May 24, 2024

Archives for January 2009

Logical Minds Reject “Solution” Of More Debt

Logical minds are questioning the wisdom of US stimulus (deficit) spending.   We have already seen the end results of excessive borrowing and spending by the State of California – see California Defaults.

Global Worries Over U.S. Stimulus Spending

DAVOS, Switzerland — Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.

“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”

While the focus in Washington has been on putting together a stimulus package that will attract broader political support when it comes up for a vote in the Senate, here in Davos the talk has been about the coming avalanche of Treasury debt needed to pay for the plan on top of the bailout measures approved last fall, like the $700 billion Troubled Asset Relief Program, or TARP.

American officials maintain they are aware of the challenge. A top White House adviser, Valerie Jarrett, promised in Davos on Thursday that once the stimulus plan achieved its intended affect, the United States would “restore fiscal responsibility and return to a sustainable economic path.”

“Even before Obama walked through the White House door, there were plans for $1 trillion of new debt,” said Niall Ferguson, a Harvard historian who has studied borrowing and its impact on national power. He now estimates that some $2.2 trillion in new government debt will be issued this year, assuming the stimulus plan is approved.

“You either crowd out other borrowers or you print money,” Mr. Ferguson added. “There is no way you can have $2.2 trillion in borrowing without influencing interest rates or inflation in the long-term.”

“This is a crisis of excessive debt, which reached 355 percent of American gross domestic product,” he said. “It cannot be solved with more debt.”

While Mr. Ferguson is a skeptic of the Keynesian thinking behind President Obama’s plan — rather than borrowing and spending to stimulate the economy, he favors corporate tax cuts — even supporters of the plan like Mr. Zedillo and Stephen Roach of Morgan Stanley have called on the White House to quickly address how it will pay for the spending in the long-term.

The stimulus is widely expected to pass, but once it does, Mr. Roach said the focus would shift to “who foots the bill and what is the exit strategy. We don’t have the answer to either question.”

Mr. Zedillo, who remembers how Mexico was forced to tighten its belt when it received billions from Washington to keep its economy from collapsing in 1994, was even more blunt.

“People are not stupid,” Mr. Zedillo said. “They see the huge deficit, the huge spending, and wonder what comes next.”

US Should Take Its Own Advice

We could not come close to achieving fiscal responsibility when we did not have a financial crisis.  It is absurd to think that “at some future date” we will do so.  There is no easy solution to our financial nightmare.  The attempt to postpone and paper over the debt crisis with additional borrowed or printed money merely guarantees a bigger problem down the road.

Mr. Zedillo, former Mexican President, notes that his country was told by America  to “tighten its belt when facing financial collapse”.   Is the United States exempt from the same logic?  Why are we not taking the same advice we force upon others?

California Defaults

California to Delay $4 Billion in Payments – WSJ

California’s chief accountant on Monday will begin delaying nearly $4 billion of scheduled state payments, postponing income-tax refunds, grants to college students and welfare checks in an effort to prevent the state from running out of cash.

The delays will hurt an already wilting state economy, economists said, calling them the opposite of stimulus checks because people won’t get money they expect to receive. Controller John Chiang has said the delays will last 30 days.

Now, as lawmakers continue to haggle over how to erase a budget deficit projected to reach $42 billion by mid-2010, the state’s chief accountant has said he must delay payments to meet constitutionally mandated debt obligations.

Included in the delayed payments are personal income-tax refunds totaling nearly $2 billion, as well as bank and corporate tax refunds, among other things.

While many counties have enough cash to get through February, Trinity County in Northern California has only two to three weeks of reserves, said Dero Forslund, Trinity’s administrative officer. Once the money runs out, the county will issue IOUs to its 320 workers, he said, and then see if service reductions will be necessary as well. Trinity was expecting $2 million from the state in February, he said.

For years, California has relied on borrowing, by selling municipal bonds, to help get through difficult budgetary situations. But with a bond market that has nearly dried up — and with a poor credit rating — the state is hard-pressed to borrow.  California is already tied with Louisiana for the lowest credit rating among states.

