Posts Tagged ‘economy’

« Older Entries
Newer Entries »

Is this 1937 ?

Friday, July 9th, 2010

There is a frightening symmetry going on with the Great Depression. I have previously pointed this out, for example in my review of The House of Morgan by Ron Chernow. Amity Schlaes has written about the aftermath of the crash and how the Depression developed in The Forgotten Man. Both of these books are important to understand what is happening now. Chernow’s book is a bit dated as it was written after the S&L crisis of the 80s. Another, recent book is important. That is After the Fall by Nicole Gelinas.

In graphic form:

Are we at 1937 ? The economy was recovering from the crash but unemployment was still high and banks had been sorted out by the FDIC.. The FDIC is one of the best measures Roosevelt devised. I am a fan of the WPA and the CCC, both of which put men to work on useful tasks. That could never happen today because of the vast web of regulations that have grown up in recent decades, most stimulated by the environmental movement. Donald Luskin, from whose blog that image comes, has some thoughts.

The stock market tells us that last year we avoided a new Great Depression—barely. It was a close call, but we’re not headed for 1932. Now, as stocks correct from their April highs and fears of a “double dip” recession mount, should we be worried about an economic relapse like 1938?

First, the good news. An important milestone was passed last week for stocks. Friday, July 2, was the 997th day since the all-time high in October 2007. That’s how many days the bear market in the Great Depression lasted, starting at the high several weeks before the Great Crash of 1929 and ending on June 1, 1932, one month before Franklin Delano Roosevelt was nominated to run for president. [Ed The bear market had ended before Roosevelt was elected.]

At the bottom in 1932, stocks (as measured by the S&P 500) had lost 86.2% from the 1929 top. Last Friday, stocks were only off 34.7% from the 2007 top. “Only”? To be sure, losing 34.7% is no buggy-ride. But to match the devastation in the Great Depression, the S&P 500 would have to fall 806 points from Friday’s level, or 78.8%.

This comparison is no idle thought experiment. In 2008 and 2009, based on what the stock market was indicating, we really were headed for a new Great Depression. At two crucial junctures in 2008 and 2009, stocks had fallen further than they did in the Great Depression the same number of days after the 1929 top.

In 1920, Harding and Coolidge faced a similar prospect to that which faced Roosevelt. There had been a bear market and a deflationary depression since the end of World War I and the cancellation of war orders. What did they do ? They cut spending and declared “a return to normalcy.” They are often mocked by the left for this but do you know what happened ? The Depression ended in 1921.

The climax came in early March 2009. Then, with the banking system still feared to be insolvent, the hasty passage of a massive deficit-busting “stimulus” bill sent the message that an all-powerful new president and Congress would just as quickly enact their strident antibusiness agenda. At the worst, stocks plunged to show a loss of 56.8% from the 2007 highs. At the comparable point in the Great Depression, stocks were off only 49%.

But a funny thing happened on the way to the new Great Depression. Chairman Ben Bernanke’s Federal Reserve announced a massive program to buy Treasury bonds and mortgage-backed securities to pump liquidity into the banking system. Treasury Secretary Tim Geithner deftly executed “stress tests” enabling the largest banks to be recapitalized in public markets. And one agenda item at a time—socialized health-care, cap-and-trade energy tax, unionization “card check,” mortgage “cramdown”—got diluted, slowed down or stopped.

So, the failure of most of Obama’s agenda saved the economy. OK, I’ve got that.

The most worrisome analogue is the great bear market that began in March 1937. From the top stocks lost 60% of their value, making it the second worst bear market in history. Not ending until April 1942, it was the longest ever.

That’s worrisome because, as the nearby chart demonstrates, over the last year the stock market has followed a path eerily similar to 1937. First, a strong, rapid run to a recovery high—same pace, same magnitude. Then a correction—again, the same. Will we continue on the path that led the correction of 1937 into a collapse in 1938? This question would be nothing more than a technical curiosity for chartists if it weren’t for alarmingly similar economic backdrops between the two periods.

Or, maybe it was a bear market rally.

[A]fter 1937 the economy relapsed into what historians call “the recession within the Depression,” a downturn so severe that in any other context it would qualify as a depression itself.

It was triggered by a set of very specific policy mistakes. The Fed tightened by raising reserve requirements. Consumers were hit with new taxes to pay for the then-new Social Security program. Worried about excessive deficits, Roosevelt cut government spending. At the same time, his administration accelerated antibusiness rhetoric and regulation.

Sound familiar? We’re repeating some of the same mistakes right now, even as fears of a “double dip” recession mount. Antibusiness rhetoric from the Obama administration is at toxic levels, and the pending Dodd-Frank financial reform bill is the harshest regulatory initiative in a generation. Taxes are set to rise, to support new social spending such as health-care reform, and if for no other reason because no one will stop the expiration at the end of this year of the 2003 Bush tax cuts.

Amity Schlaes has some thoughts, too.

Government can spur the private sector. That’s the gist of the argument that’s in the air this summer. This week, for example, President Barack Obama said, “we’ve got much more work to do to spur stronger job growth and to keep the larger recovery moving.” Such spurring is often said to occur in a technical way, when government outlays have a so-called multiplier effect that invigorates other economic participants.

The Obama administration has a second meaning for “to spur.” It is that government entering an industry as a competitor will strengthen that industry and make it more honest. The president has said government entry into the health insurance sector will force the private companies to lower premiums.

But in reality the government isn’t a spur, either kind. It’s a competitor. And when such a big player jumps into a market, it tends to squeeze others out. Even promising industries — the Internet sector, for example — can be hurt.

This is what happened in the 1930s to the Internet equivalent of that era, the utilities industry.

Read the rest. I am still pessimistic about the economy and, as many of my friends know, am taking steps to insulate myself from the worst.

