Mish's Global Economic Trend Analysis

Time Lapse Unemployment Visualization

noreply@blogger.com (Michael Shedlock) — Sat, 21 Nov 2009 00:48:00 +0000

Inquiring minds are watching The Geography Of A Recession, a time lapse unemployment visualization from the start of the recession until now.

Click on the link to play. This is undoubtedly my shortest post ever.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Disingenuous Credit Card Whining And Questionable Risk Policies At Citigroup

noreply@blogger.com (Michael Shedlock) — Fri, 20 Nov 2009 18:37:00 +0000

Citigroup is whining that new regulations eliminate pricing for risk. So what does it do? Jack up rates is the answer. To lower interest rates, Citi customers must spend more.

For Citibank credit card holders, there is one way to escape the bank's rate hikes currently under way: Meet a monthly spending requirement.

Those who meet the spending minimum -- in some cases $750 a month -- will be able to get a rebate on their total interest charges for that month. The rebate could cover some or all of the interest rate hike. Customers also need to make payments on time to qualify for the rebate.

Without giving specifics, Citi said the monthly spending requirements and interest rate hikes will vary depending on the cardholder's credit history.

About half of its customers will be able to erase 50 percent to 100 percent of their rate increases through the rebates. Citi said its rebates will be based on interest charges for an entire balance, not just monthly charges.

With 92 million credit cards in circulation last year, Citi was the second largest card issuer in the country, according to CreditCards.com. Chase was the largest with 119.4 million cards, and Bank of America was third with 80.2 million cards.

The change by Citi comes as the industry rushes to adjust to sweeping reforms to start in February that will limit when and how much card issuers can hike interest rates. In a statement, Citi said the actions were necessary given elevated losses from souring loans and "regulatory changes that eliminate repricing for that risk."

The bank also noted that "customers who do more business with us will have the most opportunity to reduce their rates." Of course, consumers could need to spend more than they otherwise would to qualify.

Disingenuous Whining

Notice how Citigroup is whining they cannot price for risk.

So what do they do but lower rates for those clients taking on more risk by charging more. Common sense would say that the lower the balance the less the risk.

That's the case for Lindsey Pappas, a 25-year-old public relations professional in San Francisco. She received a letter from Citi Wednesday that her interest rate was being hiked to 19.99 percent, up from 14.99 percent.

If she spends $750 a month, however, she can get a refund for part of the higher interest rate charges. The problem is that Pappas is trying to pay off a $5,000 balance on the card, so she tries not to charge any money on it.

"I'm just going to have to deal with the higher interest rate. Spending that much would be irresponsible," she said.

"Spending that much would be irresponsible" said Lindsey Pappas. Indeed it would be. The irony is Citigroup complains about "regulatory changes that eliminate repricing for that risk" then voluntarily turns around and encourages customers to take on more risk while pricing less for it.

Such policies will drive away less risky clients while keeping the poor ones.

Is it any wonder Citigroup is in trouble?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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California Students Protest 32% Tuition Hike; State Budget Gridlock II Coming; Massive Deficits In San Francisco

noreply@blogger.com (Michael Shedlock) — Fri, 20 Nov 2009 08:35:00 +0000

Massive fiscal problems confront California once again. Let's start with a look at California students hit with 32% hike in tuition.

California undergraduates and their parents just got hit with a 32% increase in tuition by next summer.

With hundreds of angry students chanting outside their meeting at UCLA, the California Board of Regents approved the $2,500, two-step fee hike, which will raise the basic tuition at the 10-campus University of California system to $10,300 a year. That's three times what it cost a decade ago. Other fees, books, and room and board adds an additional $16,000.

With the state $21 billion in the hole and slashing funding for education, the regents said they had no choice. At the same time, UC is restricting new admissions in a bid to save money.

More increases seem inevitable.

UC President Mark Yudof has asked for $913 million more next year for the UC system and says he "can't make any promises" to not raise fees again if the state doesn't come through. "When you have no choice, you have no choice," Yudof said after a regents' committee endorsed the fee plan Wednesday. "I'm sorry."

California Deficit Hits $21 Billion

California is back in another deep hole. A $21 Billion Fiscal Shortfall Could Mean More Cuts, Higher Taxes and the Return of IOUs to Meet Obligations. Please consider Budget Gap Widens in Sacramento.

California is deep in red ink again, according to a new report projecting that the cash-strapped state faces a $21 billion budget shortfall through June 2011.

Facing so much fiscal red ink, Californians could see another round of spending cuts and tax increases. Since September 2008, state lawmakers have enacted three budgets to close a cumulative $77 billion shortfall. They closed the gap largely through spending cuts and tax increases, but also with federal-stimulus funds and one-time accounting gimmicks. At one point, California was so close to insolvency it was forced to issue IOUs.

The report's conclusions now raise the likelihood of another lengthy impasse among the state's hyper-partisan legislators that could threaten California's solvency and force officials to again resort to IOUs.

Republicans, including Gov. Arnold Schwarzenegger, are opposing tax increases. Democrats, who control the state legislature but fall short of the two-thirds majority needed to pass budgets, vow to resist new spending cuts.

Mr. Schwarzenegger, who will release a budget proposal in early January, has said the state needs more across-the-board cuts. "I think it's important not to raise revenues, not to raise taxes," he said Wednesday at a conference in Milan, Italy. "We have to live within our means."

The new budget report said $6 billion of the projected shortfall in the current fiscal year is largely due to unrealistic budget assumptions about tax revenue and spending on schools and prisons.

A chunk of the remaining $14 billion deficit forecast for the 2010-2011 fiscal-year budget would result from the expiration of temporary budget solutions, such as use of federal-stimulus funds and accounting gimmicks, according to the report.

California Gridlock II Coming

History is about to repeat. A $21 billion budget deficit gridlock threatens to send Sacramento back into gridlock.

"There is no more to cut from our schools," California Teachers Assn. President David Sanchez said Tuesday. "There is no more meat on this bone. . . . The next step is amputation."

In higher education, Chancellor Charles Reed of the Cal State University system said this month that he will plead for $884 million in funds from Sacramento next year. The University of California will ask for $913 million more for its 10-campus system, President Mark Yudof has said.

"If ever there was a time to fight for and invest in the institution best positioned to power this state from recession, now is that time," Yudof said in a statement. UC students, meanwhile, are coping with a staggering 32% fee hike.

California's finances have been so bad that the governor's finance director, Mike Genest, told a budget forum in Washington last week that back in February he had combed through the U.S. Constitution to research whether California could legally declare bankruptcy -- or revert to some kind of territorial status. (Neither was realistic, he determined.)

The state's financial problems predate the current recession and the gimmicks used to paper over the deficit, experts say. Year in and year out, state government spends roughly $10 billion more than it collects in tax revenue.

Political divisions in Sacramento, where support from both parties is necessary to pass a budget, have repeatedly stymied efforts to plug that hole. The task probably won't be easier next year as various interests try to muscle one another to the sidelines.

Budget Woes In San Francisco

It's not just the sate that is in trouble. The San Francisco Chronicle reports S.F. home value drop, jobless drain city budget.

San Francisco's lowered home values and high unemployment rates have created another unwelcome side effect: far less revenue coming into city coffers than expected.

