Archive for the ‘Financial Crisis’ Category

What’s so shocking about Cyprus’ tax on bank accounts?

March 26, 2013

OK, Cyprus is going to slap a tax on bank accounts over $100,000.

The world is aghast.  The end of financial systems as we know them is in the balance.

Say, what?

It’s not the first time that a government – think, U.S. government — has seized (oops, I meant “taxed”) private assets


Here are a couple of examples from close to home …


Highly educated folks most likely to pile on too much debt …

October 31, 2012

Recently released research suggests that despite generally held assumptions, it wasn’t just uneducated people, and not just homeowners, who precipitated the financial crisis by taking on too much debt.

Before the financial crash of 2008, it was highly educated Americans who were most likely to pile on unmanageable levels of debt.


Overall, the percentage of Americans who were paying more than 40 percent of their income for debts like mortgages and credit card bills increased from about 17 percent in 1992 to 27 percent in 2008.

But college-educated people were more likely than those with high school or less education to be above this 40 percent threshold – considered to be a risky amount of debt for most households.

“People with college educations may have thought they were immune to any economic problems. But when people stop believing things might go bad, that’s when they get in trouble.”


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No economist foresaw the severity of the recession … and no president could have done a better job … wrong and WRONG!

October 2, 2012

Obama has been stumping that no economists foresaw the severity of the recession … so don’t blame him the a trillion dollar faux-stimulus didn’t keep unemployment under 8%.

Former President Clinton pitched at the DNC that no president – not even him – could have pulled us out of the dive better than Barack did.


Last weekend, the  NY Times debunked the first claim:

President-elect Obama’s economic team spent the final weeks of 2008 trying to assess how bad the economy was.

It was during those weeks ..when they first discussed academic research by the economists Carmen M. Reinhart and Kenneth S. Rogoff that would soon become well known.

Ms. Reinhart and Mr. Rogoff  … were arguing that financial crises led to slumps that were longer and deeper than other recessions.

Almost inevitably … policy makers battling a crisis made the mistake of thinking that their crisis would not be as bad as previous ones.

Obama advisers … knew the history … yet, of course,  they did repeat it.

By late 2008, the full depth of the crisis was not clear, but enough of it was.

A few prominent liberal economists were publicly predicting a long slump.

The Obama team, in private, discussed the Reinhart-Rogoff work.

So why didn’t that work do more to affect the team’s decisions?

Want more proof?

On 12/24/2008, USA Today published a piece titled: Forecasters share predictions for economy’s outlook in 2009

The punch lines:

If the recession continues past the spring, as many economists predict, it will be the most prolonged one since the Great Depression.

Employers are expected to continue to shed jobs at a rapid pace.

Consumers will pull back spending.

Businesses will cancel equipment purchases. Unsold, empty homes will dot city blocks.

I guess what Team Obama means is Goolsbee, Romer, and Bernstein didn’t see the severity.

Clinton’s claim of un-doability is just plain silly.

Reagan inherited a recession as severe as the one Obama inherited, plus 18% inflation.

He pulled the economy out in 1-term … so, there !

Team Obama seems to have a penchant for re-writing history.

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Private capital being unleashed on the residential housing market …. finally!

April 25, 2012

Way back in November 2008 —  in a post titled:  “Big Idea: Rallying private capital to stabilize housing prices.”  — I proposed a plan to resuscitate the residential housing market.

The essence of the plan (in 2008) was to:

  1. Eliminate ALL of the capital gains taxes on residential property that is bought from now until, say, December 31, 2010 and held for at least 18 months,
  2. Allow these “qualified residential properties”, if they are rented, to be depreciated for tax purposes at an aggressively accelerated rate (say, over 5 or 10 years) to generate high non-cash tax losses, and
  3. Allow ALL tax losses generated by these “qualified residential rental properties” to offset owners’ taxable ordinary income with no “passive loss’ limitations, thereby reducing their federal income tax liability.

At the time, I said “the positive results are practically guaranteed”.

Well, almost 4 years later, look what’s happening — even without the bold strokes that I suggested.

The NY Times reports that “Investors Are Looking to Buy Homes by the Thousands”.

Some deep-pocketed investors are betting that the residential real estate market is poised to explode.

With home prices down more than a third from their peak and the market swamped with foreclosures, large investors are salivating at the opportunity to buy perhaps thousands of homes at deep discounts and fill them with tenants.

There are close to 650,000 foreclosed properties sitting on the books of lenders.

An additional 710,000 are in the foreclosure process, and about 3.25 million borrowers are delinquent on their loans and in danger of losing their homes.

With so many families displaced from their homes by foreclosure, rental demand is rising. Others who might previously have bought are now unable to qualify for loans.

Investors believe the rental income can deliver returns well above those offered by Treasury securities or stock dividends.

At the same time, economists say, they could help areas hardest hit by the housing crash reach a bottom of the market.

Imagine if the movement had started 4 years ago.

And, imagine if the movement was boosted with the tax incentives,

It’s late, but not too late.

As I said before; “the positive results are practically guaranteed”.

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In business, when you miss your plan …

November 8, 2011

… you get fired.

In government, you cite bad luck and argue that things might have been even worse.

The numbers say it all … expend $1 trillion and get:


Source: NY Times

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Tanning salons say “go get ‘em B of A”

October 25, 2011

As if Bank of America didn’t cause enough of a stir with its $5 monthly debit card charge …

A B of analyst issued a report predicting that U.S. debt will be downgraded again in November or early December.

His rationale: the so-called “super committee” designated to craft a plan to reduce the nation deficit and debt will fail to reach a compromise and the draconian default cuts will kick in.

Specifically,B of A  analyst Ethan S. Harris wrote:

We expect a moderate slowdown in the beginning of next year, as two small policy shocks — another debt downgrade and fiscal tightening — hit the economy.

The “not-so-super” Deficit Commission is very unlikely to come up with a credible deficit-reduction plan.

The committee is more divided than the overall Congress

It is hard to imagine the liberal Democrats on the Committee agreeing to significant entitlement cuts.

And,  all the Republican members have signed the “no taxes” pledge.

The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan.

Hence, we expect at least one credit downgrade in late November or early December when the super Committee crashes.

Didn’t these jabrones see what happened to S&P, Gibson Guitars and the tanning salons?

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SEC goes after S&P … Moody’s gets a pass … hmmm.

September 27, 2011

Well, well, well.

According to the WSJ: “The SEC has given S&P a so-called Wells notice alleging that S&P violated federal securities laws with respect to its ratings for a collateralized debt obligation known as Delphinus CDO 2007-1”.

Hmmm. About 4 years after the fact … but only a month or so after S&P lower the U.S. credit rating.


Probably so.

And, here’s another twist: Moody’s was also up to its eyeballs slapping AAA ratings on CDOs.

But, Moody’s isn’t under investigation.

Did I mention that Warren “Please Tax Me More” Buffet owns a big chunk of Moody’s.

Double hmmm.

Probably just a coincidence.

But, it doesn’t smell right, does it?

Gotta love that good, old fashioned Chicago politics.

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How safe is your money market fund?

July 11, 2011

Punch line: Amid the Greek mini-panic this month, did you notice the really shocking news? To wit, U.S. regulators are worried about the “systemic risk” posed by the exposure of American money-market funds to European bank debt.

* * * * *
According to the WSJ:

A 1983 Securities and Exchange Commission rule allows money funds to report a stable net-asset value of $1 per share, even if that’s not precisely true based on changes in the fund’s underlying assets.

The result is that investors have come to expect that money funds never “break the buck,” never decline in value.

But since 2008 U.S. money funds have been allowed to pile into European bank debt.

Half the assets in U.S. prime money market funds were invested in European banks as of the end of May.

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Bottom line: If Greece tanks and takes down some Euro banks with it, the impact will be felt by US money market funds … which could possibly break a buck …

Has anybody bothered to study the cumulative effect of these things?

June 9, 2011

That’s the question that JP Morgan CEO posed – in public – to Fed chair Bernanke.

Bernanke’s answer: “No”.

* * * * *

It’s widely reported that:

Dimon rattled off a couple of the more than 300 new regs that Dodd-Frank will impose on banks.

Then, he popped the question, adding

“I have a great fear that somebody will write a book that the things we did in the crisis will slow down the recovery”.

Bernanke quipped that he thought the Fed and Administration were doing pretty good, then bluntly answered the question: “No”.

U.S. close to losing Aaa credit rating …

December 14, 2010

As you read this, keep in mind that Moody’s (a Warren Buffet company), rated billions of dollars of mortgage backed securities AAA …

Moody’s warned Monday that it could move a step closer to cutting the U.S. Aaa rating if President Obama’s tax and unemployment benefit package becomes law.

