December 22, 2024

Opposition To Stimulus Plan Grows

February 5, 2009 by Leave a Comment

As Americans learned more about the stimulus package that proposes to put us $1 trillion deeper into debt, logical minds are beginning to question the wisdom of the plan.  Public approval for the stimulus plan is at 38% and dropping.

Reasons for opposition to the plan

-Workers receive only a small tax cut

-The decline in home values, the insolvent banking industry and foreclosures are not addressed

– The majority of the money is to be spent on special interest group programs

-Little of the spending has a direct connection to job creation

Home values, the banks and foreclosures are to be addressed separately by Congress at a later date.  My question is, how many trillion dollar plans can the country afford?  Excessive debt and leverage is in large part responsible for the financial crisis.  The cure cannot be the same as the disease.

As a nation, we need to do something – here’s what people are saying.

Thoughts From Around the Web

Obama Losing Stimulus Message War

At this crucial juncture in the push to pass an economic recovery package, President Barack Obama finds himself in the most unlikely of places: He is losing the message war.

Despite Obama’s sky-high personal approval ratings, polls show support has declined for his stimulus bill since Republicans and their conservative talk-radio allies began railing against what they labeled as pork barrel spending within it.

The New York Times

The most serious charge against the stimulus package is that it does not pack enough punch. Two different camps have been making this argument over the last few weeks. Publicly, the Obama administration hasn’t really answered either one.

And Obama aides say they are open to adding some tax cuts that specifically encourage spending. They looked into the possibility of sending debit cards to all 150 million American households, but decided it was not yet logistically feasible. Instead, the final package may include some smaller programs, like a home-buying subsidy the Senate began discussing on Tuesday.

But targeted tax cuts — in effect, a bribe for households to spend more money — bring their own problems, officials say. One of the economy’s big weak spots right now is consumer indebtedness. Additional spending will help the economy this year, but it could also lead to more credit card and mortgage defaults — which would undermine the Treasury Department’s efforts to revive the financial system.

Third, as Mr. Summers said, “Fiscal measures are only one prong — one component — of our overall approach.” The response also “includes financial rescue, support for housing and global economic cooperation,” he said.

Obama’s First Fumble

The Wall Street Journal edit page reckoned it out at about 12 percent stimulus.  What about the other 88 percent?  It was mostly the usual liberal special-interest spending, 40 years of pent-up pet projects.  Things looked so bad that the Journal’s other edit page, the liberal news side, decided to put out a calming analysis piece.  Obama aides “say this is a baseball game in its early innings, or a football game at halftime,” Gerald F. Seib assured us.

You’d think the Democrats would do a better job of camouflaging their real agenda, given the effort they have put, starting with the 2006 mid-term elections, into wooing the middle class.  According to pollster Alex Lundry, “middle class” is the number one positive thing that people associate with Democrats.  But the stimulus bill proves that it’s not about the middle class.  It’s about the Democratic patronage state.  Always was, always will be.

The Burden Of Proof

There are a lot of people in my comments saying, apparently in all earnesty, “I really think the burden of proof is on the wackos who don’t want the stimulus.”

I am frankly flabbergasted.  The proponents of the stimulus are proposing to spend nearly a trillion dollars.  That’s about $3,000 for every man, woman, and child in the United States.  Do you have $3,000 lying around that could just be spent on any old thing without you really caring?  You may call me crazy, but in the McArdle household, we view $3,000 as quite a tidy sum, the kind of money we want to make sure is wisely spent.

At least with the tax cuts, there’s little risk that the money will, from the taxpayer’s standpoint, be wasted.  It may not create much in the way of stimulus, but it’s essentially a neutral act–give them money now, take it later.  Cash transfers, too, offer relatively few of those frictions; there’s some deadweight loss, but whatever those on unemployment or welfare buy, they presumably valued more highly than alternative uses for the money.  Government spending, on the other hand, comes with no guarantee that whatever it buys will be worth as much to the polity as the alternative uses for the money.  Hell, badly done government projects can actively destroy value–go up to Buffalo and look at the empty, useless subway that killed Main Street, for example.