A report released Monday by the controller's office shows that property tax revenues will likely be $35 million less than anticipated in the 2009-10 fiscal year that began July 1. Payroll tax revenues will probably be $24.8 million less than expected, the report said.

To make matters worse, some city departments are going over budget, including shortfalls of $5.1 million in the Fire Department, $4 million in the Sheriff's Department and $3.2 million in Superior Court.

"I don't even know if I have words to describe how bad this is," said Steve Kawa, Mayor Gavin Newsom's chief of staff. "It may be the perfect financial storm," Kawa said. "It's going to be incredibly difficult to find a way to balance next year's budget without some severe impacts."

In the near term, the fight over midyear cuts could get ugly. Already, several supervisors are at odds with the mayor over the supervisors' plan to approve spending $7 million to rescind more than 500 layoff notices going into effect this week for city and school district workers.

Supervisor Sean Elsbernd said he expects the $35 million figure to wind up being conservative. He said 350 property owners had filed appeals by this time two years ago, and their properties were worth a total of $2 billion. This year, the 4,000 property owners represent property totaling $25 billion.

Elsbernd said that's why the board needs to get serious about major fiscal reform, including employee health benefits and retirement systems.

"These numbers are dramatic," he said. "We need to go after the big money now. A clip here, a clip there doesn't get it done."

Rest assured everyone in California is going to get clipped one way or another, and probably multiple ways at once.

What an incredible mess.

Yet, there is still little talk about cutting pensions, fixing the prison system, privatizing services, or doing anything about illegal immigrants. Those are items that should be at the top of the discussion list.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Ron Paul, Alan Grayson Audit The Fed Bill Approved In House Finance Committee

noreply@blogger.com (Michael Shedlock) — Fri, 20 Nov 2009 06:37:00 +0000

Chalk up a rare victory for the little guy (and the nation itself). The Bill To Audit Federal Reserve Passes Key Hurdle

In an unprecedented defeat for the Federal Reserve, an amendment to audit the multi-trillion dollar institution was approved by the House Finance Committee with an overwhelming and bipartisan 43-26 vote on Thursday afternoon despite harried last-minute lobbying from top Fed officials and the surprise opposition of Chairman Barney Frank (D-Mass.), who had previously been a supporter.

The measure, cosponsored by Reps. Ron Paul (R-Texas) and Alan Grayson (D-Fla.), authorizes the Government Accountability Office to conduct a wide-ranging audit of the Fed's opaque deals with foreign central banks and major U.S. financial institutions. The Fed has never had a real audit in its history and little is known of what it does with the trillions of dollars at its disposal.

Backers of the Watt amendment pressed their case on Wednesday by sending a letter from a "political cross section of prominent economists" backing a measure like Watt's. HuffPost reported, however, that those economists might well have be prominent, but they certainly aren't a "political cross section." Seven of the eight economists in question have extensive connections to the Fed -- and half of them are currently on the Fed payroll. Those affiliations were not noted in the letter.

The playbook in Washington often goes like this: When a measure that threatens the establishment builds enough momentum that it must be dealt with, it is labeled as "unserious." The Washington Post editorial board, true to the script, called Paul's measure "an unserious answer to a serious question."

And it particularly rankles the center that a pair of "wingnuts" are behind a successful effort to challenge the prevailing order. [See Grayson Called "Wingnut" By New York Times].

For anyone remaining confused, the debate was further clarified by the central bank itself: Federal Reserve Vice Chair Don Cohn and General Counsel Scott Alvarez spent much of the day calling committee members, urging them to oppose the Paul-Grayson amendment in favor of Watt's, a member of Congress who asked for confidentiality told HuffPost.

Paul's opponents also placed a letter from former Fed chairmen Alan Greenspan and Paul Volcker on the seats of every committee member. Such a move is in violation of House rules and Grayson was able to have the letters removed.

As the day wore on and support held for the Paul-Grayson side, the Fed still could hope that both would pass. Watt's amendment, which included additional restriction, would then trump Paul's.

To counter that possibility, the Paul-Grayson side moved to fully replace Watt's amendment with theirs, leaving only one amendment to vote on. The motion carried and the amendment passed in a landslide.

Frank said he was opposing the Paul amendment because it could be perceived as influencing monetary policy, which can have inflationary pressure. "Perception is very important in monetary policy," said Frank.

He urged a no vote, yet 15 Democrats bucked him, voting with Paul.

"Today was Waterloo for Fed secrecy," a victorious Grayson said afterwards.

Listen To Grayson

Clearly Grayson has this story cold. Equally as clearly, Barney Frank is a liar who never supported a true audit the Fed proposal in the first place.

Thanks to the Huffington Post for running these stories. Also thanks go to everyone who called, phoned, or faxed in support for the Ron Paul, Alan Grayson amendment.

Bear in mind there will be other attempts to water down this bill and/or to change it dramatically in the Senate. Be prepared to phone, fax, and call in again as necessary.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bank Regulators "Reign of Terror" on Small Business Loans

noreply@blogger.com (Michael Shedlock) — Thu, 19 Nov 2009 20:53:00 +0000

In response to Freefall In Small Business Loans I received an email from "ABO" the CEO and owner of a bank.

ABO, who has been in the banking business 30 years, writes:

Mish,

I was reading the article you wrote concerning the difficulty of securing small business loans and President Obama promising assistance via the Small Business Administration - SBA.

Most small banks run from the SBA. Reasons are many. Suggesting that the SBA is a solution is naive or dishonest. The problem starts with the government and they only make things worse!

To your list of reasons as to why banks do not lend I would add;

5) Bank regulators are pursuing a reign of terror, too late, after ignoring massive problems for years. They let this mess happen by ignoring safety and soundness and instead focused on important things like CRA and other compliance issues. Safety and soundness were ignored for political goals. Common sense was abandoned! What kind of regulator lets the majority of banks take brokered deposits and have a loan to deposit ratio of 120% or more with a concentration in one area such as commercial real estate. Any fool knows the danger that scenario poses! With a 6% capital ratio and virtually 100% of deposits invested in commercial real estate how likely would a bank be to survive? Even a 3% drop in real estate prices puts the bank out of business. Small undercapitalized banks are scared to death, as they should be. Yet, well capitalized banks with sound practices now fear the reign of terror.

Enormous Paperwork With SBA

One of the problems that ABO alluded to on SBA loans under the American Recovery and Reinvestment Act of 2009 (ARC) is the sheer volume of paperwork involved.

From CNN Money: "This is the stack of paperwork the Browns filled out for their ARC loan. They got $14,000, less than half of what they applied for."

Hunkering Down In The Fast Food Business

"Hunkering Down", a fast food restaurant owner writes:

I discovered your blog a while back, and I have become a faithful reader. You have been spot on in my opinion in most of your commentary. I have a small business, an independant fast food restaurant, we've been in our location since 1988.

We have survived the recessions, new competitors, and many other ups and downs of the joys of capitalism, but I am not sure we are going to live through the governments meddling in the current financial disaster.

Last year we had 21 employees, now we have 11. Fortunately I was blessed with a better accountant than Bernanke. Mine told me when I was nattering on in 2007 (yes 07) about getting a 50,000 dollar loan for improvements that there was a horrible recession coming. He suggested that I pay down my debts and basically go into hibernation mode if I wanted to get through this. And thank goodness we did.