Tags:, , ,
Posted in economics, History, politics | Comments Closed

The coming economic crash

Monday, June 7th, 2010

Arthur Laffer has a powerful column today in the Wall Street Journal. He, of course, was the author of the “Laffer Curve” that led to supply side economics as the economic policy of Ronald Reagan.

People can change the volume, the location and the composition of their income, and they can do so in response to changes in government policies.

It shouldn’t surprise anyone that the nine states without an income tax are growing far faster and attracting more people than are the nine states with the highest income tax rates. People and businesses change the location of income based on incentives.

This is one effect that supply side economics, in its most basic form, should predict. Maryland passed a “Millionaire’s Tax” a couple of years ago and discovered that millionaires and their tax revenue disappeared.

But as the state comptroller’s office sifts through this year’s returns, it is finding that the number of Marylanders with more than $1 million in taxable income who filed by the end of April has fallen by one-third, to about 2,000. Taxes collected from those returns as of last month have declined by roughly $100 million.

That is supply side economics. The basic definition is narrow, that demand does not drive the economy but that economic activity is based on incentives for the producers. If you can make more money by producing widgets, you will do so. The principle difference from Keynesian economics is that the producers themselves, not government bureaucrats, make the decisions. This is Adam Smith’s Hidden Hand. Making more widgets will not necessarily cause consumers to buy them. It is up to the producer to recognize demand and fulfill it. Sometimes they will fail because they misread the market. That is their problem, not the government’s.

People can also change the timing of when they earn and receive their income in response to government policies. According to a 2004 U.S. Treasury report, “high income taxpayers accelerated the receipt of wages and year-end bonuses from 1993 to 1992—over $15 billion—in order to avoid the effects of the anticipated increase in the top rate from 31% to 39.6%. At the end of 1993, taxpayers shifted wages and bonuses yet again to avoid the increase in Medicare taxes that went into effect beginning 1994.”

Even Hillary CLinton recognized the incentive and had her law firm bonus moved up to December 1992.

We saw this in 1992 when there was a bulge in income realizations late in the year as people anticipated higher taxes after the election of Bill Clinton. Hillary Clinton’s law firm, for example, distributed bonuses in 1992 that otherwise would not have been paid until 1993. While the number of people who have this much flexibility in timing their income this way is small, the same principle applies to all income earners. In the aggregate, the impact can be large.

We have seen the same phenomenon with the “Cash for Clunkers” program and with the cash incentive for first time home buyers, which ended on April 30. In both cases, purchases were moved up to take advantage of the incentive but the sales after the incentive expired plunged. No net increase in economic activity resulted.

Laffer discusses the Reagan tax cut of 1981.

In 1981, Ronald Reagan—with bipartisan support—began the first phase in a series of tax cuts passed under the Economic Recovery Tax Act (ERTA), whereby the bulk of the tax cuts didn’t take effect until Jan. 1, 1983. Reagan’s delayed tax cuts were the mirror image of President Barack Obama’s delayed tax rate increases. For 1981 and 1982 people deferred so much economic activity that real GDP was basically flat (i.e., no growth), and the unemployment rate rose to well over 10%.

But at the tax boundary of Jan. 1, 1983 the economy took off like a rocket, with average real growth reaching 7.5% in 1983 and 5.5% in 1984. It has always amazed me how tax cuts don’t work until they take effect. Mr. Obama’s experience with deferred tax rate increases will be the reverse. The economy will collapse in 2011.

He doesn’t mention that the delay in implementation of the tax cuts was due to Bob Dole who, as Senate majority leader, rejected supply side economics and delayed the recovery. The result was a big loss for Republicans in the 1982 election. The election this fall is being compared to the 1982 election but there is a huge difference. The Reagan loss was due to the delay in tax cuts and economic recovery. This year, the loss will be due to anticipation of Obama’s policies that have not yet taken effect. Once they are in force, things will get worse, a lot worse.

Consider corporate profits as a share of GDP. Today, corporate profits as a share of GDP are way too high given the state of the U.S. economy. These high profits reflect the shift in income into 2010 from 2011. These profits will tumble in 2011, preceded most likely by the stock market.

In 2010, without any prepayment penalties, people can cash in their Individual Retirement Accounts (IRAs), Keough deferred income accounts and 401(k) deferred income accounts. After paying their taxes, these deferred income accounts can be rolled into Roth IRAs that provide after-tax income to their owners into the future. Given what’s going to happen to tax rates, this conversion seems like a no-brainer.

The result will be a crash in tax receipts once the surge is past. If you thought deficits and unemployment have been bad lately, you ain’t seen nothing yet.

This might be dismissed as partisan rhetoric except that Laffer predicted the 1981 to 83 effect of delaying tax cuts.

Next year will be a bad year for the US economy. I have read an investment letter since 1977. It is called The Dow Theory Letter and it has been written by Richard Russell since the 1950s. I wish I had taken all his advice but, fortunately, I have taken some. Twice, he has sent an unscheduled warning to subscribers. Each time, it was a warning of a major drop in the stock market. Once was in 1987, a month before the 25% market drop in one day. The second time was two weeks ago. He told his subscribers to sell all their stocks. He also said that, by the end of the year, the America we know would be changed beyond description. I think there may be a bit of hyperbole in that statement but I would sell all my stocks if I still had any.

We have not yet seen the Obama policies in effect. The economy has made some tentative moves in the direction of recovery. That will end once the Obama policies take effect. I have made adjustments in my life, including selling my house. I wonder how many others are doing the same thing ?

Tags:, , , ,
Posted in economics, financial, politics | 5 Comments »

Jobs

Sunday, May 9th, 2010

There is a lot of discussion about jobs and the economy lately. This week the Labor Department announced that jobs growth had increased.

The American economy added 290,000 jobs in April — the most in four years or so. At the same time, the jobless rate grew to 9.9 percent, after hanging at 9.7 percent for three consecutive months.

