October 2, 2022

An Economic Puzzle – Consumer Confidence Hits Six Year High While Majority of Americans Say U.S. Still in Recession

courtesy: forbes.com

If everyone from the Fed Chairman on down to the average man in the street seems confused about how the economy is doing, well, it’s because they are. The economy is still in a recession, a depression or an emerging boom depending on who you listen to. Two recent news articles published days apart highlight the divergence of opinion on the state of economic affairs.

Consumer Confidence Revisits High Set in 2007

Americans are more confident about the economy than at any time since July 2007, a survey found, suggesting consumers will spend more and accelerate growth in the months ahead.

The University of Michigan said on Friday that its final reading of consumer sentiment in July was 85.1. That’s up one point from June and nearly 13 points higher than a year ago.

Rising home prices and steady job gains are bolstering household wealth and income. The proportion of Americans who expect their inflation-adjusted incomes to rise in the coming year is greater than at any time since late 2007, the survey found. And the percentage of Americans who say their home values have risen is also at a six-year high.

Majority of Americans Say U.S Still in Recession

The economy may be sputtering along. But it hasn’t been in recession for more than four years. More than half of Americans think it still is.

A majority of people — 54% — in a new McClatchy-Marist poll think the country is in an economic downturn, according to the survey conducted last week and released Tuesday.

The McClatchy-Marist poll found that Americans who earn less are more likely to think the economy is in a recession. Of those earning less than $50,000 a year, nearly two-thirds say the downturn is still underway. For those earning more than that, only 47% think so.

Is it any wonder that Bernanke swings from tapering to easing in the same week? The Federal Reserve, packed with PhD economists, seems as equally confused about the state of the economy as the average consumer.

After considering the divergent opinions, two general conclusions regarding the economy are possible here.

-Predicting the future is a fool’s game, and
-Consumers who have well-paying jobs, money in the bank and rising incomes are far more likely to be optimistic about the future than someone with no job and no money.

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

Latest Government Scheme For Growth – The Invisible Tax Cut

Pulling forward future demand to stimulate economic growth didn’t work with the cash for clunkers program or housing tax credits.   Car and home sales collapsed after consumers who were going to buy cars or houses anyways bought today instead of tomorrow.  Past stimulus programs have increased government deficits without improving long term economic fundamentals.

Undeterred by previous failures the government is again attempting to pull forward demand, this time with accelerated write offs for new plant and equipment spending.

The new Obama tax break proposals are likely to be even more ineffective than previous stimulus attempts.  To “offset” the revenue loss of accelerated deductions, other taxes would be raised, effectively muting the net stimulus that the plan attempts to provide. 

NYT –  In a speech in Cleveland on Wednesday, Mr. Obama will also make a case for the package of roughly $180 billion in expanded business tax cuts and infrastructure spending disclosed by the White House in bits and pieces over the past few days. He would offset the cost by closing other tax breaks for multinational corporations, oil and gas companies and others.

The “tax cuts” for increased business investment merely accelerate the existing tax write off for business investments that are presently written off over a period of years.  If other taxes are raised to “offset” the accelerated tax deductions, the net effect of the plan would be to effectively increase taxes on businesses.

The lure of accelerated tax cuts (which increase cash flow) is not likely to affect decisions on investment spending since corporate America is already sitting on a record amount of cash.  Accelerating depreciation deductions will merely pull demand forward from companies that had already planned spending increases for plant and equipment. 

Rational consumers and businessmen do not base long term spending decisions on tax deductions.  Increased spending by businesses is based on an increase in forecast demand.   Consumer spending is ultimately based on confidence in the prospect for increases in future incomes.  

For good reasons, neither businesses nor individuals are confident about the future and there is deep skepticism that additional stimulus programs will do little more than increase the government deficit.  The latest stimulus plan is conceptually vacuous and likely to decrease public confidence in the government’s ability to formulate a plan for long term economic recovery.

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”?

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

The FDIC Deposit Insurance Fund (DIF) – A Risky Game Of Confidence

FDIC Rightly Worries About Public Confidence

Due to the large number of bank failures during 2009 the FDIC Deposit Insurance Fund (DIF) has fallen to the lowest level since March 1993.  Numerous headlines are screaming that the FDIC is bankrupt and that the DIF fund is depleted.  Considering the perilous financial condition of the banking industry and the possibility of perhaps another 1,000 or more bank closings, the FDIC is probably not capable of fulfilling its mission without substantial loans from the US Treasury.  (The last time this happened was in the early 1990s during the savings and loan crisis when the FDIC had to borrow $15 billion from the US Treasury.)  This does not mean, however, that the upcoming FDIC  Quarterly Banking Profile will report a negative balance in the DIF.