Adding salt in the wounds of those who did not see this coming, the Obama administration is scaring businesses to death with threats of huge taxes, health mandates, card check unionization, and cap and trade on one hand, and sheer ignorance of economics on the other.

Is a tax credit of FICA wages supposed to make me spend 20,000 a year on a new hire? Really? Money to pay the rest of his wage is going to come from....where exactly? Businesses are not going to hire to get a tax credit of FICA, they will hire when they need to. The program is useless for job stimulation, but costly for the deficit.

Any business person with a lick of sense is hunkering down, and the ones without sense are being forced to hunker, BECAUSE THERE IS NO BUSINESS! No, I don't want a loan. A loan (debt) is the last thing I or anyone else who is trying to surf the tsunami of this economy wants.

This is the "can't make him drink" economy whether you are a consumer, or a business person. The mess is compounded government officials riding horses with the saddles on backwards. The rest are either nuts or criminals, so there you are.

Multiply me by thousands of sensible others, and you see where we are headed.

Sincerely,
"Hunkering Down"

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Economists Opposing Fed Audit Are On Fed Payroll

noreply@blogger.com (Michael Shedlock) — Thu, 19 Nov 2009 18:19:00 +0000

When you can't change public opinion any other way, you buy it. That is the message from Huffington Post today in Economists Opposing Fed Audit Have Undisclosed Fed Ties.

As the debate over an audit of the Federal Reserve intensifies in the House, one camp is trotting out eight academics that it calls a "political cross section of prominent economists."

A review of their backgrounds shows they are anything but.

In a letter to the House Financial Services Committee earlier this month, all eight wrote that they support the type of amendment now being introduced by Rep. Mel Watt (D-N.C.). Watt's approach purports to increase Fed transparency while it actually would tighten restrictions on any audits that could go forward.

But far from a broad cross-section, the "prominent economists" lobbying on behalf of the Watt bill are in fact deeply involved with the Federal Reserve. Seven of the eight are either currently on the Fed's payroll or have been in the past.

The Fed connections are not outlined in the letter sent around to committee members on Wednesday, but are publicly discernible through a review of their resumes, which are all posted online.

In September, Huffington Post reported that the Federal Reserve has accomplished a soft form of effective control over the field of monetary economics simply by employing -- and being the means for career advance -- for an overwhelming proportion of the discipline.

Let's run the traps:

Frederic Mishkin is a former board member, having served from 2006-2008. His career at the Fed stretches back to 1977 and he currently holds two positions: one as a member of the Center for Latin American Economics at the Federal Reserve Bank of Dallas, where he's been since 1996; and another as an academic consultant to the Federal Reserve Bank of New York, where he's been since 1997.

Anil K. Kashyap is currently a consultant with the Federal Reserve Bank of Chicago, a position he's held since 1991. He's also on the economic advisory panel of the New York branch and was a consultant there in 2003. He was a visiting scholar at the division of monetary affairs at the Board of Governors of in1994, 2001 and 2005 and at the division of international finance in 1997.

Pete Klenow was a visiting scholar at the Federal Reserve Bank of Minneapolis from 1994-1999, 2003-2004, 2006 and again this year. From 2000-2003 he was also a senior economist at that branch. He's currently a visiting scholar at the Federal Reserve Bank of San Francisco, a position he's held since 2005. He was a visiting scholar at the Federal Reserve Bank of Kansas City from 2004-2006.

Ricardo J. Caballero was a visiting scholar at Federal Reserve Bank of Boston from 2004-2005 and a visiting scholar at the Federal Reserve Board on multiple occasions.

Robert Hall was a research assistant at the Board of Governors of the Federal Reserve System from 1982-1984 and an economist there from 1988-1991.

Thomas Sargent was an adviser to the Federal Reserve Bank of Minneapolis from 1981 to 1987 and continues to write frequently for Fed-sponsored journals.

Micheal Woodford is currently on the Monetary Policy Advisory Committee of Federal Reserve Bank of New York, a position he's held since 2004. He's also listed as a consultant to the research department there dating back to 2005. In the past, he's been a visiting scholar at the Board of Governors and various regional branches in 1987, 1993-1998 and 2000-present, often at multiple banks in the same year.

That list of economists is anything but unbiased. The conflict of interest is clear, loud, and undeniable.

Audit The Fed Needs Your Help ... Again!

Please help.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Cap-And-Trade "Three-Card Monte" Dead For 2009

noreply@blogger.com (Michael Shedlock) — Thu, 19 Nov 2009 10:26:00 +0000

Typically, one of the best thing Congress ever does is nothing. And so it is again with the Cap-And-Trade energy bill. Thankfully, Senate Climate Bill Delay Raises Doubt on Chance for U.S. Law.

The U.S. Senate won’t try to pass a bill limiting U.S. greenhouse-gas emissions for months, clouding the prospects for final legislation as the Obama administration focuses on health care and the economy.

“We’re going to try to do that sometime in the spring,” Senate Majority Leader Harry Reid, a Nevada Democrat, said of climate-change legislation in remarks to reporters yesterday. He didn’t cite a reason for the delay.

President Barack Obama had sought Senate action on a measure, already passed by the House, in time for talks in Copenhagen next month on a new global climate treaty. The Senate slowdown further jeopardizes the measure’s chances of passage, Whitney Stanco, an analyst in Washington for Concept Capital, said in a report today.

“The spring timeline would push the debate closer to the 2010 mid-term elections, potentially setting lawmakers up for a difficult vote before they face their constituents in the ballot box,” said Stanco, whose company advises investors.

Senator Barbara Boxer, a California Democrat and chairman of the panel, said this week that lawmakers will be too busy debating health care, job creation and banking legislation to take up cap-and-trade proposals. “By the time you turn around, it’s March,” Boxer told reporters.

“The Senate is far from the 60 votes needed to move a climate-change bill and that is unlikely to change as long as the economy continues to underperform,” said Thomas Mann, a political analyst at Washington-based Brookings Institution in an e-mail yesterday. “If Obama succeeds in getting a health- reform bill and financial regulation, I think his energies in 2010 will be focused on jobs and the economy.”

Sins of Emission

Inquiring minds are reading Sins of Emission in the Wall Street Journal, how the ethanol boondoggle is an environmental catastrophe.

OCTOBER 29, 2009
Donning FDR's cape, Eisenhower's stripes and JFK's boat shoes, President Obama observed in Florida on Tuesday that his "clean energy economy" will require "mobilization" on the order of fighting World War II, building the interstate highway system and going to the moon. Of course, the only "mobilization" going on at the moment is on behalf of ethanol, whose many political dispensations the biofuels lobby is finding new ways to preserve even as the evidence of its destructiveness piles up.

The latest embarrassment arrives via the peer-reviewed journal Science, not known for its right-wing inclinations. A new paper calls attention to what the authors (led by Princeton's Tim Searchinger) call "a critical accounting error" in the way carbon emissions from biofuels are measured in climate-change programs world-wide.

The Science study argues [the Cap-and-trade program] is a false economy, because it doesn't consider changes in land use. If mature forests are cleared to make room for biofuel-growing farms, then the carbon that would otherwise accumulate in those forests ought to be counted on ethanol's balance sheet as well.