The latter figure was explained as discouraged workers returning to the job market. Maybe so. A lot of those jobs were temporary census jobs.

There is also a theory that the lost jobs may never come back.

More on that here.

Three industries, in particular, where many jobs may not be coming back are retailing, manufacturing and advertising.

Retailers have lost 1.2 million, or 7.5 percent, of jobs that existed before the recession, according to Labor Department data. Circuit City and Linens & Things have collapsed. Starbucks closed nearly 800 U.S. stores. Robert Yerex, an economist at Kronos, a work force management company, estimates 20 percent of those jobs are never coming back.

Manufacturing has shed 2.1 million jobs, or 16 percent of its total, since the recession began. Goodyear Tire & Rubber and Boeing Co. laid off a combined 15,700 people during the recession. General Motors eliminated 65,000 through buyouts and layoffs. And as Americans buy fewer cars and homes, more than 1 million jobs in the auto, steel, furniture and other manufacturing industries won’t return, according to estimates by Moody’s Analytics.

Advertising and PR agencies have lost 65,000 jobs, or about 14 percent of the pre-recession total. Moody’s Analytics estimates those industries will lose even more within five years.changed the Railway Labor Act to encourage unions to organize Delta Airlines.

Under an interpretation of the Railway Labor Act dating to 1934, aviation and rail workers who don’t vote on whether to form a union have been counted as “no” votes. That means a union could not be approved without a full majority of employees voting yes.

Under the National Labor Relations Act governing the vast majority of private-sector workers, a union can be created if a majority of the votes cast are in favor of collective bargaining. In such elections, nonvotes don’t count.

The rule change by the NMB mandates that unionization votes for air and rail workers be tallied in the same manner as in other industries.

Now, if 5% of employees vote in a union election, the rest may be forced to join or pay dues to the union. That should help jobs !

It’s hard to exaggerate how bad the job market is. Here’s one arresting fact: One of every five men 25 to 54 isn’t working.

Even more alarming, the jobs that many of these men, or those like them, once had in construction, factories and offices aren’t coming back. “A good guess…is that when the economy recovers five years from now, one in six men who are 25 to 54 will not be working,” Lawrence Summers, the president’s economic adviser, said the other day.

Is this true ? Are poorly educated men facing permanent unemployment ? The jobs picture had some dark spots as the overall unemployment rate climbed.

Reflecting the modest nature of this recovery, the report included some negative notes. The overall jobless rate, including people who have stopped looking, jumped to 17.1%, which is the highest rate this year. More disturbing, the share of those out of work for 27 weeks or more reached another record of 45.9%. This means that some 6.7 million Americans have spent more than half a year without maintaining the skills and contacts they’ll need to compete across a lifetime.

This is a worry. Government employees have not seen layoffs yet although they will be coming in California soon. The private sector is reeling.

Demand for workers who haven’t much education—which includes many men, particularly minority-group men—is waning. A shrinking fraction of them are working. Some are looking for work; some have given up. Some are collecting disability benefits or an early-retirement pension. Some are just idle. On average, surveys find, the unemployed in the U.S. spend 40 minutes a day looking for work and 3 hours and 20 minutes a day watching TV.

One of every five men between ages 25 and 54 isn’t working, and jobs once available for men in construction and factories continue to dry up in the U.S.

For 50 years, the fraction of men with jobs in what once were prime earning years has been trending down. Over the same decades, the share of women who work has been rising, a significant social change that lately has cushioned the blow of Dad’s unemployment for many couples.

Women have suffered less in this recession. They were more likely to be in health care and other jobs that weren’t hit as hard as construction and manufacturing. They are increasingly likely to have the education so often required to get or keep a good job these days.

I think this is too pessimistic and I also think the value of a college education has drastically declined in the past 30 years. I have talked to small businessmen and small business is the source of most jobs for men since heavy industry, like the auto companies, has contracted. Many of these small businesses are busy and their employees are working full time. What is the difference ? A lot of the men I know who are working have skills with tools. A lot of the long term unemployed have limited skills other than the work they were doing, like residential loan processing, that isn’t coming back.

My neighbor runs a flooring business out of his home. That is technically against some city code or other but he is a good guy and I don’t care. I run a small (very small) consulting business out of my home. He has a big truck loaded with carpet in front of his house most days. He does a lot of theater work so they work at night a lot. He has a bunch of young men working for him, all US natives, and they work hard. The hardest thing a small business employee says about new hires is seeing them arrive on time Monday morning. A lot of American kids have not learned a work ethic. The illegal aliens often work harder.

I had my house painted two months ago. The guys who own the painting business are Asian but their employees are Hispanic. They did a good job and worked quickly. Some of the painters spoke good English and some didn’t. I also had some guys from a pest control company check my home for termites and they found a number of areas of dry rot. There are also termites in my attic and I will have the house tented when it is sold, as it is for sale. The fixed the dry rot, including replacing a window, and did a great job at a reasonable price. The guys told me they were all construction workers who had gone to work for the pest control company and they did good work; very good work.

The one thing that Obama and his administration can do to help jobs is to aid small business. Since they appear to be doing the opposite, I don’t expect much but I do see people working. Maybe they aren’t making the money that the Ford assembly line workers make but there are a lot fewer jobs like that. I deal with plumbers, like Joe the Plumber, and with electricians. They are working. Restaurants are in trouble but I was in one last night for a Mother’s Day dinner with the family and it was very busy. Maybe weeknights are slow. I see retail stores going out of business and I fear a lot of them won’t come back in my lifetime. Those, however, are not men’s jobs. My college student daughter got a restaurant job a couple of months ago but the business is slow and she is only getting three days a week work. She is looking for another job and can work her class schedule around if given enough lead time.

There’s an amusing piece on the Daily Beast on “Prostitute Moms”. Now there’s a job men can’t do. Of course there is a male equivalent.

