December 21, 2024

Census Bureau Report Portrays Destruction Of The American Dream

September 11, 2009 by Leave a Comment

It Already Is A Depression For Many

The latest report from the Census Bureau on income, poverty and health insurance coverage portrays a darkening economic picture for millions of Americans.  Incomes and living standards fell without regard to geography, race or work profession.  For many, the Census report only confirms the destruction of the “American Dream” of economic advancement.

  • For 2008 real median household income declined 3.6% to $50,303.
  • The official poverty rate in 2008 increased to 13.2% from 12.5% the previous year and is the highest since 1997.   There are now 39.8  million people in poverty.  The government definition of poverty for a family of four is an income below $22,025.
  • The number of people without health insurance increased from 45.7 million to 46.3 million.  The number of people with private health insurance decreased slightly to 201 million.
  • Incomes declined across all racial groups.
  • Incomes declined in every geographic region except the Northeast where incomes remained unchanged.
  • Income inequality was unchanged in 2008 from the prior year, indicating that no income class was spared from a decline in income.

While the government is rolling out the press releases congratulating itself on an economic recovery, many Americans remain in an economic nightmare of unemployment, poverty and hopelessness.   The latest stats from the Census Bureau provide little reason for optimism since without income growth there will be no economic recovery. The latest report on the number of homeowners in foreclosure signals no recovery to date in incomes or jobs.

U.S. Foreclosure Filings Top 300,000 for Sixth Straight Month

Sept. 10 (Bloomberg) — Foreclosure filings in the U.S. exceeded 300,000 for the sixth straight month as job losses that boosted the unemployment rate to a 26-year high left many homeowners unable to keep up with their mortgage payments.

A total of 358,471 properties received a default or auction notice or were seized last month, according to data provider RealtyTrac Inc. That’s up 18 percent from a year earlier…. One in 357 households received a filing.

Foreclosures rose from a year earlier as companies cut payrolls by 216,000 workers last month…

“The foreclosure numbers are largely unemployment related,” Davis, a former Federal Reserve Board economist, said in an interview. “As long as 15 million Americans are unemployed, record foreclosures will continue.”

With the real world unemployment rate approaching 20%, the government’s loan modification schemes merely delay inevitable foreclosure for many homeowners – without income any monthly payment is too high.  Nor is unemployment the only cause of foreclosures.  For those who still have jobs but are barely getting by, a decrease in income can easily lead to mortgage default.

We Need Income – Not More Debt

cbearnings

While the divorced from reality politicians in Washington decide on what new deficit financed spending program they should enact next, they are missing the big picture.  Our future long term national prosperity will be based on promoting free enterprise job creation – something that does not appear to be on the agenda in Washington.

Filed Under: Economy, Government spending, Have Nots, Jobs, Stimulus Plan Tagged With: , ,

Extended Unemployment Benefits Make Little Sense

September 2, 2009 by 18 Comments

Do Extended Benefits Reduce Job Seeker’s Motivation?

Excluding the depression of the 1930’s we are fast approaching a new official high in unemployment.  During the depths of the last worst recession of 1981, unemployment exceeded 10% vs 9.4% today.  If we include marginally attached and involuntarily part time workers in the unemployment numbers, the current unemployment rate exceeds 16%.

In response to the high level of unemployment and the difficulty of obtaining employment, Congress has enacted legislation that allows the unemployed in 24 states to collect up to 79 weeks of unemployment benefits.   The other states allow unemployment benefits  from 46 to 72 weeks.  In more normal economic times, the limit on unemployment benefits was usually up to 26 weeks.

Washington legislators are now proposing another extension of benefits for up to another 13 weeks that would cost up to $70 billion.  The additional extension of benefits was prompted by the fact that up to 1.5 million unemployed Americans would soon be losing their unemployment checks as they reach the current payment limits.

In addition, the duration of unemployment has reached new highs not seen since record keeping began.

Duration of Unemployment

Given the unprecedented level of unemployment, the duration of unemployment and well reasoned arguments on why unemployment will continue to increase, the entire concept of unemployment benefits should be reconsidered.