The plan agreed to by President Obama and Republican leaders last week could push up debt levels, increasing the likelihood of a negative outlook on the United States rating in the coming two years, the ratings agency said.

A negative outlook, if adopted, would make a rating cut more likely over the following 12-to-18 months.

For the United States, a loss of the top Aaa rating, reduces the appeal of U.S. Treasuries, which currently rank as among the world’s safest investments.

“From a credit perspective, the negative effects on government finance are likely to outweigh the positive effects of higher economic growth.”

Moody’s May Cut US Rating on Tax Package, 13 Dec 2010

“Hey dude, why are you snapping your fingers ?”

October 12, 2010

3 variants of a very old joke:

A dazed guy is standing on a street corner snapping his fingers.  Curious guy approaches and asks “Hey dude, why are you snapping your fingers ?”  Dazed guy answers: “To keep away elephants”.  Curious guy says: “There aren’t any elephants around here.” Finger snapper says: “See.  It works.”

A President is standing on a street corner spending like a drunken sailor.  Curious guy approaches and asks “Hey dude, why are you spending like a drunken sailor ?”  Free-spender answers: “To avert an economic depression”.  Curious guy says: “There’s no depression around here.”  President says: “See.  It works.”

Recent Past Version
A President is standing on a street corner ordering troops to Iraq.  Curious guy approaches and asks “Hey dude, why are you ordering troops to Iraq ?”  Troop-sender answers: “To avert another terrorist attack”.  Curious guy says: “There haven’t been any terrorist attacks since 9-11.”  President says: “See.  It works.”


Why are only 2 of these counter-factuals considered far fetched by the media?

About the $30 billion added stimulus … Did anybody bother to ask small businesses or their banks ?

September 28, 2010

Punch line: Yesterday, the President was touting his next great stimulus package — ostensibly to help small businesses.

But, the $30 billion small community business lending program faces a big challenge: many of the community banks and businesses it’s supposed to help don’t want it.

* * * * * 

The legislation contains a mix of tax cuts and credits aimed at helping small businesses. The centerpiece of the bill is an effort to make billions of dollars available to community banks for loans to small businesses.

It seems like a simple effort to unclog a credit pipeline that has been blocked since the financial meltdown two years ago.

But interviews with community bankers, as well as small business owners, show a reluctance to participate.

Bank executives say their customers don’t want loans, even at low interest rates, because the sluggish economy has chilled expansion plans.

Some say the federal money isn’t worth it because they fear it will come with too many strings attached, too much regulatory oversight, and too much uncertainty.

“The rules can be changed any time.”

“We have taken a strategic decision not to have our primary regulator, the government, also be a partner in our bank.”

The fears stem from what happened under TARP, the Troubled Asset Relief Fund, formed at the height of the financial meltdown to pump money into banks. Banks that accepted TARP money had to later cut dividends to shareholders and limit compensation to top executives. They were also penalized for early repayment.

Banks said they already has enough capital to meet the paltry demand for loans.

“Our business customers are mired in uncertainty and are reluctant to invest in their businesses”

91% of small business owners surveyed said all their credit needs were met. Only 4 percent cited a lack of financing as their top business problem.

Plans for capital spending were at a 35-year low.

“The crucial questions facing business owners are does it make sense to make an investment right now, and will it generate positive returns?”

“Many of our clients, business owners, put their projects on ice in 2008 because their job number one is to see their company through to the other side of this economic crisis.” 

Source: Associated Press:

Regarding the dismal economy, as Woody Allen would say …

September 24, 2010

Dems say spend, spend, spend.

GOP says cut, cut, cut.

Reminds me of a Woody Allen quote:

“More than any other time in history, mankind faces a crossroads.

One path leads to despair and utter hopelessness.

The other, to total extinction.

Let us pray we have the wisdom to choose correctly.”

Woody Allen, Speech to Graduates, circa 1979

Summers going, going ….

September 22, 2010

gone !

Not the season, the Obama econ adviser … the third to jump ship … along with budget director Orzag and Christine “8%” Romers.

Two points:

1) If the Stimulus is working as well as Obama and Biden say, why aren’t these folks sticking around for the applause ?

2) At Monday’s twn hall, the President was asked specifically if Summers or Geithner would be replaced … he answered “no pesonnel decisions have been made” … do you think (a) decision was made yesterday, or (b) Obama didn’t know, or (c) the President wasn’t answering truthfully ?

Consumer de-leveraging … by the numbers.

September 17, 2010

Total consumer credit outstanding fell 0.1 percent in July, marking the 20th monthly decline in the past 22 months.

Top-tier borrowers retain access to credit, but these lower-risk consumers continue to impose austerity measures as they de-leverage in the wake of the recession.

At the same time, less creditworthy borrowers have been substantially cut off from credit due to high levels of lender risk aversion.

Bottom line: Tighter Consumer Credit Poses Headwind To Recovery

Ken’s Note: And the impact of FinReg hasn’t been felt yet.  It’s called unintended consequences …

Source: Marcus & Millichap

More re: the German Recovery …

September 9, 2010

Below is a link to still another article on whether the apparently successful German austerity program trumps the U.S’s spending spree program …

* * * * *

Germany has cut government spending and its economy is growing smartly.

Germany’s real output expanded at a robust 9% annual rate in the second quarter, while the U.S. economy grew at an anemic 1.6% rate.

So is Germany now a role model for how to recover?

By comparison with U.S. policy makers, “we (Germans) take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation.”

Full article: WSJ, The German Miracle: Another Look, Sept. 8, 2010  

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Expiration of Bush tax cuts puts Dems in a pickle…

September 7, 2010

Everybody knows that the so-called Bush Tax Cuts are due to expire at the end on 2010.

Here’s the rub …

While Dems like to refer to them with the modifier “for the wealthy”, they touched all income brackets and, the bulk of the tax savings (in dollars) go to the middle and lower income earners.

So, letting the whole tax plan expire is a non-starter … violates Obama’s campaign pledges and delivers a staggering blow to the slow economy.

Conventional wisdom is that the so-called middle class cuts would be extended, but that the upper bracket cuts would be allowed to expire.

The problem: Would be more an act of politics than economics … would only dent the deficit (since most dollars are going to the lower and middle brackets) … and the dent assumes that upper bracket folks don’t change their behavior (i.e. by shifting income and assets).

For sure, the impact on the economy would be negative – since high earners consume disproportionately, and since some small businesses are lumped in the tax bracket. May not be a losing hand, but it sure isn’t a winner.

The other option is is renew the Bush Tax Cuts in their entirety for a year or two.


That would say that Bush was right all along … not good politics.

As Woody Allen would say:

More than any other time in history, mankind faces a crossroads.

One path leads to despair and utter hopelessness.

The other, to total extinction.

Let us pray we have the wisdom to choose correctly.

Woody Allen, Speech to Graduates, circa 1979

* * * * *

Post inspired by: WSJ,  ‘The Bush Tax Increase’, August 31, 2010

Is fiscal responsibility (by individuals, not the gov’t, of course) killing the economy?

September 2, 2010

Punch line: As long as consumers (and companies) continue to deleverage, the economy will continue to sputter.

And, the deleveraging is likely to continue …

* * * * *

Excerpted from RCP :Why the Recovery Lags, by Robert Samuelson, August 30, 2010

The logic of  Recovery Summer allegedly recognized that over-borrowed Americans would repay loans and replenish depleted savings, creating a temporary drop in consumer spending and economic activity.

But once savings increased and debt declined, consumer buying would strengthen. It would replace the Obama stimulus program. Hiring would improve; the recovery would become self-sustaining.

So, why is the recovery faltering?

There are many explanations: depressed housing; weaker-than-expected exports; cautious (rebellious?) corporations.

But consumers, representing 70 percent of the economy’s $14.5 trillion of spending, are the crux of the matter.

“Consumers are deleveraging (reducing debt) … and rebuilding saving faster than expected.”

In 2007, the personal savings rate (the share of after-tax income devoted to saving) was 2 percent. Now it’s about 6 percent. In the early 1980s, the savings rate averaged 10 percent.

The Federal Reserve reports that debt service — the share of income going to interest and principal payment — has decreased from almost 14 percent in early 2008 to about 12.5 percent, the lowest since 2000.

In the past decade, consumers counted rising stock and home wealth as “saving,” which rationalized high borrowing and spending.

Now, the process may work in reverse.

Since late 2007, lower home and stock values have shaved about $10 trillion from household wealth.

If Americans tried to replace most of this through more annual saving, consumer spending would remain weak for years.

Consumers are adopting a “defensive outlook,” they’re prone to “pare their debt” or increase “reserve” savings.

They aren’t “itching to resume old spending habits.”

Full article:

Is Germany Ruining the Recovery?