To help close the budget gap, California Gov. Arnold Schwarzenegger last month ordered some state employees to take two days off a month without pay, starting Feb 6. The order applies to tens of thousands of state workers — out of a total of 238,000

The Cruel Irony of Excessive Debt

Call it what you will.   California avoids the legal definition of default but to the many creditors stiffed by the State, it makes little difference.  Those relying on income tax rebates and welfare checks to pay their bills will not be able to.   This broadens the economic pain to other creditors, retailers, etc. continuing the vicious downward cycle.  California must cut its spending but every spending cut equates to an income cut for someone else.

End result of excessive debt –  The State is left with zero options – it cannot borrow, it is defaulting on payment obligations and tax collections are plunging as the California economy implodes.  Every action the State needs to take to survive further harms their economy.  Further defaults or “debt holidays” by the State of California are inevitable.

California Faces Fiscal Armageddon- JrDeputy Accountant

“Fiscal Armageddon” has already sunk its teeth into the country – why should California be any different? With large numbers of immigrants, low-income residents, and disproportionate amounts of wealth and conservatism planted in Southern California, we’re pretty hopelessly screwed at this point. The battle of liberal vs. conservative will be waged across our great state with the whackos up here in San Francisco yelling for more social services and the LA neocons screaming for tax cuts; the truth is we all need a break and arguing about it isn’t going to help anything.

In such tumultuous times, an anticipated tax refund check can mean the difference between a roof over your head and eviction or food in your stomach and starvation. Many Californians who may have once blown stimulus checks and tax refunds on frivolous expenses are now counting on that mini-windfall to get them through what has already worked out to be a rough beginning of the year.

What exactly are we supposed to do with an IOU? California will not solve this budget crisis. Instead of IOU, an FU might be more appropriate because no one is going to be able to collect on these without putting the state in even deeper trouble.

The upside? These IOUs earn interest. Sadly, it’s a false upside – imagine millions of Californians owed 5% on promissory notes trying to squeeze blood out of a turnip. It just isn’t happening.

And no, California will not allow you to remit an IOU with your tax returns. This is a one-way dicking, my friend, and you are on the receiving end.

California’s “Super Stimulus” Program Fails

California has been living on vast amounts of borrowed money for decades.  The State has effectively been running “super stimulus” programs on a vast scale for years.  The false prosperity created by stimulus spending  is now over.  The economic pain that follows will destroy the financial security of many State residents.   Was the excessive spending with borrowed money worth the results?  The California example of failure should be considered in Washington as lawmakers attempt to “super stimulate” the entire country by burying us in more debt.

Notable Links

An $800 Billion Mistake

As a conservative economist, I might be expected to oppose a stimulus plan. In fact, on this page in October, I declared my support for a stimulus. But the fiscal package now before Congress needs to be thoroughly revised. In its current form, it does too little to raise national spending and employment. It would be better for the Senate to delay legislation for a month, or even two, if that’s what it takes to produce a much better bill. We cannot afford an $800 billion mistake.

Start with the tax side. The plan is to give a tax cut of $500 a year for two years to each employed person. That’s not a good way to increase consumer spending. Experience shows that the money from such temporary, lump-sum tax cuts is largely saved or used to pay down debt. Only about 15 percent of last year’s tax rebates led to additional spending.

The proposed business tax cuts are also likely to do little to increase business investment and employment.

The problem with the current stimulus plan is not that it is too big but that it delivers too little extra employment and income for such a large fiscal deficit. It is worth taking the time to get it right.

The same politicians who are telling us that the stimulus package must be enacted ASAP are the same ones who did not see the financial crisis coming and then tried to deny it.  We are being told that we face disaster if we do not act quickly.

The world will not end if this spending bill is not passed this week.  We heard the same “we must act now” warnings last year with the $750 billion TARP disaster.  The politics of fear is wearing thin.   The so called stimulus act should be debated and time given to the American public to decide if this massive expenditure of money will accomplish anything other than running up more debt.

My advice to Congress and the President

How about this?  Come clean with the American public about the problems we face as a nation.  Admit that we have indebted ourselves to such an extent that our economic future is now at risk.  Stop trying to sell the idea that spending and borrower will fix the problem.   The problem caused by too much debt cannot be cured by more borrowing.  How about admitting that we are overextended financially and need to face sacrifices instead of passing the problem on to our children?  If the politicians can’t put these thoughts into words, they can simply hold up a picture of the chart below.


The Real Long-Run Value of Gold

To match its inflation-adjusted peak of $850 an ounce – as recorded by the London PM Gold Fix of 21st Jan. 1980 – the price of gold should now stand nearer $2,615.

