders and creditors of the banks must share in some of the losses.
  • Bank employee bonuses will be severely limited or eliminated until the banks recover.
  • The government will take part ownership in the banks until they return to financial health.
  • I have asked my Attorney General to investigate whether these institutions committed any crimes.  I will ask him to hold indictments in abeyance until we are on our way to recovery.
  • Let me assure you that the government will punish wrongdoing.

We Build Prisons of our Own Making

We know this fictional address to the public did not take place.  The Obama Administration now owns the policies of failed bailouts.  The recovery is precarious and now the government asserts that the health of the stock market hinges on re-appointing Ben Bernanke as Federal Reserve Chairman.  The Massachusetts senatorial election was a wakeup call that the middle class is “mad as hell and isn’t going to take it anymore.” See The President Wakes Up and Smells the Election Results.

In tonight’s State of the Union Address, President Obama scratched the surface of candor. He stated that he hated helping the banks, but that failure to do so would have led to greater unemployment, business closure and lost homes.  President Obama, it is not too late for complete candor. It is not too late to commence investigations and prosecutions.

Col. Jessep was wrong: the American public can handle the truth!

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26
Jan 10

The President Wakes Up and Smells the Election Results

In Barbell Economy posted on January 21, I hypothesized that the Democrats lost the Massachusetts election because the Obama administration ignored the needs of the middle class.  The systematic destruction of the middle class is the most potent issue of 2010.  It appears the White House finally woke up and smelled the coffee.  President Obama yesterday proposed a series of initiatives to aid the middle class. The Christian Science Monitor reported the President’s remarks:

We … need to reverse the overall erosion in middle-class security so that, when this economy does come back, working Americans are free to pursue their dreams again,” said Mr. Obama Monday at a meeting of the administration’s Middle Class Task Force.

A White House fact sheet listed some of the specific initiatives:

Child care. The administration is proposing to nearly double the child-care tax credit for families whose income is less than $85,000 a year. For those folks, the percentage of child-care expenses eligible for reimbursement via the credit would rise from today’s 20 percent to 35 percent.

In dollar terms, the maximum credit for a two-child family making, say, $80,000 a year, would increase from $1,200 to $2,100. That’s a $900 benefit.

Families with incomes up to $115,000 a year would be eligible for at least some increase in their child-care tax credit, on a sliding scale.

The administration also is proposing to increase by $1.6 billion the amount of money in the Child Care Development Fund, which pays for child care for poor families, including those receiving public assistance.

Dependent care. The White House is proposing to add $52 million to the Caregiver Initiative, a Department of Health and Human Services program that provides temporary respite care, counseling, and referrals to critical services for hard-pressed families taking care of elderly relatives. According to the administration, this extra cash means the program will serve an additional 200,000 people.

The administration is also proposing to add a further $50 million to programs that subsidize adult day care, transportation, and aides who help seniors bathe and cook.

College expenses. …[T]he administration is proposing to limit the amount of student loan money that a borrower must repay to 10 percent of the borrower’s income, over and above a basic living allowance.

The proposal would also cap the total amount of money a borrower must pay. For borrowing students who enter a field of some kind of public service, all remaining debt would be forgiven after 10 years of payments. For others, forgiveness would follow 20 years of payments.

Retirement savings. About 40 percent of working heads of households don’t have any kind of employer-sponsored pension or retirement plans. The administration thus is proposing to require employers who don’t offer such plans to enroll their workers in automatic, direct-deposit IRAs (individual retirement accounts).

Employees could opt out if they wanted to. All contributions would be voluntary.

The administration also wants to streamline the process by which workers enroll in 401(k) retirement plans.

Where are the Jobs?

While providing some benefits to the middle class these initiatives do not create jobs.  The Administration seems to miss the larger point, perhaps the only point:  we have too much debt, too little savings and too little demand.   Economically it is impossible to return to the pre-2007 level of prosperity because we have not liquidated or paid off our massive debt.  Zero interest rates misprice risk.  Banks are hoarding money to reserve against future losses in their loan portfolios. There are few credit-worthy borrowers.

And so, both parties remain guilty of legislative gimmicks.  Bailouts and tax credits do not get to the heart of our problem, too much debt. When will we reach a moment of recognition that there are no quick fixes?  Debt must be liquidated or paid off, savings must become more important than spending, and we will all have to be more productive.

What we need now are leaders who understand these truths.