Given that, it seems to me that the burden of proof ought naturally to be on the stimulus proponents to satisfy the public that their highly theoretical models are basically sound, especially for the parts of the bill that aren’t tax cuts or transfer payments.  Let’s recall that the evidence for this kind of stimulus working in this kind of situation basically rests on a single instance (World War II)–the other two times it was tried (Japan in the 1990s and America in the 1930s) the economy basically rolled along in the doldrums for the rest of the decade.

Stimulus Package Should Address The Housing Problem

As the economic stimulus package moves to the Senate, the drumbeat is growing louder for new provisions that directly address the housing crisis.

Key senators from both parties said they will push for measures intended to spur sales and help homeowners at risk of foreclosure.

Advocacy in the Senate for more housing measures in the stimulus bill comes while President Obama is expected to release a comprehensive plan to fix the financial system within the next two weeks.

Obama has been promising for the past month that he would soon propose a foreclosure prevention program, and many believe that could be part of a plan he announces in the coming week. Indeed, he said Saturday that his plan will include a proposal to lower mortgage costs.

Each Taxpayer Could Get $9718 From The Stimulus Money

Question: “If we just gave all the bailout money to taxpayers, how much would we each get? I’ve seen $25,000, $300,000, $1 million – what’s the real answer?” — Miranda Marquit, Logan, Utah

Answer: $9,718.49

To arrive at that figure, CNNMoney.com took the total of the bank bailout, $700 billion, and added that to the proposed stimulus spending in the House of Representatives bill, $819 billion. That totals $1.519 trillion.

We then divide that number by 156.3 million, which was the total number of U.S. filers in 2008.

So: $1.519 trillion divided by 156.3 million equals $9,718.49 per U.S. taxpayer.

Economist’s View

There were really only two glimmers of hope that the US could avoid a Japan-like multi-year stagnation. One was the offsetting effect of a strong global economy. Of course, we all know how that story ended. Poorly. The other was my certainty that US policymakers like NEC head Lawrence Summers and Treasury Secretary Timothy Geithner had studied the Japanese crisis up and down and realized that you needed to meet a banking crisis head-on, not with halfway measures that left the system crippled.

But today, reading CNBC’s coverage of the plan, it becomes painfully clear that we are headed full speed on a policy bullet train designed to repeat Japan’s errors.

The financial crisis has been so mismanaged that the public will not support package with a high price tag, a price tag that could climb into the trillions. And there is no way to even bring the issue to the public unless taxpayers effectively buy troubled banks, which can only be justified after first wiping out shareholders and bondholders. Then the

The “New Math” of Stimulus

First you have our darling President Obama, who believes that his Porkulus will somehow create or save 3 million jobs. Did he pull that number out of his supreme ass? Nah. He’s using the most Bizarro math of all, the multiplier effect touted by our homie and economic slumlord John Maynard Keynes:

The multiplier theory, made famous by John Maynard Keynes in his 1936 book General Theory of Employment, Interest and Money, basically says that each dollar of government spending “injected” into the economy will create a larger increase in national output.

Indeed, it seems like multiplier madness is sweeping the nation, with Keynesian economic theory dominating political and mainstream economic thought once again.

With so many experts placing so much at stake on the basis of this theory, the multiplier must be a sound foundation for public policy, right?

Not exactly.

As economic journalist Henry Hazlitt stated in his 1959 book, The Failure of the ‘New Economics’, “There are, in fact, so many things wrong with the multiplier concept that it is hard to know where to begin in dealing with them.”

Enough With The Stimulus

You better love me forever for reading through 161 pages of absolute bullshit just so you can read what is actually ON this stimulus bill without having to read through 161 pages of absolute bullshit.

The anatomy of OMGObama’s stimulus (that word never gets old): Pages 1 – 50:

Pro & Con

President Obama: “A failure to act and to act now will turn crisis into catastrophe and guarantee a longer recession.”

Senator Graham (R) South Carolina: “Scaring people is not leadership”.