Cap-and-trade programs exacerbate the problem because developed countries (where emissions are putatively capped) get credit for reductions from ethanol—despite the fact that their biofuels are generally grown in developing countries (where emissions aren't capped). So if Malaysians burn down a rain forest to grow palm oil that ends up in German biodiesel, Malaysia doesn't count the land-use emissions and Germany doesn't count the tail-pipe emissions.

By way of a solution, Mr. Searchinger and his coauthors modestly suggest doing away with the regulatory three-card monte and counting net ethanol emissions from where they are actually emitted. But this is political heresy on Rep. Henry Waxman's Energy and Commerce Committee, which passed its own cap-and-tax program in July with the votes of farm-state Democrats, because the bill all but banned the Environmental Protection Agency from studying land-use changes. So much for letting "the science" guide public policy.

In Florida, Mr. Obama said the only people who could oppose his climate plan are "those who are afraid of the future." On this one, at least, the President is right.

Green Hell

Not only is Cap-And-Trade environmentally unsound, it would be crippling to many businesses. However it would benefit GE.

Please consider Boxer pays off GE in climate bill

Sen. Barbara Boxer’s climate bill set to be released today contains a provision that will compensate General Electric quite nicely for its lobbying and media efforts promoting climate legislation.

Section 821(c) requires that, by December 12, 2012, the EPA set standards for greenhouse gas emissions from “new aircraft and new engines used in new aircraft.”

General Electric is the world’s largest manufacturer of commercial and military jet engines, a business worth about $12 billion in annual revenues.

So the Boxer bill would compel airlines and the military, when purchasing new aircraft and new aircraft engines, to purchase more expensive “green” engines made by GE, according to standards set by the current and GE-lobbied Obama administration.

Keep in mind that GE CEO Jeff Immelt is member of President Obama’s Economic Recovery Advisory Council.

More evidence that GE’s political action committee (GEPAC) meant what it said in its August 19, 2009 e-mail to employees by John Rice, the CEO of GE Technology Infrastructure:

Dear Colleagues:

I would like to invite you to join me in an important initiative available to GE leaders — the GE Political Action Committee (GEPAC). This year, Senior Professional Band (SPB) employees will have the choice to join other eligible employees to become members of GEPAC.

The intersection between GE’s interests and government action is clearer than ever. GEPAC is an important tool that enables GE employees to collectively help support candidates who share the values and goals of GE. While we must continue to engage elected officials to help them better understand our various businesses and how legislation affects our Company and our customers, we must also make sure that candidates who share GE’s values and goals get elected to office. ....

For the rest of the Email please see GE seeks support for GE-minded politicians.

Cap and Tax Fiction

Please consider another Wall Street Journal on Cap and Tax Fiction

To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.

The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."

The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.

When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.

Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.

As the saying goes ...

It's time to update the old saying "What's Good For GM Is Good For America"

Here is the new saying ... "What's Good For GE Is Bad For America"

For more on GE and how corporate cronyism is helping destroy the country, please see GE CEO Plays Kiss Ass With Obama.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Audit The Fed Needs Your Help ... Again!

noreply@blogger.com (Michael Shedlock) — Thu, 19 Nov 2009 07:06:00 +0000

It's time to make some phone calls. It will take less than 10 minutes. Here are the Democrats who support the auditing of the fed.

Rep. John Adler, NJ: (202) 225-4765
Rep. Travis Childers, MS: (202) 225-4306
Rep. Steve Driehaus, OH: (202) 225-2216
Rep. Rubén Hinojosa, TX: (202) 225-2531
Rep. Suzanne Kosmas, FL: (877) 956-7627
Rep. Dan Maffei, NY: (202) 225-3701
Rep. Brad Miller, NC: (202) 225-3032
Rep. Walt Minnick, ID: (202) 225-6611
Rep. Ed Perlmutter, CO: (202) 225-2645
Rep. David Scott, GA: (202) 225-2939
Rep. Brad Sherman, CA: (202) 225-5911
Rep. Jackie Speier, CA: (202) 225-3531

Please call them and ask them to support the Ron Paul/Alan Grayson amendment and NOT the Mel Watt BS amendment to the bill.

Vote(s) will be held in the coming days.

Please call Mel Watt too: (202) 225-1510
Mel Watt's contact info.

Watt claims to support full auditing and increased transparency, yet his amendment completely removes all effect and substance and purpose from the bill itself. Thus his claim is beyond disingenuous, in deep outer space.

For more on Mel Watt's effort to gut Ron Paul's bill, please see the Huffington Post article Audit The Fed Effort Under Threat In House.

Phone Your Own Representative

For a list of phone and fax numbers for Congress please see Speak Out - Audit the Fed, Then End It!

Call Democratic Central Committee

On October 8, in Audit The Fed Revisited Jacob Dreizin offered this advice.

Without a flood of citizen lobbying, they will most likely water down H.R. 1207 into something meaningless, or else ignore it altogether.

The committee Democrats' central phone number is (202) 225–4247, and the fax is (202) 225-6952. Alternately, and perhaps more effectively, you can politely email some or all of the committee's most senior Democrat staff directly, as follows:

Committee staff director and chief counsel: Jeanne.Roslanowick@mail.house.gov

Committee deputy chief counsel: Lawranne.Stewart@mail.house.gov

Committee communications director: Steven.Adamske@mail.house.gov (or possibly Steve.Adamske@mail.house.gov)

Call The Capital Switchboard

Conservative For Change has this advice in Ron Paul's Audit the Fed Bill Gutted.

It is time to get on the phone with everyone in Washington...Congressman and Senators and demand action against the illegal Federal Reserve. Call the Capitol Switchboard 202-224-3121 and speak with everyone you can!

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Housing Starts Green Shoots Wither On Vine

noreply@blogger.com (Michael Shedlock) — Thu, 19 Nov 2009 02:35:00 +0000

After optimists talked up rising housing starts for several months as green shoots, improving conditions, etc., reality came knocking in full force with the New Residential Construction Report For October 2009.

BUILDING PERMITS

Privately-owned housing units authorized by building permits in October were at a seasonally adjusted annual rate of 552,000. This is 4.0 percent below the revised September rate of 575,000 and is 24.3 percent below the October 2008 estimate of 729,000.

Single-family authorizations in October were at a rate of 451,000; this is 0.2 percent below the revised September figure of 452,000. Authorizations of units in buildings with five units or more were at a rate of 85,000 in October.

HOUSING STARTS

Privately-owned housing starts in October were at a seasonally adjusted annual rate of 529,000. This is 10.6 percent below the revised September estimate of 592,000 and is 30.7 percent below the October 2008 rate of 763,000.

Single-family housing starts in October were at a rate of 476,000; this is 6.8 percent below the revised September figure of 511,000. The October rate for units in buildings with five units or more was 48,000.

HOUSING COMPLETIONS

Privately-owned housing completions in October were at a seasonally adjusted annual rate of 740,000. This is 1.9 percent above the revised September estimate of 726,000, but is 29.9 percent below the October 2008 rate of 1,055,000.

Single-family housing completions in October were at a rate of 528,000; this is 10.7 percent above the revised September figure of 477,000. The October rate for units in buildings with five units or more was 200,000.

Total Privately Owned Housing Starts

Looking at the chart it is hard to make a case for optimism in the first place.

