Posts Tagged: Obama

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19
Aug 10

Artificial Sweeteners

Artificial sweeteners have been the subject of health concerns.  Aspartame, for example, has been found to be a migraine headache trigger.  Products containing it carry a health warning for PKU, a rare hereditary disease.  Today we learn that diet sodas markedly increase the risk of pre-term deliveries.  See Add Diet Soda to the List of Things to Avoid While Pregnant.

Similarly, the Federal Reserve and the Administration have not trusted that the economy can heal through natural market forces.  Instead we have been served up the economic equivalent of artificial sweeteners.  Concerned by slow growth, not even negative growth, the government again is firing up the machinery for money printing and stimulus.

In each instance, the government is intervening, distorting, and artificially “sweetening”  the bond market, the housing market and, indirectly, the stock market.  What are the consequences?

There is No Free Lunch

Martin Hutchinson in The Peril of False Bottoms targets faulty government policy as the reason for our anemic economic recovery.  Excessive economic stimulus and a misguided zero interest rate policy has created false bottoms in the housing and stock markets.    A false bottom is defined as a stabilized “price far above the likely long-run price equilibrium of the assets concerned.”

Bernanke has precedent for providing excessive liquidity and holding interest rates too low for too long.  Greenspan reacted to the internet stock market crash by flooding the market with liquidity.  Doing this drove the market to over 14,000 on the Dow Jones Index and created a housing boom.   In the 2008-2009 real estate and stock market crash we learned  how flawed this policy was.

More on False Bottoms

Hutchinson points out federally inspired housing market distortions:

House prices are currently 47% above their level in January 2000, according to the S&P Case-Shiller 20-city index, compared to a 49% rise in prices since that time – in other words, they are in real terms at the same level as at the top of an immense speculative boom.During the recent contortions, the U.S. monetary and fiscal authorities have established false bottoms in two markets. The first is housing, where subsidies to first-time buyers, ultra-low mortgage rates, government guarantees on $700,000 home mortgages and foreclosure-avoidance schemes have prevented the housing market from falling even to its average level where the average house price is about 3.4 times average earnings. The Peril of False Bottoms

These misguided policies have consequences:

…with additional buyers having been sucked into the market, it is now likely that house prices will fall further than this. Indeed, if the appalling suggestion put forward last week that the government through Fannie Mae and Freddie Mac forgive $1 trillion of defaulted home mortgages is put into effect, they will undoubtedly do so. Nothing could be more designed to destroy confidence in the housing market than a massive subsidy to the most foolish and improvident home buyers, at the expense of the thrifty and careful renters who are the major source of potential new demand for housing.

If the buyer pool is attacked in this way, or forced into unnecessary losses by being made to buy too soon, house prices may not bottom out at the market-clearing level … but may continue falling.  The Peril of False Bottoms

Wither the Stock Market?

The stock market is the second false bottom:

Currently at 10,650 as I write, the market is 35% above its appropriate “middling” target. The “trailing” P/E ratio of 20.4 on the Standard and Poors 500 is also above its historic average, even though corporate and bank earnings are currently inflated by ultra-low financing costs and a steep yield curve. Thus at some point we can expect reality to intrude, and the market to drop to its likely cycle low in the region of 5,000 on the Dow Jones index.

Again market prices are too high for any intelligent buyer.  And worse, buyers will then be unavailable to buy stocks at the bottom. The Perils of a False Bottom

Politics v. Economics

Politicians are worried about the next election.  Thus, we see the desperation of the Administration to throw economic caution to the wind.   Zero interest rates, forgiveness of imprudent debt, subsidies to overpaid public sector workers (with no corollary “give backs”) are all hallmarks of erratic and misguided government policy.  They also sacrifice long-term prudence for the feel good of short term stimulus.

Who will pay this price?  Unfortunately, it will be stock market investors, pension plans, life insurance companies and homeowners.  Directly or indirectly, that is virtually all of us.  We need to beware politicians handing out artificially sweetened candy. Just like aspartame and our physical health, artificial economic sweeteners can be harmful to our financial health.