Filed Under: Bailout, Economy, Stimulus Plan Tagged With: ,

“Financial Catastrophe” – Part II

February 5, 2009 by 2 Comments

President Predicting Catastrophe

President Obama declared today that “A failure to act and to act now will turn crisis into catastrophe and guarantee a longer recession.”

Alan Blinder, a former vice chairman of the Federal Reserve, echoed the President by proclaiming “It would be an act of extreme stupidity not to enact a big stimulus”.  Mr Blinder did not expound on the logic of his remark.  Presumably, if you were too stupid not to vote for spending one trillion dollars, then you would be too stupid to understand his rationale.

A short 6 months ago President Bush, Chairman Bernanke and Treasury’s Paulson were predicting a financial meltdown if the $700 billion TARP bill did not pass.   The $700 billion was approved and the money passed out to banks and other assorted supplicants.  How wisely was the $700 billion spent?   All we do know is that the bankers managed to pay themselves huge bonuses, the money is gone and we now face financial Armageddon (again) if we do no spend another massive amount of borrowed money.   All we really know about the new, almost $1 trillion dollar “stimulus package”, is that it must be passed immediately, no questions asked.   Maybe more questions should have been asked the first time, when $700 billion was supposed to have solved the financial crisis.

Bernanke Proclaims Financial Crisis Resolved: October 2008

In October 2008, after passage of the $700 billion TARP bill, Chairman Bernanke spoke at the Economic Club of New York.

“The problems now evident in the markets and in the economy are large and complex, but, in my judgment, our government now has the tools it needs to confront and solve them.

Generally, during past crises, broad-based government engagement came late, usually at a point at which most financial institutions were insolvent or nearly so. Waiting too long to respond has usually led to much greater direct costs of the intervention itself and, more importantly, magnified the painful effects of financial turmoil on households and businesses. That is not the situation we face today. Fortunately, the Congress and the Administration have acted at a time when the great majority of financial institutions, though stressed by highly volatile and difficult market conditions, remain strong and capable of fulfilling their critical function of providing new credit for our economy. This prompt and decisive action by our political leaders will allow us to restore more normal market functioning much more quickly and at lower ultimate cost than would otherwise have been the case.

Reading the Chairman’s comments today, we know that his assessment of the situation was wrong. TARP 2008 did not resolve anything nor will the stimulus package of 2009.

Did the original $700 billion “save” our country from a “catastrophe”?.  In hindsight, much of the money spent was wasted on zombie banks that should have been shut down.  The executives running Bank of America, Citibank, JP Morgan and Wells Fargo, etc. still have their high paying jobs, while many others are unemployed.

What Does The Stimulus Spending Accomplish?

If we are facing a financial catastrophe, why is so little of the spending being directed  towards solving the root of the problem –  insolvent banks and the decline in home values?  Some of the spending goes towards minimalistic tax breaks – up to $500 per individual or $1,000 per couple.  Is an extra $10 or $20 a week going to make a real difference to most people?  The vast majority of the spending goes for expanded funding of various social programs and special interest groups.  The money will be disbursed through Government agencies that will need a much larger bureaucratic staff to administer spending and regulation.  This will accomplish nothing for the real economy and we are still left with insolvent banks and foreclosed homeowners.   Maybe after passing the bill, someone should say “mission accomplished”.

End Result

The one certainty is that this will not be the last trillion asked for.  The banking industry will need many more trillions of dollars to become solvent.  Fortune Magazine estimates the ultimate banking bailout cost at $4 trillion, maybe more.  Yet there is still no overall coherent plan for resolving this crisis.  Watching the elite ruling class operate in Washington reminds me of Groundhog Day.   Washington keeps doing the same thing over and over again, expecting a different result – isn’t that the definition of insanity?

Filed Under: Bailout, Banking Industry, Economy, Federal Reserve, Stimulus Plan Tagged With: ,

Why Did So Few People Save For Hard Times?

February 4, 2009 by Leave a Comment

A Recession of Biblical Proportions

Consumers usually build savings in booms, then raid their troves during busts – but not this time.