“Ask the investor who rushed out to Buy Gold precisely 29 years ago, at $845 an ounce, about gold as an inflation hedge,” as Jon Nadler – senior analyst at Kitco Inc. of Montreal, the Canadian dealers and smelters – said on the 29th anniversary of gold’s infamous peak last week.

“They could sell it for about $845 today…[but] they would need to sell it for something near $2,200 just to break even, when adjusted for inflation.”

Because for gold to reach $2,200 an ounce in today’s money (if not $2,615…) would mean something truly remarkable in terms of its real long-run value.

  • Inflation-adjusted, that peak gold price of 21 Jan. 1980 saw the metal worth more than 5 times its purchasing power of 1913;
  • In March 2008, just as Bear Stearns collapsed and gold touched a new all-time peak of $1,032 in the spot market, the metal stood at its best level – in terms of US consumer purchasing power – since December 1982;
  • Touching $2,200 an ounce (without sharply higher inflation undermining that peak), gold would be worth almost 6 times as much as it was before the Federal Reserve was established in real terms of domestic US purchasing power.

Is gold a smart investment in terms of preserving purchasing power?  Depends on when you purchased it as the article explains.  Virtually every asset class except gold has seen a major drop in value over the past two years – something to think about.


Every day seems worse than the previous day. Five hundred thousand people are getting laid off every month. Our banking system is on life support. Retailers are going bankrupt in record numbers. The stock market keeps descending. Home prices continue to plummet. Home foreclosures keep mounting. Consumer confidence is at record lows. You would like to close your eyes and make it go away. Not only is the news not going away, it is going to get worse and last longer than most people can comprehend.

These “experts” fail to see the big picture and have no sense of history. It took 28 years to get to this point and it will take at least a decade to repair the damage. If the politicians running this country try to take the easy way out (very likely), add another decade to the recovery timeframe. Some indisputable facts will put our current predicament in perspective:

Another great article by James Quinn who assesses America’s economic future.  A very sobering and detailed analysis well worth reading.

The Unemployment Rate – Is It 7.5% Or 18%?

Job losses continue to accelerate as thousands of workers lost their jobs today.

The latest numbers include:

CORNING INC     3,500
BOEING               5,500
STARBUCKS         6,700
AOL                       700
FORD CREDIT      1,200

Job losses for the day totaled 17,600.    Compared to 65,000 job cuts yesterday and considering that 143 million people are still employed in the US labor force, today’s job loss may seem minor.   None the less, at a rate of almost 18,000 layoffs per business day, the annualized total of job losses in 2009 would amount to 4.5 million jobs.   Total job losses last year came in at 2.1 million.

Companies that announce layoffs of up to 20% of the work force are not just fine tuning.   The size of the job cuts being announced imply that businesses see an unprecedented and major reduction in future sales and profits.

Despite the obvious increase in job losses, official government estimates may be drastically understating the true unemployment rate.  Consider the following:

The Birth/Death Model Defies Economic Reality

The birth/death adjustment made by the Bureau of Labor Statistics added over 900,000 new jobs last year when computing the unemployment rate.  The model attempts to estimate new job formation caused by the birth and death of businesses.  The model admittedly produces inaccurate numbers at economic turning points but we are far beyond that point.  Last year’s addition of jobs based on the model were ridiculous and had zero correlation with economic reality.  Accordingly, the official government statistics understated the unemployment rate last year due to the birth/death model distortions.

True Unemployment Rate May Be Twice The Government Numbers

The official unemployment rate may also be dramatically inaccurate based on the Bureau of Labor Statistics method of calculation.  Consider the chart below from

If the government was still calculating the unemployment rate using the same criteria and methods that had last been used during the Clinton administration, the “official” unemployment rate today would be closer to 18%.

Courtesy of

The SGS Alternate Unemployment Rate reflects current unemployment reporting methodology adjusted for SGS-estimated “discouraged workers” defined away during the Clinton Administration added to the existing BLS estimates of level U-6 unemployment.

The economy is always about jobs.  Regardless of the method of computation, the unemployment rate is growing dramatically.   As the affects of layoffs and deleveraging continue to ripple throughout the economy, expect to see an official unemployment rate of over 10% in 2009.