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21
Jan 10

The Barbell Economy

Political statements come in all shapes and form.  Tuesday it arrived with the election of Republican Scott Brown of Massachusetts to the United States Senate. Pundits conjured instantaneous rationales for this upset: the proposed health care bill, bailout of the banks, high unemployment rate, rise in the price of gasoline, declining home prices among others.

We can attribute Brown’s victory to any or all of these rationales; however, we are describing the symptom and not the disease.  The disease is the “barbell economy.”  On one side of the barbell we have the rich who have been rewarded with bailouts, large bonuses, hedge fund profits, at the expense of taxpayers.  These people appear to be insulated from the recession. On the other side of the barbell are the growing numbers of poor people who utilize our many social safety nets: welfare, food stamps, loan modification programs, Medicaid and others.  The dwindling middle class, the fulcrum of American society and the bar that holds up the barbell, is being disenfranchised and economically destroyed.

The Destruction of the Middle Class

We have witnessed the slow destruction of the middle class over the last 30 years.  Two wage earners were needed to maintain a middle class life style.  Then middle class wealth was destroyed in the stock market crashes of 2000 and 2008.  Easy credit and low interest rates mired the middle class in a cycle of debt.  Good paying jobs were outsourced to low wage foreign countries.  Unemployment soared and wage growth was eliminated.  Inflation in necessary commodities such as gasoline siphoned off more income.  The coup de grace was the implosion in house prices.

Albert Edwards, Global Strategist for Societe Generale, opines that the Federal Reserve has destroyed the middle class:

Some recent reading has got me thinking as to whether the US and UK central banks were actively complicit in an aggressive re-distributive policy benefiting the very rich. Indeed, it has been amazing how little political backlash there has been against the stagnation of ordinary people’s earnings in the US and UK. Did central banks, in creating housing bubbles, help distract middle class attention from this re-distributive policy by allowing them to keep consuming via equity extraction?  The emergence of extreme inequality might never otherwise have been tolerated by the electorate (see chart below).  And now the bubbles have burst, along with central banks? credibility, what now?

He cites the Census Bureau analysis that median income failed to rise in real terms for the entire decade, the first time that median income did not rise in all US history. See Scandal Edwards Alleges Central Banks were Complicit in Robbing the Middle Classes.

The middle class is now left with 10% percent unemployment (effectively 17% or more), decimated retirement income, skyrocketing health insurance premiums,  rising state and local taxes, a high debt load and a house with zero or negative equity.  Further, middle class tax payers are not stupid.  They know that taxes will soar to pay for these deficits and expansion of entitlement programs.  Promised a new political regime of hope, change and transparency, the middle class has endured a year of betrayal.

The Politics of Anger

Both Democrats and Republicans misread the current situation.  Middle class voters feel abandoned by both parties.  Backroom deals on health care legislation are only symptomatic of a deeply flawed and corrupt political system where the rich and connected obtain special favors and ignore the middle class.

The middle class is the bedrock of America.  Paraphrasing George Bailey’s defense of his father’s character in It’s a Wonderful Life, the middle class “does most of the working and paying and living and dying” in America.   The middle class needs real hope, not false promises of hope.  The two parties need to pay immediate attention to the middle of this economic barbell.  If they do not, more of this current group of elected officials might just be added to the unemployment rolls.

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18
Dec 09

Faux Powerlessness Part Deux

Less than twenty-four hours from my Monday post, Faux Powerlessness, we learn the true state affairs.  President Obama not only failed to use the powers of his office to admonish bankers, but also engaged in a virtual love fest with bankers at his vaunted Monday White House meetings with bankers.

The Banker -Administration Love Fest

Charles Gasparino broke the story in “Two Faces of O:”

In public, President Obama is on a tear against Wall Street. In private, not so much.

Over the weekend, Obama attacked fat-cat investment bankers, telling “60 Minutes” he didn’t become president to aid and abet Wall Street — which, only a year after the financial meltdown and taxpayer bailout, is now scheduled to hand out tens of billions of dollars in bonuses to its bankers and traders.

But the president’s meeting yesterday with the CEOs of the largest banks was nearly a love fest, I’m told by attendees.

The meeting was devoid of surprises.  The White House “telegraphed” their modest message through talking points sent to the attendees last week:

  • lend more to small business,
  • reduce bonuses
  • support Congressional efforts to enact regulatory reform.

Said one CEO who attended: “I expected to be taken to the woodshed, but the tone was quite the opposite.”