The FDIC has made it clear that they consider it important to maintain a positive DIF number to avoid causing a lack of confidence in the banking system by the public.

The FDIC believes that it is important that the fund not decline to a level that could undermine public confidence in federal deposit insurance. A fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors.

In addition, the FDIC has increased assessments on FDIC insured institutions to replenish the DIF fund and predicted that the DIF would remain positive in 2009.

May 22, 2009 – With the special assessment adopted today, the FDIC projects that the DIF will remain low but positive through 2009 and then begin to rise in 2010. However, Chairman Bair also cautioned that given the inherent uncertainty in these projections and the importance of maintaining a positive fund balance and reserve ratio, “it is probable that an additional special assessment will be necessary in the fourth quarter, although the amount of such a special assessment is uncertain.”

Even though the FDIC has significant authority to borrow from the Treasury to cover losses, a fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors.  The FDIC views the Treasury line of credit as available to cover unforeseen losses, not as a source of financing projected losses.

The DIF Shell Game

So how does the FDIC manage to report a positive DIF when the March 31, 2009 balance was $13 billion and estimated FDIC losses on bank closing since March 31 total $19.3 billion?  Determining the DIF balance is not a matter of simply subtracting the banking failure losses from the DIF fund.  The FDIC uses accrual accounting to establish reserves against the DIF fund for estimated future losses.

For example, during 2008 the FDIC heavily reserved for anticipated future banking failures in 2009.  The FDIC established provisions for losses of $41.8 billion compared to actual losses on 2008 bank closings of $17.9 billion.  The reserve fund at March 31 had a balance of $28.5 billion against which the FDIC year to date losses since March 31 of $19.3 billion could be charged.  This would still leave the FDIC a reserve balance for future banking failures of $9.2 billion.

In addition, the FDIC has imposed large assessment on FDIC insured banks to replenish the DIF fund.   The assessments earned by the FDIC have increased steadily throughout 2008 as the banking crisis unfolded.   In the first quarter of 2009, the FDIC collected assessments of $2.6 billion to rebuild the DIF fund.  This compares to total assessments for all of 2008 of $2.965 billion and only $643 million in 2007.

In summary, if the FDIC offsets its losses against previously established reserves,  and collects an additional $3 billion in assessments, the FDIC could actually report an increase in the DIF fund to approximately $16 billion.   My guess is that the FDIC will only use a portion of the reserve balance, and report a DIF positive balance in the range of $10 to $13 billion when the Quarterly Banking Profile is released.   It’s all about confidence and an uneducated stupid public – the DIF balance of around $20 billion allegedly “protects” over $6 trillion in deposits! The only thing that would expose this “confidence game” is if the financial results for the banking industry come in much worse than the last quarter.  Stay tuned.

DIF

DIF

Disclosures:  None

FDIC Tells Banks California IOU’s Good As Gold

Bank Have Enough Bad Assets

Yesterday, a group of major banks, including Bank of America, Citigroup, JP Morgan and Wells Fargo,  said that they would stop accepting California IOU’s.  The State of California, virtually out of cash, has been issuing IOU’s, known officially as “individual registered warrants” to creditors in lieu of cash.  The State has promised to pay IOU holders 3.75% interest when the warrants mature on October 2.

With Fitch Ratings dropping California’s debt rating to BBB junk status, it is understandable that the banks do not want to cash the IOU’s.  Allowing warrant holders to cash in their IOU’s would effectively transfer the credit risk of the IOU’s to the banks.  Most major banks already have a mountain of non performing assets and, understandably, do not wish to add California IOUs to the list.

The reality of the situation is that California has already defaulted since they have reneged on their obligations to creditors.   I wonder what the State of California’s reaction will be when their citizens adopt the State’s method of bill payment and start sending in IOU’s instead of cash for tax payments due?  Many of California’s citizen have been placed in a horrendous financial situation by California’s “spend and borrow until we are bankrupt” policies.  If the banks won’t cash in the IOU’s, why would an average citizen or business want the IOU’s?   The IOU’s won’t pay for your groceries or rent and they can’t be converted to cash – what does that say about faith in California’s “promises to pay tomorrow what is due today”?

FDIC Issues Statement On California IOU’s

The FDIC today issued the following statement to its member banks regarding the credit worthiness of California’s IOU’s.

California Registered Warrants
Interagency Statement

Summary: The federal financial institution regulatory agencies are jointly issuing the attached supervisory guidance for financial institutions regarding the regulatory capital treatment for registered warrants issued by the State of California as payment for certain obligations.

