April 25, 2024

Credit Union Bailout Needed – NCUA Insurance Fund Insolvent

March 23, 2009 by Leave a Comment

Corporate Credit Unions Fail

The National Credit Union Administration (NCUA) announced today that two major corporate credit unions have been put into conservatorship as the true size of their losses became apparent.

March 20, 2009, Alexandria, Va. –– The National Credit Union Administration Board today placed U.S. Central Federal Credit Union, Lenexa, Kansas, and Western Corporate (WesCorp) Federal Credit Union, San Dimas, California, into conservatorship to stabilize the corporate credit union system and resolve balance sheet issues. These actions are the latest NCUA efforts to assist the corporate credit union network under the Corporate Stabilization Plan.

The two corporate credit unions were placed into conservatorship to protect retail credit union deposits and the interest of the National Credit Union Share Insurance Fund (NCUSIF), as well as to remove any impediments to the Agency’s ability to take appropriate mitigating actions that may be necessary.

The Federal Credit Union Act authorizes the NCUA Board to appoint itself conservator when necessary to conserve the assets of a federally insured credit union, preserve member assets and protect the NCUSIF.

Corporate credit unions do not serve consumers. They are chartered to provide products and services to the credit union system.

U.S. Central has approximately $34 billion in assets and 26 retail corporate credit union members. WesCorp has $23 billion in assets and approximately 1,100 retail credit union members. The member accounts of both credit unions are guaranteed under provisions of the previously announced NCUA Share Guarantee Program, through December 31, 2010.

Following initial actions taken by the NCUA Board January 28, 2009 (see NCUA Letter to Credit Union No. 09-CU-02 http://www.ncua.gov/letters/letters.html), NCUA staff completed a detailed analysis and stress test of the mortgage and asset backed securities held by all corporate credit unions, including US Central and WesCorp. Specifically, this review determined that an unacceptably high concentration of risk resided only in the two conserved corporate credit unions. Securities held by US Central and WesCorp deteriorated further since late January 2009, contributing to diminished liquidity and payment system capacities, as well as further loss of confidence by member credit unions and other stakeholders.

The findings indicated an overall estimated reserve level, previously announced by NCUA, had increased from $4.7 to $5.9 billion. The specific computation and the impact of the refined reserve level are addressed in NCUA Letter No: 09-CU-06, which NCUA issued and posted online today at http://www.ncua.gov/letters/letters.html.

The National Credit Union Administration is the independent federal agency that regulates, charters and supervises federal credit unions. NCUA, backed by the full faith and credit of the U.S. government, also operates and manages the National Credit Union Share Insurance Fund (NCUSIF), insuring the deposits of over 89million account holders in all federal credit unions and the majority of state-chartered credit unions.

Concern has been growing over the past year about the financial health of the corporate credit unions.  In November 2008, Price Waterhouse was asked to review NCUA recommendations for the realignment of the corporate credit unions.  The Price Waterhouse report was released January 16, 2009 and noted the following issues with the corporate credit unions.

Liquidity, Capital, Structure and Risk Management Issues

1. The primary purpose of corporates to provide short-term liquidity to (retail) natural person credit unions (NPCUs) has been constrained by the decline in market value of securities.

2. Corporates have significant unrealized losses that may become realized other than temporary impairments.

3. Corporates have significant unrealized losses that may become realized other than temporary impairments

4. Corporates have borrowed from external sources that should not serve as a sustained daily source of liquidity.

5. Low Tier 1 capital levels and capacity of regulatory capital to absorb risk are a concern for external lenders.

6. Risks from non-core activities jeopardize core, systemic clearing, settlement, and liquidity functions.

Recognition of major weaknesses with the corporate credit unions came too late to prevent their collapse.  Huge losses on mortgage related assets were mounting rapidly.  In late January 2009 the NCUSIF provided a $1.0 billion recapitalization loan to US Central Credit Union after US Central booked losses of $1.2 billion in December 2008.  After the NCUSIF capital infusion, US Central was technically in compliance with its required regulatory capital ratio.  Barely two months later, it became apparent that US Central’s losses were much larger than what they had initially indicated.

In conjunction with the capital infusion to US Central the NCUSIF also booked a $3.7 billion “Insurance Loss Expense” to cover their guarantee of all corporate credit union share deposits.  There are a total of 28 corporate credit unions, of which US Central and Western Corporate are the largest.

As admitted by the NCUA in their announcement of the takeover of US Central and Western Corporate, the estimated reserve required for losses at the corporates has ballooned to $5.9 billion (from $4.7 billion), within the past two months.

Who Pays For Credit Union Losses?

The NCUA is the administrator of the credit union insurance fund, known as the National Credit Union Share Insurance Fund (NCUSIF).  Since the credit unions are a cooperative mutual industry, all losses in the credit union system become the responsibility of all federally insured credit unions.  If the entire $4.7 billion had been recognized as an insurance loss, this would have wiped out 58% of the NCUA’s equity and required a massive increase in the insurance premiums for every federally insured retail credit union.  Congress requires that premiums on credit unions be increased if the NCUA insurance fund equity ratio drops to 1.2% or if the insurance fund drops below 1% of all insured deposits.