Should Unemployment Benefits Be “Free”?  –  Some Alternatives

  • Is the constant extension of unemployment benefits reducing the motivation of the unemployed to seek new employment?   In the past year I have tried to hire unemployed people for an entry level position in which the starting pay was comparable to or slightly above the level of unemployment benefits the job seeker was currently receiving.  In almost every instance, the job seeker declined the job offer, preferring instead to postpone employment until benefits ran out.  I have also heard this same story from other people.  To maintain unemployment benefits, many states require that a benefit recipient contact a certain number of employers per week to seek work – how many of the unemployed merely go through the routine of seeking employment to maintain benefit payments?
  • Should the economy weaken further and job losses continue, does it make sense for Congress to constantly extend costly unemployment benefits with zero obligation from the recipient?  Bill Clinton reformed welfare by requiring benefit recipients to work.  Why not do the same with the unemployed who are receiving benefits?   Many charities, local governments, hospitals and companies  could employ additional manpower in a variety of productive endeavors.   The unemployment benefits would still be paid by the government, but the benefits would have to be earned.  From a self worth perspective, getting engaged back into the real world would benefit the unemployed as well – sure beats watching television all day.
  • Instead of spending hundreds of billions on unemployment benefits and getting nothing in return, the government could establish job training programs or put the unemployed to work on infrastructure projects that the country sorely needs.  This was done in the 1930’s with the Works Progress Administration (WPA) and the country still benefits to this day from the roads, bridges, dams and buildings that were constructed.   The preferred way to do this would be for government bureaucrats to get out of the way and contract projects to private industry.  Paying people to do nothing accomplishes nothing.

Ideally, the economy recovers and private industry rehires many of the unemployed.  Realistically, the country may face continued massive job losses or at best a slow recovery where the unemployment rate remains in the 10% plus range for an extended period of time.   Maintaining an army of paid and unemployed workers to sit idle makes no sense.

More on this topic

When The Laid-Off Are Better Off

Would it surprise you to learn that survivors can suffer just as much, if not more, than colleagues who get laid off?  “How much better off the laid-off were was stunning and shocking to us,” says Sarah Moore, a University of Puget Sound industrial psychology professor who is one of the book’s four authors. “So much of the literature talks about how dreadful unemployment is.”

Filed Under: Economy, Government spending, Have Nots, Jobs, Layoffs, Regulatory Reform, Unemployment Tagged With: ,

If You Buy A Lottery Ticket In Connecticut Don’t Go On Vacation

August 17, 2009 by 2 Comments

Living Beyond Your Means

Connecticut is facing a projected $8 billion dollar plus deficit over the next two years.  In an attempt to prevent raising taxes which are already among the highest in the nation, Connecticut is following the  familiar tactic of borrowing to cover spending that the State’s citizens can’t afford.

Aug. 4 (Bloomberg) –– Connecticut, which faces an $8.55 billion budget deficit over the next two years, may borrow almost $1 billion to close a gap left over from the fiscal year that ended June 30.

“We would agree that it is necessary and appropriate” to borrow to fill the deficit, Jeffrey Beckham, a spokesman for the state’s Office of Policy and Management, which is controlled by the governor, said in a telephone interview yesterday.

Connecticut, in addition to being the wealthiest state, is also the most in hock, with $4,490 in net tax-supported debt per capita as of the end of last year, according to Moody’s. It sold bonds to finance deficits in 2002 and 2003, and was downgraded around that time one step to Aa3 as a result of its finances, said Nicole Johnson, a Moody’s analyst in New York.

Spend more than you earn year after year and the final conclusion is obvious.  At some point, a debt crisis develops as  creditors stop lending.   The debt crisis leads to modest spending cuts and large tax increases which further reduces private economic growth that taxes are ultimately based on.

California Situation Ignored

This should all sound very familiar to citizens of the State of California who are a bit further along the path of economic suicide than Connecticut.    Connecticut has not officially raised the income and sales tax rates but  has imposed a large variety of  fee increases (taxes) on every transaction possible.  Thousands of fee increases  on everything from motor vehicle registrations to business licenses have reduced Connecticut taxpayers’ disposable income.

The State has sought to squeeze money out of their citizens in the most obnoxious ways possible.    Draconian enforcement of traffic laws yield fines in excess of an average person’s weekly paycheck for relatively minor transgressions.   Leave your money in a brokerage or bank account for a couple of years without making a transaction and the State will grab the funds under the pretext of protecting the depositor yet will make little effort to track down the owner of the account.  The list goes on.  Taxpayers being squeezed dry may understandably ask why State spending cannot be cut and exactly who benefits from the huge spending  increases?