Job Losses – Symptom Of The Economy’s Downward Spiral

Major Job layoffs become a non stop story

Here’s a list of Monday’s horror show.

Sprint Nextel Cuts 8,000 jobs

Texas Instruments 3,400 jobs

Caterpillar 20,000 jobs

Corus 3,500 jobs

Philips Electronic 6,000 jobs

Home Depot 7,000 jobs

ING 7,000 jobs

Pfizer 8,300 jobs

GM 2,000 jobs

A total of 65,200 job losses in one day that will in turn result in further job losses as the jobless drastically cut back spending on all but essential items.

Points to consider about the ever increasing job losses:

1.  Only the large layoffs by national firms make the headlines.  Small businesses that employ over half of all private sector employees probably laid off a comparable number of people as demand and spending evaporate throughout the economy.

2.  Given the high unemployment rate, very few of the recently laid off will be finding new jobs.

3.  The stimulus plan is unlikely to re-employ the armies of workers now unemployed.  The government simply cannot manufacture enough make work jobs to replace those lost in the free enterprise productive sector of the economy.  The cost of every non productive job “created” will put a further burden on the private sector that creates the majority of jobs.

4.  The downward spiral of home prices and increased foreclosures will continue as many of the unemployed will be unable to make their mortgage payments.

5.  Car loans, credit cards, student loans and personal loan default rates will continue to rise based on the inability to pay.

6.  Asset values backing the defaulting debt will decline, causing further defaults.

7.  Destruction of confidence will cause major spending reductions even by those still employed and contribute to further job losses.

8.  Huge job losses and credit defaults will cause further massive losses for lenders of every type.  Lenders with exploding delinquency rates will drastically cut back their lending.   The current situation is unprecedented and the lending models based on income, credit, job stability etc. no longer work; every potential borrower will be viewed as a future default.

9.  The demands on the Treasury will be of such extremes, that economic triage will be necessary.  Rescuing the system will take precedence over millions of individual cases of economic ruin.

10.  Ultimately, it is always about jobs.

Despite all the optimism about the “stimulus” program, it will not work.  The amount of spending proposed is insignificant compared to the amount of asset and job destruction taking place.  The government will vastly increase its spending throughout 2009, but ultimately it will be time and price that bring the over leveraged system back into equilibrium.  A majority of Americans will see much of their wealth destroyed before we reach the end of this national tragedy.

New Federal Standards For Mortgage Industry Largely Irrelevant

Obama Plans Fast Action to Tighten Financial Rules

WASHINGTON — The Obama administration plans to move quickly to tighten the nation’s financial regulatory system.

Officials say they will make wide-ranging changes, including stricter federal rules for hedge funds, credit rating agencies and mortgage brokers, and greater oversight of the complex financial instruments that contributed to the economic crisis.

Broad new outlines of the administration’s agenda have begun to emerge in recent interviews with officials, in confirmation proceedings of senior appointees and in a recent report by an international committee led by Paul A. Volcker, a senior member of President Obama’s economic team.

Timothy F. Geithner, the nominee for Treasury secretary, made similar comments in written and oral testimony before the Senate Finance Committee.

Aides said they would propose new federal standards for mortgage brokers who issued many unsuitable loans and are largely regulated by state officials. They are considering proposals to have the S.E.C. become more involved in supervising the underwriting standards of securities that are backed by mortgages.

More Effective Regulation Was Necessary Years Ago

Anyone familiar with the type of mortgage lending that occurred during the housing boom and lending mania should applaud the actions of the Obama administration.   Mortgage loans werer granted to all takers, no questions asked.  Every party involved in the lending lunacy bears responsibility –  this includes the Fed, Congress, Wall Street, major banks, sub prime lenders, and the multitude of mortgage brokers who fed the food chain above them.

The unanswered question is why weren’t these regulations passed and enforced 5 years ago?  Apparently, Alan Greenspan’s encouragement to borrow by keeping credit easy and rates low lulled all of us into complacency.

Too Little, Too Late

Enacting legislation now to control the excesses of the mortgage industry is largely for public relations consumption.

Stricter regulations won’t help much now –  the disaster has already occurred.  The sub prime lenders are out of business, most of the major banks are insolvent, the Wall Street firms are largely bankrupt, borrowers no longer qualify, buyers are too afraid to buy a home and most of the mortgage brokers are out of business.  Who is left to be regulated??