September 2, 2010

Yesterday’s post – which suggested that Germany’s fiscal austerity is outperforming Obama’s ‘spend ‘til you drop’ program – seems to have piqued some interest.

As a follow-on, here are some highlights a New Republic article on the topic:

For months, top U.S. officials have begged the Germans to stay the course on their modest stimulus measures, fearing that a too-quick withdrawal would hamstring the European recovery and pose risks to the global economy.

But the Germans have stood firm, rejecting the administration’s Keynesian logic with rhetoric that can sound gratingly reminiscent of Republican talking points.

The Germans even dragged their feet over a stress test of European banks, complicating efforts to restore confidence in the continent’s balky financial system.

* * * * *

Welcome to economic stewardship in the age of German parochialism.

For years, the Germans could be relied upon to play a stabilizing role in Europe, subsuming their national self-interest to lofty visions of continental solidarity.

But, over the last decade, as German leadership has passed to a younger generation less compelled by the war’s memory and unbothered by the Soviet menace, the Germans have ceased to view Europe’s safekeeping as their historical responsibility.

* * * * *

The Americans and Germans spent a stretch of the spring debating the right time to close the stimulus spigot and start narrowing their deficits.

The Americans, haunted by the Great Depression, worried that countries would cut back too quickly and relapse into recession.

The Germans, haunted by their own interwar experience, worried that deficits would lead to a debilitating inflation.

* * * * *

Goodbye to Berlin: How Germany became a thorn in America’s side, August 30. 2010

Fiddling while Rome burns …

August 27, 2010

How many pundit columns or TV clips have you seen in the past week that have opened with “Nobody begrudges the President with some hard earned R&R”?

OK, I just have to get this off my chest … I begrudge Obama his vacation.

Geez, he’s the POTUS … not Clark Griswald.

Ask any C-level exec if they’ve ever had a vacation cancelled, shortened, or interrupted by urgent company business

I’ll bet 100% say they did. I sure did.  Just ask my family.

There’s no more important job than POTUS … and — except for war or a plague — few matters more urgent than an economic meltdown.

According to the AP …

The government is about to confirm what many people have felt for some time: The economy barely has a pulse.

Today, the Commerce Department will revise its estimate for economic growth in the April-to-June period and Wall Street economists forecast it will be cut almost in half, to a 1.4 percent annual rate from 2.4 percent.

That’s a sharp slowdown from the first quarter, and economists say it’s a taste of the weakness to come.

Such slow growth won’t feel much like an economic recovery and won’t lead to much hiring.

The unemployment rate, now at 9.5 percent, could even rise by the end of the year.

Consumers can’t be sure their jobs are safe, with unemployment so high. Business executives don’t know if sales and profits will grow enough to justify adding jobs.

And potential changes to tax laws at the end of this year and other policy reforms also make it hard to plan ahead, economists say.

People have been overwhelmed by uncertainty.”

High unemployment is making it harder for people to make their mortgage payments and stay in their homes.

About 10% of homeowners have missed at least one mortgage payment this year.

AP, Snapshot of economy about to get a lot bleaker, Aug 27, 2010

Rather than strolling around swanky Martha’s Vineyard showing folks what a cool dude he is, I’d like our POTUS at least acting like he’s engaged on the economic problem.

Whatever happened to “”I will not rest until (fill in the blank)”

Oh, I know that he took time for a conference call with his economic advisers.

Big deal.

The outcome: stimulus was a grand success, staying the course with people and programs, not to worry – the home winterizing credits and solar panel tax incentives are still in play.

Give me a break …

Obama’s Economic Remarks in Ohio … say what ???

August 25, 2010

I’d bet the ranch that Obama took no courses in economics, business, or taxes in college. (Of course, we’ll never know since he refused to release his transcripts.)

Here’s one of his frequent refrains that makes me cringe:

“And so a couple of things that we’re focused on right now is, number one, making sure that small businesses are getting help, because small businesses like Joe’s architectural firm are really the key to our economy.

They create two out of every three jobs.

And so we want to make sure that they’re getting financing.

We want to make sure that we are cutting their taxes in certain key areas.

One of the things that we’ve done, for example, is propose that we eliminate capital gains taxes on small businesses so that when they’re starting up and they don’t have a lot of cash flow, that’s exactly the time when they should get a break and they should get some help.”

Obama’s Economic Remarks in Ohio, August 18, 2010

Perhaps somebody can explain to me what capital gains an upstart small business has?

Sure, there are capital gains when a small business goes public or gets bought.

But – except for small companies that buy and sell assets, e.g. financials, real estate – there are no capital gains from normal operations.

So, cutting the cap gains tax rates does nothing to increase cash flow … save for being an incentive to get others to throw dough into the business.

So, what the heck is he talking about ?

Consumer deleveraging … $6 trillion to go.

August 24, 2010

From the WSJ …

There seems to be a structural change in the American economy.

The relationship of household debt to income has proven unsustainable.

The ratio is normally somewhere below 100%, but in 2007 the debt ratio hit 131% of income.

It has now fallen to 122%, but at this pace it would take another five years to bring it under 100%.

The pre-bubble norm was 70%.

To get to this ratio again, debt would have to be reduced by about $6 trillion.

WSJ, The End of American Optimism, August 16, 2010

Flash: Michael Moore may be onto something… well, kinda.

August 16, 2010

An article in The Daily Beast — by super-sized, unconscionably rich, uber-lib Michael Moore – caught my eye.  In it, Moore says:

To understand what’s happening (in the economy), we have to focus on the bottom line, just like CEOs do.

And what the bottom line says is that the entire business world has figured out how to make huge buckets of money without hiring people to work for them.

I’m not sure how in the long run this benefits these companies. Maybe the same robots who make most things now are also programmed to buy them?

But the upshot is this: We have to face the fact that most of America’s CEOs don’t want the economy to get “better.”

Because for them, it couldn’t get better—they’ve got profit coming out their ears, while with 9.5 percent unemployment their entire workforce is too scared to ask for a 25 cent-an-hour raise.

They’d be happy to have things stay just like they are now. Forever.

Profits Up at GM! And You’re Still Unemployed by Michael Moore, Aug 13, 2001

I think Moore’s conclusion that CEOs don’t want the economy to get better is just plain nuts.

But, he’s onto something: the entire business world has figured out how to make huge buckets of money without hiring people.

Well, maybe not the entire business world, but a big chunk of it.

Fact is that businesses always use economic slowdowns to purge themselves of organizational fat that has accumulated in good years.  This slowdown is no exception.

The differences:

(1) more fat had accumulated this time so the cuts appear deeper

(2) companies are rebuilding their cash balances so that – if there is a double dip – they won’t have to grovel for gov’t aid again

(3) few companies  are expecting a quick return to growth —  so hiring freezes are in place

(4) surviving employees are stepping up and delivering productivity increases

(5) ObamaCare, etc., have substantially increased the cost per employee – so there’s less economic advantage to hiring.

Just in case you still think the Stimulus stimulated … a great analysis!

August 10, 2010

The Administration (and mainstream media) have been touting a recent paper by Alan Blinder and Mark Zandi that apparently vindicates the Obama stimulus plan, claiming  that if not for the response of the federal government, the unemployment rate would be 15.7 percent, far higher than the current 9.5 percent …  and understandably way higher than the promised 8%.

Yeah, right.

First, not noted by the press,  most of the positive effects cited in the paper came not from the stimulus but from stabilizing actions of the Federal Reserve, the FDIC, and TARP.

Second, the paper argues that the 8% promise was impaired because Romer & Bernstein didn’t adequately dope out how bad the economy really was.

The below analysis shreds the “starting point” argument and concludes that the stimulus program achieved – in effect – nothing  … except for boosting the national debt by a trillion dollars.

* * * * *

Excerpted from Weekly Standard: Did the Stimulus Stimulate?, Lawrence B. Lindsey, August 16, 2010

In January 2009, Christina Romer, who resigned last Friday as chairman of the president’s Council of Economic Advisers, and Jared Bern-stein, chief economic adviser to Vice President Biden, published a paper projecting what would happen if President Obama’s proposed stimulus package passed, compared with what would happen if it did not.

The Romer-Bernstein paper has often been cited as saying that if the package passed, the unemployment rate would peak below 8 percent in the middle of 2009 and would decline to below 7.5 percent by now.

Obviously this has not happened.

The administration argues that it is not fair to conclude that this proves the package was a failure since Romer and Bernstein underestimated the severity of the recession and that unemployment was already 8.2 percent in the first quarter of 2009, higher than the assumed peak.

The chart below corrects for their complaint by raising their estimate of where unemployment started in their experiment.


The lowest line provides the original estimate of the path of unemployment provided by Romer and Bernstein on January 9, 2009.