After getting a women’s studies degree, Isabel entered the sex industry as a 24-year-old high-end escort, three years after her mother had died. Before she passed away, she told Isabel, “You own the means of production, you can be anything.” It’s unclear how she would have reacted had she lived to see Isabel working as an escort.
“When I got burned out from doing sex work, I drove a city bus for three years,” Isabel says. “They took my picture—I was the young female driver with a red streak in her hair—and made me the poster child for the union.” Isabel is also a trained clown (“I studied the Pachenko method”), a health practitioner, and an organic farmer.

Now, is there any doubt about the value of a college degree ?

Tags:
Posted in economics, financial, politics | Comments Closed

The perfect storm.

Friday, February 19th, 2010

There is an excellent paper available today from CATO institute on how the financial crisis got to be so bad. It fits well with the theory in Nicole Gelinas’ book, After the Fall, which I reviewed here.

This paragraph is critical.

Given the large number of contributory factors — the Fed’s low interest rates, the Community Reinvestment Act, Fannie and Freddie’s actions, Basel I, the Recourse Rule, and Basel II — it has been said that the financial crisis was a perfect storm of regulatory error. But the factors I have just named do not even begin to complete the list. First, Peter Wallison has noted the prevalence of “no-recourse” laws in many states, which relieved mortgagors of financial liability if they simply walked away from a house on which they defaulted. This reassured people in financial straits that they could take on a possibly unaffordable mortgage with virtually no risk. Second, Richard Rahn has pointed out that the tax code discourages partnerships in banking (and other industries). Partnerships encourage prudence because each partner has a lot at stake if the firm goes under. Rahn’s point has wider implications, for scholars such as Amar Bhidé and Jonathan Macey have underscored aspects of tax and securities law that encourage publicly held corporations such as commercial banks — as opposed to partnerships or other privately held companies — to encourage their employees to generate the short-term profits adored by equities investors. One way to generate short-term profits is to buy into an asset bubble. Third, the Basel Accords treat monies set aside against unexpected loan losses as part of banks’ “Tier 2” capital, which is capped in relation to “Tier 1” capital — equity capital raised by selling shares of stock. But Bert Ely has shown in the Cato Journal that the tax code makes equity capital unnecessarily expensive. Thus banks are doubly discouraged from maintaining the capital cushion that the Basel Accords are trying to make them maintain. This litany is not exhaustive.

Banks were allowed to use Mortgage Backed Securities as capital assets and were encouraged to do so by regulations.

In 1988, financial regulators from the G-10 agreed on the Basel (I) Accords. Basel I was an attempt to standardize the world’s bank-capital regulations, and it succeeded, spreading far beyond the G-10 countries. It differentiated among the risks presented by different types of assets. For instance, a commercial bank did not have to devote any capital to its holdings of government bonds, cash, or gold — the safest assets, in the regulators’ judgment. But it had to allot 4 percent capital to each mortgage that it issued, and 8 percent to commercial loans and corporate bonds.

When MBS vehicles were devised, they were rated as AAA.

The United States implemented it in 1991, with several different capital cushions; a 10 percent cushion was required for “well-capitalized” commercial banks, a designation that carries privileges that most banks want. Ten years later, however, came what proved in retrospect to be the pivotal event. The FDIC, the Fed, the Comptroller of the Currency, and the Office of Thrift Supervision issued an amendment to Basel I, the Recourse Rule, that extended the accord’s risk differentiations to asset-backed securities (ABS): bonds backed by credit card debt, or car loans — or mortgages — required a mere 2 percent capital cushion, as long as these bonds were rated AA or AAA or were issued by a government-sponsored enterprise (GSE), such as Fannie or Freddie. Thus, where a well-capitalized commercial bank needed to devote $10 of capital to $100 worth of commercial loans or corporate bonds, or $5 to $100 worth of mortgages, it needed to spend only $2 of capital on a mortgage-backed security (MBS) worth $100. A bank interested in reducing its capital cushion — also known as “leveraging up” — would gain a 60 percent benefit from trading its mortgages for MBSs and an 80 percent benefit for trading its commercial loans and corporate securities for MBSs.

This is why the crash is a failure of regulation and not just a result of “greed.”

Tags:,
Posted in economics, financial | 9 Comments »

The wisdom of Tom Freidman

Wednesday, January 13th, 2010

Tom Friedman has a column today about China. Interestingly, his theme is that he knows more about the economics of China than a very successful investor.

Reading The Herald Tribune over breakfast in Hong Kong harbor last week, my eye went to the front-page story about how James Chanos — reportedly one of America’s most successful short-sellers, the man who bet that Enron was a fraud and made a fortune when that proved true and its stock collapsed — is now warning that China is “Dubai times 1,000 — or worse” and looking for ways to short that country’s economy before its bubbles burst.

Friedman dismisses this fellow, who made a fortune shorting Enron, and thinks he knows better.

I am reluctant to sell China short, not because I think it has no problems or corruption or bubbles, but because I think it has all those problems in spades — and some will blow up along the way (the most dangerous being pollution). But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us).

And here is the other thing to keep in mind. Think about all the hype, all the words, that have been written about China’s economic development since 1979. It’s a lot, right? What if I told you this: “It may be that we haven’t seen anything yet.”

Why do I say that? All the long-term investments that China has made over the last two decades are just blossoming and could really propel the Chinese economy into the 21st-century knowledge age, starting with its massive investment in infrastructure. Ten years ago, China had a lot bridges and roads to nowhere. Well, many of them are now connected. It is also on a crash program of building subways in major cities and high-speed trains to interconnect them. China also now has 400 million Internet users, and 200 million of them have broadband. Check into a motel in any major city and you’ll have broadband access. America has about 80 million broadband users.

He had previously expressed his enthusiasm for China’s political class.

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power.