Total credit union deposits according to the NCUA exceed $600 billion.  Had the $4.7 billion losses been properly recognized, the NCUA’s equity would have dropped to only $3.3 billion from $8 billion, requiring  a $2.7  billion premium increase for the retail credit unions.  The retail credit unions, already struggling with high default rates, strenuously objected to the prospect of large premium increases to cover losses that they had nothing to with.   For example, the Congressional Federal Credit Union, in a letter to its members on February 12, 2009 noted its strong disapproval of the US Central bailout and the attempt to raise insurance premiums.

The National Credit Union Administration (NCUA), the federal regulator of credit unions and the administrator of the National Credit Union Share Insurance Fund (NCUSIF) announced in late January that it has used deposits in the NCUSIF to provide a $1.0 billion recapitalization loan to US Central Credit Union. As a cooperative mutual industry, any loss in the credit union system is theresponsibility of all federally insured credit unions. As I reported earlier this year, Congressional has no investment exposure to US Central Credit Union. The Board and management team decided fourteen years ago to avoid any uninsured deposits in the
corporate credit union system. Nevertheless, as a result of the NCUA’s decision to recapitalize the debt of US Central through the CU insurance system and as a participant in the co-operative credit union movement, Congressional FCU will be recognizing approximately $3.3 million extraordinary expense during 2009 for the recapitalization of US Central Credit Union.

It is significant for Congressional FCU members to be aware that the Congressional FCU Board and management have vigorously opposed the decision by the NCUA to “bailout” US Central through the use of our deposit in the NCUSIF. As indicated, the impact of this inequitable NCUA decision is that credit unions, like Congressional FCU, who had long ago made a sound business decision not to participate in US Central Credit Union, are being required to pay an insurance premium to recapitalize US Central Credit Union. Members should also recognize that similar actions by the NCUA would result in further undue burden being
placed on Congressional FCU.

NCUSIF is the insurance that protects credit union member deposits up to $250,000. The insurance fund is 100% funded by credit unions and provides coverage for member deposits in more than 8,000 credit unions. The Federal Credit Union Act, federal legislation for credit unions, mandates that the NCUA maintain the insurance fund at a minimum level of 1% of total insured deposits in the credit union system. Each credit union maintains an account with the NCUSIF in an amount equal to 1% of the insured shares. As the funds for the loan to US Central are withdrawn from the NCUSIF, Congressional FCU will be required to expense our portion and then re-fund our NCUSIF account back to 1%.

How A $4.7 Billion Loss Is Not A Loss

In order to avoid the imposition of large insurance premium increases on the retail credit unions, the NCUA offset the $4.7 billion insurance loss with a $4.7 billion accounting entry called “accrued recapitalization and premium income”, which represents the premium income due from the credit unions to fund the insurance losses. This offsetting accounting entry by the NCUA eliminated the $4.7 billion loss and allowed them to remain technically solvent with an unchanged equity level.

This offsetting entry to the $4.7 billion reserve was made despite the fact that the NCUA has not assessed or collected any of the additional booked insurance premium from the credit unions.   Judging by the outraged response of the Congressional Federal Credit Union cited above, it is unlikely that the NCUA can impose or collect the huge insurance fee increases necessary to replenish the insurance fund of the NCUSIF.  Keep in mind also, that this original $4.7 billion reserve to cover corporate credit union losses is now inadequate as admitted by the NCUA which increased its estimated losses at the corporates to $5.9 billion in its March 20 announcement.

The NCUA’s “creative” non GAAP (generally accepted accounting principles) accounting was explained in a Credit Union National Association (CUNA) letter in early March 2009.

CUNA Explains NCUSIF Accounting

ALEXANDRIA, Va. (3/2/09)—The most recent monthly National Credit Union Share Insurance Fund (NCUSIF) report showed the fund booked both the expenses and the income associated with the corporate credit union stabilization plan in January.

The National Credit Union Administration’s (NCUA) NCUSIF booked, for accounting purposes, a $1 billion expense for “Loss on Investment – Corporate” that is related to its capital infusion into U.S. Central FCU.

It also booked a $3.7 billion “Insurance Loss Expense” to control for the risk associated with NCUA’s guarantee of “excess” corporate credit union share deposits. The information was revealed last week at the NCUA’s open board meeting.

However, the NCUA also booked the NCUSIF’s $4.84 billion in “accrued recapitalization and premium income” in January, again for accounting purposes, despite the fact that NCUA has not yet collected the premium from credit unions.

Unless the NCUA adopts an alternative approach to how the costs of the corporate stabilization program will be paid or changes course on its accounting decision, its action could force credit unions to have to reflect all of their insurance costs for the corporate assistance, the replenishment of the 1% deposit and the premium, on their March call reports.

The NCUA, as a government agency, has flexibility to deviate from Generally Accepted Accounting Principles (GAAP) in its financial reporting if the Office of Management and Budget (OMB) and the Comptroller General agree to such a deviation.