The second line replicates the Romer and Bernstein path, but raises the initial unemployment rate from their assumed 7.5 percent to 8.2 percent. This was the actual average of the unemployment rate in the first quarter of 2009, the period in which the stimulus was passed.

The third line provides a more extreme alternative by raising the initial unemployment rate to the 9.3 percent average of the second quarter 2009.

The first modification fully compensates for their objection while the second modification more than compensates for their concern.

But as the chart shows, the problem with the stimulus wasn’t just the starting point — it was that the stimulus itself has been ineffective at lowering it.

The actual unemployment rate, given by the red solid line, is not only above the original Romer-Bernstein projections, but also above projections that take account of the “starting point” problem.

Actual unemployment has been consistently above all of the projections, regardless of starting point, because the stimulus bill has basically brought no relief in terms of lower unemployment.

Full article:

Romer’s Legacy: “Spend a trillion and unemployment will stay under 8%”

August 6, 2010

Which metaphor applies ?

Was she thrown under the bus or did she jump off the ship?

Romer’s history of academic research concluded that Keynesian fiscal stimulus doesn’t work.

Then, she drank the kool-aid and shilled for Obama’s trillion dollar faux-stimulus spending spree.

She seemed smart enough and sincere enough, that one had to think that she was dying of hypocrisy on the inside.

Now, after a short 18 months as Obama’s chief economic spokesperson, Romer woke up and realized that her youngest child was going to start high school, so she needed to move back to California,

Yeah, right.

If she didn’t see that one coming 18 months ago, how could she possibly forecast the economy?

I feel for the lady. 

She’ll end up being remembered for her 8% promise — which will go down in the history books next to “Mission Accomplished”.

If only she had maintained her academic integrity …

* * * * *

Excerpted from WAJ: Romer to Resign as Obama Adviser,  August 6, 2010

Christina Romer said she would resign as chairman of President Barack Obama’s Council of Economic Advisers to return to her teaching post at the University of California at Berkeley, effective Sept. 3.

Ms. Romer is the second member of Mr. Obama’s economic team to leave.

White House budget director Peter Orszag left earlier this summer.

She said she is returning to California so the youngest of her three children can begin high school there.

Among her challenges was explaining why her prediction that the Obama-backed fiscal stimulus would keep the unemployment rate below 8% proved overly optimistic. The unemployment rate is now at 9.5%.

Ms. Romer’s academic work focused, among other things, on the causes of and recovery from the Great Depression and the impact of monetary, spending and tax policy on the economy.

Her 19 months in Washington has confirmed some of her prior beliefs …

Full article:

Is that a Mercedes in the Dollar General parking lot?

August 3, 2010

Punch line: Americans are broke and depressed — and also swilling $3 lattes and waiting in line for iPhones.

Go figure.

* * * * *
Highlights from Bloomberg Business Week:The New Abnormal, July 29, 2010

The new abnormal has given rise to a nation of schizophrenic consumers — dollar stores and luxury. They splurge on high-end discretionary items and cut back on brand-name toothpaste and shampoo.

Companies like Apple and Starbucks  are thriving. Mercedes-Benz is having a record sales year.

The irony is that it is often the same people juggling iPhones and venti lattes who are open to switching to off-brand laundry detergents — abandoning Ivory soap and Crest toothpaste for generic brands.

They may also be sneaking into discount retailers for these deals.

The dollar store is the new Target … You go in there to buy shampoo for a buck so you can go to Starbucks and justify spending $3 for a coffee … you buy cheap towels there before hitting a pricey spa.”

What’s going on?

“Some consumers are probably liquidity-constrained … and aren’t buying iPads.

But 90 percent of Americans do have a job, and maybe 70 percent are confident about them. And maybe half of those have liquidity.”

“Consumers’ brains lack a line that separates spending from saving. Instead they practice a certain amount of thrift to justify blowing a large sum frivolously.”

People are saying, ‘There is still risk. I gotta cut back … but life has to have some normalcy. I have to have some luxuries.”

Full article:

Why folks are feeling down …

July 26, 2010

Punch line: This has been the most egalitarian of all the 11 recessions since World War II.

In various ways, it has touched every social class through job loss, pay cuts, depressed home values, shrunken stock portfolios, eroded retirement savings, grown children returning home — and anxiety about all of the above.

* * * * *
Excerpted from RCP: The Great Stranglehold, Robert Samuelson, July 12, 2010 

A new study from the Pew Research Center  confirms that Americans have become more frugal and changed life plans:

  • 71 percent say they’re buying less expensive brands
  • 57 percent say they’ve trimmed or eliminated vacations
  • 28 percent of Americans under 65 borrowed money from family or friends
  • 11 percent say they’ve postponed marriage or children
  • 9 percent have moved back with parents.

The economic and spiritual damage extends much further, for many reasons.

First, the huge job loss: By most measures (length of unemployment, permanent firings versus temporary layoffs), joblessness is the worst since World War II.  Younger workers change jobs more often and have higher jobless rates.)

Second, pay cuts: These have affected almost a quarter of workers, including nearly a fifth of those with family incomes exceeding $75,000. Some workers also have had to take unpaid leave or part-time work.

Third, the loss of housing and stock market wealth: This decline (more than 25 percent at its peak on an annual basis) has been concentrated among higher-income Americans, who own a disproportionate share of the wealth. A reverse wealth effect has gripped the upper middle class. Feeling poorer, people saved more and spent less. Their reluctance to make major purchase commitments (a new car or home) validates their pessimism by retarding recovery.

Full article:

“Every economist agrees that the Stimulus worked” … oh, really ?

July 21, 2010

That’s what the President keeps saying.

Michael Boskin – a senior professor of economics at Stanford University – disagrees … as do dozens of his colleagues.

* * * * *

Excerpted from WSJ: Obama’s Economic Fish Stories, July 21, 2010

President Obama says “every economist who’s looked at it says that the Recovery Act has done its job” — i.e., the stimulus bill has turned the economy around.

That’s nonsense.

Opinions differ widely and many leading economists believe that its impact has been small.


The expectation of future spending and future tax hikes to pay for the stimulus and Mr. Obama’s vast expansion of government are more than offsetting any direct short-run expansionary effect. That is standard in all macroeconomic theories.

So, as I and others warned, the permanent government expansion and higher tax rate agenda is a classic example of what not to do during bad economic times.

The president does not say that economists agree that the high future taxes to finance the stimulus will hurt the economy.

Mr. Obama’s economic statements are increasingly divorced not only from competing viewpoints but from those of his own economic advisers, e.g. he claims that the stimulus bill was several times more potent than his chief economic adviser estimates.

The stimulus bill has assumed certain mystic powers in administration discourse, but revoking the laws of arithmetic shouldn’t be one of them.

At the very least, his staff needs to avoid putting these exaggerations on the teleprompter.

It undermines confidence and raises concerns about competence. It’s doing nobody any good—not the economy and certainly not Mr. Obama.

Full article:

Savvy corporations are keeping their powder dry …

July 14, 2010

Corporate cash has been piling up.

3,000 non-financial firms have $1.641 trillion dollars in cash and equivalents.

More important, the 500 largest non-financial firms have $1.8 trillions dollars in cash.

  • The top 50 firms account for over half of this dollar amount, accounting for $823.642 billion dollars.
  • The top 20 firms, ranging from Berkshire to United Health Group account for most of this — $635.386 billion dollars.
  • Berkshire & GE have almost 15% of the cash …


Source: Corporate Cash: Top 20 Firms = $635 Billion,   By Barry Ritholtz , July 12th, 2010

Thanks to Tags for feeding the lead.

Decades of economic pain … until lucrative union & government pension plans go to the graveyard.

May 7, 2010

I’m a believer that commitments should be kept.  Even when they turn out to be disadvantageous.

So, I’m conflicted.

For decades, companies and governments have made major concessions to their employees — often reflected in lucrative retirement and pension plans (think UAW and Federal gov’t), regarded as too distant in the future to worry about, and inconsequential if growth rates stayed very high.

Well, now they (and we) are paying to the piper.

The pension obligations in most states and for many companies is choking the economic horse.

And, there’s no means of avoiding the burdensome costs — save for reneging on past deals made.

Since I rule out that option, I see our economy saddled by these obligations until retirees have the political courtesy to go meet their maker. 

That’ll take awhile … though the rate may accelerate under ObamaCare’s seniors’ rationing rule.  Hmmm …

* * * * *

Excerpted from WSJ: How to Tackle Government Labor Costs, April 29, 2010

State and local governments’ … pension obligations are underfunded to the tune of $1 trillion … propelled over the last decade by rising municipal employment.