Connecticut is leaving no stone unturned in its efforts to increase the effective tax rate on its citizens.  The latest outrage  in the State’s desperate attempt to expropriate every dollar possible is a reduction in the time allowed for lottery winners to claim their winnings.  Any lottery ticket buyers in Connecticut should not take long vacations.  The time limit for claiming prizes has now been reduced to only six months instead of 1 year, effective August 2, 2009.   The change in claim time limitation is expected to cheat Connecticut lottery players out of $6.1 million yearly.  As things currently stand, Connecticut is collecting $13 million of unclaimed winnings each year from winners who do not collect within the one year limitation.

The larger question here is how can individual taxpayers deal with a Government that is out of control, irresponsible and oblivious to the economic destruction they are causing?   The answer may be one that nobody wants to hear.

Filed Under: Corruption, Futility of higher taxes, Government spending Tagged With: , ,

Super Clunkers – How Congress Can Double US Vehicle Sales

August 14, 2009 by 5 Comments

Clash for Clunkers Increases Car Sales

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

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

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

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

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

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

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

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

Clunkers Encore

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

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

How Congress Can Double Car Sales

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

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

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

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

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

What politician would not vote for this plan?

Disclosures: No Positions

Filed Under: Bailout, Cash For Clunkers Phase II, Congress, GM, Government spending, Stimulus Plan Tagged With: , ,

How The Government Encourages “Ruthless Defaulters”

July 28, 2009 by Leave a Comment

The Delusion of Lenders

The old banking rule of lending only to those who had the capacity to repay was gradually relaxed and then completely abandoned over the past two decades.

New techniques such as loan securitization spread the risk far and wide, theoretically reducing the risk by spreading the risk.    No income verification for mortgage loans became routine since home price appreciation seemed to further diminish the risk – a defaulted mortgage loan could be fully recovered by seizing and selling the collateral.  Risky unsecured credit card lending seemed to have limited risk, as well, since a troubled borrower could simply borrow more to make loan payments that were beyond his income ability.

It all worked fine until it didn’t and economic historians will be debating for decades what went wrong.   The short answer is, of course, that loans extended to those without the ability to repay will eventually default.

The government’s answer to cure defaults by over indebted consumers is to encourage banks to extend more credit to postpone the day of reckoning.  Unfortunately, the government’s “solution” won’t work this time since it is the day of reckoning.

Businesses and the average American consumer have the good sense to realize that borrowing more when they can’t afford the debt payments they have now is total lunacy.  The result is stricter lending by the banks and reduced demand for loans.  Consider the reduction in bank lending taking place:

Loans Shrink as Fear Lingers

Lending continues to slow as bankers and borrowers refrain from taking risks, in a bearish sign for the economy.

The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows.

The numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses. And loan demand is falling as companies shelve expansion plans and consumers trim spending to ride out the recession.

The slow pace of lending has created political heat for the Obama administration. On Friday, Rep. Spencer Bachus (R., Ala.) pressed Treasury Secretary Timothy Geithner to “tell me why we didn’t really see that multiplier effect” from banks funneling their TARP money into lots of loans.

The disturbing part of the above article is that politicians view tougher lending standards as an economic negative when, in fact,  it is extremely positive.

Bankers, businesses and consumers see the new economic reality and are cutting debt and rebuilding balance sheets –  essential actions for a sound economic recovery.  Those encouraging more lending and borrowing should consider the following chart.

Debt VS Savings

Debt VS Savings

Courtesy: Credit Writedowns

Debt Burdens Double

With income growth declining and debt burdens already intolerable for many,  what rational lender would seek to lend and what rational borrower would seek to borrow?  The debt burden for many has reached levels where default is the only option – more credit would only lead to a larger future loss to a lender.

Growth in debt that is commensurate with growth in income promotes sound economic growth.  Unfortunately the debt burden has expanded far in excess of income growth, with debt to income ratios doubling since the 1980’s.

hhdebttoincome43

Household Debt To Income

Courtesy:  continuations.com

Debt Repudiation And Unintended Consequences

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

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

How does a banker factor into his risk adjusted lending rate “defaults of convenience”?  The problem of debt repudiation is large and will get larger as described by the New York Times.