Obama has deemed these money center banks too big to fail and has guaranteed their debt. The Administration has allowed the banks to mint profits through: paying interest on reserves, eliminating competition through mergers, and steepening the yield curve so banks can borrow at zero and purchase higher yielding, long term government securities.  A zero interest rate policy coupled with government guarantees against failure irrationally has encouraged speculation.  Some of the speculative money flowed into commodities such as oil, driving up consumer prices.  Bank profits and bonuses have soared at the expense of Main Street.

Elites Grow More Powerful at the Expense of the Middle Class

The Bush Administration began many of these policies.  However, wasn’t Obama elected to effect change?  It appears the Administration is more interested in Wall Street’s treasure trove of campaign contributions than effecting meaningful change.  The outburst on 60 Minutes on Sunday night, in light of the Gasparino article, appears nothing more than a staged drama for the masses.  Citizens who had hoped for change are waking up to the reality that they may have wasted their vote. Meanwhile elites grow more powerful and the middle class shrinks.  This does not bode well for our republic.

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14
Dec 09

Faux Powerlessness

In an appearance on Sixty Minutes President Obama lashed out at bankers.  Today’s  Wall Street Journal reported:

“I did not run for office to be helping out a bunch of fat cat bankers on Wall Street,” Mr. Obama said in an interview on CBS’s “60 Minutes” program on Sunday.

“They’re still puzzled why is it that people are mad at the banks. Well, let’s see,” he said. “You guys are drawing down $10, $20 million bonuses after America went through the worst economic year that it’s gone through in — in decades, and you guys caused the problem. And we’ve got 10% unemployment.”

President Obama is calling bankers to a meeting at the White House to discuss their failure to lend to small businesses and consumers.

Bankers Acting Badly

I have written much about the anti democratic nature of the early and massive efforts of government to bolster the banks.  These efforts have added to excessive risk taking, outsized bonuses and a reciprocal feeling on the part of the public that they can walk away from mortgages and credit card debt.  We have institutionalized moral hazard.

Exercising Power

This essay is really about power and the lack thereof.  As a long-time observer of corporate culture, there were obvious situations where executives in my company  should have been terminated.  But numerous times, I watched superiors decry their lack of power to take action.  I would scratch my head and wonder, “if you don’t have the power to terminate this person, who does?”  I call this behavior “faux powerlessness.”  These executives had absolute power to terminate an employee (who often richly deserved it), but instead they feigned powerlessness.  The executives would curse the fates, pound on their desks and look to the heavens to decry their plight.  Frankly, they were too scared or too political to take the necessary action, and the organization suffered.

How much more unbecoming is it for the President of the United States to go on national television and decry the bankers?  Isn’t the President the most powerful man in the free world?  Absent the irony and cinematic quality of the line, this is a true statement.  President Obama has multiple levers of power to affect banker behavior.  He has the Treasury, the FDIC, the Comptroller of the Currency, the SEC and other executive branch agencies which can change and influence banker behavior.  Further, if bonuses are excessive, propose a windfall tax on bankers’ bonuses.  The French and the English were able to do so. The concept does not have to be foreign. See French Join Brits on Supertax on Bonuses.

Talk is Cheap.  Do Something About It

Mr. President, if you truly believe the bankers have acted poorly, then do something about it. Stop pandering to the public and take some real action.  These actions would go a long way toward stemming the growing public anger and sense of inequity of the banker bailouts that you and your administration sanctioned.

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26
Nov 09

Can We Continue the Status Quo?

Every so often one comes across a brilliant essay that cuts to the heart of the problem.  Writing for the Prudent Bear in “Wanted: Iconoclasts,” Martin Hutchinson identifies the rising political anger at the “partnering” of the Obama Administration and Wall Street:

In such an atmosphere, with unemployment above 10% and rising, and U.S. living standards descending inexorably towards those of the Third World, it is not surprising that the public beyond the Washington Beltway is in an iconoclastic mood. Its iconoclasm is rational, economically speaking. The tight oligopoly of Wall Street is profiting excessively from its 2008 bailout by taxpayers, with the payments to Goldman Sachs and others on the AIG credit default swaps coming to seem increasingly misguided and possibly corrupt, given Goldman Sachs’s close connection with the Treasury Secretary Hank Paulson who disbursed taxpayers’ money in such an unproductive manner. AIG and Citigroup remain in business, with even AIG Financial Products, the cause of much of 2008’s pain, still in operation. Fannie Mae and Freddie Mac remain dispensing their guarantees to the housing market, noticed by the media only at the end of each quarter as they tote up their losses and demand further billions of the taxpayers’ money. The economically damaging subsidies to home purchase, diverting as they do scarce U.S. capital towards yet more unproductive housing, have just been extended both in time, for a further six months and in scope, to existing homeowners. The economic recovery, such as it is, appears to [be] sic producing almost no jobs but only an ever-widening spiral in commodity prices, affecting the costs of everything the public consumes and eroding the value of its meager savings.