In booms we put away some of the abundance because we know we’ll need it in busts to come. Then, when the bad times hit, we spend some of what we’ve saved. But no more: Our recent bizarre behavior helps explain how we got into this economic mess.

For the first time since Genesis, consumers are doing everything backward. During the expansion from 2002 through 2007, our savings rate fell rather than rose. In mid-2005 it even went negative, and it mostly stayed below 1% until late last year. Then, as the recession really took hold, we again did the opposite: We increased our saving. As the economy shrinks, our savings rate has climbed to almost 3%.

Not only do we lack savings to dig into and spend during this downturn, but we’re also spending a smaller proportion of our incomes (which are themselves stagnating, so maybe it’s a triple whammy). Put it all together, and it’s clear why this recession is dragging on.

The central mystery: Why did we go into hock in the fat years? One argument is that we were behaving rationally. As our homes increased in value, they were doing our saving for us, so we didn’t have to save out of current income.

Nor was our borrowing binge focused only on mortgages; we were going heavily into most other types of debt as well. In fact, we were spending record proportions of our incomes just to service our personal debt – even with interest rates near historical lows.

Maybe it was just a mania, focused not on tulip bulbs but on the simple joy of buying, reinforced by a belief that bad times were no longer inevitable.

Whatever happens, don’t expect miracles. Spending and saving behavior evolves slowly, and our current mess is in some ways the culmination of a long journey. We may not suddenly start behaving with biblical wisdom. But at least let’s try not to forget how bad things can be when we get spending and saving backward.

Normal vs. Abnormal

It’s normal human behavior to want more than we have.   Our free enterprise system rewards hard workers by allowing them to live well.   What was not normal over the past decade were the ridiculous lending policies of the banks, encouraged and supported by the easy monetary policies of the Federal Reserve.

In fact, not much of anything was normal over the past ten years.  It’s not normal to lend borrowers large amounts of money without regard to income or credit.  It’s not normal to expect housing prices to rise 100% every five years.  It’s not normal to expect that a nation could borrow its way to prosperity.  The list goes on.

The really bad news here is that while consumers know what they have to do (save more, spend less) every action being taken by the Government and Federal Reserve is to continue the failed policies of the past, this time on an even grander scale.  Let’s all hope that the common sense of the governed will ultimately elect leaders who stop promising free lunches with borrowed money.

Courtesy:      mwhodges.home.att.net/

Filed Under: Economy, Federal Reserve, Housing, Stimulus Plan Tagged With: , ,

A 7% Return? Absolutely!

February 4, 2009 by Leave a Comment

A Guaranteed 7%: Can Putnam Pull It Off?

Who wouldn’t want a guaranteed return in this market? To know that you’re going to make money no matter what the market does is an understandably appealing notion. Problem is, the marketers at Putnam Investments agree.

Putnam has just released a series of “absolute return” funds that promise specific percentage returns — 1%, 3%, 5% or 7% above the Merrill Lynch U.S. Treasury Bill Index (a gauge of inflation) — if investors hold on for three years or more.

But like all things that seem too good to be true, so is the notion of a guaranteed return. Judging from the fund names — Absolute 100 (PARTX), Absolute 300 (PTRNX), Absolute 500 (PJMDX) and Absolute 700 (PDMAX) — shareholders could reasonably assume they would get the corresponding return. “It sounds like there are guarantees,” says mutual fund analyst Adam Bold. However, if you read the fine print in the funds’ prospectus you’ll see they don’t actually have to meet the returns indicated in their names. The documents state the funds “are designed to pursue consistent returns” but acknowledge a potential “risk of loss.” What’s more, that risk may actually be greater in these funds than that of relative-return funds. Those offerings typically invest in specific asset classes like large-cap stocks or bonds and try to beat benchmark indexes instead of aiming for specific levels of return. Putnam’s absolute-return funds invest in all manner of stocks, bonds and other securities, which can leave more room for error.

“The more choices you have, the easier it is to pick the wrong thing,” says Morningstar analyst Laura Lutton.

Putnam CEO Robert Reynolds says the broad mandate actually reduces risk and volatility by allowing the portfolio managers to focus on meeting the return.