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17
Jun 10

Gullible’s Travels

President Obama displays a worrying trend.  Confronted with major crises, the President over relies on experts.  Further, he projects a detached leadership style. One would think that with an Ivy League education and a professorship at the University of Chicago, Obama could be skeptical of expert opinion rather than openly accepting of it.

Crisis Management

Crisis management require several elements: recognition that there is problem, identification of the right personnel to solve the problem, appointment of a team leader,  allocation of resources to the team, and active involvement of the most senior executive to ensure the team leader and team are on track.

I have been in both the team leader and most senior executive role.  Both roles require that the team and supporting experts be questioned, re-questioned and “grilled.”  Interchanges need to be spontaneous, “rough and tumble.”  For a desired outcome in these sessions, one cannot indulge in deference to rank, credentials or purported expertise.

At its best, the team is a white hot crucible where no one spares feelings and sensitivities.  Questioning must be unsparing, comprehensive and intense.  After every alternative is examined and probed, team members must “push” to even greater creativity. Only then can the team start to believe that it is approaching a solution.   The senior leader must actively involve himself, and display enough self confidence to doubt any experts when appropriate.  There are no short cuts to an outcome by way of  blind deference to experts.

Obama’s Disturbing Pattern

Perhaps it is folly to speculate on the workings of the US Presidency.  The President is surrounded by myth and press handlers. However, from time to time the public can glean elements of executive style. Some disturbing patterns emerge from Obama’s carefully constructed façade:

-          In the health care debate there was an unwillingness to take on trial lawyers, health insurers, unions and big pharmaceutical companies.

-          Protecting “too big to fail” financial institutions has remained the unquestioned economic doctrine inherited from the Bush Administration.

-          Bank CEOs feel entitled enough not to attend White House summit meetings. Rather than displaying disapproval, the President lauds Jamie Dimon and Lloyd Blankfein as savvy businessmen. See Obama Doesn’t  ‘Begrudge’ Bonuses for Blankfein, Dimon

-          Deference to BP’s original oil spill estimate and deepwater spill containment expertise, has allowed the Deepwater Horizon problem to mushroom, undermining White House credibility.

In a brilliant article in Naked Capitalism, What do BP and the Banks Have in Common? The Era of Corporate Anarchy, Gonzalo Lira diagnoses the problem with Obama:

On the occasion of the BP oil spill disaster, President Obama delivered an Oval Office speech last night—a masterpiece of milquetoast faux-outrage. The speech was all about “clean energy” and “ending our dependence on fossil fuels.” Faced with the BP oil spill—likely the most severe environmental disaster ever—this was President Obama’s response: polite outrage, and vague plans to “get tough,” “set aside just compensation” and “do something”.

President Obama missed what the BP oil spill disaster is really about. Though unquestionably an environmental disaster, the BP oil spill is much much more.

The BP oil spill is part of the same problem as the financial crisis: The BP oil spill and the banking crisis are two examples of the era we are living in….

In a nutshell, it’s an era of corporate anarchy when corporations do not have to abide by any rules—none at all.

With his lack of the necessary public and crisis management leadership experience, Obama has become facilitator-in-chief of the chaos. Often he appears above the fray.

Too Cool Isn’t Cool

A well read teleprompter speech does not substitute for leadership.  Obama has carefully cultivated a “cool” persona: not uncaring, but objectively detached.  Leadership is a lot like baseball.  No matter how good the pitcher’s fastball is, if that is all he throws, major league batters will eventually hit it.  Like good pitching, good leadership requires changes in approach and speed.  “Cool” may work sometimes, but sometimes it is necessary to display genuine emotion, concern and personal involvement.   Further, at times the team leader needs to just get angry and make the team fearful of that anger. To do so requires enormous self confidence and battle testing.