Before the housing numbers release this was the Bloomberg headline

Builders Probably Broke Ground on Most U.S. Houses in 11 Months

Builders in October probably broke ground on U.S. houses at the fastest pace in 11 months, and consumer prices held below the Federal Reserve’s long-range goal, economists said reports today may show.

Housing starts rose 1.7 percent to an annual rate of 600,000, the most since November 2008, according to the median forecast of 77 economists in a Bloomberg News survey.

Government tax credits and lower prices and borrowing costs may spur residential sales and construction in coming months, indicating housing will help the economy recover.

“Housing is starting to turn,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York.

Housing Starts Forecast

The lowest number out of 77 economists was 570,000. The number came in at 529,000.

Some might claim that concern over the $8,000 housing tax credit is to blame. Well even if so, what exactly does that say about the recovery when government has to give away money to home buyers?

Who Wants A House?

I keep asking "Who wants a house, can afford a house, and does not yet have a house?" Unfortunately there is no such survey, but the number cannot be that high. Yet, when you give away tax credits that can be used for closing costs the number can go up ... for a while.

Then what?

Is it possible all the pent-up demand is exhausted already? Unless today's release is an outlier, that is a reasonable explanation.

Notice what happened in the last recession. Housing never slowed at all. We also had loose credit, declining lending standards, liar loans, a credit bubble, and promotion of housing by Greenspan and Bush's "Ownership Society".

The bigger the boom, the bigger the bust.

Now we are on the backside of peak credit, with a huge, albeit declining inventory. Furthermore, declining inventory ignores pent-up foreclosures, shadow inventory (banks holding foreclosures off the market hoping prices rise), and increasing inventory in rental units.

Speaking of rental units, starts of 5-unit structures hit a new record low.

Privately Owned Housing Starts 5-Unit Structures or More

This is a recovery?

Government can continue to "stimulate housing". However, it will be at the expense of multi-unit properties, but even then, only for a while. Eventually, pent-up demand will fall to zero unless government increases the tax credit or otherwise modifies the program.

Signs are pent-up demand is reaching exhaustion already.

This is exactly the problem with all these Keynesian stimulus ideas and exactly why the only solution is to let housing prices fall to where they are genuinely affordable, where there is real, as opposed to artificial demand.

“Housing is starting to turn,” said Michael Moran, chief economist at Daiwa Securities America Inc. in New York.

Indeed it has, for the worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Freefall In Small Business Loans

noreply@blogger.com (Michael Shedlock) — Wed, 18 Nov 2009 17:56:00 +0000

In what should be no surprise, banks are cutting back on small business loans. Please consider Small business loans: $10 billion evaporates.

Eight months after President Obama began prodding the nation's banks to increase their small business lending, the loan numbers continue to move in the opposite direction.

The 22 banks that got the most help from the Treasury's bailout programs cut their small business loan balances by a collective $10.5 billion over the past six months, according to a government report released Monday.

Three of the 22 banks make no small business loans at all. Of the remaining 19 banks, 15 have reduced their small business loan balance since April.

Credit crunch: Obama administration officials, including Treasury Secretary Tim Geithner and Small Business Administration head Karen Mills, will host a forum Wednesday in Washington to discuss the lending challenges small businesses face. Bankers, members of Congress, and a selection of small business owners will participate.

While credit conditions have improved in some parts of the financial system, lending remains very tight for businesses that rely on banks for their financing, Federal Reserve Chairman Ben Bernanke acknowledged on Monday.

The article details the plight of Frank and Ingrid Brown who owns retail art and gift shops and wants to expand.

They applied for $35,000 in small business loans and "after filling out mountains of paperwork, the couple got a loan for $14,000 -- less than half the $35,000 they applied for. Frank complained "By the time you get through everything, it is not even worth it."

They also applied for a $50,000 credit line and were only approved for $10,000.

So what is it they need, $35,000, $50,000, or $85,000? If I was a bank I would be extremely nervous about making loans to expand small retail gift shops in this environment especially when they want a large line of credit to go along with it.

Bear in mind we do not have all the facts, nor does the article. But these tales of woe are useless without the facts. I see no reason to believe this couple is a good business risk. Perhaps they are, perhaps they are not but my inclination is to side with the banks.

Pump Runs Dry

Flashback March 16, 2009 Obama: Pumping money into small biz

President Obama vowed Monday to ease the financial plight of the nation's small businesses, which have been hit hard by the recession.

"Small businesses are the heart of the American economy," Obama said in a speech at the White House. "They're responsible for half of all private sector jobs, and they created roughly 70% of all new jobs in the past decade. They're not only job generators, they're at the heart of the American Dream."

Many small businesses, drowning from dried-up coffers and unpaid bills, are having a tough time getting loans from lenders.

"Too many entrepreneurs can't access the capital to start, operate or grow their business," Obama said. "Too many dreams are being deferred or denied by a form letter canceling a line of credit."

The stimulus bill allocated $730 million for direct spending on small-business programs, including expanded financial support for the SBA's two key lending initiatives, the 7(a) and 504 programs. Under those programs, the SBA guarantees loans made by banks to small-business borrowers. If the business defaults, the SBA picks up the tab for the insured portion of the loan.

Supply Side Economics Lesson

The articles are presenting things from the supply side as if there is a supply problem (banks are refusing to lend and there is not enough money to lend). Yet, Keynesians and Monetarists in general can hardly moan about the supply of money.

The Fed Funds Rates is zero, Bank excess reserves are close to a $trillion, another $trillion is stimulus is floating around.

Combined, all this money could do is raise GDP estimates up to a now downward revised 2.5% (probably low-balled so we can beat the street by a couple tenths yet again).

See 3rd Quarter GDP +2.5% : Is That All? for details.

So Why Aren't Banks Lending?

1) There are no credit-worthy businesses that want to borrow.

2) Consumers are tapped out and do not want to borrow.

3) Banks are scared to death of pending commercial real estate losses, credit card losses, residential real estate losses, home equity lines of credit losses, and losses in general.

4) Asset prices are simply too high (and banks know it) and the securitization market has dried up

Demand Side Economics

Let's now take a look at the demand side of things.

It's easy to find cases like the plight of the Brown family as noted above and trump up "Banks aren't lending tales". But what if there are fewer credit-worthy businesses that want to borrow?
More to the point, what if in general, actual demand for small business loans is plunging?

Actually there is no "what if" there is simply "is".

For proof, inquiring minds are digging for facts in the latest Fed Senior Loan Survey.

Please consider these charts.

Demand for C&I loans from small firms

Lending Standards For Small Firms

There you have it. 85.5% of banks responding to the survey have lending standards that basically remained the same yet 44.6% of banks report moderately weaker demand for loans, with only 8.9% reporting moderately stronger demand for loans.

There is plenty of money available for lending. However, there are fewer businesses wanting loans, and fewer still credit worthy businesses who want loans. That is what the data shows but it is not what is being reported.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Worst Is Yet To Come For Insurance Companies

noreply@blogger.com (Michael Shedlock) — Wed, 18 Nov 2009 07:48:00 +0000

Fitch is warning Insurers Face $23 Billion Loss on Commercial Property.

U.S. life insurers, a group led by MetLife Inc. and Prudential Financial Inc., may lose as much as $22.6 billion on investments in commercial real estate through 2011, Fitch Ratings said.