When Debtors Decide to Default

Those on the front lines of the debt industry say there is a small but increasingly noticeable group of strapped consumers who, like Ms. Birks, are deciding they will simply stop paying. After loading up on debt eagerly provided by the card companies during the boom times, these people now find themselves trapped in an endless cycle where they are charged interest on interest and fees upon fees while the lenders get government bailouts.

The lending industry term for these people is “ruthless defaulters.” In a miserable economy where paychecks, savings and expectations are all diminished, their numbers will surely grow.

Collectors are noticing a shift not only in ability but in willingness to pay. “With all the bailouts the government is giving everyone, no one has any personal accountability about their own debts,” said Roger Knauf, who runs a trade group of debt-buying firms.

Much of the blame for the excessive debt that consumers took on can be placed on fee crazed bankers who did not properly evaluate risk.  As loan losses continue,  expect bankers to act like bankers again and to continue tightening their lending standards to avoid future defaults.

Lending will remained constrained and intelligent consumers will continue to borrow less and save more – the exact strategy necessary to work off the insane debt binge this country has been on for decades.

Biggest Fool Still Borrowing

Unfortunately, there is still one drunken fool at the party,  relentlessly expanding the borrowing insanity that has put the world on the brink of economic ruin.  Uncle Sam needs to sober up and rethink the flawed theory that unlimited credit equals unlimited wealth.

US Deficits and Debt Increases

US Deficits and Debt Increases

Courtesy: Wikepedia

Filed Under: Deleveraging, Government spending, loan modification Tagged With: , ,

The Perfect Health Care Plan For The Legendary 46 Million

July 2, 2009 by Leave a Comment

Another Government Solution At Zero Cost

Congress has been working hard lately as one trillion dollar legislative decree after another has “solved” the banking crisis, the global warming crisis and the foreclosure crisis.  In between all of this, an almost trillion dollar stimulus plan was passed to solve the economic crisis of declining GDP growth and job losses.    (See Cost of Easy Money – $14 Trillion and Counting).

Now, as we enter the month of July, Congress is eager to pass  another multi trillion dollar piece of legislative fiat, this time to solve the health care crisis.   We are also told that solving the health care crisis will be achieved at zero cost due to offsetting “savings”.

The goal of providing unrationed, free and universal health care may be more difficult and complex than anticipated.   Health care spending comprises almost 20% of our GDP and involves millions of jobs and hundreds of thousands of varied health care providers all intertwined in a complex network.  Simplistic solutions put together during the frenzied atmosphere of  “let’s get it done this month” are likely to produce many unintended adverse consequences.  Public opinion polls reveal the confusion regarding what should be done to improve the US health care system.

Confused US Has Lots To Say About Health Care

Americans are passionate and confused about it — and their opinions are all over the lot.

A CNN-Opinion Research poll found that 51 percent of Americans favor Obama’s health-care plan, but a Wall Street Journal-NBC poll found that only 33 percent think it is a “good idea.” A New York Times-CBS News poll found that nearly six in 10 would be willing to pay higher taxes so that all could be insured, but a Kaiser poll found that 54 percent would not be willing to pay more to increase the number.

A Quinnipiac University poll found that a majority — 54 percent — believe that reducing health-care costs is more important than covering those who lack coverage, while the Times-CBS poll found that 65 percent thought that insuring the uninsured was a more serious issue. A Washington Post poll found that 57 percent of Americans are dissatisfied with the health-care system — but 83 percent are satisfied with the quality of their own care.

In short, when it comes to health care, the state of the union is confused. The confusion won’t be cleared up by the complexity of the debate, with all the jargon about community ratings and insurance exchanges and risk adjustments and guaranteed issues.

Reading some of the latest commentary on health care reform, our national leaders have tried to dumb down the issue and provide simplified answers for confused Americans.

Here are the promises:

Obama vows that health care reform will not add one dime to the federal budget deficit.  The plan to provide government insurance to those who cannot obtain private health insurance will be paid for by collecting premiums from the newly insured.

Drastic cuts in Medicare and Medicaid reimbursements to specialists and other health care providers can be used to pay for the cost of providing medical services to the uninsured.

The legendary 46 million uninsured people in America will have the unlimited health care they are entitled to.

In order to achieve universal and affordable health care, time is of the essence and Congress needs to quickly approve legislation by the end of July.