Of course, that column was written before the CRU scandal so he is overly impressed with global warming, unlike the Chinese he so admires, but I doubt he has changed his mind. The religion of the left these days is global warming. If only Obama could just dispense with that clumsy democracy we have. Well, he is trying. Others have noticed a plethora of empty buildings and other signs of economic stress.

Some Chinese economists who argue for the merits of a Keynesian style market economy have openly defended the Chinese Government’s position. They claim that an over-priced property market is a small price to pay for preventing a sharp rise in unemployment.

I am not an economist. I cannot put forward a technical argument against this kind of fallacy. My friend Dfzh is not an economist either. However, he does represent a middle-class group in China. This group neither owns capital nor controls the State. Instead, they derive their income and status from service and management. Like many Chinese people in his socio-economic group, Dfzh has become increasingly disenchanted over the Chinese Government’s economic policy, as well as the CCP’s strong grip on power. He has regularly expressed to me his concern about a widening gap between the rich and the poor, and how this is creating social instability.

The problem with Friedman’s, and Obama’s, love affair with the corporate state is that it may not work as well as they think it will. Stratfor.com does not seem to agree with Friedman.

Security officials have warned that these out-of-work laborers could be a source of instability or, more ominously, a target for domestic or foreign instigators to exploit to undermine the Chinese government. The All-China Federation of Trade Unions has warned that China must be vigilant and prevent “hostile forces” from taking advantage of the new masses of unemployed migrants, while the Ministry of Public Security is sending work teams to the countryside and cities to assess social stability and stress factors. Chinese President Hu Jintao has led a chorus of Chinese officials calling on the People’s Liberation Army and the People’s Armed Police Force to be first and foremost loyal to the Party, and to be on alert for rising instability in China due to economic stresses and foreign and domestic hostile forces.

They are not that optimistic at all.

And with China’s economic problems (for which Beijing has assiduously sought to blame everyone but itself), cracks have begun to appear in the veneer of nationalism. They appear not only because of individual reactions to economic problems, but also as various provinces slip into local protectionism, seeking their own recovery over that of the nation.

I will take the advice of James Chanos, thank you. Friedman married money but Chanos made his own. Billions of it.

Tags:,
Posted in financial | 5 Comments »

The healthcare precipice

Friday, December 18th, 2009

A few days ago, President Obama said the Democrats stand on the precipice of a health reform bill. Truer words were never spoken, at least by him. What is Harry Reid doing ? The theory seems to be to pass something, no matter what it is, so that Democrats can claim success.At one time we had two bills, the Senate version and the House version. Now, no one knows what is in this bill. It is simply amazing. His hurry to pass something may come from his realization that, as time to understand the bill passes, the public likes it less and less. No one knows what it will cost because the CBO has been given false data to analyze.

For some time, I’ve suspected the answer is that congressional Democrats have very carefully tailored their individual and employer mandates to avoid CBO’s definition of what shall be counted in the federal budget. Democrats are still smarting over the CBO’s decision in 1994. By revealing the full cost of the Clinton plan, the CBO helped to kill the bill.

Since then, keeping the cost of their private-sector mandates out of the federal budget has been Job One for Democratic health wonks. While head of the CBO, Obama’s budget director Peter Orszag altered the CBO’s orientation to make it more open and collaborative. One of the things about which the CBO has been more open is the criteria it uses to determine whether to include mandated private-sector spending in the federal budget.

Why is this being done ?

Our federalist system, the separation of powers, our bicameral national legislature, six-year terms for senators, staggered Senate elections, and the Senate’s procedural rules all exist precisely to prevent what Reid is trying to do: ram a sweeping piece of legislation through Congress without due consideration.

This is the fascist way.

Jonah Goldberg’s book, Liberal Fascism enraged the left well before the election of Barack Obama. It might be time to read it again. If you doubt these people are fascists, here is their suggestion for political opponents. If you are a Congressman who does not vote for the favored bill, you should be expelled from Congress. One party rule.

The problem is that it won’t work. The Democrats would be even worse off if they pass it than if it fails.

If Democrats need to appeal to Independents and moderates to hold their majorities, then passing this bill is a terrible idea. The most recent polling shows that 81% of Republicans and 69% of Independents oppose the healthcare plan (with 74% of Republicans and 57% of Independents strongly opposing it). With majorities of Independents strongly opposed to the bill, it’s really hard to imagine any boost in Democratic turnout from passing the plan being enough to surpass the ensuing backlash from Republicans and Independents.

It isn’t even clear that there will be a boost in Democratic turnout. The latest version of the Senate bill holds little appeal for progressives.

Maybe this will teach them that we are not ready for fascism yet.

Tags:, , , , , ,
Posted in health reform, politics | 3 Comments »

Gold and the future.

Tuesday, November 17th, 2009

Here is a piece about the price of gold and the future of the economy that has the ring of truth. Of course, I am a pessimist.

The rise in the gold price above $1,100 per ounce last week is a pretty good indicator that something has changed. For 18 months, the gold price had been in a trading range topping out around $1,000. It has now broken out decisively from that range. The opportunity for the world’s central banks to change policy and affect the economic outcome has been lost. The world economy is now locked on to an undeviating track towards another train wreck.

At most times, the gold price is not an economically significant indicator. In 1980-2000, it declined irregularly from $850 to around $280, and movements in it seemed to have had little or no effect on the global economy. That’s what you’d expect; even at $1,000 per ounce, the global production of gold is only around $100 billion annually, which would put the entire world’s gold extraction industry only 17th on the Fortune 500. When Gordon Brown sold Britain’s entire gold reserves in 1999, at a price below $300 per ounce, it seemed a defensible decision. I went to a meeting in 2001 hosted by a diverse group which believed that the U.S. Treasury was conspiring to suppress the gold price, and my main thought was: why would Treasury bother?