Mr. Hutchison levels his criticism of the management of the financial crisis at the behavior of Obama, Bernanke and Geithner, whose knee jerk response was to maintain rather than reform system.  They chose to bolster bankrupt financial institutions at taxpayer expense. Further, they chose zero interest rate policies which punish savers and trillion dollar deficits ad infinitum which punish all taxpayers and future generations.  They created a giant irrational structure. (See Why Do All Irrational Structures Fail?).

Offering Solutions

Mr. Hutchinson does not deliver a jeremiad.  Instead, he departs from dire rants and prognostications and points to a rational way out of the ongoing crisis.  Recognizing that the current economic-political trajectory we are currently on is unsustainable, he provides policy prescriptions to end the crisis:

It will thus have become obvious that the housing market needs to be restored to a fully private market state, in which government subsidies are confined to the truly indigent. Zombie banks must be closed down, while the beneficiaries of “too big to fail” must be forced to slim down and divest operations until they are of a size where failure is conceivable. Commercial banks will simply become regional entities, whose failure would damage a regional economy but not the entire financial system. The trading behemoths will be broken into several competitors, whose market share will be too small for them to profit from “insider information” about market flows – a modest transactions tax will also reduce trading’s dominance. Home mortgages will once again be granted locally, with derivatives and securitization technology used only to prevent cost squeezes in high-growth areas. The obvious cost reductions in health-care, eliminating the current system’s cross-subsidizations, will be legislated to reduce the sector’s oppressive cost growth. Public expenditure generally will be put on a strict diet, with expansionist foreign policy ended, both in its belligerent and its globalist forms.  Finally, monetary policy will set interest rates at a level that rewards savers properly and prevents bubbles.

Conclusion

Staying on our current course of action is irrational.  Mr. Hutchinson clearly links together politics and economics.  Often economists take a narrower view, ignoring political realities.  Since this is not a normal recession and has all the hallmarks of a depression, “business as usual” policy measures taken to date have been ineffective and have deepened the crisis. There is a growing political reaction among the masses of Americans who face unemployment, inflated gasoline prices and foreclosure.  Democratic losses in recent elections were an early harbinger of that discontent.  There is still time for Obama, Bernanke and Geithner to become iconoclasts, break with orthodoxy and restore economic growth which will benefit all Americans.  Continuing the status quo will be harmful to the current ruling political class, the Wall Street elite and the economy.

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18
Nov 09

Consistently Inconsistent

Attorney General John Mitchell  ”Watch what we do, not what we say.”

The Obama Administration was elected on a platform of “hope and change” and transparency.   Americans want their leaders to be honest and fair.  The first year of the administration has been nothing short of a disappointment.   Economic policy making has been elitist, deceptive and unfair to the constituency who voted for this President.  Let us examine just three programs and initiatives: the stated goal, the outcome and the inconsistencies.

  • Cash for Clunkers – A program to provide incentives to Americans to trade in their “gas guzzlers” for a new car and a government rebate.  Outcomes – Why are we incenting car purchasers when we are running out of oil and mass transit is in disarray?  Doesn’t this continue to promote the inefficient model of suburban homes, driving long distances to work or shopping?   The program also adds to the debt burdens of consumers who took out auto loans.  Auto analysts at Edmunds.com estimate that each car costs the taxpayer $24,000. The program had additional energy costs in destroying the clunkers.  Finally, it added to the trade deficit as many of the cars purchased were imports.  Inconsistencies: trade deficit, energy conservation, debt.
  • Zero Per Cent Interest Rates – The Chairman of the Federal Reserve vowed to keep interest rates at zero as long as the economy was weak. Outcome- This policy has encouraged consumers and speculators to take on more debt. It has discouraged savings and it has had a particularly pernicious effect on elderly retirees.  It has revived leverage and the same risk taking behavior in the financial community that caused the initial crisis.  By allowing banks to borrow at zero percent and either park the money in safe treasuries or lend to consumers and speculators at higher rates, they have been able to earn risk free profits and pay large bonuses.  And since we manufacture little here, the trade deficit has risen. Finally, the dollar has weakened with the side effect of commodity prices soaring and most importantly, the price of a barrel of oil doubling from its low. Inconsistencies: More speculation and risk taking, inflation in key commodities, added debt and discouragement of desperately needed savings.
  • Health Care Reform – The Administration has a monomaniacal focus on achieving some form of national health care.  Outcome:  If passed Obama’s favored proposal will add enormous costs to employers at the same time that employers need to cut costs to remain competitive.  The Congressional Budget Office conservatively calculates that these proposals will add at least $239 billion to the already out of control government budget deficit.   Finally, taxes will increase to pay for the “reforms”  further delaying economic recovery.  Inconsistencies:  deficits expanded, businesses made less competitive through added costs and tax increases.