Here are the realities:

The Congressional Budget Office estimates the cost of health care reform at $1.6 trillion over the next ten years.   Based on the routine cost overruns of every government program, expect this number to be at least twice the estimate.

“Savings” obtained by cutting reimbursements translates into reduced jobs and incomes for the companies employing health care workers.

If there are really 46 million people being denied health care in this country, we would literally be tripping over the dead and dying every time we ventured out.  Where are the headlines citing real people who have perished from unavailable health care?  This hyped and unverified figure exaggerates the “health care crisis” for political purposes.

If 46 million people actually have no insurance, the logical question is why?  If  many of the uninsured do not have health insurance because they cannot afford the cost, exactly how is the government going to cover the cost of providing health care to the uninsured by “collecting premiums”?

Health care, essential to all of us,  is an issue for many Americans.   Those who believe that Washington can provide universal health care without “adding a dime to the federal deficit” are in fantasy land.

And this from a major hospital in Connecticut in a letter to their employees:

Tough times continue for “X”  Hospital and for health care overall.  At this time last year, our financials were making a comeback – not so far this year.  As unemployment rises in the local area, we’re seeing more patients with government insurance.  We already know that we will be reimbursed even less for these patients next year.  In our immediate region, Bridgeport, Greenwich, New Milford and Waterbury hospitals have laid off workers to make up for financial losses.

The initial results of government “cost savings” generated by lower reimbursements are resulting in health care job losses and weakening the financial condition of many hospitals and other health care providers.  Given the size of future promised government “savings” from reduced payments to health care providers,  who will be left employed in the health care industry to provide health care?

Filed Under: Government spending, Health care reform, Too Good To Be True Tagged With: ,

Obama – 40 more years!

June 17, 2009 by 1 Comment

For all of those worried about tax increases, slow economic growth and rapidly expanding deficits, I have one word – relax.  Consider the following comments made by the President today.

Obama Says Robust Growth Will Prevent Tax Increases

June 16 (Bloomberg) — “One of the biggest variables in this whole thing is economic growth,” the president said in an interview with Bloomberg News at the White House. “If we are growing at a robust rate, then we can pay for the government that we need without having to raise taxes.”

Obama has repeatedly said he would keep his campaign pledge to cut taxes for 95 percent of working Americans while rolling back tax breaks for households making more than $250,000 a year.

The U.S. economy shrank at a 5.7 percent annual pace in the first quarter… The median forecast for growth next year is 1.8 percent, according to the survey.

Obama warned that if economic growth remains “anemic” and Congress fails to adopt his plans to hold down the cost of health care, work on alternative energy sources and improve the U.S. education system, “then we’re going to continue to have problems.”

He also repeated his promise to cut the budget deficit, forecast to hit $1.8 trillion this year, in half by the end of his first term.

“If my proposals are adopted, then not only are we cutting the deficit in half compared to where it would be if we didn’t do anything, but we’re also going to be able to raise revenue on people making over $250,000 a year in a modest way,” he said. “That helps close the deficit.”

Fiscal discipline that leads to lower budget deficits is important, Obama said, to ensure investors around the world keep buying U.S. government debt.

From warning of a “financial catastrophe” some short months ago, we are now being told that:

  1. Robust economic growth will cover government spending increases
  2. 5% of working Americans will cover the tab for the other 95%
  3. New spending on health care, education and the environment will spur economic growth
  4. Deficits will be cut in half to only $1 trillion a year
  5. Fiscal discipline will cause investors to lust after U.S. debt securities

News like this is almost enough to make one believe that the recent 40% gain in stock prices is just the beginning of  new wealth creation for investors.

Before rushing into a 100% long position with your portfolio,  consider some of the potential headwinds that the President’s magic scenario will face.

Past decades in the U.S. have been distinguished by slow economic growth (despite huge credit stimulus), stagnate or declining real incomes and a massive increase in the debt burden on every sector of the economy.   In addition, American’s have seen their major asset categories – stocks and real estate – vaporized by multi trillion dollar losses.

Median Household Incomes Fell in 94% of the States – 1999-2005.