The decline was, I believe, an indicator that inflation, at great cost, had been wrung out of the economy for decades. I bought gold at $405 an ounce in 1978 and sold it six months later for $810. Thereafter, it slowly declined. When Bill Clinton was elected, I bought gold shares and they made a nice profit his first year in office. After 1994, I sold them and made about an 80% profit on the deal. A few years ago, when gold had been slumping along around $300, I thought about buying again. I wish I had.

However, in relatively few periods, gold becomes of immense importance. When investors lose trust in conventional currencies, because monetary policy appears set to debauch them, gold is the immediately available safe haven. During such periods, gold’s former importance as a store of value becomes uppermost in the public mind, and its price becomes a major economic indicator.

Gold became important from about July 1978 to early 1980, during which period its price rose from $185 to $850 per ounce. For that 18 month period, the price of gold was the most important factor in day-to-day market fluctuations. The gold price, more than the inflation rate directly, moved markets and by extension moved monetary and to some extent fiscal policy in the major economies. Only after Paul Volcker took over at the Fed in late 1979 did M3 money supply begin to supplant it in investors’ analyses.

We now appear to be at the beginning of another such period.

I agree and am very worried about the future. Obama seems locked in a leftist ideology that nothing can change. He has no experience in the world, academia and “community organizers” being sheltered from reality. I wonder sometimes about his progress from college student to Senator and tend to be a bit paranoid about it. He really is a mystery man.

Ben Bernanke’s Fed is ignoring this. It insists that it will maintain interest rates at the current near-zero level for an extended period, regardless of what the gold price does. By this, it is ensuring that the present bubble in gold and commodities will play out to its full extent. Had the Fed begun to tighten gently during the late spring or early summer, when it had become obvious that the U.S. economy was bottoming out, but while stock markets remained subdued and gold remained within its 2008-09 trading range, it’s possible that it could have deflated the incipient bubble, steering the U.S. and global economies back on to a sustainable growth path. The U.S. Treasury would have had to cooperate by beginning to reduce the federal deficit, but at this stage with unemployment in the 10% range, there would have been no need for draconian action on that front.

With current Fed policy, gold is headed rapidly toward $2,000 per ounce, probably within six months. The forecasters who see such a price, but suggest it would take four to five years to get there, are ignoring history. Since gold was able to get from $185 to $850 in 18 months in 1978-80, there is no reason why it cannot get from $1,100 to $2,000 in six months now. What’s more, although 1980’s peak seemed madness at the time, and was equivalent to nearly $2,400 today, there is no reason why gold cannot go much higher if it is given another year or so to get there.

If I had a store of liquid funds available, I would buy gold now, even at $1100. Instead I have two houses and a child in college so my options are limited. Houses, even with mortgages, are probably better to hold than dollars for the next few years but they are not very liquid. I remember very well the survivalist mentality of the late 70s when people were stocking up dried food and other supplies for a period of unrest. If we get to 15% unemployment, and I think we will, those lessons may need to be learned again.

We only thought that Carter was the worst president ever. Who knew that the lesson would have to be learned again?

Read the rest of that piece. Here is another segment:

At some point, probably before the end of 2010, the bubble will burst. The deflationary effect on the U.S. economy of $150 plus oil will overwhelm the modest forces of genuine economic expansion. The Treasury bond market will collapse, overwhelmed by the weight of deficit financing. Once again, the banking system will be in deep trouble. The industrial sector, beyond the largest and most liquid companies and the extractive industries, will in any case have remained in recession – it is notable that, in spite of the Fed’s frenzy of activity, bank lending has fallen $600 billion in the last year. Unemployment, which will probably enter the second downturn at around current levels, will spike further upwards. The dollar will probably not collapse, but only because it will have been declining inexorably in the intervening year, to give a euro value of $2 and a yen value of 60 to 65 yen to the dollar.

In the next downturn, the Fed will not be able to cut interest rates, because inflation will be spiraling, as in 1980. Instead it will need to raise them while dealing with a profound crisis in the bond markets. Capital in the U.S. will become still more difficult to come by, and unemployment will approach 15%.

Maybe another 1994 Congressional turnover will save us but I think it may be too late.

UPDATE: We are now learning that some of the actions taken last year were unnecessary, which makes us wonder why they were taken.

In the fall of 2008 the New York Fed drove a baby-soft bargain with AIG’s credit-default-swap counterparties. The Fed’s taxpayer-funded vehicle, Maiden Lane III, bought out the counterparties’ mortgage-backed securities at 100 cents on the dollar, effectively canceling out the CDS contracts. This was miles above what those assets could have fetched in the market at that time, if they could have been sold at all.

The New York Fed president at the time was none other than Timothy Geithner, the current Treasury Secretary, and Mr. Geithner now tells Mr. Barofsky that in deciding to make the counterparties whole, “the financial condition of the counterparties was not a relevant factor.“

Whaaat ??? Read the rest.

UPDATE # 2: The story of TARP and it isn’t pretty.

Tags:, , ,
Posted in financial | 10 Comments »

Manufacturing and the Democrats

Thursday, November 12th, 2009

We have been hearing about the loss of manufacturing jobs in this country for years. Ross Perot talked about a “great sucking sound” in Mexico. That may apply for unskilled jobs but the real manufacturing job is one requiring skill. Not everyone can be a packer or a assembler. A lot of that can be automated. Why is manufacturing leaving our shores ? There are some theories being talked about now. An interview of an executive a couple of weeks ago started another round.

Nov. 11 (Bloomberg) — Emerson Electric Co. Chief Executive Officer David Farr said the U.S. government is hurting manufacturers with regulation and taxes and his company will continue to focus on growth overseas.

“Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing,” Farr said today in Chicago at a Baird Industrial Outlook conference. “Cap and trade, medical reform, labor rules.”

Emerson is a big company and has been expanding in other countries for a while. Still, he struck a chord as the administration produced a response from a spokesman for Gary Locke, who is the Secretary of Commerce but has no business experience.