The inescapable conclusion: Labor costs, which at $1.1 trillion in 2008 account for half of state and local spending, simply must come down.

Years ago, there was an informal “social contract” — public employees generally received lower wages than private-sector workers, and in return they got earlier retirement and generous pensions, allowing them to catch up.

For years, state and local government employees have received pay increases in excess of inflation, and they now have wages that are 34% higher on average than in the private sector.

Partly responsible for these trends is unionized …  pay levels higher than needed to attract qualified employees. The average quit rate among state and local employees is a third of that in the private sector.

Public employees also have a 70% advantage in benefits. Health insurance, retirement benefits, life insurance and paid sick leave are not only much more available to them, but much richer. In 2009, the costs of health insurance were 2.18 times as much for state and local employees as for private-sector workers.

Public-sector retirement costs also are high because many can retire at age 55 after 30 years of employment with pensions equal to 60% or more of final salary, which is often jacked up by lots of overtime in final working years. In some states, employees can “double dip” by retiring early and then resuming their previous jobs or taking other government positions. So they get salaries and pensions at the same time.

With slow economic growth, limited income expansion and high unemployment likely in future years, a taxpayer revolt may be brewing.

Americans still want basic municipal services like police and fire protection, good schools for their kids, clean streets and garbage collection, but at lower costs and budgets that don’t kick the deficit can down the road.

State and local government labor costs can be reduced in an orderly way.

  • Following in the footsteps of bankrupt GM, two-tier wage structures would allow existing employees to continue at current salaries, but pay new hires much lower wages that are nevertheless adequate to attract and retain qualified people.
  • And the new people can be enrolled in defined-contribution pension plans that require employee contributions instead of defined-benefit plans. Retirement ages can be increased.
  • While waiting for existing employees to retire, their pay can be frozen.
  • Pension formulas can be reformed to avoid the system being gamed by heavy overtime in final years on the job, and double-dipping can be eliminated.
  • Retirees in the public sector can be required, as they are in the private sector, to pay meaningful shares of their health-care costs.

These changes would be profound and shake up the high-paid, secure image of state and local government jobs. But essential services would still be delivered, only much more cost effectively. Push has come to shove.

Full article:

Blame the recession on low and declining business investment — and don’t expect it to get better.

March 11, 2010

Punchline: Headlines typically say that low consumer spending is at the root of the recession.  But, gov’t data indicates another cause: low and declining business investment in plant, equipment, software, and inventories. An aggregate demand problem that is certain to be exacerbated — not mitigated — by higher taxes on business and capital.

* * * * *

Excerpted from: IBD: No Recovery Until America Invests Again, 03/09/2010

The deeper story of the continuing recession can be found buried in the statistical appendix to the 2010 report of the president’s Council of Economic Advisers.

That story: a devastating decline in investment spending.

The government’s data reveal that, contrary to popular belief, consumer spending held up fairly well during the recession, falling less than 2% from the fourth quarter of 2007 to the second quarter of ’09.

A drop in private investment spending — primarily business purchases of structures, equipment, software and additions to inventories — was far more significant to the recession.

Gross private domestic investment peaked in 2006. Between the first quarter of that year and the second quarter of 2009, it fell precipitously, by nearly 34%.

This huge decline in investment spending portends an extended period of slow economic growth, lasting several years and perhaps longer. Worn-out equipment, obsolete software, ill-maintained structures and depleted inventories are not the stuff of which rapid, sustained economic growth is made.

Business firms have also fled from inventory investment, trimming their holdings by an unprecedented $125 billion in 2009 after lopping off $35 billion in 2008.

Federal government spending, meanwhile, has raced ahead. From 2007 to 2009, government purchases of newly produced final goods and services — the federal government’s “contribution” to GDP — increased by over 13% in constant dollars.

Making matters worse, the explosion of the federal government’s size, scope and power since mid-2008 has created enormous uncertainties among investors.

New taxes and higher rates of old taxes; potentially large burdens of compliance with new environmental and energy regulations and mandatory health care expenses; new, intrinsically arbitrary government oversight of systemic risks associated with virtually any type of business — all of these unsettling possibilities must give pause to anyone considering a long-term investment.

Unless Washington acts soon to resolve these uncertainties, from the cap-and-trade folly to the health care monstrosity, most investors will likely remain largely on the sidelines, consuming some of what would have been invested and protecting the remainder of their wealth in cash hoards and low-risk, low-return, short-term investments.

Full article:

The fundamental economic problem of our age … and the impotency of policy makers.

March 5, 2010

Punch line: Commentary from Bill Gross — one of the premier bond traders in the world:  

“The impotency of policymakers … has consequences for credit and asset markets worldwide.”

* * * * *

Excerpted from PIMCO investment outlook, March 2010

Let’s get reacquainted with the fundamental economic problem of our age – lack of global aggregate demand – and how we got to where we are today:

(1) Twenty years of accelerated globalization incrementally undermined the real incomes of most developed countries’ workers/citizens …

forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap – making sure that consumers keep buying things.

When the private sector assumed too much debt and asset prices bubbled (think subprimes and houses, or dotcoms/NASDAQ 5000), American-style capitalism with its leverage, deregulation, and religious belief in lower and lower taxes reached a dead end.

There was a willingness to keep on consuming, there just wasn’t the wallet. Vigilantes – bond market or otherwise – took away the credit card like parents do with a mall-crazed teenager.

(2) The cancellation of credit cards led to the Great Recession and private sector deleveraging, the beginning of government policy reregulation, and gradual deglobalization – a reversal of over 20 years of trade policies and free market orthodoxy.

In order to get us out of the sinkhole and avoid another Great Depression, the visible fist of government stepped in to replace the invisible hand of Adam Smith.

Short-term interest rates headed to 0% and monetary policies of central banks incorporated new measures labeled “quantitative easing,” which essentially involved the writing of trillions of dollars of checks to replace the trillions of dollars of credit that disappeared after Lehman Brothers.

In addition, government fiscal policies, in combination with declining revenues, led to double-digit deficits as a percentage of GDP in many countries, a condition unheard of since the Great Depression.

(3) Financial crises led to sovereign defaults or at least uncomfortable economic growth environments where real GDP was subpar based on onerous debt levels – sovereign and private market alike.

Dubai, Iceland, Ireland and recently Greece pointed to a potential flaw in the model.

Now, markets are raising interest rates on sovereign debt issuance either in anticipation of higher future inflation, increased levels of credit risk, or both. This places a potential “cap” on the “debt” that supposedly can be created to get out of the “debt crisis.”

* * * * *

An investor’s motto should be, “Don’t trust any government and verify before you invest.”

The potential impotency of policymakers to close the gap are evolving into a life or death outcome for the weakest sovereigns, with consequences for credit and asset markets worldwide.
Full article:

Blue states bleed red ink … surprised?

March 2, 2010

Punch line: What do you get when you have union dominance, lots of  state employees, and a comfortable environment for moochers?  Well, a Dem majority with mountains of debt, lots of unfunded pension liabilities, and enough social services to choke a horse. 

* * * * *

Excerpted from Forbes: Political Litmus Test: Bluest States Spilling The Most Red Ink, 02.25.10 

Want to know which states are in the worst financial condition? One telling indicator that might not immediately come to mind is whether most of its citizens identify themselves as Democrats.

The five states in the worst financial condition–Illinois, New York, Connecticut, California and New Jersey–are all among the bluest of blue states.

Forbes’ metrics for each state included unfunded pension liabilities, changes in tax revenue, credit ratings, debt as a percentage of Gross State Product, debt per capita, growth expectations for employment and the state economy, net migrations and a “moocher ratio” that compares government employees, pension burdens and Medicaid enrollees to private-sector employment.

Why do Democratic states appear to be struggling more than Republican ones? It comes down to stronger unions and a larger appetite for public programs.

“Unions in general have more influence in Democratic-controlled states … where they’re strong you have bigger demands for social services and coalitions with construction companies, road builders and others that push up debt.”

Of the 10 states in the worst financial condition, eight are among a total of 23 defined by Gallup as “solidly Democratic,” meaning the Democrats enjoy an advantage of 10 percentage points or greater in party affiliation. These states include the ones listed above as making up the bottom five, plus Massachusetts, Ohio and Wisconsin.

Of the three other basement-dwellers, Kentucky is defined as “leaning Democratic” (a five- to 10-percentage-point Democratic advantage) and the remaining two–Louisiana and Mississippi–are termed politically “Competitive” (less than a five-percentage-point advantage for either party). Louisiana tilts slightly Democratic and Mississippi slightly Republican.

The majority Republican states ranked among the financially healthiest are Utah, Nebraska, Texas, North Dakota and Montana.