Losses Expanding Geometrically

After taking a $4.7 billion charge to reflect losses by the corporate credit unions, the NCUA’s accounting method resulted in a zero reduction of their total equity.  This almost makes AIG accounting look sound.   In the real world the NCUA insurance fund is totally inadequate to cover the mounting losses in the credit union industry and its reserves are below those required by Congress.  The ability to deviate from GAAP, as noted above, allows the NCUA to maintain a facade of solvency.

Making matters even worse, Michael Fryzel, chairman of the NCUA now states that the 28 corporate credit unions have estimated unrealized losses of $18 billion at the end of last year.   To replenish the NCUA insurance fund, premiums on the retail credit unions would have to be raised dramatically or the taxpayer has to fund another bailout.  Mr Fryzel quickly made it clear what his choice would be.

Wall Street Journal

WSJ – Michael E. Fryzel, chairman of the National Credit Union Administration, the industry’s federal regulator, said the seizure was necessary to maintain the integrity of the credit-union system and protect the insurance fund that backs up deposits in thousands of retail credit unions.

In total, the 28 wholesale (corporate) credit unions in the U.S. were showing paper losses of about $18 billion as of Dec. 31. Mr. Fryzel said regulators aren’t concerned about the health of any other wholesale credit union besides the two brought into conservatorship.

NCUA had said it would make up the expected losses in the insurance fund by dunning the nation’s thousands of retail credit unions. But after an outcry from the industry, Mr. Fryzel said the agency’s board now plans to ask Congress in the coming week for authority to borrow money from the Treasury. He said the industry isn’t looking for a bailout, and would repay all such borrowings.

Conclusion – NCUA Bailout To Cost At Least $15 Billion

The NCUA’s insurance fund is insolvent.  With total estimated losses at the corporates of $18 billion, the NCUSIF has equity of only $3.3 billion (after taking write-offs of $4.7 billion), leaving a black hole of at least $10 billion.  In addition, to maintain a statutory capital ratio of 1.2%, another $5 billion is necessary since the NCUA’s equity base has been depleted.

The losses of the corporate credit unions is estimated at $18 billion by the NCUA.   How can Michael Fryzel say that regulators aren’t concerned about the other 26 corporate credit unions after stating that their losses are at least $18 billion, and the loss estimates have been increasing dramatically month after month?

In addition, the NCUSIF has already paid out $1 million in claims on two failed retail credit unions in just the last month.  There are 8,000 retail federal credit unions insured by the NCUA fund that have an insured asset base of $611 billion and almost $400 billion of loans outstanding.  Credit unions make mortgage, credit card, car and personal loans to their members.  Delinquencies on similar loans at other lending institutions are running at upwards of 10%.  How many more retail credit unions will fail and what will the losses amount to?

The credit unions will be another large hole in the taxpayers’ wallet.  A best case scenario leaves the NCUA short by $15 billion.  Based on previous loss estimates that have spiraled upwards, the final total will probably be much larger.

Filed Under: Bailout, credit unions, NCUA, NCUSIF Tagged With: , , , ,

Are Geithner’s Days Numbered? Banks And Investors Have Zero Confidence

March 16, 2009 by Leave a Comment

First Impressions Hard To Reverse

The old saying in the recruiting business is that one is judged in the first 15 seconds of a job interview.  Irregardless of what happens for the rest of the interview, that first impression cannot be changed.  No doubt, Treasury Chief Geithner wishes that he could take back that first big interview on February 10 when he announced his Financial Stability Plan.  The plan was so lacking in details that one could only wonder why Mr Geithner did not postpone his grand announcement.   Investors on Wall Street rendered prompt judgment on Mr Geithner with the Dow plunging almost 400 points.

Forget The Learning Curve

A month later, Mr Geithner has still not come up with anything of substance to deal with a broken banking system, which by some estimates could cost upwards of $4 trillion dollars.  In fairness to Mr Geithner, he is tasked with solving a problem that only time and the free markets may ultimately cure.   There are no quick and easy answers to the banking and housing crisis, but we cannot afford the luxury of allowing Mr Geithner a multi month learning curve period.    Mr Geithner’s delay in coming up with a detailed plan after his disastrous first attempt may have destroyed his credibility to the point where it doesn’t really matter what he does for an encore.

Banks Burning Mad As Geithner Fiddles

“As Americans recover from the shock and disgust of this latest [AIG] revelation, they will justifiably ask who got us into this mess,” writes Henry Blodget. “The answer, in part, is the same man who has yet to come up with a coherent plan to get us out of it: Tim Geithner.”

Geithner told Bloomberg TV this weekend he will “move quickly to lay out a new financing program” to help banks deal with their toxic assets.

In other words, Geithner still hasn’t put the finishing touches on the “Financial Stability Plan” he announced in mid-February to rousing condemnation because it lacked detail. More to the point, Geithner still doesn’t have a coherent plan he’s willing to share a year after the Bear Stearns-JPMorgan shotgun wedding.