“This attack isn’t supported by the facts,” Kevin Griffis, a spokesman for U.S. Commerce Secretary Gary Locke, said today in an e-mail from Singapore, where they are attending the Asia-Pacific Economic Cooperation meetings.

“This administration has made a significant commitment to U.S. manufacturing, including reforming the country’s health insurance system to bring down costs and make American companies more competitive globally,” Griffis said.

If Locke thinks that health care bill will bring down costs, he hasn’t read it. Of course, no one else has either.

Here is a response, to the Obama Secretary of Commerce and his flunky.

Well, yes it is Kevin. There is a great article in today’s Wall Street Journal that you and Gary ought to read on global warming before they rush off and saddle American manufacturing with Cap and Trade. And rather than slam the manufacturing community represented by the US Chamber of Commerce because they have ideas on health care that are different from the government take-over scheme your boss urges, you ought to shut up and listen. And even the Democrats who control the Senate won’t support your ridiculous Card Check scheme to try to bring labor unions back from the dead. You set up a labor lawyer as the manufacturing czar and a certifiable nut case on the NLRB. You have attacked manufacturing at every turn since taking office.

The Wall Street Journal article on Global Warming closes with:

But from our first column on this subject, we have been convinced that the scientific questions are interesting and irrelevant, since it was never in the cards that Western societies (or Brazil or India or China) would sacrifice economic growth for the uncertain benefits of fighting climate change. Unable to do anything meaningful about climate change, policy would therefore default to satisfying the demand of organized interests for climate pork.

That is no way to run a railroad. Cap & Trade will kill off the rest of manufacturing. I remember when a lot of the fiberglass boat building industry was in Orange County, a half hour or less from my home. The Clean Air Act drove most of it out of business, along with the oil crisis of the 70s as petroleum products quadrupled in price. OIl came back down but the EPA was still there so most of southern California manufacturing moved to Mexico where the Mexican liked jobs more than clean air. In fact, the air was pretty clean in Newport Beach all along.

What else is Obama doing to help industry?

Well, the new hand-picked CEO of AIG, e insurance giant bailed out by the administration last spring wants to resign after 3 months on the job. Why ?

“The executive is chafing under constraints imposed by AIG’s government overseers, particularly a recent compensation review by the Obama administration’s pay czar, Kenneth Feinberg,” WSJ said citing people close to the development.

AIG, which is 80 per cent government owned since its rescue last year, is one of the companies under Feinberg’s purview.

That’s not manufacturing but one thing executives have in common is the desire to make money. Then, of course, there are the new taxes. These are enormous increases in marginal tax rates and they are not indexed for inflation.

In order to raise enough money to make their plan look like it won’t add to the deficit, House Democrats have deliberately not indexed two main tax features of their plan: the $500,000 threshold for the 5.4-percentage-point income tax surcharge; and the payroll level at which small businesses must pay a new 8% tax penalty for not offering health insurance.

This is a sneaky way for politicians to pry more money out of workers every year without having to legislate tax increases. The negative effects of failing to index compound over time, yielding a revenue windfall for government as the years go on. The House tax surcharge is estimated to raise $460.5 billion over 10 years, but only $30.9 billion in 2011, rising to $68.4 billion in 2019, according to the Joint Tax Committee.

Then there is the stimulus which takes the taxes and throws them away.

Taxing the rich hits small business very hard as many file personal returns and many of these new taxes are not subject deductible expenses, just like the AMT.

Americans of a certain age have seen this movie before. In 1960, only 3% of tax filers paid a 30% or higher marginal tax rate. By 1980, after the inflation of the 1970s, the share was closer to 33%, according to a Heritage Foundation analysis of tax returns.

These stealth tax increases—forcing ever more Americans to pay higher tax rates on phantom gains in income—were widely seen to be unjust. And in 1981 as part of the Reagan tax cuts, a bipartisan coalition voted to index the tax brackets for inflation.

We also know what has happened with the Alternative Minimum Tax. Passed to hit only 1% of all Americans in 1969, the AMT wasn’t indexed for inflation at the time and neither was Bill Clinton’s AMT rate increase in 1993. The number of families hit by this shadow tax more than tripled over the next decade. Today, families with incomes as low as $75,000 a year can be hit by the AMT unless Congress passes an annual “patch.”

The Pelosi-Obama health tax surcharge will have a similar effect. The tax would begin in 2011 on income above $500,000 for singles and $1 million for joint filers. Assuming a 4% annual inflation rate over the next decade, that $500,000 for an individual tax filer would hit families with the inflation-adjusted equivalent of an income of about $335,000 by 2020. After 20 years without indexing, the surcharge threshold would be roughly $250,000.

This is a job killer. So is card check.

And on we go toward the fate of Argentina.

Tags:, , ,
Posted in financial, politics | 9 Comments »

The election

Wednesday, November 4th, 2009

UPDATE: There are some strange things going on in the final vote count. Maybe it’s not over. They sure got Owens sworn in fast. What happens if he lost the election ?

Well, Hoffman lost but not by much. Dede Scozzafava managed to sink him by endorsing the Democrat. So much for Newt Gingrich’s counsel. He had several factors against him. He apparently did not live in the district although it is huge. I suspect his business is in the district but that was not enough. He also did poorly on local issues in a newspaper interview. That could be a phony issue if the paper was supporting someone else but this was not a good moment.

Regarding the proposed rooftop highway across the top of the district linking Watertown to Plattsburgh, Mr. Hoffman said only that he was open to studying the idea that has been around for years and will require federal financial assistance to complete.

Mr. Hoffman had no opinion about winter navigation and widening the St. Lawrence Seaway with their potential environmental damage. He was not familiar with the repercussions of a proposed federal energy marketing agency for the Great Lakes, which could pay for Seaway expansion contrary to district interests.