Utah, the fiscally fittest state, has debt of just $442 and unfunded pension obligations of $7,272 per resident. It is also America’s second reddest state with a 21-percentage-point Republican advantage in party affiliation. The Beehive state boasts a triple-A credit rating from Moody’s.

Illinois is in the worst financial condition, with per-capita debt of $1,877 and unfunded pensions of $17,230. Moody’s rates Illinois’ general obligation debt A1, ahead of only California’s.

Full article:

Remember the $787 billion Stimulus … oops, make that $862 billion.

January 27, 2010

Yesterday the CBO released a new budget outlook for 2010 and beyond.  The highlights (or,  lowlights):

  • ” … if current laws and policies remained unchanged, the federal budget would show a deficit of about $1.3 trillion for fiscal year 2010.”
  • The unemployment rate is projected to fall to 9.5% by 2011, 8% by 2012 and about 6% by election day 2012 (hmmm)



  • Somewhat buried in the details is a re-estimation of the cost of the 2009 stimulus bill (officially known as ARRA – American Recovery and Reinvestment Act).

    CBO originally estimated that ARRA would cost $787 billion from 2009 through 2019. Its new estimate is $862 billion, about $75 billion (9.5%) higher than previously forecast.

    Roughly 75% of the overage is attributable to “safety net” programs — food stamps and unemployment benefits.  Logical since the Stimulus program was going to be the silver bullet that kept unemployment below 8%.  Oops.Below is a chart summarizing all of the costs.

    Note that $258 billion hasn’t been spent yet (bank it ?) and that, so far,  a whopping 3% of the budget ($28 billion) has been spent to rebuild our roads and bridges.  Wasn’t that supposed to be the main event?

    Side note: if CBO estimate is off by 10%  in the current year of a budgeted program, how much confidence should we have in a trillion dollar healthcare estimate ?  Yipes.

    Click the chart to enlarge it

See Appendix A of the CBO Report:

Of course he’s anti-business … so say 77% of investors

January 25, 2010

Ken’s Take: Let’s see, unemployment is over 10% and businesses provide jobs … so, go to war with banks and business.  Hmmm.  Might work.

Bernanke gets the highest approval ratings — by far — so don’t reappoint him.  Hmmm again.

* * * * *

Excerpted from Bloomberg: Obama Seen as Anti-Business by 77% , Jan 21,2010

U.S. investors overwhelmingly see President Barack Obama as anti-business and question his ability to manage a financial crisis, according to a Bloomberg survey.

  • 77 percent of U.S. respondents believe Obama is too anti-business.
  • Four-out-of-five are only somewhat confident or not confident of his ability to handle a financial emergency.
  • Only 27 percent of U.S. investors view the President favorably.

“Investors no longer feel they can take risks,” citing Obama’s efforts to trim bonuses and earnings, make health care his top priority over jobs and plans to tax “the rich or advantaged.”

Investors say Obama has been in a “constant war” with the banking system, using “fat-cat bankers and other misnomers to describe a business model which supports a large portion of America.”

The U.S. investors’ perceptions of Obama stand in contrast to those of their European counterparts, most of whom say the president strikes the right balance when it comes to managing business interests. Europeans, however, are more confident in Obama’s leadership on financial matters than Asians.

U.S. respondents give Geithner a 63 percent unfavorable rating and Summers 67 percent. One financial figure to find favor among U.S. respondents is Federal Reserve Board Chairman Ben S. Bernanke, who garners a 68 percent approval rating.

Unlike other recent presidents, Obama hasn’t selected a leading business executive for his cabinet or a top advisory role.

The UAW … California style.

January 25, 2010

Punch line: The pension liability created by lucrative union contracts was no problem … until folks started to retire … and live a lot longer than expected.

* * * * *

Excerpted from WSJ: Public Employee Unions Are Sinking California,  Jan,22, 2010

Months after closing its last budget gap, the Golden State’s $83 billion budget is $20 billion in the red.

“This year alone, $3 billion was diverted to union pension costs from other programs.”

To balance the budget, California needs to take on its public employee unions.

Approximately 85% of the state’s 235,000 employees (not including higher education employees) are unionized.

Over the past decade pension costs for public employees increased 2,000%. State revenues increased only 24% over the same period.

There are now more than 15,000 government retirees statewide who receive pensions that exceed $100,000 a year.

Many of these retirees get a pension that equals 90% of their final year’s pay. The pensions for these (and all other retirees) increase each year with inflation and are guaranteed by taxpayers forever—regardless of what happens in the economy or whether the state’s pensions funds have been fully funded (which they haven’t been).

Note: Many of the retirees are former police officers, firefighters, and prison guards who can retire at age 50 with full benefits.

Full article:

UK banker’s face 50% added tax on big bonuses … and, I’m cheering.

December 10, 2009

I’m becoming a populist on this issue.  You just shouldn’t be able to keep lotto winnings when other taxpayers pay for your ticket. These nitwits have no conscience.

* * * * *

Excerpted from WSJ: Banks’ Bonuses Hit by 50% Levy in U.K., Dec. 10, 2009  

The U.K. slapped banks with a 50% tax on some bonuses they pay to individuals, in perhaps the most aggressive move yet by a government to rein in banking compensation after the financial crisis.

The tax  is an effort by the ruling Labour Party to address public anger over bank bonus pay ahead of next year’s general election.

The U.K. bonus tax will be paid by banks on discretionary individual bonuses that exceed £25,000 ($41,000).

For instance, if a bank pays an individual a bonus of £30,000, it would pay a 50% tax on the £5,000 portion over the threshold.

The individual’s income tax wouldn’t be affected.

The government says the driving idea behind the tax is to end the banking industry’s culture of compensating risk-takers and to push down bonuses so that banks retain more capital and step up lending.

Treasury chief Alistair Darling said “If they insist on paying substantial rewards, I am determined to claw money back for the taxpayer,” he said.

But the new tax applies only to discretionary and not contractual bonuses. Banks will avoid the charge, then, for payments to any banker whose bonuses are guaranteed by contract. Banks operating in the U.K. plan to pay about $6 billion in bonuses this year, about $1 billion of which is discretionary, as opposed to bonuses guaranteed to bankers by contract.

In addition to the new tax on pay, bankers will be hit by an increase on income tax. Those who earn above £150,000 are already set to see their tax rate rise to 50% from 40% in April.

“Sending out a message that the U.K. does not welcome high earners will be music to the ears of rival global financial centers.”

Full article:

Resurrect the 90% tax on bonuses — not for AIG — for Goldman.

November 23, 2009

I’m a life-long hard core capitalist. 

But, Goldman Sachs is shaking my belief structure.

They were at center stage in the financial meltdown,

They ran to the gov’t for a rescue package — even if they didn’t need the money, they took it  — and they solicited and got a favorable redesignation as a bank.

They reaped a windfall when Paulson & crew refused to extend comparable advantages to other financial culprits.

Now, they have the audacity to pay themselves mind-boggling reward bonuses.  Even their asleep-at-the-switch shareholders are whining.

WSJ: Goldman Holders Miffed at Bonuses:
Some Investors in the Stock Urge That More of the Riches Be Passed Along to Them

Last year, reacting to some AIG bonus payouts, Congress toyed around with a  90% tax rate on bonuses to TARP supported companies.

WSJ: House Passes Bonus Tax Bill: 90% Hit Would Affect Major Banks

At the time, I argued that the tax code shouldn’t be used for punitive purposes, that contracts are contracts, and that execs should be paid to the terms of their contracts even if there were unintended consequences, e.g. big bonuses for poor performance. 

I’ve changed my mind. 

A 90% punitive tax on the Goldman bonuses strikes me as just about right.

Dante must have a special place in his Inferno for these soul-less knuckleheads.

How many Americans does it take to make nine pairs of work boots?

November 19, 2009

Bottom line: “No matter how hard or imaginatively the Administration spins, the reality is that the stimulus has been the economic bust that critics predicted it would be.”

And, “they” want another $1 trillion to whack the healthcare system.

Somebody tell these guys that respect and credibility are earned …

* * * * *

Excerpted from WSJ: The Phantom Jobs Stimulus, Nov. 19, 2009

How many Americans does it take to make nine pairs of work boots?

According to the White House’s site, an $890 shoe order for the Army Corps of Engineers, courtesy of the stimulus package, created nine new jobs at Moore’s Shoes & Services in Campbellsville, Kentucky.

The job-for-a-boot plan may not be American productivity at its best.

But such stories go a ways toward explaining how the Administration has come up with 640,329 jobs “created/saved” by the American Recovery Act as of October 30.