Similarly, Geithner & Co. have yet to unveil their new blueprint for regulating banks. But, again, it’s coming soon

Recipients Of Bailout Cash Stage Revolt

The original TARP bailout plan which was supposed to save the banking industry from collapse has turned into a disaster.  Many banks are saying that they were forced to take expensive TARP money that they did not need or want and now want to return the money – see Banks Push Back On Bailout Plan – Wells Fargo Calls Stress Test Asinine.   The Chairman of Wells Fargo voiced some remarkably blunt criticism of the TARP plan yesterday when he called the governments plan to “stress test” banks asinine.  Relations between the banks and Geithner’s Treasury seem frayed beyond repair at this point.

Effective Leadership Needed

Mr Geithner seems to command zero confidence or respect at this point – he should be replaced by someone who can get the job done.

Filed Under: Bailout, Banking Industry, Confidence, Geithner, Housing Tagged With: , , ,

Banks Push Back On Bailout – Wells Fargo Calls Stress Test “Asinine”

March 16, 2009 by Leave a Comment

Wells Fargo Discovers High Cost Of Government Help

Wells Fargo Chief Calls Stress Test Asinine

March 16 (Bloomberg) — Wells Fargo & Co. Chairman Richard Kovacevich criticized the U.S. for retroactively adding curbs to the Troubled Asset Relief Program, which he said forced the bank to cut its dividend, and called the administration’s plan for stress-testing banks “asinine.”

When the U.S. Treasury persuaded the nation’s nine biggest banks to accept capital investments in October, it signaled the whole industry was weak, Kovacevich, 65, said in a March 13 speech at Stanford University in California. Even though Wells Fargo didn’t want the money, it must comply with the same rules that the government placed on banks that did need it, he said.

Kovacevich joins a growing list of bankers who are chafing at restrictions imposed by the TARP program, which affect lending, foreclosures, pay and perks. Lenders including Bank of America Corp., U.S. Bancorp and Goldman

Kovacevich said the government is still making mistakes as it tries to save the industry.

“We do stress tests all the time on all of our portfolios,” Kovacevich said. “We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.”

Regulate Yes – Operate No

Wells Fargo Chief Kovacevich is discovering the truth of Ronald Regan’s quip when he said the nine most terrifying words in the English language are “I’m from the government and I’m here to help”.  I applaud the head of Wells Fargo for pushing back and rejecting the heavy hand of the government in the banking industry.   Those banks that have run their operations properly should reject or return bailout funds and run their operations free of the strangulating hand of government control.  The government should regulate banks – not operate them. The government failed at regulating banks in the past – what are the odds that the government could run a bank properly?

Many other banks are also pushing back and returning TARP money that they say was forced upon them.  Ironically, the TARP money that certain banks were required to accept wound up causing more harm than good.   The banks that accepted TARP funds were viewed as tainted by the public.  The interest rate that the government was charging the banks was so high (up to 9%) that the money could not be profitably lent out without taking undue risk.

TARP was passed by Congress last year after the Fed, the Treasury and the President employed scare tactics, predicting financial Armageddon unless the $700 billion bailout was approved.  Now we learn that much of the TARP money was forced upon banks that did not need the money and now wish to return it.  This entire episode leads us to wonder exactly how poor the government’s comprehension of the banking problem was to begin with.  Any future scare tactics employed by the government to borrow more trillions to “save us” should be viewed with great skepticism.

Banks Scramble to Return Bailout Funds

A growing number of healthy bank chains across the country are bailing out of the $700-billion federal banking bailout program, saying it has tarnished the reputation of banks that took the money and tangled them in unwieldy regulations.

“The TARP money is tainted and we don’t want it,” said Jason Korstange, a spokesman for Minnesota-based TCF Financial Corp., which received $361 million and announced this month that it wanted to pay it back. “The perception is that any bank that took this money is weak. Well, that isn’t our case. We were asked to take this money.”

The bank issued a toughly worded statement earlier this year, saying that the money had put the financially strong banking chain at a “competitive disadvantage” and that the bank now believed it was “in the best interest of shareholders” to return it.

For Rothenberg, the banker in Century City, the prospect of unlimited government intervention was too much.

Only a few banks formally have told the department they would return the money early, although others have signaled they intend to follow suit, a Treasury spokesman said.

So far, the banks are waiting to hear how they are supposed to return the money.

Government Cure Was Worse Than The Disease

The banks have learned that any free enterprise operation that gets entangled with the suffocating idiocy of government bureaucracy will neither live long nor prosper.  The government cure turned out to be worse than the disease.  Now let’s see how long it takes the government to figure out the rules that must be followed before the banks can return the taxpayer money that they don’t need or want.

Filed Under: Bailout, Banking Industry, Wells Fargo Tagged With: , ,

AIG Says We Must Retain The Talented Staff That Lost $170 Billion

March 16, 2009 by 1 Comment

According to AIG, Good Work Must Be Rewarded

Record Loss

AIG, whose fourth-quarter loss was the worst in corporate history, earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave the crippled insurer.

The company’s fourth-quarter loss of $61.7 billion was the biggest ever recorded for any U.S. company, and AIG considered seeking court protection before accepting the U.S. rescue in September.