Lack of experience was raised during the last presidential election.  The charge was dismissed and Obama was compared to President Kennedy.  Kennedy, however, was tested in battle during World War II and in the Senate.   Kennedy inherited a wariness of businessmen from his father.  He welcomed brilliant men and women into his cabinet; however, he never appeared star struck or naive.

It is dangerous to speculate on someone’s psychological narrative, but Obama, a person raised in modest circumstances without a father present, welcomed into the Ivy League and the halls  of academia and political power at an early point in his life, is bound to be over-awed by the “experts.”

Obama now appears gullible, weak and ineffective.  Pundits tell him to get angry.  Such a display would be faux anger, as displayed in Tuesday evening’s address.

The President has to become a genuine skeptic, an Interrogator–In-Chief, questioning more and trusting less.  Failure to do so only emboldens the enemies of our country, both internal and external.

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15
Jun 10

Bailout Nation Lives: Revisited, a Short Update

A mere two days after Bailout Nation Lives was posted, the President urged Congress to bail out states to avoid massive layoffs. The President

…urged reluctant lawmakers Saturday to quickly approve nearly $50 billion in emergency aid to state and local governments, saying the money is needed to avoid “massive layoffs of teachers, police and firefighters” and to support the still fragile economic recovery.  In a letter to congressional leaders, Obama defended last year’s huge economic stimulus package, saying it helped break the economy’s free fall, but argued that more spending is urgent and unavoidable. “We must take these emergency measures,” he wrote in an appeal aimed primarily at members of his own party. See Obama Pleads for $50b in State, Local Aid.

The price tag for this proposal will be $50b.

The Problem

  1. We continue to foster profligate spending
  2. We spare states the need to make the hard choices of picking which employees need to be laid off (it does not necessarily require states to lay off police or teachers); raise taxes or cut spending in other areas.
  3. Knowing that this proposal is unpopular, we get another weekend announcement to deflect criticism.  Where is the vaunted transparency the Administration trumpeted? See Shredding the Social Fabric where we discussed the pre-Christmas Eve unlimited bailout of Fannie Mae and Freddie Mac.
  4. Given all the Administrative propaganda on the robust recovery, why must we take “emergency measures” to support the “still fragile recovery?”
  5. Are ANY groups not entitled to a bailout?

Where is Your Money Going?

The savvy view is that Obama is just buying the votes of public sector union members in key states.  See Obama Once Again Wants to Buy Union Votes with your Tax Dollars. Our money is going to pay very rich public sector salaries, pension and health benefits.

Juxtapose the problem of underfunding state pension plans with rich salaries and benefits in the public sector.   Michael Shedlock points out that seven state pension funds will be out of money in 2020 and twenty state pension funds out of money in 2025.  See Seven State Pension Funds Out of Money by 2020.

At the same time we learn that 100 top administrators have earned pension benefits that actuaries value from $7m to $26m. See Make this Story Go Viral – You Thought California State Pensions were Out of Control? Wait Until You See this List from Illinois. The Illinois state teachers’ pension fund is 61% underfunded and is employing risky strategies using derivatives to try to achieve full funding.

Why shouldn’t we get “back to even” with risky investment strategies that smack of “doubling down” in Vegas?  Obama has our backs and is sure to bail us out when we inevitably fail.

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26
May 10

The Failure of the Technocrats

The Bible has some great story lines.  The inhabitants of Babel built a huge tower to the heavens to challenge the Master of the Universe.  Of course they failed; the tower first burned and then was swallowed up by the earth.  And the Master punished them with a fitting and eternal dilemma: the world’s people no longer were able to understand each other.  They would forever after have seventy different languages, live in different locations, and most importantly have different mindsets and worldviews.  My own additional take on the moral of the story:  when man believes he can control the entire universe and challenge the Deity, he is asking for trouble and retribution from the Master.