  • Head Start in Augusta, Georgia claimed 317 jobs were created by a $790,000 grant. In reality, the money went toward a one-off pay hike for 317 employees.
  • One Alabama housing authority claimed that a $540,071 grant would create 7,280 jobs … only 14 were created.
  • In some cases, Recovery Act funds went to nonexistent Congressional districts, such as the 26th in Louisiana or the 12th in Virginia.
  • Up to $6.4 billion went to imaginary places in America.

When asked about the overstatements, Ed Pound, the director of communications for the Obama Administration’s, said, “Who knows, man, who really knows.”

That’s a confidence builder, isn’t it?

Full article:

After $787 billion, an we stand much more stimulation?

November 9, 2009

The current refrain: almost 1 million jobs saved or created.  Yeah, right.

The chart says it all …


“Synchronous Lateral Excitation” … risky, but not what you’re thinking.

October 7, 2009

TakeAway: In finance, actions can be both individually prudent and collectively disastrous. It’s called “synchronous lateral excitation”, and it explains the credit crunch of 2008 – 2009.

* * * * *

Excerpted from New Yorker: Rational Irrationality – The real reason that capitalism is so crash-prone, John Cassidy, October 5, 2009

On June 10, 2000, Queen Elizabeth II opened the high-tech Millennium Bridge, which traverses the River Thames from the Tate Modern to St. Paul’s Cathedral.

Thousands of people lined up to walk across the new structure, which consisted of a narrow aluminum footbridge surrounded by steel balustrades projecting out at obtuse angles. Within minutes of the official opening, the footway started to tilt and sway alarmingly, forcing some of the pedestrians to cling to the side rails. Some reported feeling seasick.

The authorities shut the bridge, claiming that too many people were using it. The next day, the bridge reopened with strict limits on the number of pedestrians, but it began to shake again. Two days after it had opened, with the source of the wobble still a mystery, the bridge was closed for an indefinite period.

Some commentators suspected the bridge’s foundations, others an unusual air pattern.

The real problem was that the designers of the bridge, who included the architect Sir Norman Foster and the engineering firm Ove Arup, had not taken into account how the footway would react to all the pedestrians walking on it. When a person walks, lifting and dropping each foot in turn, he or she produces a slight sideways force.

If hundreds of people are walking in a confined space, and some happen to walk in step, they can generate enough lateral momentum to move a footbridge—just a little. Once the footway starts swaying, however subtly, more and more pedestrians adjust their gait to get comfortable, stepping to and fro in synch. As a positive-feedback loop develops between the bridge’s swing and the pedestrians’ stride, the sideways forces can increase dramatically and the bridge can lurch violently.

The investigating engineers termed this process “synchronous lateral excitation,” and came up with a mathematical formula to describe it.

What does all this have to do with financial markets? Quite a lot.

Most of the time, financial markets are pretty calm, trading is orderly, and participants can buy and sell in large quantities.

Whenever a crisis hits, however, the biggest players—banks, investment banks, hedge funds—rush to reduce their exposure, buyers disappear, and liquidity dries up.

Where previously there were diverse views, now there is unanimity: everybody’s moving in lockstep.

“The pedestrians on the bridge are like banks adjusting their stance and the movements of the bridge itself are like price changes,” Shin wrote. And the process is self-reinforcing: once liquidity falls below a certain threshold, “all the elements that formed a virtuous circle to promote stability now will conspire to undermine it.” The financial markets can become highly unstable.

This is essentially what happened in the lead-up to the Great Crunch of 2008.

Why private sector jobs won’t be coming back any time soon … hint: it’s called passive aggressive resistance

July 21, 2009

Team Obama thinks that it has corporate America right where it wants it –- under its thumb.

CEOs and Boards serve at the pleasure of the President, executive compensation is overseen by a Federal czar, product lines are green-dictated by Federal czars and Task Forces, contract law is suspended at will,  bankruptcy laws are changed on the fly — relegating secured creditors behind politically-favored unsecured ones, ineffective government agencies dictate to stumbling companies, unions are given jolts of legislated adrenalin.

The Administration has empowered itself to sort out good guys from bad guys, to pick marketplace winners and  losers, and to destine survivors and failures, Companies (and individuals) that question government policy are ridiculed, harassed, and punished; those that oppose the policies are squashed faster than decades-old GM or Chrysler dealers.

Corporate CEOs are quaking in there boots … or are they ?

Team Obama –- which consistently demonstrates uncanny business naiveté — may be underestimating a staple of organizational behavior: the power of passive aggressive resistance.  Rather than being openly insubordinate when confronted with undesirable tasks — and getting nailed by vindictive superiors —  employees and organizational units will often just procrastinate and work work inefficiently, in effect, pocket vetoing the unpopular orders from above.   In corporate jargon, it’scalled “slow rolling”.

Sure, corporate chieftains will tell President Obama what he wants to hear, and may even stand next to him on a stage in a faux show of support.  Why risk the rath of a Presidential punishment, especially when there are other ways to skin a cat?

Specifically, with respect to continuing job cuts and rising unemployment, here’s a theory of the case.

First, you can’t  let a good crisis go to waste, right?  Businesses always use tough economic times to clean house.   Fat builds in all organizations over time.  In “normal” times, it’s difficult to get rid of dead wood.  Employment laws —  perhaps well-intended originally –- serve to protect slackers by making it cumbersome and difficult to fire anybody.  When the economic tide rolls out, companies have the air cover they need to resize and purge under-performers en masse. The tendency is to cut deep.  If some muscle gets pared too, so be it.  It can be rehabilitated later.

In typical business cycles, employment is a so-called lagging indicator of an economic rebound.  That is, when the economy starts to recover, jobs are usually added back very slowly.  Why?  Because businesses have a renewed zeal for productivity, they recommit to keeping the fat from building up again, and they want to be sure that the signs of better economic times aren’t false positives.

Eventually, open positions are filled and capacity — human and physical —  is added to meet increasing demand.  It may take awhile, but the system eventually gets back in balance.

If the economy is bottoming out now -– as many experts assert —  employment would be expected to start rebounding in 2010.  But, it won’t. Why?

Because the rules of engagement have changed.  It has become far more costly and risky for companies to restore or enlarge their payrolls.

For openers, the minimum wage is scheduled to increase by over 10%, making entry level staffing more costly.  Then, there is the risk that “employer mandate” will force companies to expand health insurance coverage or pay fines – again, making labor most costly.  Then, there is the threat of “card check” legislation turbo-boosting  the mass unionization of U.S. businesses .  And now, there’s the evident risk that government will change rules and regulations on political whims, creating an unprecedented level of uncertainty.

The bottom line: businesses will resist government policies passive aggressively.  Fewer jobs will get added back than history would suggest, and those that get added back will materialize later than past patterns.  Businesses will add jobs as a last resort rather than trying to build capacity ahead of the economic growth curve.  Why should companies  increase their costs and  risks any more than is absolutely necessary ? Companies will continue to off-shore jobs, but will be more clever and clandestine about it, e.g. by vertically disintegrating and simply buying goods and services from 3rd parties.

Given the Administration’s anti-corporate rhetoric, actions, and proposed game-changing rules, I doubt that many CEOs will be taking on added costs and risks to boost the administration. More likely, they will let unemployment continue to creep up, and will slow roll the process of rehiring.  Corporate chieftains will sit back and watch the President squirm and spin his “4 million jobs – saved or created”.  As Rev. Wright would say “the chickens will have come home to roost”.  Passively aggressive  resistance at its very best.

Unfortunately, that means we’ll be seeing double digit unemployment for some time – at least through the 2010 Congressional elections.

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Dependence on foreign oil … oops I meant foreign bondholders.

July 20, 2009

Ken’s Take: The ballooning deficit and national debt raise two mega-worries: (1) An eventual increase in interest rates as it gets increasingly difficult to find buyers for US bonds, and (2) the increasing dependence on foreign buyers of the debt – especially China.  Neither should be taken lightly …

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Excerpted from NY Post,”The Never Ending Pork Parade”, July 4, 2009

Thanks to ongoing trade deficits and relentless borrowing, America’s financial status is deteriorating rapidly.

  • The Commerce Department reported last week that:
  • The value of foreign assets owned by Americans is $19.89 trillion,
  • The value of American assets owned by foreigners is $23.36 trillion.
  • So, we are a “net debtor” to the tune of $3.47 trillion. 
  • Foreigners, most significantly China, own nearly 50 percent of our government’s public debt.

So while the Obama administration frets that we are dangerously dependent on foreign oil (Note: Canada sends us as much oil as the Persian Gulf region, and Mexico not much less), we are increasingly threatened by dependence on foreign bondholders who could wreak havoc on the dollar and our interest rates far more easily than OPEC could cut off our oil.

Full article:

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Penny Mac … heard of it?

July 14, 2009

This was a new one to me…

In the book Catastrophe, Dick Morris includes a chapter on PennyMac — a joint venture set up by former high-level executives at Countrywide Financial. The name stands for Penny Mortgages After Countrywide.