Bonuses paid by companies receiving public funds have sparked outrage among lawmakers. New York Attorney General Andrew Cuomo is probing $3.6 billion in bonuses paid by Merrill Lynch & Co. shortly before it was acquired by Bank of America Corp. on Jan. 1.

AIG Faces Growing Wrath Over Payouts

Troubled insurer American International Group Inc., now 80% owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been funneled to various banks and used to pay employee bonuses at the business unit that almost sank the company.

After calls for more transparency, AIG disclosed Sunday that roughly two-thirds of the $173.3 billion in federal aid it received has been paid out to trading partners such as banks and municipalities in the U.S. and abroad.

The disclosures came as AIG was lambasted for about $450 million in bonus payments planned for employees at a business unit that lost $40.5 billion last year. The unit’s woes pushed the company to near-collapse, forcing the government bailout.

Conclusion

The government’s bailout of AIG has been a disaster.   The bailout been a public relations nightmare and the cost to taxpayers is open ended.   A controlled liquidation of AIG would have been a more complex but better option.

How does AIG, which is now 80% owned by the US taxpayers, get away with this outrageous conduct?  Had there been no bailout, AIG would not have had the cash to make these ridiculous bonus payments.
What has the $170 billion (and counting) bailout of AIG accomplished?  We still have an organization that is losing huge amounts of money and is now using taxpayers money to pay ridiculous bonuses to the people who ran the company into the ground to begin with.

Let the free market work here.  Stop the government bailout of a failed company and let AIG go bankrupt as they should have.   Executives who have “contractual rights” to huge bonuses can get in line with other creditors in the bankruptcy court.  The taxpayers supporting this atrocity have been screwed enough already.

Filed Under: AIG, Bailout, Corruption, Government spending Tagged With: , ,

The Humpty Dumpty Economy

February 19, 2009 by 1 Comment

The Big Black Hole Expands As Asset Values Collapse

Not even a month in office, Mr Obama has spent trillions on bailouts, stimulus plans, bank recapitalization and loan guarantees.  The markets have spoken with a resounding lack of confidence.  The asset destruction caused by recent world wide drops in stock and bond markets exceed and effectively negate the government’s desperate spending and borrowing efforts to put Humpty Dumpty back together again.  The continued destruction of consumer confidence is being caused by the whacko “plan a day solutions” coming out of Washington.

The markets are bigger than any government’s ability to artificially prop up all asset values, as the example of Japan demonstrates. The destructive self reinforcing cycle of deleveraging will continue until debt levels decline to the point where debtors have the cash flow to service debt payments.   The process of achieving equilibrium between income and debts will be especially difficult as massive job layoffs, salary freezes and pay reductions make debt repayment more difficult.  Expect a long and painful deleveraging.  The debt bubble that has been building for decades will not be quickly reversed.

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Source : Barrons

Some Further Insight From The Web Worth A Read

Gold Climbs As Economic Catastrophe

The feeling that the government has no idea how to proceed has created palpable panic. In response, pragmatic investors are seeking the ultimate store of wealth. In 2009, as has occurred countless times throughout history, that store will be stocked with gold. Thus, whether the Federal government’s interventions will succeed or fail will be anticipated by the price of gold. Right now, the market is screaming failure.

Despite massive Government spending on rescue and stimulus, the American consumer clearly is becoming increasingly nervous, and the credit markets show few signs of recovery.

Not only have gold spot prices risen in the face of such selling pressure, but the price of physical gold is now some $20 to $40 per ounce above spot. This would indicate that investors are now so nervous that they are insisting on taking physical delivery.

Make no mistake, the economy will not turn around soon. When the recovery fails to materialize, look for governments around the world, and especially in the U.S., to send another massive wave of liquidity downriver. When it does, the value of nearly everything, except for gold , will diminish. Don’t be intimidated by the recent spike in gold. Buy now while you still can.

Collapsing Dreams

It almost seems amusing that we are still discussing the “coming” depression because of the fact that it is already arrived and settling in.  Really, what this entire new “era” is all about is watching our dreams deteriorate right before our eyes.

It seems that the majority of us are just not destined to move forward.  How many thousands of thousands of heads of households are looking at the devastation of their 401K portfolio?  It’s not easy to forget the glory days of the past as they lose their home and lose their savings.  I see eventually Hooverville shacks lining vacant lots.  Made up of cardboard and bits of old trash taken from local garbage.  This is our future?

Fiat World Mathematical Model

Day of Reckoning

The day of reckoning comes when asset prices start falling, defaults soar, and the value of credit on the books starts plunging. That day of reckoning has arrived.

Why Obama’s Home Owner Rescue Is Bound To Fail

Is there anything more heartless than foreclosing on a home and throwing a family out on the street?

How about taxing the family next door into penury to pay for the reckless borrowing of its neighbors?

meanstreet

Welcome to the Obama Homeowner Affordability and Stability Plan — a complicated wealth redistribution scheme dressed up as a cure for the nation’s housing woes.

It is almost certainly bound to fail.