Losses on investments in apartment buildings, offices, shopping malls and other commercial real estate will begin to increase in the next 6 months to a year as rents decline and vacancies increase, said Fitch Senior Director Andrew Davidson. Life insurer losses on commercial real estate have been “virtually nil” so far, he said.

“It will be more of a 2010 and 2011 issue,” Davidson said in an interview today. “It will put some stress on the capital positions as they realize the losses.”

Life insurers held more than $450 billion in commercial loans and mortgage-backed securities at the end of 2008, Fitch said in a related report. The delinquency rate on U.S. CMBS rose to 4.01 percent at the end of October, almost seven times what it was a year ago, Moody’s Investors Service said yesterday.

MetLife has recorded three straight quarterly losses and Hartford Financial Services Group Inc. has lost money since June 2008 as investments that include those backed by commercial and residential mortgages dropped in value. New York-based MetLife and Prudential have said commercial mortgage defaults will climb in the next year.

The credit crisis has driven $138 billion worth of U.S. commercial properties into default, foreclosure or debt restructuring, according to New York-based Real Capital Analytics Inc. Commercial real estate prices have plunged almost 41 percent since October 2007, the Moody’s/REAL Commercial Property Price Indices show.

With that plunge in commercial real estate prices, there will be staggering losses percentage-wise on any foreclosures. Perhaps the insurance companies can survive the hit, but small undercapitalized, over-leveraged banks will not be able to do so.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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DeLong Says Odds of Another Great Depression Reach 5%; I Assess Odds of Various Scenarios

noreply@blogger.com (Michael Shedlock) — Wed, 18 Nov 2009 01:42:00 +0000

Economist Brad DeLong, Department of Economics, U.C. Berkeley, is getting increasingly pessimistic. DeLong says: Chance of Great Depression Now 5%...

For 2 1/4 years now I have been saying that there is no chance of a repeat of the Great Depression or anything like it--that we know what to do and how to do it and will do it if things turn south.

I don't think I can say that anymore. In my estimation the chances of another big downward shock to the U.S. economy--a shock that would carry us from the 1/3-of-a-Great-Depression we have now to 2/3 or more--are about 5%. And it now looks very much as if if such a shock hits the U.S. government will be unable to do a d----- thing about it.

We could cushion the impact of another big downward shock by a lot more deficit spending--unemployment, after all, goes down whenever anybody spends more (even though sometimes falling unemployment comes at too-high a price in rising inflation), and the government's money is as good as anybody else's. But the centrist Democratic legislative caucus has now dug in its heels behind the position that we cannot undertake more deficit spending right now because we have a dire structural health-care financing problem after 2030.

The Republican legislative causes has now dug in its heels behind the position that the fact that unemployment is 10% shows not that policy earlier this year was too cautious but rather that it was ineffective. And the Obama administration has not been able or has not tried to move either of those groups out of their current entrenchments.

...
So if another big bad shock hits the U.S. economy, what could the Obama administration possibly do?

Depression Debate

For starters it is clear we are in a depression. However, this gets back to the Depression Debate: Is This A Depression?

I say it is, for reasons given in the article. However, while this is "A" depression, this is clearly not the "Great Depression". Delong calls it 1/3 of the Great Depression. For the sake of argument let's accept that.

Who's To Blame?

DeLong is blaming Democrats and Republicans for not wanting to spend enough. He is right about the increasing odds, yet he is badly misguided as to the the reason why.

The problem is debt. One does not cure a debt problem by going deeper in debt. We should have let failed banks actually fail instead of making zombies out of them. We are repeating the very same mistakes Japan made, and ironically Delong's wants to to make the same mistakes only much bigger.

Sadly, that is how Keynesian economists think.

Rather than not doing enough, I claim U.S. Faces Second Lost Decade "Because" of Misguided Stimulus.

Repeating The Mistakes of the Great Depression

We have made all the wrong policy decisions just as Hoover and FDR did in the 1930's. Contrary to popular belief, it was not failure to keep up the stimulus that lead to a relapse in the late 1930's, but a rather a whole series of policy errors on top of the basic problem: Eventually stimulus will always run dry because by definition it must, and when it does the artificial boom ends but the debt overhang still remain.

WWII ended the Great Depression at a huge expense to the rest of the world.

The US was a shining beacon of growth after the war for the easily explainable reason that our productive capacity was not destroyed while productive capacity was destroyed everywhere else.

Debt Implosion

Japan is on the verge of imploding right now with debt-to-GDP at close to 200%. Yet somehow, Keynesian economists think more debt and more stimulus is the answer.

What the administration should have done is let failed banks fail. Instead we propped them up, just as Japan did.

So much capital has been wasted propping up failed banks, that the risk of another serious implosion has increased. I think it is much higher than the 5% DeLong says.

However, let's be careful here. Social safety nets are much bigger now than in the 1930's. Another "Great Depression" will look much different because of food stamps, foreclosure policy, unemployment insurance, etc.

In another implosion, expect those nets to expand. Such a policy response would cost jobs and prolong the agony of course, but it will be tried. Indeed, it has already. Fannie Mae is renting foreclosed houses back to people.

The US government is in effect the nation's biggest landlord.

Assessing The Odds

I have the odds of a severe downturn at 15% (unemployment exceeds 13% perhaps by a lot) and a less severe fashion at 30% (unemployment exceeds 12% or higher). In both of these scenarios there is a double dip recession. This is the "L" or "WW" scenario. In the milder form we flirt in and out close to recession for a number of years and unemployment essentially flatlines for years before finally turning lower.

"Muddle Through" means things do not get much worse nor do they get much better (Unemployment tops out under or near 12% and we do not double dip or if we do it is barely noticeable). Unemployment peaks, then very slowly starts to drop. Let's put the odds of "Muddle Through" at 35%. "Muddle Through" might be labeled a "U Shaped Recovery" but it would feel more like an "L". Realistically this is about the best we can hope for.

Slightly better than muddle through has about a 15% chance (A genuine U-Shaped Recovery). Unemployment peaks, then drops at a modest pace.

The vaunted V-Shaped recovery with strong growth in jobs has about a 5% chance in my estimation. Even in a V-Shaped recovery, the odds of unemployment dropping to 6% or less by 2015 are close to zero.

In general, expectations about what this recovery will look like are far too optimistic, perhaps even by me.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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3rd Quarter GDP +2.5% : Is That All?

noreply@blogger.com (Michael Shedlock) — Tue, 17 Nov 2009 19:27:00 +0000

Yesterday Dallas Federal Reserve President Richard Fisher threw a little cold water on the V-shaped recovery madness everyone seems to be buying into these days.

Please consider Fed's Fisher: GDP Growth In Third Quarter Likely Lower Than Reported.

Speaking at a conference in Tyler, Texas, Fisher said he was willing to venture that the increase would not be "as robust as originally reported."

He did say, however, that the growth rate would still be positive - though it would be closer to a rate of 2.5 percent - and that growth would also be positive for the fourth quarter.

Even though he said economic growth would be positive, Fisher cautioned that the high unemployment rates would cause recovery from last year's financial crisis to be slow.

Managing Expectations

Got the idea the Fed is attempting to manage expectations? If so, that is precisely what the Fed is doing.

When asked about the dollar at a question and answer session following his speech, Fisher said that lower interest rates have not increased the risk of the dollar declining in value. Rather, he said, the weakening of the dollar was due to other major currencies entering the world's economic system.