Here’s the scheme:

Penny Mac buys distressed mortgages from failing banks at the lowest possible prices, works out affordable deals with homeowners, and then re-bundles and re-sells the now “performing”.loans.

For example, according to Morris, Penny Mac recently bought $558 million of home mortgages from the FDIC, which acquired the notes after the collapse of the First National Bank of Nevada. PennyMac paid only $42.2 million, averaging only $.30 to $.50 on the dollar. PennyMac keeps $.20 on every dollar that it initially recovers, with an increase to $.40 down the line.

Think about it. Countrywide executives made bad loans, sold them in packages to investors,  and then, they buy them back as distressed loans at a deep discount, restructure the terms — since they have plenty of spread to play with — and then sell the loans again, at a profit.

Makes you scratch your head, doesn’t it?

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Re: the economy … let’s take a Mulligan.

July 6, 2009

Note: “”Mulligan” is a golf term.  When a golfer hits a particularly bad shot, he may petition his buddies (usually fruitlessly)  for a 2nd try, a “do over”.  That’s called a Mulligan

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Ken’s Take:  Washington has thrown trillions of dollars at this recession, including that famous $787 billion in more spending that was supposed to yield $1.50 in growth for every $1 spent.

The ‘stimulus’ promised a jobless peak of 8%; it’s now 9.5%.

The defense: (1) We guessed wrong (Biden), (2) Less than 20% of the stimulus has hit the economy (wasn’t it an “emergency bill”  intended for this year?), (3) It’s Bush’s fault (remember him, from long ago?)

Since so little of the stimulus has been spent, let’s reclaim the dough and either bank it or do it right.

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Extracted from WSJ, “Tilting at Windmill Jobs”, July 3, 2009

As always, a sustained expansion and job creation must come from private investment and risk-taking.

Yet as America’s entrepreneurs look at Washington they see uncertainty and higher costs from:

a $1 trillion health-care bill;

  • higher energy costs from the cap-and-tax bill;
  • new restraints on consumer lending in the financial reform bill;
  • new tariffs and threats of trade protection;
  • limits on compensation and banker baiting;
  • the possibility of easier unionization, among numerous other Congressional brainstorms.

None of this inspires “animal spirits.”

The best thing Mr. Obama could do to create jobs would be to declare he’s dropping all of this and starting over.

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Things are tough all over … Queen of England running out of money (ouch).

July 1, 2009

This one speaks for itself … bailing out the Queen:

From the UK Guardian, “Queen running out of money for palace expenses”, June 29, 2009

The Queen’s reserve of public funds is set to run out by 2012, according to Buckingham Palace accounts published today, raising expectations that the government will be asked to increase the civil list, which pays for the running of the royal household.

The Queen has used up £6m from the cash reserve to boost the civil list. The amount is the largest ever drawn from the reserve of surplus cash from the list.

Palace officials have complained that they lack funds to properly maintain some royal residences. They once claimed that part of the facade of Buckingham Palace was in such bad repair that a chunk fell off, narrowly missing Princess Anne.

The total cost to the taxpayer of keeping the monarchy increased by £1.5m to £41.5m during the 2008-09 financial year – effectively 69p per British person last year and an increase of 3p on the previous year. The civil list was £13.9m last year, 43% of which came from the Queen’s reserve.

If she continues drawing on the reserve at the current rate, she will run out of funds by 2012 – the year of her diamond jubilee.

The fund has gone down from £35m to £21m over the last decade.

The current deal – in which the Queen gets £7.9m a year – was agreed by Sir John Major in 1990. The arrangement expires in 2010.

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Jumping over the limbo bar …

June 11, 2009

Back on Feb. 16, I suggested a stake in the ground for measuring the success of Team Obama’s stimulus spending –- namely,  the 8% to 8.5% unemployment rate that economists were predicting under a “do nothing” scenario. 

Well, now that unemployment has blown past 9%, the “saved or created” math is getting pretty creative to say the least …  and the shaky argument “it would have been even worse” is taking center stage.

Below is a reprise of the original post.

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Obama’s team sets the stimulus bar at limbo level …”,

Obama says the trillion dollar pork-laden, faux stimulative program will “save or create up to 4 million jobs”.

Last week, I pointed out that “up to” provides mucho definitional cover by itself, but that the serious wiggle room comes from “jobs saved” — a comparison against some fabricated “what if” number.

Well, the fabricated “what if” number is already being planted:

Austan Goolsbee, one of Obama’s chief economic advisers, says  he’ll consider the effort successful if the worst scenarios don’t come to pass, “if by the end of 2009 we aren’t looking at GDP numbers that are huge negatives, if unemployment rises to the 8% range rather than the 11% that some are predicting.”

I can’t find any non-Obama paid economist saying 11%.  Most economists are saying that the unemployment rate will peak in the range of 8 to 8.5% if we do nothing.  Apparently, Team Obama is prepared to declare success (i.e. claim millions of jobs saved) is the stimulus plan does about as well as doing nothing. The jobs saved will be calculated against a disaster scenario that they’ll specify, thank you.

In other words, a victory party is guaranteed …

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Reference for Goolsbee quote:

Original post:

What’s private equity without equity? hmmm…

June 4, 2009

When money was cheap and freely available, private equity firms were among  the (unregulated) darlings of wall Street.  My, how times have changed.

KKR – one of the biggies – was (is) planning an IPO. business overview.  So, they provided a public overview last weekend. 

CNBC reports:

KKR had an adjusted pre-tax loss of $1.19 billion in 2008 while its assets under management dropped by 11 percent.

The firm still has $15 billion in capital it has yet to invest in deals, but …  “Given that private equity can’t get financing for deals of more than $2 billion if they’re lucky, it could be a while until KKR works off all that capital. PE firms exists to raise money for new funds, reap the fees from those funds and quickly deploy and return the capital raised. … It’s fair to say that right now the model isn’t working that well.”

And KKR has mucho unrealized losses from the investments it made during the LBO crazed days of 2005-2007.  For example,

“Its deal to acquire First Data in September of 2007 which cost $2.325 billion is now worth almost a billion less at $1.395 billion

The world’s biggest private equity deal, the acquisition of TXU has seen the value of KKR’s equity stake decline by exactly 50 percent from $1.817 billion to $908 million.”

And it all seemed so easy …

Full article:

Re: the economy, keep your eyes on bondholders and bond buyers …

May 29, 2009

Ken’s Take: Team Obama thought it was a good idea to screw Chrysler bondholders (secured creditors) un favor of the UAW (unsecured “junior” creditors), and has assumed that investors (mostly the Chinese) would continue soaking up US Treasury bonds to fund the current spending spree. 

Now, Treasury bond yields are soaring.  A function of the massive amount of debt being put on the books, and the realization that the rules re: the security of bond offerings is subject to government whims.  This is going yo become a big story …

* * * * *

Excerpted from WSJ: “The Bond Vigilantes”, May 28, 2009

Treasury yields leapt again yesterday at the long end, with the 10-year note climbing above 3.7%, its highest close since November. Treasury yields had stayed low, and the dollar had remained strong,

As risk aversion subsides, and investors return to corporate bonds and other assets, investors are now calculating the risks of renewed dollar inflation.

They have cause to be worried, given Washington’s astonishing bet on fiscal and monetary reflation. The Obama Administration’s epic spending spree means the Treasury will have to float trillions of dollars in new debt in the next two or three years alone.

No wonder the Chinese and other dollar asset holders are nervous. They wonder — as do we — whether the unspoken Beltway strategy is to pay off this debt by inflating away its value.

The surge in the 10-year note is especially notable because its rate helps to determine mortgage lending rates, and the Fed is desperate to keep mortgage rates low to reflate the housing market,.

Full article

WH says "no new jobs this year" … how un-stimulating !

May 12, 2009

Extracted from IBD, “What About Jobs?”, May 11, 2009

One of President Obama’s campaign pledges was to “create or save” more than three million jobs in his first two years in office — not all that ambitious considering the economy has created 1.5 million jobs annually since 1980.

K-Note: That claim morphed to “save or create 3.5 million jobs” via the $750 billion stimulus.

As of May 1, just $29 billion in stimulus spending, or about 3.7% of the total, had gone out. In a $14 trillion economy, that’s nothing.

The new White House economic forecast contains more than one stunning revelation. Tops on our list is that no net new jobs are expected this year, even as the economy recovers.

Now, Christina Romer, chairwoman of the White House Council of Economic Advisors, says don’t expect any new jobs this year — and that unemployment could reach 9.5%, up from the current 8.9%, even though she expects the economy to grow 3.5% in the fourth quarter.

Full article:

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