Now, there is no doubting that Obama’s heart is in the right place. With foreclosures at record highs, the American white picket fence dream is crumbling.

And the impulse of any caring President must be to do something, almost anything to keep the dream alive.

But the experience of politicians tinkering with the U.S. housing market is not a happy one. Fannie Mae and Freddie Mac, anyone?

Real estate is simply too complex to be manipulated by anything but the “invisible hand” of the market.

A Powder Keg – Debt and Unemployment

When times are good, some people still struggle to keep up with their credit and debt payments. In a downturn, bad gets worse because for some, there’s less money to devote to debt.

Some Americans, Underwater but Ineligible, Are Riled Up

President Barack Obama’s new foreclosure-prevention plan is already sparking outrage from some Americans who won’t qualify for federal aid — and from those who resent having to foot the bill for those who do.

“What do you expect from the government?” said David Newton, 46 years old, proprietor of DJN Management LLC, which owns 232 rental apartments in the Atlanta area. “The government isn’t out there to help people who obey the law and follow the rules.”

Mr. Obama “told everybody, ‘I’m going to spread wealth around,’ and that’s what he’s going to do,” Mr. Newton said.

The housing measures have also upset a range of homeowners who say they shouldn’t have to subsidize those who bought more than they could afford. “We’ve lived a conservative life,” said Tim O’Brien, 61, a retired CPA from Los Angeles. “We’ve paid our house off and saved our money, so you kind of find yourself on this issue not agreeing with everything.”

Brenda Gilchrist said she feels like she is being punished twice, first by watching foreclosures depress the value of her three-bedroom condominium in Santa Rosa, Calif., and now by subsidizing borrowers who bought more than they could afford.

Others are skeptical that the plan will work. “Twelve months down the road they’re going to say, ‘We’re going to need to throw another $50 billion at the problem,’ ” said Mr. Newton, the Atlanta property owner. “They should just foreclose on the properties, auction them off on the courthouse steps and see who buys them.”

Common Sense Eludes The Government

Financial Sense

“You cannot legislate the poor into freedom by legislating the wealthy out of freedom.  What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”

Assessing the Mortgage Plan

The president’s new mortgage-relief plan contains clever elements that might indeed help homeowners. However, the superfluous threat of inviting judges to rewrite contracts must dilute the collateral behind troubled mortgage-backed securities. That, in turn, would jeopardize the endangered capital of banks, pension funds and other holders of such securities, including the Federal Reserve, Fannie Mae and Freddie Mac.

In sum, allowing conforming loans to be refinanced without a big equity position seems promising. Trying to bribe lenders to trim monthly mortgage bills to 31% of income would help those lucky enough to get in on the deal before the money runs out. But all of this potential good could be undone by the systemic risks to mortgage-backed securities caused by the unpredictable legal risks of a judicial cramdown.

Filed Under: Bailout, Confidence, Deleveraging, Government spending, Stimulus Plan Tagged With: , , , ,

Notable Links

February 19, 2009 by 1 Comment

Straight Talking Common Sense

Obama Must Destroy Detroit, So America Can Live – Evan Newmark

Dear President Obama,

Who said life was fair?

You’re in office less than a month and the markets already hate your presidency, your Treasury secretary and your economic stimulus plan.

It’s time for you to destroy Detroit, so that the rest of America can live.

Mr. President, it’s time for the bankruptcy of GM and Chrysler.

Now that may seem harsh. But you really have no choice. Look around you. Everybody in America has his hand out — California and the movie industry, New York and Wall Street, homebuilders and the millions of mortgage deadbeats.

You need to send a message to all America — and fast. No more Mr. Nice Guy and no more money. Reinventing America doesn’t mean bailing everyone out. It means stopping those things that just don’t work anymore.

But such a bold gamble could mark a turning point early in your term.

It would get Republicans behind you. It would get Wall Street and America’s trading partners behind you. And it would get even more Americans behind you. Americans know when something makes sense.

Remember Ronald Reagan and the air traffic controllers’ strike of 1981?

That’s how he reinvented America. Now, it’s your turn.

Some good thoughts – worth a full reading.  Only problem is it won’t happen because there is no common sense in Washington and Mr. Obama is not Ronald Reagan.

The Burning Platform

The $787 billion 1,074 page stimulus bill has been passed. President Obama has signed it. The market immediately dropped 500 points. It will have no impact on the economy in 2009. The bill will stimulate nothing but the National Debt. Within months, plans for another stimulus plan will be demanded by the Democratic led Congress because speed and the appearance of action are how politicians get reelected. When I see Senator Charles Schumer of New York make a speech on the floor of the Senate saying, “And let me say this to all of the chattering class that so much focuses on those little, tiny, yes, porky amendments, the American people really don’t care”, I want to throttle him.Only a U.S. Senator would consider $100 billion a little tiny pork. His words prove that our leaders are so corrupted and disconnected from real Americans that they are running this country for their own self interest and the interests of their corporate money backers. Abraham Lincoln, an honest and wise man by most accounts, knew that calling pork spending stimulus doesn’t make it stimulus.