Reynolds may be enthusiastic because he needs a hit after shaking up the company’s management ranks last year. Morningstar says assets in the company’s open-end funds were chopped in half last year to $40 billion due to outflows and the market downturn.

One thing to consider before buying in: fees. Annual expense ratios range from 1.82% to 2.82%, depending on the asset class. They promise to charge less if they miss their target returns — but not much less. The expense ratio for the Absolute 100 Fund only drops 0.04% if the fund does poorly. “That’s still more expensive than a good balanced fund,” says Bold.

It’s easy to predict the outcome for this fund

The only thing guaranteed here is that Putnam will be facing investor lawsuits down the road.  Salesmen, being what they are, will probably market this fund as having a guaranteed 7% return.  Although a 7% return is in no way guaranteed, an investor not doing his homework could justifiably misinterpret the words “absolute return” to mean “guaranteed return”.

In addition, this fund is classified by Putnam as class A shares which carry a huge front end load of 5.75%.

The following tables show how sales charges of class A shares vary across funds based on investment levels.

Growth, value, blend, asset allocation funds — class A
Amount invested Sales charge
Under $50,000 5.75%
$50,000 to $99,999 4.50
$100,000 to $249,999 3.50
$250,000 to $499,999 2.50
$500,000 to $999,999 2.00

An investor putting money into this fund would incur fees of around 7.55% in the first year for the front end load and the annual expense ratio.  To return 7% to the investor, Putnam would have to achieve over a 14% return on assets.  Over the past 10 years, the average mutual fund now has a negative return.  In addition, the vast majority of managed mutual funds (meaning actively traded) under perform a low expense S&P500 index fund.  The odds of an investor in the Absolute Return 700 Fund achieving a positive return or outperforming the S&P are remote.  The odds of Putnam earning handsome fees on this fund are outstanding.

Does the SEC ever look at these things?   If the SEC was doing its job properly, there would be more stringent rules that limit marketing hype of investment company mutual funds.   Investors have been punished enough over the past decade.

Pass on the “Guarantee”

There are many other places where an investor can put his money and be assured that the fund managers are working for the benefit of the investor.  Pass on this “guarantee”.

Filed Under: Mutual Funds Tagged With: ,

Fannie and Freddie – The New Subprime Lenders

February 2, 2009 by Leave a Comment

Fannie and Freddie Impose Huge Fees On Borrowers

Freddie Mac last week announced additional fees for condo owners who refinance, effective April 1, 2009.  The fee mirrors a similar charge imposed by Fannie Mae last year.  Both Fannie and Freddie now assess a wide variety of fees to borrowers based on loan to value, credit and type of loan.  The fees are euphemistically referred to as “Postsettlement Delivery Fees for Mortgages with Special Attributes”. Translation – we need the money and are now charging huge fees to reflect lending risks that we never recognized prior to the housing crash.

Many borrowers are finding out that the Fannie and Freddie fees are resulting in mortgage rates far higher than the rates they see advertised.  See All Time Low Rates For A++ Borrowers Only.   The fees imposed are too large to be absorbed by the lending institutions that sell their loans to Fannie and Freddie.  Therefore the fees must be passed on to the customer in the form of closing costs and/or a much higher interest rate. The total fees imposed by the agency lenders are cumulative for each special attribute. The end result is that the fees and rates are so high that most borrowers are unable to refinance.

Here is an example of the fees that Fannie and Freddie would charge on a routine mortgage refinance with the following “special attributes”.   The borrower is attempting to refinance at 80% loan to value, has a 675 FICO score and needs to take cash out.    This is a routine type of refinance and the credit score of 675 is considered good.  The borrower is applying for the prevailing rate of 5.5%. Three years ago, this borrower would easily have qualified under a conforming Fannie or Freddie loan with a minimum of agency fees.  The same borrower today, if approved, would be facing very steep fees as follows in a $250,000 loan example.