1999-2006 Income Declines

1999-2006 Income Declines

Courtesy: mwhodges.home

Household Debt Ratio

Household Debt Ratio

Debt to National Income

Debt to National Income

Debt to National Income Ratio

Debt to National Income Ratio

Workers in Manufacturing

Workers in Manufacturing

Personal savings rate

Personal savings rate

Decline In Purchasing Power US $

Decline In Purchasing Power US $

Conclusion:

The national economic trends of past decades are:

  • Lower incomes
  • Staggering increases in debt
  • Dramatic decreases in savings
  • The destruction of our manufacturing base
  • A 90% decline in the purchasing value of our currency

If the President can reverse these trends, I say change the Constitution and give him 40 more years in office!

Filed Under: Economy, Government spending, Jobs, Uncategorized Tagged With: ,

The Cost Of Easy Money – $14 Trillion and Counting

June 16, 2009 by Leave a Comment

Supervisory Insights – Where The Money Went

The FDIC released their Supervisory Insights report today which contains a detailed breakdown of the almost $14 trillion dollars committed by the Government to support the financial system over the past two years.   This huge commitment of taxpayer money can be viewed as the  cost of cleaning up after the Greenspan era of easy money.   The cost of the financial devastation that ensued from the easy money/easy lending era  far outweighs any illusory benefits that may have been gained.

The FDIC report easily recognized  the precipitating factors of the financial crisis of 2008.

The factors precipitating the financial turmoil of 2008 have been the subject of extensive public discussion and debate. The fallout from weak underwriting standards prevailing during a multi-year economic expansion first became evident in subprime mortgages, with Alt-A mortgages soon to follow. Lax underwriting practices fueled a rapid increase in housing prices, which subsequently adjusted sharply downward across many parts of the country.

Excessive reliance on financial leverage compounded problems for individual firms and the financial system as a whole.

One indicator of the gravity of recent developments is this: in 2008,  U.S. financial regulatory agencies extended $6.8 trillion in temporary loans, liability guarantees and asset guarantees in support of financial services.  By the end of the first quarter of 2009, the maximum capacity of new government financial support programs in place, or announced, exceeded $13 trillion.

And some of the old banking basics—prudent loan underwriting, strong capital and liquidity, and the fair treatment of customers—re-emerged as likely cornerstones of a more stable financial system in the future.

The obvious question is why were prudent loan underwriting standards abandoned in the first place?  Lenders, borrowers and regulators alike were all blinded by greed and the misguided belief that easy wealth was being created by the use of ridiculous amounts of cheap credit.  Now, at a cost of almost an entire year’s GDP, we know better – at least until next time.

Government Support for Financial Assets and Liabilities Announced in 2008 and Soon Thereafter ($ in billions)
Important note: Amounts are gross loans, asset and liability guarantees and asset purchases, do not represent net cost to taxpayers, do not reflect contributions of private capital expected to accompany some programs, and are announced maximum program limits so that actual support may fall well short of these levels
Year-end 2007 Year-end 2008 Subsequent or Announced Capacity If Different
Treasury Programs
TARP investments1 $0 $300 $700
Funding GSE conservatorships2 $0 $200 $400
Guarantee money funds3 $0 $3,200
Federal Reserve Programs
Term Auction Facility (TAF)4 $40 $450 $900
Primary Credit5 $6 $94
Commercial Paper Funding Facility (CPFF)6 $0 $334 $1,800
Primary Dealer Credit Facility (PDCF)5 $0 $37
Single Tranche Repurchase Agreements7 $0 $80
Agency direct obligation purchase program8 $0 $15 $200
Agency MBS program8 $0 $0 $1,250
Asset-backed Commercial Paper Money Market Mutual Fund
Liquidity Facility (AMLF)9 $0 $24
Maiden Lane LLC (Bear Stearns)9 $0 $27
AIG (direct credit)10 $0 $39 $60
Maiden Lane II (AIG)5 $0 $20
Maiden Lane III (AIG)5 $0 $27
Reciprocal currency swaps11 $14 $554
Term securities lending facility (TSLF) and TSLF options program(TOP)12 $0 $173 $250
Term Asset-Backed Securities Loan Facility (TALF)13 $0 $0 $1,000
Money Market Investor Funding Facility (MMIFF)14 $0 $0 $600
Treasury Purchase Program (TPP)15 $0 $0 $300
FDIC Programs
Insured non-interest bearing transactions accounts16 $0 $684
Temporary Liquidity Guarantee Program (TLGP)17 $0 $224 $940
Joint Programs
Citi asset guarantee18 $0 $306
Bank of America asset guarantee19 $0 $0 $118
Public-Private Investment Program (PPIP)20 $0 $0 $500
Estimated Reductions to Correct for Double Counting
TARP allocation to Citi and Bank of America asset guarantee21 – $13
TARP allocation to TALF21 – $80
TARP allocation to PPIP21 – $75
Total Gross Support Extended During 2008 $6,788
Maximum capacity of support programs announced throughfirst quarter 200922 $13,903