The mortgage industry has effectively been nationalized.  The only lenders that remain are government owned or sponsored – Fannie Mae, Freddie Mac and the FHA.  It’s great to have these new financial regulations but it is largely irrelevant at this point.

Connecticut Discovers How To Eliminate Unemployment

The State of Connecticut has discovered a method of preventing job layoffs.

Blumenthal Wants Connecticut Regulators To Block AT&T Job Cuts – The Hartford Courant

AT&T said last month that it would pare its Connecticut workforce, which totals about 6,800, by 400 jobs and transfer another 60 jobs to Michigan. A day after the news broke, Attorney General Richard Blumenthal, flanked by union leaders, implored state regulators to block the cuts with the force of law while the state investigates the impact on customer service.

“This is not about AT&T. This is not about Blumenthal. This is about the kind of message Connecticut is sending to business — a state that has no positive job growth and [has] people who are falling over themselves to prove that they’re pro-consumer by showing they’re anti-business,” AT&T spokesman Dave Mancuso said.

State regulators have so far denied Blumenthal’s requests, without listing specific reasons.

Blumenthal’s call for a stay on layoffs has only intensified AT&T’s growing frustration with operating in Connecticut. During an economic conference in September, AT&T’s eastern regional manager urged government officials to scale back regulation and let the company do its job.  “We don’t need policy-makers stepping in and telling us how to do it or where to do it,” Chad Townes said at the conference.

Though parts of AT&T are regulated, the company is increasingly operating in a competitive marketplace that demands lower costs and lower prices.

“In order for them to be competitive with other carriers, this is what they have to do,” Kagan, the telecom analyst, said. “If they have to start worrying about how many jobs they have to leave in how many states … the company would be doomed.”

Layoff Bans Are Counter Productive

Under the guise of preserving customer service the Attorney Generals attempt to block job cuts will only further destroy Connecticut’s ability to draw new businesses to the State.  The Attorney General should know better and his actions seem more directed to pandering for votes rather than improving the business climate in Connecticut.

If prohibiting job layoffs is a great idea, why not extend the theory of a centrally planned economy even further?  Prohibit all layoffs by every business operating in Connecticut.  Extend this logic further and pass a law forcing AT&T and every other business in the State to hire new employees until the unemployment rate reaches zero?   Excuse me for saying so Mr. Blumenthal, but this tactic has failed in every socialist state on the planet.

Attempting to prohibit layoffs is total lunacy and it will not work.  My advice to the Attorney General – Instead of creating a hostile business environment,  Connecticut should be focusing on sensible issues that will foster economic and job growth.

If the Attorney General really wants to help Connecticut’s economy, here’s something sensible that he can work on.

Tax Foundation – Connecticut 3rd Highest Tax Burden in Nation

Tax Freedom Day is the day when Americans finally have earned enough money to pay off their total tax bill for the year. In 2008, Connecticut taxpayers had to work until May 8 (the latest in the nation) to pay their total tax bill, 15 days later than the national Tax Freedom Day (April 23).

Connecticut‘s State/Local Tax Burden Third-Highest in Nation
Connecticut, currently ranked 3rd highest, has risen 21 places over the last three decades and now holds a place among the nation’s highest-tax states.

Connecticut’s 2008 Business Tax Climate Ranks 38th
Connecticut ranks 38th in the Tax Foundation’s State Business Tax Climate Index. The Index compares the states in five areas of taxation that impact business: corporate taxes; individual income taxes; sales taxes; unemployment insurance taxes; and taxes on property.

Connecticut Levies Sales Tax above National Median; Gasoline and Cigarette Taxes among Nation’s Highest

Connecticut Residents Are Voting With Their Feet

The Connecticut State Data Center says figures from last year show the population growth in the state is very small.

The University of Connecticut-based center says Connecticut’s population grew by less than two-tenths of 1 percent last year.

There is a connection between high taxes, job losses and zero population growth.  Connecticut has become a very high cost state for both residents and employers.  If Connecticut really wants to increase jobs in the state,  attention should be focused on lowering taxes.  Foolish, politically motivated schemes such as prohibiting layoffs will only lead to further job losses.