Delivery Fees Effective April 1, 2009 Based on 80% Loan to Value

1. 675 FICO score fee 2.50%
2. Cash out fee 1.50%
3. If the property is a  Condo add additional fee .75%

The total fees imposed by Fannie or Freddie on this example loan would total 4.75% of the $250,000 loan or $11,875. In addition, there are various lender and legal fees involved in a refinance that could easily total another $2,000.   These Fannie and Freddie fees make the defunct sub prime lenders look like good guys.

Rates Are Low – Don’t Bother Applying

In real life, here’s what would happen. The borrower refuses to pay $11,875 in fees to get 5.5%.  The lender could not provide that rate in any event since the total of fees involved are so high that they would violate predatory lending rules. The rate cannot be raised enough to absorb all of these fees based on current pricing structures.  The best this customer could get would be a rate of around 7.25 and agency fees of $7,000, plus regular closing costs.  Several years ago, this customer could have gotten a lower fixed rate with much lower fees from a sub prime lender.

For a borrower to get the “low rates available” today, you usually need to show up with a credit score of 740 and a loan to value of 70% or less. Most borrowers who need to refinance today do not possess this loan profile.  While the Fed strives to lower mortgage rates, Fannie and Freddie are effectively telling all but the highest quality borrower to get lost by pricing them out of the market.  Compounding this ridiculous situation is that the Federal Housing Administration (FHA)  does not charge many of these fees, even at higher loan to values and lower credit scores.

By the way, did I mention that the Government has effectively nationalized the mortgage industry?

Filed Under: Banking Industry, Federal Reserve, Mortgages, refinance Tagged With: , , ,

The Flip Side of Bad News – Still A 90% Employment Rate

February 2, 2009 by Leave a Comment

Disappearing Money

Charles Biderman of TrimTabs gave an interesting interview to Barron’s this weekend.  TrimTabs tracks flows of money in an effort to predict the stock market’s primary trend.

According to TrimTabs, “the first sign of a turnaround will be corporate insiders buying their own stock again and boards announcing new stock buybacks and cash takeovers of other public companies.  Right now, such buybacks are off about 90% year over year.

CEO confidence is at its lowest level since the Conference Board begain measuring in 1976.

Not a very positive assessment for those looking to put funds to work in the market.

In addition, the often cited “huge amounts of cash sitting on the sidelines” (in money markets funds), is also not apt to be a reason for launching the stock market higher either.   According to Mr Biderman,

“of the almost $4 trillion sitting in money market funds, almost two-thirds is institutional money, much of it probably earmarked as reserves against shareholder redemptions or committed to retirement and other long term purposes.  The money coming out of equity mutual funds is greater than that going into bank CD’s, money markets or other savings.  The money is disappearing because people are using it to live on.”

Of course, there are other possibilities as to where the disappearing cash is going.  Consider the  mistrust of the banking system and near zero interest yields on savings.  Perhaps some of these folks who sold their stocks are putting the money under their mattresses.  Or they just might be spending some of it.

Despite talk of consumers spending less and saving more, I have not really seen much evidence of that from one perspective.   I went to three casual dining establishments over the weekend (TGIF’s, Bertucci’s and Ruby Tuesdays) and each place was packed with customers.  There was a 10 to 20 minute wait time at each place for a table.   Maybe Connecticut’s economy is not yet getting hit as hard as other states.  Maybe people have decided to spend some of the money from liquidated equity funds.  Or, maybe things aren’t quite as bad as they say.   After all, even if the unemployment rate is at 10%, that means that 90% are still working and still spending.

Filed Under: Confidence, Connecticut, Economy, Jobs Tagged With: , , ,

Logical Minds Reject “Solution” Of More Debt

January 31, 2009 by Leave a Comment

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?

Filed Under: Bailout, Dollars, Economy Tagged With: ,

California Defaults

January 31, 2009 by 3 Comments

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.

Filed Under: Economy, Stimulus Plan Tagged With: , ,

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January 29, 2009 by Leave a Comment

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.

Courtesy:  http://mwhodges.home.att.net/

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.

TURNING JAPANESE – THE AUDACITY OF REALITY

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.

Filed Under: Bailout, Economy, Gold Tagged With: , ,