More on this topic:
FDIC Lists Root Cause For Failed Banks – Lax Regulation

Filed Under: Bailout, FDIC, Government spending, Greenspan, Housing Tagged With: ,

Fiscal Discipline – Endorsed By All, Practiced By None

June 7, 2009 by

Has anyone noticed the correlation  of “fiscal discipline” chatter to rising interest rates?  Efforts by the Fed to manipulate rates lower through the outright purchases of treasuries and mortgage securities seem to be failing as the long end of the yield curve continues to steepen.  Is the fiscal discipline talk simply an effort to calm bond investors or is the plan deeper?

Consider some recent comments by the President and the Fed Chairman.

Obama Urges Congress To Pass Law Enforcing Fiscal Discipline

(Bloomberg) — President Barack Obama said he is committed to imposing fiscal discipline on the government and called on Congress to pass a law requiring any new spending be matched by higher taxes or cuts elsewhere. Obama, in his weekly radio and Internet address, said that while his initiatives to confront the economic crisis have deepened the country’s debt,

“We need to adhere to the basic principle that new tax or entitlement policies should be paid for,” Obama said.

“We cannot sustain deficits that mortgage our children’s future, nor tolerate wasteful inefficiency,” Obama said.

Earlier this week, Obama was criticized as doing too little to confront the deficit when he ordered his Cabinet to cut $100 million out of the budget

And right on cue, Mr Bernanke followed up with  sobering remarks on the perils of deficit financing and fiscal imbalances.

Fed Chief Calls For Plan To Curb Budget Deficits

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” he said.

The deficit is expected to reach $1.8 trillion this year as the country spends feverishly on financial bailouts, a sweeping stimulus package, lending programs, rescues for the automobile industry and more.

Why Bernanke is Right to be Worried

Mr Bernanke states that ”even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance. Prompt attention to questions of fiscal sustainability is particularly critical because of the coming budgetary and economic challenges associated with the retirement of the baby-boom generation and continued increases in medical costs.”

These are strong words, and appropriately so given the worrisome fiscal outlook facing the US. By necessity, Mr Bernanke will increasingly be in the business of countering monetisation and inflation concerns.

Indeed, the markets have already fired a couple of clear warning shots in the last couple of weeks, as illustrated by recent moves in US bonds and the dollar.

It’s Your Problem, Bernanke Tells Congress

Congress and the people who elected it must decide how much government they want to afford, Bernanke said. Stating the obvious, he went on to say: “Crucially, whatever size of government is chosen, tax rates must ultimately be set at a level sufficient to achieve an appropriate balance of spending and revenues in the long run.”

Unfortunately, Congress and the people have seldom gotten the balance right. We want the benefits of a large government without paying the costs, just as we wanted a loftier personal living standard than our income could support.

The current economic crisis — which demanded “strong and timely actions,” in Bernanke’s view — has accelerated the day of reckoning for our public and private debt…

Both Obama and Bernanke are intelligent men.  I doubt that either one truly believes that unlimited borrowing or printed money create enduring economic prosperity.   The bailouts, guarantees and deficit spending were necessary to prevent the economic crisis from turning into something much worse, but the cost has  accerlerated  the “day of debt reckoning”.

Now that the crisis seems contained and rates are rising,  the emphasis by both Obama and Bernanke is on ‘balancing spending with revenues”.   Since neither man  mentions reduced  spending, what exactly do they have in mind?

The way this plays out should be interesting.  The President wants his numerous costly programs implemented and Bernanke, a “student of the depression” will be loathe to endorse tax increases on a still very fragile economy.  Bernanke tells Congress that paying the bills is their problem and Obama states that new entitlements should be paid for.  So what is the solution? 

The solution is the only one it has ever been-  defer any meaningful action to the next administration, defer the unwinding of the excesses to the next business cycle, and defer  the debts to the next generation.  The “solution”  will keep on working until it doesn’t.

Filed Under: Bernanke, Economy, Federal Reserve, Government spending, printing money Tagged With: