October 5, 2022

What Financial Issues Do People Worry The Most About?

Besieged by the rising cost of energy and food, many consumers are barely able to make ends meet.  Throw in the fact that for many consumers real wages have been stagnant for decades and you have the makings for the establishment of a permanent financial underclass that is living on the edge of financial disaster.

According to a survey of 2,016 Great Britain consumers done by MoneySupermarket, the financial worries most on the minds of people is the rising cost of fuel and food.  Portraying the deep financial distress of the average consumer, only 9% of survey respondents said that they foresaw no financial worries in the next year.

The survey also showed that 8% of people had no one to turn to for help if a financial emergency arose.

The infographic shown below breaks out the financial worries of the survey respondents by age group.  It is interesting to note the older respondents had the greatest worries about the cost of fuel, utility bills and food costs, suggesting that the older age groups have less disposable income and/or are worried about having enough money for retirement.

The precarious financial condition of  many individuals in the survey is highlighted by the impact that a relatively small amount of money would have on their financial situation.  Shown below are the survey results to the question of what respondents would do if they suddenly received 1,000 British pounds, the equivalent of US $1,584.  Almost 50% of respondents replied that a 1,000 pound windfall would help to relieve their financial anxiety.

Although the survey does not directly inquire as to what amount of financial assets the respondents had, it appears somewhat obvious from the survey answers that most had very little or no savings on which to fall back on.  Nor does the survey report on what is the biggest problem confronting virtually every developed country in the world – the crushing level of debt burdens on consumers and governments.

Central banks have probably prevented a 1930’s style deflationary depression by printing trillions in paper currency to support over-leveraged banks, consumers and governments.  Unfortunately, Central Banks cannot manufacture what is most needed in weak economies which is  jobs and higher incomes.

Obama Jobs Plan Bad Joke For Both Employed and Unemployed

The long awaited and hugely hyped Obama “Jobs Solution Speech”, hastily crafted between rounds of golf on the Vineyard, is unlikely to help either the employed or  unemployed.

Obama’s calls his new proposals the “American Jobs Act” but it strongly resembles the $825 billion stimulus spending program of 2009 which was ineffective and failed to stimulate the economy or create new jobs.   Taxpayers will likely fail to see the logic of a $447 billion stimulus program working any better than a $825 billion stimulus program.

The latest proposals out of the White House appear to be another desperate Keynesian attempt to keep the economy on life support long enough to boost Obama’s chances in the presidential election race.  Expecting voters to buy into Obama’s new program pushes the bounds of credibility.  Why would a relatively small $447 billion program work any better than the $4 trillion in deficit financed spending since Obama came into office?

Telling voters that the new half trillion dollar program will be paid for from future mythical budget cuts isn’t likely to fly either after seeing the results of the latest fiasco on deficit reduction talks that lead to a downgrade of the US credit rating.

Half of $447 billion “Jobs Act” program consists of payroll tax cuts for both employers and employees.  While probably adding to aggregate spending, the tax cuts do not address the fundamental problems of unemployment and income stagnation over the past decade.

Why Payroll Tax Cuts Won’t Work

What business bases hiring decisions on a 2% drop in the social security (FICA) tax?  Any business man stupid enough to decide to hire new employees simply because his share of the FICA tax will be slightly lower is already out of business.  New employees are added by businesses when there is added demand for their products and when they are confident that a lasting economic recovery is underway.  Today, there is subdued demand and no confidence – a cut in the FICA tax does nothing to change this situation.

Regarding the payroll tax cut for employees, here’s how one Connecticut resident assessed the situation.

“I am currently making $80,600 per year.   The recent reduction of 2% in the FICA tax resulted in an increase of $31 per week to my paycheck.  Meanwhile, the State of Connecticut just passed the largest tax increase in history, retroactive to the first of the year, which results in paying $17 more per week.  My weekly deduction for medical insurance increased by $12 per week since last year and our employer has suspended pay increases.

My net benefit from the FICA tax reduction is $2 a week.  Meanwhile, the cost of gasoline, home heating, insurance and groceries has risen at least 6% over the past year.  Even if the FICA tax cut was made permanent, an extra $2 per week is certainly not going to motivate me to spend more.

My savings goals for college funding and retirement have been destroyed by a collapsing stock market and zero interest rates on savings.  I  have to cut current spending in order to meet my savings goals and any extra income would be saved, not spent.”

Did Obama talk to any “real people” outside of the group of Washington elites and millionaire celebrity pals he hangs around with?  I think not.

Did Obama talk to any “real businessmen” before coming out with his warmed over and effective stimulus plan?  I think not.

Did Obama talk to “Helicopter Bernanke” about how to spread out the $447 billion of borrowed money?  The government could simply spend the $447 billion by sending every household in America a check for $3,886 attached with a note telling the recipients to thank their grandchildren whose future has been mortgaged.

Voters are rightfully disgusted by the rapid decline in their standard of living, the debasement of the US currency and the self serving dealings of the ruling Washington elites.  To pull out an old campaign slogan, “It’s time for a change”.

There are no easy answers to pulling a debt laden economy out of depression, but increasing transfer payments, small tax cuts, massively increased regulatory burdens, trillions in stimulus spending and zero interest rates have not worked.  Maybe the Washington elites should simply step aside, stop micro managing the $14 trillion dollar US economy and allow the creative forces of capitalism to work

US Treasury Calls TARP Repayments A “Milestone” While Ignoring The Elephants In The Room

Treasury’s Victory Call On Financial Bailout Premature

The Treasury Department’s latest public relations effort to highlight the success of the financial system bailout focuses on the amount of TARP repayments versus total debt outstanding.  In addition, the Treasury, which had previously estimated the cost of the TARP program at $341 billion, has now lowered that estimate to only $105 billion.

Wall Street Journal – The U.S. Treasury Department said Friday the total amount repaid to taxpayers for government funds used to bail out U.S. companies has surpassed, for the first time, the amount of outstanding debt.

The Treasury, in its May report to Congress on the Troubled Asset Relief Program, reported TARP repayments reached $194 billion, which has exceeded by $4 billion the total amount of outstanding debt—$190 billion.

Treasury’s assistant secretary for financial stability, Herb Allison, in a statement described the totals as a “milestone” and said this is “further evidence that TARP is achieving its intended objectives: stabilizing our financial system and laying the groundwork for economic recovery.”

Does the general public accept the Treasury’s view that the bailout was a resounding success at a relatively modest cost?  Recent Pew Research data, which reveals overwhelming negative public opinion for both the government and the banks, suggests that the Treasury’s spin on the bailout will be given little credence by the public.

Large majorities of Americans say that Congress (65%) and the federal government (65%) are having a negative effect on the way things are going in this country; somewhat fewer, but still a majority (54%), say the same about the agencies and departments of the federal government.

But opinions about the impact of large corporations and banks and other financial institutions are as negative as are views of government. Fully 69% say that banks and financial institutions have a negative effect on the country while 64% see large corporations as having a negative impact.

In March, during the final debate over health care reform, just 26% of Americans offered a favorable assessment of Congress – by far the lowest in a quarter-century of Pew Research Center polling.

Large majorities across partisan lines see elected officials as not careful with the government’s money, influenced by special interest money, overly concerned about their own careers, unwilling to compromise and out of touch with regular Americans.

The skepticism regarding the ability of government to operate honestly in the public’s best interest is well founded and the latest Treasury report on progress of the TARP program bears this out.  While the Treasury reports on the “success” of repayments under the $700 billion Troubled Asset Relief Program, other government bailouts and guarantees that are far exceed the cost of the TARP program are conveniently ignored.   If the Treasury really wants to provide a comprehensive accounting of what the financial system bailout will cost the American taxpayers,  here’s my short list of additional items to address in their next report.

1.  The amount currently owed under the TARP program does not include amounts committed by the US Treasury but not paid out.   According to the WSJ, “the outstanding debt amount does not include $106.36 billion that has been committed to institutions but has yet to be paid out by the Treasury. Factoring in that amount, the outstanding debt would be roughly $296 billion.”

2.  Two of the biggest ongoing bailouts in history go unmentioned.   The  Housing and Economic Recovery Act of 2008 provided for a $400 billion bailout of Fannie Mae and Freddie Mac.   The Government subsequently granted Fannie and Freddie an unlimited line of credit with the Treasury.   Fannie and Freddie have already drawn $145 billion and according to Bloomberg, the final cost to bailout out the two agencies could approach $1 trillion.

3.  Future banking failures constitute another sizable risk for increasing the cost of bailing out the US financial system.   The FDIC has been able to resolve banking failures to date using premiums collected from the banking industry, including a special assessment of $46 billion at the end of 2009.   While the FDIC has not yet had to tap its $500 billion line of credit with the US Treasury, future banking failures may require it to do so.

In its latest quarterly report, the FDIC reported an increase in the number of problem banks to 775, out of a total of 7,932 FDIC insured banks.  Assets at the problem banks total $431 billion.  Total deposits insured by the FDIC now total $5.5 trillion.   The amount of reserves in the FDIC Deposit Insurance Fund total negative $20.7 billion.   Liquid reserves of the FDIC total a mere $63 billion.   If the US economy weakens and more banks fail, the FDIC’s only option will be a costly bailout by the US Treasury.

The government seems to believe they can fool all of the people all of the time. Whatever happened to “change you can believe in”?

Geithner Lectures Europe On Fiscal Discipline – This Is Like BP Giving A Seminar On Oil Well Safety

With Europe Facing Meltdown Geithner Offers Advice

After recently “saving” the US from economic Armageddon, Treasury Secretary Geithner must feel uniquely qualified to  advise European governments on their looming sovereign debt crisis.   Geithner’s solution to Europe’s out of control deficits is additional stimulus (via increased deficit spending), bailouts and stress tests on Europe’s tottering banks to rebuild public confidence in the banking system.

Wall Street Journal – LONDON—U.S. Treasury Secretary Timothy Geithner landed in Europe and reasserted a traditional American role of dispenser of financial advice to the world, telling European governments to get their fiscal houses in order.

After two years in which an historic financial crisis seemed to deprive the U.S. of its self-confident global economic leadership, Mr. Geithner signaled a new-found willingness to reassert American authority on the future of the world economy.

Inside No. 11 Downing Street, the home of his British counterpart, Mr. Geithner pushed continental Europe to speed up the rescue of debt-laden economies, and to not stint on fiscal stimulus.

The U.S. is also advising European countries that can afford it—the U.K., Germany, France—to keep pumping stimulus into their economies.

“This crisis is multifaceted, but I believe bank stress tests can be helpful as a critical component of any comprehensive plan to restore confidence in the European financial system,” said Lee Sachs, who was, until a month ago, a top adviser to Treasury Secretary Timothy Geithner.

Mr Geithner’s advice that over indebted nations should borrow more money to solve their debt crisis was met with scorn by European officials.  The recommended stress tests for banks was viewed as a mere public relations exercise.

WSJ – For Geithner critics, the new U.S. assertiveness is misplaced. Desmond Lachman, a former senior IMF European official who is now a researcher at the American Enterprise Institute, said the repeated bailouts engineered by Mr. Geithner have made the overall problem worse, and that the U.S. advice of providing even more financing for heavily indebted countries like Greece is bound to fail.

Mr. Lachman said Greece’s debt needs to be restructured and that weaker euro-zone countries should consider dropping the euro and reverting to their national currencies. “Geithner is part of the problem,” he said. “It’s obvious this can’t work.”

“You don’t need a stress test to tell you what would happen if Spain became bankrupt; it would be horrible,” one German official said.  German officials argue the U.S. tests were little more than public-relations stunts, designed so that banks would pass.

European governments realize that the American solution of borrowing trillions for bailouts and fiscal stimulus has only compounded the original problem of too much debt.   US Government debt now exceeds $13 trillion and the debt to GDP ratio of the US equals or exceeds that of many European nations that are now tottering on the fiscal abyss.  Based on continued unprecedented expansion of the national debt, the IMF is forecasting that total US debt will exceed GDP by 2012.  Debt to GDP ratios over 100% raise serious questions about a country’s ability to service their debt, especially if interest rates rise.

Tragically, Europe has bought into the “Geithner solution”.  Despite their doubts and with no other easy options, Europe will lend up to $1 trillion to bailout hopelessly over indebted sovereign borrowers.  Does anyone really believe that this latest bailout is a solution?

Federal Reserve Super Low Rate Policy Crushes Savers And The Elderly

Fed Sees Solution In Zero Rates

The Federal Reserve recently vowed to keep interest rates “exceptionally low”  for the foreseeable future in an attempt to revive the economy.   Since mid 2006 the Fed has brought the Fed Funds Rate down from 5% to virtually zero in an attempt to reduce the debt service burden on over leveraged borrowers.

fredgraph

A world of ultra low interest rates may continue for much longer than many expect.

Fed To Keep Rates Low  (WSJ) –  Fed officials voted unanimously to maintain their target for the key federal-funds interest rate — at which banks lend to each other overnight — near zero and said they expect to keep it there for an “extended period,” which suggested increases are at least several months off.

While consumers are spending, the Fed noted they were “constrained by ongoing job losses, sluggish income growth, lower housing wealth and tight credit.” Meanwhile, “businesses are still cutting back on fixed investment and staffing, though at a slower pace.”

A low interest rate policy has worked in the past to stimulate the economy and the Fed is applying the same prescription to the current economic downturn.   At this point, it is too early to tell if the same policies of super low rates and easy money will work as it has in the past.  Japan stands out as the premier example of a post bubble economy still failing to recover despite twenty years of super easy fiscal and monetary policies.  The Fed prescription of attempting to revive an overly indebted economy with more lending may very well produce the same results as in Japan – slow economic growth, lower incomes and crushing public debt burdens.

Individuals who were prudent enough to save and avoid debt are now left to  wonder if they will ever see a return on their savings.  Short term CD’s are below 1%, money market funds pay a ridiculously low rate barely above zero and short term treasuries have a negative yield.   Those who are retired and depend on interest income for living expenses must now deplete their savings or take on more risk by investing in higher yielding bond funds subject to substantial market fluctuations.

The Fed’s low interest rate policy effectively represents a massive wealth transfer from savers to debtors.   FDIC insured deposits of bank savings and CDs currently total $4.8 trillion and there is approximately $5 trillion in money market funds for a total of $10 trillion that is earning at best 1% compared to 5% in 2006.  The drop in interest rates from 5% to 1% represents an annual income loss to savers of $400 billion dollars per year.

Congress and the Fed have attempted to bailout out every imprudent debtor  with super low interest rates – homeowners who borrowed too much, bankers who lent foolishly, and hundreds of poorly run, over indebted companies from GM to AIG.   Someone always pays in the end and in this case, the victims are the savers.

More On This Topic

Near-Zero Rates Are Hurting The Economy

Japan’ Solution To Debt Crisis – Expand Zombie Banking

Japan’s Zombie Banking Taken To New Levels Of Lunacy

Japan’s real estate and stock market bubbles burst in the early 1990’s.   Since then, twenty years of non stop Government stimulus programs have failed and left Japan with the highest debt to GDP ratio in the world and two decades of lost economic growth.   The costly attempt to have failed banks prop up failed companies has lead to a massive misallocation of capital and resulted in Zombie Firms and Zombie Banks.

Banks were not forced to recognize the condition of their balance sheets and were encouraged to continue lending to firms that were themselves unprofitable. Anil Kashyap labels these “zombie firms.”

Zombie banks continued to direct capital to zombie firms. This charade continued for more than a decade, with the result that the once-powerful Japanese economy was completely stagnant for that period. The government’s main response was to dramatically increase spending on infrastructure and frantically try to get Japanese households to save less and consume more. The resulting “lost decade” of economic growth cost Japan more than 20% of GDP.

Japan has now decided to exponentially expand policies that have not worked for two decades by forcing banks to agree to debt moratoriums.

Oct. 6 (Bloomberg) — Japanese banks’ bad loans won’t be driven higher by a proposed moratorium on debt payments by struggling small companies, said Financial Services Minister Shizuka Kamei.

Lenders won’t have to classify loans encompassed by the plan as non-performing, Kamei, 72, said in an interview yesterday at his office in Tokyo. That means they won’t be forced to boost provisions when borrowers postpone repayments of interest or principal, he said. At the same time, Kamei vowed to push banks to extend more credit to small businesses after bankruptcies hit a six-year high in Japan.

“We’re going to get financial institutions to provide these firms with more loans,” said Kamei. “Banks won’t have to treat debt on which they provide a moratorium as bad.”

Japan’s three largest banks, including Mitsubishi UFJ Financial Group Inc., posted combined losses of almost $14 billion last fiscal year as bad-debt charges surged.

“There is a potential for any proposal along the lines Kamei has made of debt moratoriums to backfire horribly,” said David Threadgold, a Tokyo-based analyst at Fox-Pitt Kelton. The plan could make banks more reluctant to lend to small firms, Threadgold said.