Highlights:

  • The Attorney General of the State of California has opined that the registered warrants that the State is issuing as a form of payment for certain of its obligations are valid and binding obligations of the State.
  • The banking agencies’ risk-based capital standards permit a banking organization to risk weight general obligation claims on a state at 20 percent. These warrants, which are general obligations of the State, would, therefore, be eligible for the 20 percent risk weight for risk-based capital purposes.
  • Banks should exercise the same prudent judgment and sound risk management practices with respect to the registered warrants as they would with any other obligation of a state.

It would guess that the FDIC’s statement on the soundness of California’s IOU’s was more politically motivated than financially inspired.  If this is all the support that California is going to get from the Federal Government, the citizens of California have much to be concerned about.

The FDIC is telling the banks that the risk of the  California’s warrants is the same as any other state issued general obligation debt.  Nice try, but apparently, the biggest banks in the country, as well as the credit rating agencies, are not buying this line.  If the banks won’t cash the IOU’s and you can’t spend them, they are effectively worthless today.  Those stuck with California IOU’s may be in for a long wait before they can be cashed in.

Disclosures: None

Geithner – “I am not a crook”

“Chinese assets are very safe”

This remarkable assertion regarding the safety of US debt securities held by China was made by Timothy Geithner, US Treasury Secretary, during his visit to China.   That Mr. Geithner felt compelled to make this statement probably reinforced the unease China has about the finances of the United States.  If the Chinese assets were actually “safe” and everyone knew it, there would have been no need to say that they were safe.

Mr. Geithner’s denial brings to mind another famous denial made by Richard  Nixon during the Watergate affair – “I am not a crook”.  We all know how that turned out.  If it wasn’t obvious that everyone knew Nixon was a crook, he would not have had to deny it.  If US assets are really safe, Geithner would not have to say that they are safe.

Almost a Vaudeville Act

Mr Geithner’s “Chinese assets are very safe” line was  greeted with loud laughter by the student audience he made his remark to.   The laughter speaks for itself regarding the credibility given to Mr. Geithner’s assurances.  Perhaps our Treasury Secretary should have countered the laughter by saying, “I am totally serious about this”.

At the same time, the President and Chairman of the Federal Reserve were very publicly proclaiming that the US deficits would be cut, future spending would be “disciplined” and that fiscal imbalances would be addressed.  These remarks probably confused the Chinese as they watch the United States implement programs that require trillions of dollars a year of new deficit spending.  You can say you will do something but what really counts is what you actually do.   Words are a cheap commodity while confidence is precious.

The recent remarks by Geithner, Obama and Bernanke promising fiscal restraint may have something to do with the following chart.

10 Year Treasury

10 Year Treasury

Courtesy: Yahoo finance

Despite the Fed’s massive purchases of mortgage and treasury securities,  price action in the long term treasury market clearly indicates more sellers than buyers, with rates nearly doubling since late last December.  Rates at 3.75% on the 10 year treasury are certainly not a disaster, but if all the powers of the Fed and Treasury to lower interest rates are failing, then maybe things aren’t so “safe” after all.

The Futility Of Lower Interest Rates, Obama Motors, “Atlas Shrugged” Sales Surge & Confidence Mounts

As stock markets surge, GM’s future is suddenly bright and consumer confidence soars, here are some recent blog posts worth the read with some alternative insights.

Why lower interest rates are not effective monetary policy

If too much debt caused the financial crisis, why are governments world wide trying to force more debt on an over leveraged world?  Japan’s policy of rock bottom low interest rates did not prevent Japan’s “lost decade” of economic growth and results for the  rest of the world will be no different now.  Why low interest rates do not improve the economy.

We are all now GM shareholders but don’t spend the profits yet

Now that the government, aka known as “the people” own General Motors, can we expect to see a quick turnaround that has eluded GM management for decades?  If GM cannot come up with products at a competitive price that buyers in a free market will purchase, the huge taxpayers subsidies will have been nothing but “stimulus waste”.

Atlas Shrugged book sales continue strong

The truths in Atlas Shrugged continue to promote big sales of a book written half a century ago.  Government policies continue to protect and save the least productive while killing the overall economy.  Our present political system almost guarantees the continuation of self destructive governmental economic policies.

With no signs of real economic recovery in sight, consumer confidence grows

Is the increase in consumer confidence in the economy justified?  Although we seem to have avoided the economic collapse widely feared just several months back, what has really changed?  Balance sheets and incomes have not improved and job losses continue.  Do not expect a “V” shaped recovery.