The definition of unsustainable is, not able to be maintained or supported in the future. To me, a picture is worth a thousand words.

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Source: Robert Shiller

As Congressional moron after Congressional moron goes on the usual Sunday talk show circuit and says we must stop home prices from falling, I wonder whether these people took basic math in high school. Are they capable of looking at a chart and understanding a long-term average? The median value of a U.S. home in 2000 was $119,600. It peaked at $221,900 in 2006. Historically, home prices have risen annually in line with CPI. If they had followed the long-term trend, they would have increased by 17% to $140,000. Instead, they skyrocketed by 86% due to Alan Greenspan’s irrational lowering of interest rates to 1%, the criminal pushing of loans by lowlife mortgage brokers, the greed and hubris of investment bankers and the foolishness and stupidity of home buyers. It is now 2009 and the median value should be $150,000 based on historical precedent. The median value at the end of 2008 was $180,100. Therefore, home prices are still 20% overvalued. Long-term averages are created by periods of overvaluation followed by periods of undervaluation. Prices need to fall 20% and could fall 30%. You will know we are at the bottom when the top shows on cable are Foreclose That House and Homeless Housewives of Orange County.

Instead of allowing the housing market to correct to its fair value, President Obama and Barney Frank will attempt to “mitigate” foreclosures. Mr. Frank has big plans for your tax dollars, “We may need more than $50 billion for foreclosure [mitigation]”. What this means is that you will be making your monthly mortgage payment and in addition you will be making a $100 payment per month for a deadbeat who bought more house than they could afford, is still watching a 52 inch HDTV, still eating in their perfect kitchens with granite countertops and stainless steel appliances. Barney thinks he can reverse the law of supply and demand by throwing your money at the problem. He will succeed in wasting billions of tax dollars and home prices will still fall 20% to 30%. Unsustainably high home prices can not be sustained. I would normally say that even a 3rd grader could understand this concept. But, instead I’ll say that even a U.S. Congressman should understand this.

Another common sense analysis by James Quinn well worth the entire read.  Markets are larger than any government and ultimately cannot be manipulated by government over the long term.  The United States Congress will waste trillions trying to support a housing market that will ultimately stabilize based on free market factors – not government manipulation and price supports.  If the government had the power to control the housing market, they would not have let it crash in the first place.

Greenspan Backs Bank Nationalization

The US government may have to nationalise some banks on a temporary basis to fix the financial system and restore the flow of credit, Alan Greenspan, the former Federal Reserve chairman, has told the Financial Times.

In an interview, Mr Greenspan, who for decades was regarded as the high priest of laisser-faire capitalism, said nationalisation could be the least bad option left for policymakers.

The one man who is probably the most responsible for creating the debt bomb explosion and global collapse has more advice for us.  Mr Greenspan, enjoy life with your $150,000 per speech fees along with your fine government pension.   But PLEASE stop giving us your damn advice.

The mad attempts to avoid any and all foreclosures is counter-productive. The foreclosure process is how an over-priced market returns back to normalcy.

Today at 12:15 am, we shall learn of the Obama administration’s new housing plan. I suspect it will have many of the same doomed features as all the other misguided housing plans floating around.

Before getting to those specifics, let’s revisit and recognize several truths:

• Home prices remain elevated;

• Artificially propping up prices is counter-productive;

• Home owers (No equity, 100%+ debt) who are in houses they cannot afford are going to have to move to homes or apartments they can afford;

• Foreclosures/REOs are often costly to banks; The lenders that made these bad loans to unqualified borrowers will suffer write-downs;

• It is not the responsibility of Taxpayers to bailout borrowers who are in over their heads, or lenders that made bad loans.

What are we likely to see from the White House today? I expect to see an over emphasis at stopping foreclosures; a reliance on foreclosure moratoriums; Involuntary loan modifications a/k/a cramdowns; and last, Interest rate deductions;

More sound, common sense advice from Barry Ritholtz.  The government’s constant stream of ridiculous “new plans” for solving the housing crisis with their Rube Goldberg mechanisms is sure to postpone any recovery or bottom in housing for decades.

Sovereign Default –  Which Domino Falls First?

It’s no longer a question of if, but where.  Will the first sovereign default occur in Eastern Europe or Asia?  The debt levels of many countries are no longer sustainable due to collapsing economies, destruction of asset/collateral values and the inability to obtain more credit.  Of the $5 trillion in loans made to emerging market countries, almost 75% of the lending was done by Western European banks.

Many countries no longer have the economic ability to service their debts.  Debts that cannot be paid, by definition, will be defaulted on.  The larger question is will the first sovereign default trigger a domino of defaults, resulting in a catastrophic series of defaults worldwide?