A Visit to Never Never Land

I have picked three policy areas but there are more, ranging from adding troops to Afghanistan to bonus pay for bankers. There is an air of total unreality or naiveté emanating from President Obama. Today’s statement from the President unfortunately says it all:

BEIJING, Nov 18 (Reuters) - President Barack Obama gave his sternest warning yet about the need to contain rising U.S. deficits, saying on Wednesday that if government debt were to pile up too much, it could lead to a double-dip recession.

After piling up one debt laden program or initiative after another, the above statement is incomprehensible and amazing. Where is the mainstream media to criticize the Administration on these inconsistencies?  Obama’s statement only strengthens my view that this Administration is consistently inconsistent.

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13
Nov 09

The New Reality: Permanent Job Loss

On November 12, 2009, weekly initial reported jobless claims were announced as 502,000. While an improvement from last week initial jobless claims have remained over 500,000 per week for all of 2009.  In response to these continuing dreadful unemployment numbers President Obama announced a job summit to be held in December:

Obama said the White House forum will gather CEOs, small business owners, economists, financial experts and representatives from labor unions and nonprofit groups “to talk about how we can work together to create jobs and get this economy moving again.”

“We all know that there are limits to what government can and should do, even during such difficult times. But we have an obligation to consider every additional, responsible step that we can take to encourage and accelerate job creation in this country,” he said.

Marketwatch, November 12, 2009

By employing classic Keynesian remedies, the White House hopes that the right level of stimulus will overcome economic realities and persuade employers to resume large scale hiring. But, the President and his advisers have missed the basic structural changes in the job market.

Breakfast with Dave

In his letter Breakfast with Dave, David Rosenberg one of the most perceptive practicing economists currently writing, discusses the new labor market paradigm:

There are serious structural issues undermining the U.S. labour market as companies continue to adjust their order books, production schedules and staffing requirements to a semi-permanently impaired credit backdrop. The bottom line is that the level of credit per unit of GDP is going to be much, much lower in the future than has been the case in the last two decades. While we may be getting close to a bottom in terms of employment, the jobless rate is very likely going to be climbing much further in the future due to the secular dynamics within the labour market that need to be discussed

The Big Picture- US Unemployment Rated Headed for 12-13%

Rosenberg points out the unique aspects of this recession.  There has been a structural change where 6.2 million jobs have been permanently eliminated.  The workweek has been reduced to 33 hours per week.   Employers will avoid hiring well into the future, choosing instead to lengthen the workweek.  In a slow top line growth environment, this trend will be exacerbated as companies will be forced to continue slashing labor costs.

Rosenberg is validating the basic thesis in my prior blog entry, Why This May Be Worse than the Great Depression:

The government is still stuck in a 1950’s employer mentality.  Can we implement New Deal-type of public improvement efforts such as road repair or retrofitting government buildings?  How many credit derivative specialists have the ability to perform road paving or asbestos removal?

Similarly, the government is banking on new industries to be engines of growth. Is banking on this type of job growth realistic?  High growth industries such as biotechnology and solar cell companies employ few and highly specialized employees.  Even the modern US military needs fewer soldiers, as technology has revamped war.

The Great Depression ended when large numbers of employees were recalled by auto, steel, chemical and rubber companies to support the war effort.  There is no massive recall or even new industry on the horizon to absorb the unemployed.

Politicians Continue to Fight the Last War

Government intervention has its limits.  The Administration has not convinced banks to lend in the face of poor credit conditions.  To maintain profitability, companies have focused on controlling labor costs. Despite the upcoming jobs summit, the Administration will be equally ineffective in fighting the tide of this new reality: basic structural unemployment.

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American Society / Financial / Political — 0 Comments
22
Sep 09

Governmental Support of Housing – Irrational or Good Public Policy?