Early Results On “Stimulus Package” – Greed, Corruption & Stupidity

The US Senate and House of Representatives is busily putting together a stimulus package that should cost $825 billion.  The massive spending package, all conducted with borrowed money, will be spread over a wide variety of programs designed to “stimulate the nation back to prosperity”.   All of the debate on the stimulus package seems to center on how the money should be spent.  No one is debating whether we can afford this massive spending.  There has been no intelligent discussion or analysis of whether the stimulus will work, despite the historical evidence that it won’t (See Stimulus Plan Condemns Us To Further Wealth Destruction.

Most Americans seem optimistic that the stimulus plan will work and that the money will be wisely spent.

Let’s look at some early returns for an idea of how $850 billion will be spent.

Politicians Asked Feds to Prop Up Ailing Bank

Two Illinois congressmen urged the Treasury in October to avoid taking any regulatory action against a struggling bank in their state, illustrating the aggressive efforts some politicians are taking to help hometown lenders during the bank crisis.

“This is a disturbing parallel to precisely some of those things that made the savings-and-loan debacle into a political scandal as well as a financial scandal,” said William Black, an associate professor at the University of Missouri-Kansas City, who was a bank regulator in the S&L crisis.

Regulators didn’t think National Bank of Commerce qualified for a cash injection because its financial condition was so perilous. On Oct. 22, Ronald G. Schneck, an official of the bank’s federal regulator, the Office of the Comptroller of the Currency, told the bank it should “act as if capital replenishment funds will not be received,” according to the letter by Reps. Davis and Gutierrez.

Instead, on Nov. 6, OCC officials told the bank it wouldn’t be getting any TARP money. They said the Treasury had decided “to not grant assistance to restore to the Bank to an adequately capitalized status,” according to a document reviewed by The Wall Street Journal.

An OCC spokesman said: “While we don’t comment on TARP applications, it should be noted that the amount needed to recapitalize the bank was far in excess of what was allowable under TARP’s capital purchase program.”

The US Treasury did the right thing when they refused to invest more money in this failing bank.  What thought process lead these 2 congressmen to believe that they would be spending money wisely by investing taxpayer money in a Zombie bank?

Political Interference Seen in Bank Bailout Decisions

Troubled OneUnited Bank in Boston didn’t look much like a candidate for aid from the Treasury Department’s bank bailout fund last fall.

The Treasury had said it would give money only to healthy banks, to jump-start lending. But OneUnited had seen most of its capital evaporate. Moreover, it was under attack from its regulators for allegations of poor lending practices and executive-pay abuses, including owning a Porsche for its executives’ use.

Nonetheless, in December OneUnited got a $12 million injection from the Treasury’s Troubled Asset Relief Program, or TARP. One apparent factor: the intercession of Rep. Barney Frank, the powerful head of the House Financial Services Committee.

Treasury Secretary nominee Timothy Geithner, testifying Wednesday at his Senate confirmation hearing, acknowledged “there are serious concerns about transparency and accountability…confusion about the goals of the program, and a deep skepticism about whether we are using the taxpayers’ money wisely.”

“It’s totally arbitrary,” says South Carolina Gov. Mark Sanford. “If you’ve got the right lobbyist and the right representative connected to Washington or the right ties to Washington, you get the golden tap on the shoulder,” says Gov. Sanford, a Republican.

Several Ohio banks received funds after Ohio’s congressional delegation complained bitterly about the treatment of Cleveland-based National City Corp., which regulators forced into a merger rather than provide with cash. And in Alabama, the state’s top banking official says a windfall there — five banks are slated to receive funds — is testament to the influence of two powerful Alabama lawmakers who sit on key congressional committees.

Rep. Frank, besides heading the Financial Services Committee, has longstanding ties to OneUnited, and recalls having had a deposit account at a predecessor bank in the 1960s.

Later that month, Rep. Frank was intimately involved in crafting the legislation that created the $700 billion financial-system rescue plan. Mr. Frank says that in order to protect OneUnited bank, he inserted into the bill a provision to give special consideration to banks that had less than $1 billion of assets, had been well-capitalized as of June 30, served low- and moderate-income areas, and had taken a capital hit in the federal seizure of Fannie Mae and Freddie Mac.

On Oct. 27, the FDIC and Massachusetts bank regulatory officials, alleging poor lending practices and executive-compensation abuses by OneUnited, slapped it with a strong enforcement action, a cease-and-desist order. Among other things, the officials told the bank to get rid of a 2008 Porsche for executives.

Mr. Frank said he didn’t try to interfere with the regulatory process. “We have never told the regulators that they should ease up on them or not order them to do this or that,” he said.

He cites the bank’s status as the state’s only financial institution owned by African-Americans.

The free market should have been allowed to work in this case and this poorly run bank with its overpaid executives should have been closed.  Instead, based on Mr Frank’s parochial interests and ties to this corrupt institution, OneUnited receives $12 million from the taxpayer.  It would be interesting to know how much in political contributions Mr Franks received from OneUnited.

Even at a time of an unprecedented national crisis, our politicians cannot take the high road and look at the situation from a standpoint of the National interest.  The US itself will be just as bankrupt as OneUnited if we attempt to bailout every failed business entity in the country.  If the nation survives this crisis, it will be in spite of the actions taken in Washington.

In an incredibly ironic statement on the stimulus plan, Democratic Senator Inouye of Hawaii stated that “We must respond to this crisis with all the weapons at our disposal.  If we fail to act, the situation will almost certainly worsen, and the American people will continue to pay a heavy price.”  With clueless fools like Senator Inouye voting to spend trillions of taxpayer dollars to help us, we will be lucky to survive as a nation.  The Senator clearly does not see that the government and the Fed caused the financial meltdown.  He clearly does not see that the government is only going to make the situation far worse by trying to reflate the asset bubble.  Most of all he clearly does not see that he is putting the nation on the road to financial destruction by burying us in more debt.

My take on the stimulus plan is that the money will be largely wasted by keeping alive Zombie business entities that are poorly run by overpaid executives.  Money to the losers will only serve to hurt the successful.  The successful should not have to subsidize those who fail; this type of wealth shifting will  make us all equally poor.  Much of the stimulus money spent will be based on political connections, self interest and self dealing.   The economic situation will worsen as borrowed money is spent foolishly.  The only sure result of the stimulus package will be to put the sovereign credit of the United States at further risk.

Fed Struggles To Lower Mortgage Rates

Fed Determined To Lower Mortgage Rates With Unconventional Methods

Mortgage rates started dropping late last year after the Federal Reserve announced that it would be purchasing mortgage backed securities (MBS) in an effort to lower mortgage rates.  As recently as January 13th, Fed Chairman Bernanke again attempted to talk down mortgage rates in his speech at the London School of Economics by discussing the potential purchase by the Fed of longer dated treasury securities.  Bernanke noted that “In determining whether to proceed with such purchases, the committee will focus on their potential to improve conditions in private credit markets, such as mortgage markets.”

Shortly after Bernanke’s London speech, Charles Evans, Chicago Fed Chief, reiterated the Fed’s determination to lower rates by stating that “With the United States in the midst of a serious recession, it could be useful to purchase significant quantities of longer term securities such as agency debt, agency mortgage backed securities and treasury securities.  We stand ready to grow our balance sheet even more should conditions warrant.  At the current time, the biggest concern is deflation and the Fed can worry about inflation later.”

Given the Fed’s determination to lower mortgage rates, why have mortgage rates jumped 75 basis points over the past week?

Most of the Fed’s current and potential purchases of MSB and long dated treasuries may already be substantially discounted by the market.  The larger question is does the Fed have the resources to force mortgage rates lower given the competing demands for funding by virtually every major sector of the economy? Although mortgage rates have declined , they have not dropped to the extent necessary to give homeowners truly significant savings, especially after the recent run up in rates.

The Fed views lower mortgage rates as crucial in stabilizing a collapsing housing market.  However, if the Fed could have brought mortgage rates down to 2%, they would have, which implies constraints on their ability to manage rates.  These constraints are becoming visible on the Fed’s ballooning balance sheet.  The world is discovering that there are limits on the ability of Governments to bail out every sector of the economy.  (See  Insolvent Banking System Eludes Government Containment.)

Lower mortgage rates may become a sideshow to the larger issue of the solvency of nations, with Britain being the latest example . (Gordon Brown Brings Britain To The Edge Of Bankruptcy) The demands on the British treasury to rescue the entire banking system and economy are so large that the British pound has crashed and the very solvency of Britain is now being questioned.  This unfolding financial disaster in Britain puts a serious dent in the theory that Governments have unlimited financial resources.  The implications for the US Treasury, by extension, are ominous.