The moratorium, postponing repayment of principal and interest, will be extended to individuals as well as firms Kamei said. It will aim at giving relief to companies with about 100 million yen ($1.1 million) or less in capital.

“As long as I’m financial services minister, I’m not going to leave small companies in the lurch unable to get loans,” Kamei said. “If a bank takes that approach, I’ll hit them with a business improvement order.”

Japanese “salarymen” struggling to pay mortgages after bonus cuts may be eligible, he said. “We’re going to make it extremely easy for very small companies to get money,” Kamei said.

Let summarize the lunacy of this new plan: debtors pretend they will pay later; the banks pretend that the defaulted loans will be repaid; banks will be forced by the government to lend more money to debtors who cannot repay what they already owe and the banks will not have to set aside loan loss reserves on the defaulted debt.  Japan’s debt moratorium is a final desperate attempt to “save the system” by preventing deeply indebted, income poor borrowers from defaulting on debts that can no longer be serviced.  It will move private bad debt onto the already over leveraged public balance sheet and will encourage debt repudiation on a massive scale.

When Debt Becomes Inconvenient

Debt that cannot be repaid won’t be repaid and the consequences of default are in many cases relatively minor compared to the burden of continued payments.   Japan now joins the U.S. in actively encouraging the repudiation of debt as discussed in How The Government Encourages Ruthless Defaulters and Loan Mods – Just A Warm Up For The Real Thing – A Mortgage Holiday.

Ironically, the biggest impediment to future bank lending is the growing trend of debt repudiation directly sponsored and encouraged by a government concurrently seeking to encourage more lending.

Consumers having trouble paying their debts can now chose from a long list of government programs for debt forgiveness, loan modifications, rate reductions, 125% loan to value mortgages and more programs on the way.  Their is no  longer any shame or embarrassment associated with defaults and bankruptcy.  Defaulting on debt has become a rational choice for many with little repercussions.

If the long shot odds of economic recovery and job growth do not materialize,  expect to see defaults worldwide increase exponentially as even those who can pay will chose not to.  Zombie banking is alive and well.

FDIC Considers Borrowing From Treasury As Banking Failures Increase

FDIC May Request Treasury Loan As Losses Grow

The FDIC always takes pride in noting that it is self funding and covers failed bank losses by assessments on FDIC insured member financial institutions.

Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system. The FDIC insures deposits at the nation’s 8,195 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars – insured financial institutions fund its operations.

How much longer the FDIC can continue to fund itself based on fee assessments is questionable.  For the second quarter of 2009, the banking industry as a whole lost $3.7 billion dollars and second quarter FDIC assessments totaled $9.1 billion.

FDIC Insurance Fund Nearly Depleted

The FDIC did borrow money from the Treasury during the last banking crisis in the early 1990’s and later paid the money back.  The escalating number of costly bank failures over the last two years has reduced the FDIC Deposit Insurance Fund (DIF) to only $10.4 billion which  covers potential losses on almost $5 trillion dollars in FDIC insured deposits.  In addition, the number of banks on the FDIC Problem Bank List continues to expand.

The Problem Bank List grew to to 416 institutions from 305 last quarter.  The total assets at Problem Banks increased to $299.8 billion from $220 billion last quarter.  This is the largest number of problem banks since June 30, 1994.  The number of FDIC  insured institutions declined to 8,195 from 8,247 last quarter.

Earlier this year the FDIC’s line of credit at the Treasury was increased to $100 billion and up to $500 billion with the consent of both the Federal Reserve and the Treasury.  With a nearly depleted  DIF fund and the prospect of hundreds of additional banking failures, the FDIC may have no choice but to borrow from the Treasury as noted in the Wall Street Journal.

WASHINGTON –– Federal Deposit Insurance Corp. Chairman Sheila Bair said Friday her agency may tap its $500 billion credit line with the U.S. Treasury to replenish its deposit insurance fund, though she appeared cautious about doing so.

“We are carefully considering all options” including borrowing from the Treasury, Ms. Bair said Friday after a speech in Washington.

Ms. Bair has already warned banks that they may face an assessment increase to bolster the fund. Friday, she said there are also other little-known options available to the agency, including requiring banks to prepay assessments. The FDIC board of directors will meet at the end of this month to consider how to replenish the fund, she said.

Ms. Bair appeared cautious about resorting to the Treasury credit line, saying there are different views on when it should be used. She said some believe it should be reserved for emergencies only, rather than for covering losses that are already known.

Surging loan defaults show no sign of leveling off which in turn puts more banks at risk of failing.  The FDIC will need a Treasury bailout – the only question is will $500 billion be enough?

Noncurrent Loan Growth

Noncurrent Loan Growth

Feds Finally Move To Restrict Excessive Bank Compensation And Risk

Bailout Funds Go To Bank Bonuses

Banks that lost billions of dollars on speculative  investments and poor loans have routinely been awarding thousands of employees massive bonus payments.  Ironically, the only reason many of these banks are still in business and able to pay bonuses is due to the fact that they were bailed out by the taxpayers via the TARP program.

It is difficult to understand the lack of sensitivity exhibited by the bank’s compensation committees considering the populist outrage and criticism by politicians from both parties.  Consider Bankers Reaped Lavish Bonuses During Bailouts:

Nine of the financial firms that were among the largest recipients of federal bailout money paid about 5,000 of their traders and bankers bonuses of more than $1 million apiece for 2008, according to a report released Thursday by Andrew M. Cuomo, the New York attorney general.

All told, the bonus pools at the nine banks that received bailout money was $32.6 billion, while those banks lost $81 billion.

Some compensation experts questioned whether the bonuses should have been paid at all while the banks were receiving government aid.

“There are some real ethical questions given the bailouts and the precariousness of so many of these financial institutions,” said Jesse M. Brill, an outspoken pay critic who is the chairman of CompensationStandards.com, a research firm in California. “It’s troublesome that the old ways are so ingrained that it is very hard for them to shed them.”

Private firms that risk private capital on high risk leveraged investments should be free to compensate themselves as they see fit.  Banks, on the other hand, have been playing a “heads I win, tails you lose” game, risking depositor money (guaranteed against loss by the FDIC), suffering no consequences for bad decisions and collecting lavish bonuses for horrendous results.  The issue of why banks are allowed to risk taxpayer money on speculative activities was recently raised by former Federal Reserve Chairman Paul Volcker – Volcker Seeks Bank Limits.

In his speech, Volcker urged limits on the activities of banks that are considered “too big to fail,” going beyond what other officials in the Obama administration have advocated.

“I do not think it reasonable that public money –taxpayer money — be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial banking organization,” Volcker said.

“Extensive participation in the impersonal, transaction- oriented capital market does not seem to me an intrinsic part of commercial banking,” Volcker said. “Substantial involvement in heavily leveraged finance and heavy proprietary trading almost inevitably entails risks.”

“I want to question any presumption that the federal safety net, and financial support, will be extended beyond the traditional commercial banking community,” he said.

Paul Volcker was probably not the only one wondering why banks are operating outside traditional banking areas and risking taxpayer funds.  Volcker’s speech seemed to hint that regulators were belatedly preparing to restrict both bonus payments and unwarranted risk taking by the banking industry.  Following up on Volcker’s comments, the Federal Reserve today  proposed dramatic restrictions on both bonuses and risky investment activity by financial institutions.

Wall Street Journal – Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions.

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees — from chief executives, to traders, to loan officers — to take too much risk.

The U.S.’s largest banks, about 25 in number, would get especially close scrutiny. The central bank intends to compare these banks as a group to see if any practices stand out as unusually dangerous to their firms.

The Fed itself believes it has the legal authority to take such action through its existing supervisory powers, which are designed to oversee a bank’s soundness.

Pay is now seen as a factor that could make a firm, and more broadly the financial system as a whole, vulnerable to collapse. The financial crisis turned up many examples of how pay can give employees incentives to take risks. One example: loan officers who churned out thousands of low-quality loans in order to claim annual bonuses for themselves.

In a Wednesday speech, Former Fed Chairman Paul A. Volcker noted that one of the causes of the financial crisis “was the ultimately explosive combination of compensation practices that provided enormous incentives to take risks” just as new financial innovations “seemed to offer assurance — falsely, as it has turned out — that those risks had been diffused.”

The policies would apply to banks regulated by the Fed, not savings-and-loans or state banks that are overseen by the Federal Deposit Insurance Corp.

Will Fed Proposals Prevent The Next Banking Crisis?

If the Fed believed it had the legal authority to restrict undue risky activity at financial institutions, the obvious questions is why were these rules not implemented before the banking system imploded?  Regulators constantly reacting to disasters after they occur does not instill a strong sense of confidence that new regulations will prevent the next crisis.

Super Clunkers – How Congress Can Double US Vehicle Sales

Clash for Clunkers Increases Car Sales

The much maligned Cash For Clunkers program has three remarkable features that differentiate it from the other wide assortment of endless government stimulus/bailout programs.

1. The Cash For Clunkers program, at an initial $1 billion cost, is relatively “small” compared to the trillions of dollars that have been deployed for other stimulus and bailout measures.  The concept of the Cash For Clunkers program did not originate in Congress but rather was the brainchild of Jack Hidary, an entrepreneur who noticed the success of similar programs in Texas and Turkey.  Mr Hidary’s lobbying efforts ultimately resulted in the Clunkers program approval by Congress.

2. The Clunkers program is the only stimulus/bailout program enacted that allows participation without regard to income or financial need status.  A Clunkers applicant does not need to be unemployed, facing foreclosure, financially inept or destitute.

After seeing trillions of taxpayer dollars spent to bail out banks and homeowners for making stupid financial decisions, it is almost refreshing to see a program that helps those who probably don’t really need any help.  A purchaser of a new $30,000 car who can obtain financing or pay for the car in cash is probably still employed and doing quite well.

It would be interesting to see the income and credit stats on new car buyers under the Clunkers program but my guess is that many of the new car buyers are frugal, financially responsible individuals who had driven the same car for many years and would have purchased another vehicle soon anyways.  The Clunkers handout merely pulled forward future car sales – but that was the intention of the program.

3.  Without debating the merits of the Clunkers program, from a strict Keynesian economic theory standpoint, the program was a resounding success based on the multiplier effect.

Keynesian models of economic activity also include a so-called multiplier effect; that is, output increases by a multiple of the original change in spending that caused it. Thus, a ten-billion-dollar increase in government spending could cause total output to rise by fifteen billion dollars (a multiplier of 1.5) or by five billion (a multiplier of 0.5). Contrary to what many people believe, Keynesian analysis does not require that the multiplier exceed 1.0. For Keynesian economics to work, however, the multiplier must be greater than zero.

In the Clunkers case, assuming increased unit sales of 250,000 at a cost of $30,000 each,  sales revenue of $7.5 billion was generated based on a $1 billion government cost.  Compared to other government stimulus, the Clunker program can only be viewed as a resounding success.

Clunkers Encore

Under the theory that government programs never die but only get larger I would expect that the government will expand the Clunkers program to the point of absurdity.   The original program has already been extended and doubled to $2 billion.

Lobbyists for the car industry should have an easy time convincing Congress to expand the program based on its “success” in generating sales.  Let’s not forget, of course, that the government and the UAW now own General Motors.

How Congress Can Double Car Sales

If  Congress really wants to get creative about stimulating car sales and lending, they may start by looking at the average age of US vehicles currently on the road.

According to USA Today, the automotive consultants R.L.Polk calculate the median age of cars in the US in 2007 at 9.2 years and the median age for trucks and SUV’s was 7.1 years.  Over 41% of all cars in 2007 were over 11 years old.  There are 235 million passenger vehicles in the US, including 135 million autos and 100 million SUV’s and trucks.

For the sake of saving the environment from old polluting cars and stimulating the economy, Congress, by legislative fiat, could prohibit the possession or use of any vehicle over 10 years old.   The mandatory new vehicle replacements could be phased in gradually over 5 years,  and would effectively force the purchase of at least an additional 60 to 70 million vehicles.   Vehicle sales for the next five years would easily double from the 2009 estimate of 11.5 million units.

The government’s investment in GM would be worth a fortune, and the States’ budget problems would disappear with the flood of sales and property tax levies on all those new vehicles.  Government guaranteed easy financing would be provided to all, regardless of income or credit.  Cash rebates on traded in vehicles would be increased to offset the new vehicle’s cost.

Result for the US economy –  large GDP increases as $2.5  trillion dollars in new car sales jolts the economy back to life.   Unemployment drops to low single digits as the multiplier effect of  booming car sales ripple across the economy.  How does the Government finance the cost of this “Super Clunkers” program?  Not a problem – the Treasury Secretary is already requesting a large increase in the national debt limit.

What politician would not vote for this plan?

Disclosures: No Positions