A flustered and ill-at-ease Mr. Hoffman objected to the heated questioning, saying he should have been provided a list of questions he might be asked. He was, if he had taken the time to read the Thursday morning Times editorial raising the very same questions.

That was lame. He is also not that impressive being interviewed on TV. I can see how the locals would resent the effort to make the campaign about national issues. Jobs and spending and deficits are universal but he seems to have done a poor job with the local paper.

Coming to Mr. Hoffman’s defense, former House Majority Leader Dick Armey, R-Texas, who accompanied the candidate on a campaign swing, dismissed regional concerns as “parochial” issues that would not determine the outcome of the election.

Ouch ! Armey should know better than that.

Here is a post by a Hoffman supporter on the election. He makes some sweeping claims that may not bear out. A few commenters add to the discussion, then the usual trolls appear. You can spot the lefties by their use of the obscene derogatory “teabagger.” Once you see that word, you know they do not mean well and anything they say is spin.

The Virginia election was a real triumph for the GOP with the whole top slate plus many down ballot races being won.

I think it is worthwhile to note that McDonnell campaigned on the issues of spending, taxes and regulation while his opponents, including the Washington Post, got hysterical about his social views. I think that is the right approach and I think the less said by candidates about social issues next year, the better.

New Jersey turned out better than many expected. Christie was criticized before the election for refusing to rule out tax increases and by resisting the property tax issue in debates. Since he won, I guess he was right.

In California, I had some hopes for the special election in the Bay Area where Garamendi was running for CA 10 against David Harmer and won in a low turnout election. That has been a safe seat for the Democrats for years but hope springs eternal.

Turnout was estimated to be about 39 percent – “an exceptionally high figure” for a special congressional election in California, said Steve Weir, clerk-recorder for Contra Costa County, where nearly 70 percent of the district’s voters live. The district includes parts of Alameda, Solano and Sacramento counties.

The vote totals, as pointed out by a commenter at Patterico, suggest that Republicans turned out well but there just aren’t enough of them in that district.

In Tucson, the tea party movement had some success in ousting one of the left wing city council members. One has been counted as lost and the other is close. That would be a significant achievement.

Tea parties and a testy national mood aside, Ward 3 incumbent Karin Uhlich is holding on to a narrow lead over Ben Buehler-Garcia.
Nina Trasoff was trailing Republican Steve Kozachik, leaving both races too close to call, with thousands of early ballots still to be counted.

Well, 2010 is coming.

Tags:, , ,
Posted in corruption, politics | 3 Comments »

Revisiting the history of the collapse

Sunday, October 25th, 2009

Last year, I posted a lengthy piece on the origins of the mortgage industry collapse and the role Congress played. I have since closed the post to comments to reduce spam. A reader found it and sent me an e-mail about a Frontline piece that is apparently full of lies. UPDATE: I should change this to say that it is not lying that is the problem but the inability of the writers to see the merits of a free market and a determination that only regulation, and by extension a command economy, can safely run the financial markets. Derivatives were not the problem. The problem was the inability to estimate risk because the GSEs, Fannie Mae and Freddie Mac, were pushing the envelope with government guarantees to their risky loans. Every step which should have warned of the risk was failing because the parties saw huge profits and, at the end of the day, a guarantee by the Treasury that nobody could lose. Moral hazard was rampant.

Typically, it blames the Bush people (actually Greenspan and shows Bush giving him a medal) even though the problems were begun under Clinton and Congress was the chief villain. Here is an example of Congress on the job. Note the tactic of hiding incriminating videos by claiming copyright violation. At least one is still visible.

Rush Limbaugh discussed it on his show and there is a link to the PBS show.

Ladies and gentlemen, they had to do what they were told. The federal government created policies that made them make these loans to people who couldn’t pay them. That’s what the subprime mortgage crisis is all about. The architects of that are Bill Clinton, Barney Frank, Chris Dodd, and a whole bunch of other minor bit players. ACORN’s involved, ACORN’s running around hassling banks if they don’t make loans to people. So now, after following mandated policy, federal law, the Community Redevelopment Act under Carter, it was put on steroids in the late nineties with Clinton and the bunch and that thing forced the banks to make these loans. And so these banks, after following orders, are now being blamed for the problem.

My point in my post was that both parties contributed and those who tried to warn or to rein in the out-of-control Fannie and Freddie were punished or warned of punishment. Ms Born was warning but she did not see that the real risk was government intervention in markets (Fannie/Freddie) not deregulation.

Or consider the experience of Wisconsin Rep. Paul Ryan, one of the GOP’s bright young lights who decided in the 1990s that Fan and Fred needed more supervision. As he held town hall meetings in his district, he soon noticed a man in a well-tailored suit hanging out amid the John Deere caps and street clothes. Mr. Ryan was being stalked by a Fannie lobbyist monitoring his every word.

On another occasion, he was invited to a meeting with the Democratic mayor of Racine, which is in his district, though he wasn’t sure why. When he arrived, Mr. Ryan discovered that both he and the mayor had been invited separately — not by each other, but by a Fannie lobbyist who proceeded to tell them about the great things Fannie did for home ownership in Racine.

When none of that deterred Mr. Ryan, Fannie played rougher. It called every mortgage holder in his district, claiming (falsely) that Mr. Ryan wanted to raise the cost of their mortgage and asking if Fannie could tell the congressman to stop on their behalf. He received some 6,000 telegrams. When Mr. Ryan finally left Financial Services for a seat on Ways and Means, which doesn’t oversee Fannie, he received a personal note from Mr. Raines congratulating him. “He meant good riddance,” says Mr. Ryan.

Yes, this was a bipartisan scandal and PBS (government funded, of course) tries to avoid the truth and blame Bush and Greenspan. Why not ? Everyone else that is government funded does. Greenspan missed the impending crisis but the PBS program missed it too.

Tags:, , , , ,
Posted in corruption, financial, politics | 13 Comments »

« Older Entries
Newer Entries »