"You'd expect with more participants that there might be some kind of rebalancing," but such evolution would be orderly and gradual, he said.

Let me get this straight: The dollar is falling because "other major currencies [are] entering the world's economic system".

Is he serious? What this proves is these guys absolutely cannot think beyond their prepared remarks.

The Effect of Stimulus

A $trillion in stimulus (not counting bank bailouts) and other stimulus measures not labeled "stimulus" because everyone is getting tired of the word, only got us 2.5%-3.0% of GDP growth.

Dave Rosenberg was talking about GDP in today's Breakfast with Dave

Heightened appetite for risk does not mean that credit problems have gone away as we see the global speculative-grade corporate default rate rise 12 basis points in October, to 9.71%. And Fitch just published a report indicating that the U.S. banks can expect to see 10% of their $1.1 trillion of direct commercial real estate loans default and that the regional banks can expect to see “significant” cuts in their credit ratings.

DOWNGRADE TO GROWTH FORECASTS? THAT DOES SEEM TO BE THE CASE

Dallas Federal Reserve Bank President Fisher suggested yesterday that the Q3 real GDP print will be taken down from 3.5% at an annual rate to 2.5% — despite massive government stimulus. (Is that all you get for your money?) And the Philadelphia Fed survey of professional forecasters shows that this collection of 41 economists just took down their 2010 Q1 GDP call to 2.3% from 2.5% and for next year’s Q2 to 2.4% from 2.8%.

Meanwhile, the S&P 500 is currently trading as if the economy is going to expand at nearly a 5.0% rate in the coming year. If the consensus is right, then fair-value in the S&P 500 is closer to 900 than it is to 1,100. This by no means suggests that the speculative run is over; it only means that the folks allocating their capital to the stock market today do not adhere to the adage of ‘buying low and selling high’ and are very likely the same folks who were buying at the top back in 2007 when “excess liquidity” themes were all the rage.

The Stall Rate

I am of the belief that the first 2.0-2.5% of GDP is fluff hedonics, imputations, distortions, and unproductive spending that does nothing nor produces anything.

Heck, it is likely much higher than that, but Bernanke has stated that the economy needs to grow faster than 2.5% to gain any jobs. Now bear in mind the name of the game is not just to gain jobs, but to gain 100,000 jobs or more because that is his estimate as to how fast the labor market is expanding. Please see Bernanke's Outlook For Recovery and What It Means For Jobs for details.

At 2.5% GDP or even higher, unemployment will keep rising even as the effect of the stimulus is starting to drop off. Meanwhile the much touted ECRI leading indicators dropped 1.4 points and hit an eight week low. Those green shoots (which was in reality nothing more than government throwing money around), are starting to die on the vine, even as Obama is concerned about rising deficits and inflation hawks on the Fed are rattling cages about removing stimulus.

Those touting a "V-shaped recovery" are forewarned: Shockingly bad news is on the horizon and it is the shape of an "L" or "WWW".

Addendum:

I quoted Rosenberg above as saying "And Fitch just published a report indicating that the U.S. banks can expect to see 10% of their $1.1 trillion of direct commercial real estate loans default and that the regional banks can expect to see “significant” cuts in their credit ratings."

What the report actually said was "possible" not "expect" although it is entirely possible that Rosenberg was reading between the lines as to what Fitch meant. Here are the actual pertinent statements in the report as sent to be by one of the major brokerages.

Therefore, Fitch expects rating actions taken as a result of its CRE review will be concentrated among the midsized regional and smaller banks. In most cases, rating actions will likely be limited to one notch, but more significant downgrades are quite possible among the banks with the greatest exposure.

Banking companies that see their TCE/TA ratios fall below the 4% threshold will likely see ratings downgraded by a notch, with further downgrades possible for those firms that fall considerably below that level. That being said, Fitch acknowledges that it has already taken a number of rating actions on banks in the past year, so further downgrades may not be imminent for all firms low on capital, as their current rating levels may already reflect that risk.

Fitch does not intend to use the severe stress to help determine a specific rating level; however, results of the severe stress may help the rating committee determine the appropriate Rating Outlook for a specific company. Fitch anticipates that most banks or thrifts that would generate TCE/TA ratios far below the 4% benchmark under the severe stress will likely see their Rating Outlook remain at or move to Negative in the future.

Mike "Mish" Shedlock
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GE CEO Plays Kiss Ass With Obama

noreply@blogger.com (Michael Shedlock) — Tue, 17 Nov 2009 10:51:00 +0000

GE, the financial company masquerading as a manufacturer, has its eyes on the Pot of Government Stimulus Gold.

The financial crisis hasn't been kind to General Electric Co. Its stock has lost almost half its value, the government has stepped in to prop up its enormous financial arm, and sales have slumped in core industrial businesses.

But Chief Executive Jeffrey Immelt now has his eye on a huge new pool of potential revenue: Uncle Sam's stimulus dollars. Mr. Immelt, a registered Republican, quips about the shift in thinking in the nation's corner offices: "We're all Democrats now."

GE has high hopes for the strategy. It says that over the next three years or so it could bring in as much as $192 billion from projects funded by governments around the globe, such as electric-grid modernization, renewable-energy generation and health-care technology upgrades.

The company is just starting to see a payoff. Last month, for example, President Barack Obama announced $3.4 billion in government-stimulus grants for power-grid projects. About one-third of the recipients are GE customers. GE expects them to use a good chunk of that money to buy its equipment.

"The government has moved in next door, and it ain't leaving," Mr. Immelt said at the International Economic Forum of the Americas in Montreal in June. "You could fight it if you want, but society wants change. And government is not going away."

The 53-year-old executive supported the presidential campaign of Sen. John McCain, yet scored an invitation onto the President's Economic Recovery Advisory Board, led by former Federal Reserve Chairman Paul Volcker. Inside GE, he pushed his managers hard to devise plans for capturing government money.

As part of that effort, GE has promoted policy proposals such as a government-backed power-grid modernization, and pressed the government to increase the size of stimulus grants for that purpose. It also has helped customers design projects and apply for government money, with the expectation that those customers will then buy GE equipment.

GE isn't in agreement with the Obama administration on some proposals. Its GE Capital financial unit, which contributed nearly half of its earnings in recent years, received government backing for its debt when the credit markets seized up last fall. Now GE is lobbying against proposals that would separate GE Capital or its industrial-loan company from the parent company. More regulation on its finance division seems inevitable. The company also is opposed to health-care proposals that would result in $40 billion in fees on health-care device makers such as GE.

Mr. Immelt concluded that the company needed to capitalize on the surge in government spending. According to two people present at the meeting, Mr. Immelt told the group that business people needed to support the Democrats' stimulus package.

By January, Mr. Immelt had become a leading corporate voice in favor of the $787 billion stimulus bill, supporting it in op-ed pieces and speeches. Reporters who called the Obama administration for information on renewable-energy provisions in the legislation were directed to GE.

As the bill worked its way through Congress, GE lobbyists pressed for grants, tax cuts or rebates aimed at businesses GE is engaged in, including provisions worth more than $80 billion for energy projects, appliances, health-care information systems and wind farms.