The financial crisis of 2008 laid bare the over dependence of the US economy on housing.  Since the New Deal, conventional political wisdom has been that housing needs to be subsidized and supported.  Why isn’t this almost religious economic tenet ever questioned?  Is governmental support of housing irrational?

Knee Jerk Response to Crisis: Reflate Housing

Nobel Prize winning economist and New York Times columnist Paul Krugman has long advocated governmental support for housing to the point where his automatic response to a financial crisis it to re-ignite the housing bubble.  During the financial crisis, I wrote to Prof. Krugman, asking whether or not over reliance on the housing market was economically foolish.  I received no response from Professor Krugman nor did I expect one. It appears that focusing on America’s over investment in housing is too threatening for many in our political and intellectual establishment.  The Obama administration is now pursing reflating housing prices with a vengeance.

Housing as a Consumer Good

Houses are an expensive consumer item and a depreciating asset.  Buying a house has high transactional costs associated with it: brokerage fees, title searches, mortgage fees, appraisal fees, attorney’s fees, surveys, engineering inspections, pest control inspections, radon testing, etc.  For most Americans, buying a home also means taking on a staggering amount of debt.  In the Northeastern US, where I live, it is not uncommon for a modest home to be a million dollars or more.  In the heyday of the housing boom, that could mean a $900,000 to a million dollar mortgage.  When I was growing up in the 60s that amount of money could buy a fair sized business supporting 30-40 employees.  Support for home ownership is at best a short term boost to the economy.

Houses also need to be maintained.  The average suburban homeowner, who commutes some distance to a city, has little time to maintain a home; so add on expenditures for gardeners, roofers, heating and cooling maintenance and repair, pool maintenance, gutter clearing, tree surgeons, plumbers, cabinet makers, carpenters, etc.  The list is almost endless.   Before I purchased a home, I asked a long-time homeowner how much of my disposable income would be consumed in maintaining a house. The answer was 110% of it.

Suburban houses are energy inefficient compared to city based, multi-family dwellings.  Heating and cooling costs are high, lawns need to be fertilized and fertilizer has a large carbon footprint. Moreover, suburban houses require multiple vehicles and constant driving for commuting and basic shopping.  As more subdivisions are built, roads, utility lines and municipal services are extended at great economic cost, also increasing real estate taxes.  Plus, the average house size has soared over the last 25 years requiring greater expenditures on furniture, carpeting and appliances.

Politics and Economics Collide

A symbiotic relationship has developed among builders, realtors, politicians and the financial industry which fuels the perpetual motion housing machine.  Homeowners receive tax breaks in the form of deductions for mortgage interest and real estate taxes. In addition, many homeowners are eligible for subsidized mortgages through veterans’ programs, Fanny and Freddy and their progeny.

Initially, these subsidies had the desired effect of increasing home ownership and house prices.  This, in turn, encouraged homeowners to tap the ever increasing equity through second mortgages, home equity lines and reverse mortgages.  This “virtuous” and pernicious cycle made bankers, real estate agents, attorneys, appraisers, kitchen remodelers and others feel rich.  Homeowners felt rich enough to no longer feel a need to save.  Homes became a virtual ATM.  And if one home was great, why not buy a second or third home, or perhaps invest in another home for a quick purchase and resale.  All went well until the merry go round stopped in 2008 and the cycle went into reverse with foreclosures, evictions and bankruptcy.

The Perfect Storm

For the homeowner we have the perfect storm: too much net worth committed to housing, too little savings, declining prices, declining incomes and unemployment and rising home ownership costs.  Houses are also an illiquid asset.  Stocks can be sold with a click of your computer, not so with houses.

Where are We Now?

Intellectually, we have not moved beyond the New Deal construct, updated by the Bush and Obama Administrations; that is, we are going to make this an “ownership society.”  The knee jerk response of the Treasury and the Federal Reserve is to lower interest rates, pump liquidity into banks and lower lending standards through federal programs and see if we can breathe air into the housing bubble.

How Can We Change Course?

The housing boom was a massive misallocation of society’s scarce economic resources.  The government should not be in the business of subsidizing housing.  For that matter the government should not be in the business of subsidizing any industry. The government should not subsidize:  housing, airlines, autos, refrigerators or farm crops. The million dollar mortgage would be better invested in a productive business which would produce something of more lasting value. Housing is an adjunct to a productive society, not an end in itself.  The government should not be propounding the myth of home ownership as a metaphor for personal validation and certainly not as a means of wealth accumulation. What the government should be propounding is thrift, hard work, and housing, whether rented or owned, that citizens can afford.

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