It is not unreasonable to postulate that we have made technology and its enhancements into a deity of sorts.  Without question, in several ways, man is pushing the ethical boundaries of its use of technology   This is not anti-technology rant, as there is much good in technological innovation,  but rather a comment on hubris and limits.  Perhaps it is worth thinking about whether or not we are courting some divine retribution of our own.

The Financial Crisis

At the core of the financial crisis is the naïve belief that we can control risk with numbers and computers. The inherently risky subprime crisis and debacle is the most spectacular example.  Look at the components: first, mathematical modeling of historical default rates.   Next, customer “choice” in risk level, when really the product carried risk level for everyone.  Then, bogus “protections” in the form of derivative “insurance” and “AAA ratings” that offered no protection at all.   Mathematicians used their own models to demonstrate the safety of their products.  Their marketing departments brilliantly sold us on core assumptions that were not true: US house prices would always increase in price; subprime mortgages would default at the same historical rates; homeowners would do everything possible to hang onto their homes; and counterparties underwriting the risk would be fine to pay creditors in the event of massive default.

As we now know, these assumptions were horribly wrong.  Mathematicians and Wall Street learned little from the 1998 failure of Long Term Capital Management where interest rate, equity and currency modeling diverged from historical patterns.  The result was near destruction of the financial system.

Deepwater Horizon

It is now more than five weeks after the Deepwater Horizon oil spill, and we appear no closer to staunching the spill at the source.   Americans have given little thought to the complexity of drilling in 5000 feet of water into 13000 feet of rock.  Oil and gas pressures are enormous and literally destroyed the blow out preventers.   The US Coast Guard has characterized the process to cap the well as challenging as the Apollo 13 rescue.  We do not even have a good estimate how much oil is spilling each day.  The original 5000 barrel per day estimates have been supplanted by scientific estimations of 40,000 to 100,000 barrels per day; a disaster the magnitude of the Exxon Valdez occurring every couple of days.

Our thirst for oil has led us to the outer boundaries of man’s capability to control the consequences.

Enter the Technocrats

Perhaps it is time to re-think the role of technocrats in society.   We have believed the mainstream media’s propaganda that with the right science, math or technology we can control the universe.   This attitude is no more in evidence than in the hubris of Bernanke, Geithner, Summers and Obama that they have conquered natural economic cycles and protected us from another depression.

In fact, we do not know if we have entered a second downturn.  However, we should be highly skeptical if not outright disdainful of any all-knowing group of technocrats.  Man is having trouble controlling “smaller events” like one oil well or one country’s subprime market.  Our own economy is complex and exists within a more complex backdrop of global events like a crashing Euro, Chinese inflation, diminishing energy resources, conflict in the Middle East and other interlocking problems.

Adjusting a couple of economic dials through deficit spending, bailouts and artifice will probably end in tears.   The European Commission and the Obama Administration would be better served re-reading the Tower of Babel story and holding off self-congratulations in any language.

We have heard “mission accomplished” one too many times.

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25
May 10

Less Leadership Than Meets the Eye

A ritual occurs yearly in major corporations:   the annual setting of management objectives.   This task has evolved to a high art form, with the goal being an objective that looks difficult to attain, but really isn’t.  A successful executive needs to master this skill to attain status among his peers, impress his superior, and thus earn a generous bonus.  To excel at this process the exec must:

1. Privately identify an objective that everyone else has missed.

2.  Keep that objective his little secret.

3.  Complete the objective singlehandedly.  Avoid teamwork; it gets in the way and diffuses credit.

4.  Trumpet the accomplishment to superiors just before bonuses are determined.

Excellent rewards then flow from this “extraordinary achievement.”   Said more colloquially, “Set the barn on fire surreptitiously, but be the guy who has the fire trucks strategically stationed just outside the barn.  Extinguish the fire.  And make sure you’re standing next to the grateful farmer.”