Courtesy Wall Street Journal

Filed Under: Bailout, Banking Industry, Deleveraging, Government spending, Sovereign Default Tagged With: , ,

Government Bond Buyers Demand Higher Yields

February 16, 2009 by 1 Comment

Massive Government Borrowing Raises Repayment Doubts

As governments worldwide attempt to sell massive amounts of debt, investors are beginning to question whether they are being properly compensated for default risk.  The assumption that government debt is risk free is being re-evaluated as debt service payments increase to an untenable percentage of government revenues.   Bond purchasers are further unnerved by the fact that there appears to be no end in sight to  mounting government deficits as nearly every sector of the global economy demands loans and cash bailouts.  Meanwhile, the collapse in corporate profits and massive job layoffs guarantees drastically lower government revenues at the same time that borrowing needs are escalating.

Recent events indicate that the capital markets may be unable or unwilling to fund unlimited government debt sales.

Threat To Government Debt

As countries compete for trillions of dollars of funding, markets are questioning long-held assumptions about the risk-free status of government bonds, and whether their ratings can weather the storm. Moody’s has waded into the debate by dividing its 18 triple-A countries into three categories.

At the top are 14 “resistant” triple-As, whose ratings aren’t being tested by the crisis, including Germany, France and Canada. The U.S. and the U.K. rank second as “resilient” triple-As. They face shocks to their economic model and very large contingent liabilities, but Moody’s thinks they can adjust.

Spain and Ireland, meanwhile, are “vulnerable,” based on their lack of ability to rebound. Ireland’s rating already has a negative outlook. Standard & Poor’s has downgraded Spain.

All of the sovereigns face mounting debt-to-GDP ratios, as debt issuance balloons and economic output declines.

Under Moody’s stress scenario, involving a further growth shock and permanently higher interest rates, interest payments for the U.S., U.K. and Ireland as a share of general government revenues would rise above 10% by the end of 2011 from 6.1%, 5.3% and 2.8%, respectively, at the end of 2007. Spain’s indicator would rise to over 5% from 3.9%.

The 10% barrier is crucial, as above this level debt service costs start to limit governments’ options. Double-A-rated Italy’s indicator was 10.7% at the end of 2007. Rome has admitted it can only respond in a limited way to the crisis because of its debt burden.

Japanese Bonds Fall With Rising Debt Sales

Feb. 16 (Bloomberg) — Japan’s 10-year bonds fell the most in a week on concern the government will spend more to revive an economy that shrank last quarter by the most since 1974.

Ten-year yields climbed from near a two-week low after the Cabinet Office said today the economy contracted at an annual 12.7 percent pace last quarter. Japan may expand its stimulus plans by 30 trillion yen ($323 billion)

Australian bonds also fell today as Prime Minister Kevin Rudd’s government steps up debt sales to finance economic packages. Australia’s government is selling as much as A$24 billion ($15.6 billion) of bonds by June 30 as it increases spending to avoid the nation’s first recession in 17 years.

Korean Auction

The South Korean government’s auction today of 10-year bonds failed to attracted sufficient demand for a second consecutive month. The government raised 584 billion won ($409 million) at the sale today, less than the 800 billion won it was seeking.

Japan’s debt burden is the largest among G-7 nations relative to GDP, according to data compiled by Bloomberg. Italy’s debt is equal to 117 percent of GDP, while the other five countries are below 70 percent, the data show.

Obama’s Promises Of Open Ended US Borrowing Deters Buyers

The Wall Street Journal notes that:

Prices of government bonds started to fall Friday, ahead of the vote by the House of Representatives that approved the $789.5 billion stimulus package. This decline could be the beginning of the capitulation the market has been bracing for since the administration of President Barack Obama took over, with promises of a recession-era boom in government spending.

No sooner had lawmakers reached a compromise on this spending program than yet another began to take shape, this time to help homeowners avoid default on their mortgages. Though the dimensions of this package are unclear — details are expected Wednesday — the bottom line is unequivocal. Each new rescue plan signals an expansion of government borrowing and more bonds flooding the market, which absorbed a record $67 billion last week.

As we can see from the chart of the TLT, a proxy for the government long bond, the bond market has been selling off dramatically for weeks as the size of the stimulus package became clear.  Major foreign buyers of our debt, such as China, are bluntly questioning our ability to repay.  It is obvious to logical minds that there are constraints and consequences to a government’s determination to borrow money beyond its capacity to service the debt.   South Korea and Germany have already had failed bond auctions, with insufficient investor demand to buy all the debt offered.  Italy is so indebted already, it has given up trying to sell additional debt.  Rational investors do not lend money to borrowers judged incapable of servicing and repaying debt.

Courtesy StockCharts.com

US interest rates will continue to rise as Congress talks of further huge government borrowings.  Higher borrowing costs will severely strain government budgets.  The banking industry, corporate America and John Q Public all are demanding funding, bailouts and tax breaks.   Congress’s promises to bailout everyone and to “spend us into prosperity” with borrowed money will lead to financial disaster.  The out of control borrowing and spending will eventually result in the need for a bailout of the United States.  At that point, the issue of default by the United States will no longer constitute an academic discussion – it will be real and the cost will be unimaginable.   Hopefully, the ruling elite will not bring us to this final stage of national ruin.

Filed Under: Bailout, Economy, Government spending, Sovereign Default, Stimulus Plan Tagged With: , , , ,

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: ,