David Leonhardt, financial columnist for the New York Times, lauds the Obama Administration for its bold financial and health care reforms and economic stimulus legislation:

With the Senate’s passage of financial regulation, Congress and the White House have completed sixteen months of frenetic activity that rivals any other since the New Deal in scope or ambition. Like the Reagan Revolution or Lyndon Johnson’s Great Society, this new period of activity seems to be a paradigm shift in how Washington operates. See A Progressive Agenda to Remake Washington

These efforts are not beneficial to the country and appear like the objective setting exercise by our hypothetical executive.  My cynical suspicion is that in a world of sound bites, the Administration has created a formulaic check list of “reforms” to position the Democrats for the 2010 Congressional and 2012 Presidential elections. We have not “remade” anything.

Financial Reform

Since the final bill is not yet law, we can examine only its proposed parts.  The $5 trillion sink holes of Fannie Mae and Freddie Mac remain unchanged.    Instead of breaking up banks that deserve to disappear, the bill institutionalizes them as “too big to fail.”  Fair pricing remains elusive, as derivatives are not yet moved to the exchanges.  Leverage caps have not been reinstated, so the investment banks can leverage at ratios of 30 to 1 or greater.  The bill does not reinstate mark to market accounting. The Federal Reserve has ducked vigorous audit.   Rating agencies remain largely uncontrolled.

As the markets react to excessive debt in Europe, the collapse of the Euro and the possibility of sovereign debt default, it looks like the President has taken credit for “winning the past war,” instead of addressing the financial problems facing the country now.

Health Care Reform

The Administration has promised universal coverage but at what price?   Premiums for younger people will rise 17%, 4 million individuals will be subject to the $1000 penalty for not purchasing coverage, and small employers will incur at least $1000 of additional costs for employees.  Importantly, 15% of hospitals may be forced to close.  Where will doctors come from to staff this financially squeezed sector of the economy? See Obama’s Health Care Promises Already Busted

Deepwater Horizon Oil Spill

The oil rig explosion and spill occurred on April 20.  The President did not fly to the site until May 2.  This is ironic, as Obama campaigned against the Bush Administration’s lethargic response to Hurricane Katrina’s devastating impact on New Orleans and the Gulf region. The original estimate of a 5000 barrel per day spill is now believed by scientists to be 10 times as great.  BP and the government are blaming each other for misinformation about the original estimates, and we now have a bipartisan commission to examine it all.  What we do not have is expeditious candor from the beginning of this tragedy:  about its size, its scope, the ways to remedy it, what role the government will play and its potential effect on the Gulf and the Atlantic.  The Administration seems intent on avoiding responsibility and shifting any solution to BP.

Checking the Boxes

Robert Reich, former Clinton Labor Department Secretary, is scathingly critical of the timidity and lack of resolve in restructuring the finance and health care industries. He maintains that monster “regulatory” bills with huge loopholes favor these industries rather than reform them.  Worse, he predicts that these loopholes will result in later payoffs to those who benefited from them.  His damning conclusion:

So why has Obama consistently chosen regulation over restructuring? Because restructuring Wall Street or health care would surely elicit firestorms from these industries. Both are politically powerful, and Obama does not want to take them on directly. [emphasis in original article]

“A regulatory approach allows for more bargaining, not only in the legislative process but also, over time, in the rule-making process as legislation is put into effect. It’s always possible to placate an industry with a carefully-chosen loophole or vague legislative language that will allow the industry to continue as before.

And that’s precisely the problem.” See Robert Reich:  Why the Finance Bill Won’t Do Anything

Where is the Leadership?

There is an old saying that managers do things right, but leaders do the right thing.   The Obama Administration is checking all the correct political boxes: health care, financial reform, economic stimulus and crisis management.   Maybe they are doing things right politically, but I am not sure they are doing the right thing for the country.

Sudden crises like the Euro mishap and the Deepwater Horizon have a way of recurring and demanding true leadership.    What Obama may not realize is that the American public is skeptical and can see through his merely expedient responses to all these crises.  And if that is true, the recent primaries and special elections raise questions on the political longevity of this Administration.

Triumphant Rose Garden speeches will just not make up for lack of leadership.

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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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