When the stimulus package was rolled out, Mr. Immelt instructed executives leading the company's major business units "to put together swat teams to get stimulus money, and [identify] who to fire if they don't get the money," says a person who heard him issue the instructions.

In February, a few days after President Obama signed the stimulus plan, GE lawyers, lobbyists and executives crowded into a conference room at GE's Washington office to figure out how to parlay billions of dollars in spending provisions into GE contracts.

Separately, Mr. Immelt got an invitation to serve on the President's Economic Recovery Advisory Board, which would afford him access to the president's economic inner circle.

GE spent $7.55 million lobbying in the second quarter, a 34% increase from the year-earlier period and more than any other single company, according to federal data compiled by the Center for Responsive Politics.

This just goes to show you, if you have enough clout and you are are willing to kiss Obama's ass, he just may be willing to kiss yours. This is the way the game works, so someone may as well be blunt about it.

Everyone wants a handout for themselves or their company while not wanting anyone else to get one. It does not matter one iota to these corporations how much of the stimulus is wasted. All that matters is how much they get.

In October, amidst all the excitement of companies beating 5 times watered down earnings estimates, GE managed to lay an egg as noted in Earnings Disaster At GE; Profit Drops 45%; Revenues Lag.

In my review I stated "The best way to think of GE is as a finance company masquerading as a manufacturing company. This was essentially the business model of GM as well, except GE is better at it. "

That prompted an immediate Email from Anne Eisele, GE Director, Financial Communications, who said "GE generated $18.4 billion in Infrastructure orders this quarter alone. That's $500 million more in real, live manufacturing-related orders than we booked last quarter. We have $174 billion in non-financial (read: manufacturing) equipment and services backlog. At the same time, we're making good on plans to reduce the size of our financial services company so that it contributes only about 30% of company earnings. To say that GE is simply a finance company masquerading as a manufacturing company is not only incorrect, it's absurd."

I asked what percentage of earnings financial services provided now and when would it get down to 30%. I did not receive a reply back.

However I would like to point out the catchy phrase at the end of her email "GE imagination at work".

Indeed, "We're all Democrats now" is pretty imaginative. Moreover, the campaign was a success. Immelt got an invitation to serve on the President's Economic Recovery Advisory Board where he can now pitch products and ideas that will be good for GE whether they do a damn thing for the US or not.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Thanksgiving Dinner Costs Less to Make This Year; Recovery or Not, Japan Deflation Concerns Mount

noreply@blogger.com (Michael Shedlock) — Tue, 17 Nov 2009 06:56:00 +0000

Japan is off and running or so they say (for the nth time in 20 years). Yet inquiring minds will be quick to note Japan Deflation Concern Rises Even as Growth Quickens.

The acceleration of Japan’s economy to the fastest growth pace in more than two years masked a slide in prices of goods and services that threatens to temper the nation’s recovery.

The domestic demand deflator, a measure of price levels that excludes the cost of imports, fell 2.6 percent in the third quarter from a year earlier, the most since 1958, Cabinet Office figures showed yesterday in Tokyo. At the same time, gross domestic product jumped 4.8 percent, the most since early 2007.

Sustained price declines threaten to curtail a corporate- profit rebound that’s already been insufficient to spur a rally in Japan’s shares this quarter. The report prompted Deputy Prime Minister Naoto Kan to say the government may outline an emergency-spending package as soon as today, adding that “I’m concerned we’re entering into a deflationary situation.”

“This isn’t sustainable growth and the government knows it -- that’s precisely why they’re talking about the GDP deflator,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo.

Consumer prices in the world’s second-largest economy have fallen for seven straight months, undermined by the deepest recession in the postwar era. Even after seven months of gains in factory output, about one third of Japan’s factories sit idle.

“It might be a decade before the job market returns to the level of health we had a year or two ago,” he said. “The number of jobs may recover but not wages. It’s very fragile.”

A price war over jeans is a sign of that fragility. Discount retailer Don Quijote Co. last month started selling jeans for 690 yen ($7.70), undercutting Aeon Co., Japan’s largest supermarket chain, which has been offering them for about $9. Fast Retailing Co., the operator of Uniqlo stores, started the battle in March with pairs at $11.

“Japanese domestic demand is still dependent on price declines to grow,” said Naomi Fink, a strategist at Bank of Tokyo-Mitsubishi UFJ Ltd.

Good News For Turkey Buyers

In the US, Thanksgiving Dinner Costs Less to Make This Year.

Families can anticipate the biggest decline in the cost of preparing Thanksgiving dinner since 2000, according to the American Farm Bureau Federation.

This year’s survey, released yesterday, put the cost of feeding 10 people at $42.91. The grocery bill fell 3.8 percent, the steepest reduction since its 4.3 percent drop at the start of this decade. The slump was also the first since 2004.

Milk dropped the most out of a dozen items surveyed, according to the bureau. The cost of a gallon of whole milk fell 92 cents to $2.86. Turkey slid 44 cents to $18.65, based on the cost of a 16-pound bird.

I am not sure where these clowns shop but turkey (at least a frozen one) should cost well under $1 a pound.

CheapoLife reports Safeway Best Price Sale Deals – November 11-17, 2009

Safeway comes through with some of the lowest prices for your Thanksgiving Day dinner this year!

Safeway frozen turkey, Grade A, up to 16 pounds, $5.88 with $10 additional purchase.

Safeway boneless, skinless chicken breast, $1.99 per pound.

Rancher’s Reserve boneless beef top round London broil, $1.88 per pound.

Jumbo raw shrimp, 21-25 count per pound, sold in a 2 pound bag at $4.99 per pound.

A 16 pound turkey for $5.88 = 37 cents a pound. At that price, buy buy several and freeze them. Have one at Thanksgiving, one at Christmas and have an Easter turkey instead of an Easter ham.

Can they even raise a 16 lb turkey, clean it, wrap it, freeze it, ship it, and stock it for $5.88? I highly doubt it. Farmers are probably buying turkeys at that price.

What a deal. Unfortunately, it looks like that deal has expired. Nonetheless, if you are paying more than $.79 a pound or so, you are paying way too much.

Notice how Japan is concerned about falling prices on jeans and other things. The Japanese government has blown trillions over the years attempting to prop up prices. As a result, debt is now approaching 200% of GDP. The Yen will implode if Japan keeps this up.

Attempting to force up prices while unemployment is high and rising is pure insanity. Sadly the US is making exactly the same mistake.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bernanke vs. Meredith Whitney

noreply@blogger.com (Michael Shedlock) — Mon, 16 Nov 2009 23:52:00 +0000

The man that never saw it coming can't see it coming again. Please consider Bernanke Says ‘Not Obvious’ Asset Prices Misaligned.

Federal Reserve Chairman Ben S. Bernanke said it’s “not obvious” that asset prices in the U.S. are out of line with underlying values after a 64 percent jump in the Standard & Poor’s 500 Index from its March low.

“It is inherently extraordinarily difficult to know whether an asset’s price is in line with its fundamental value,” he said today in response to audience questions after a speech in New York. “It’s not obvious to me in any case that there’s any large misalignments currently in the U.S. financial system.”

“The best approach here if at all possible is to use supervisory and regulatory methods to restrain undue risk-taking and to make sure the system is resilient in case an asset-price bubble bursts in the future,” Bernanke said.

If that was the best approach then why didn't the Fed do it?

On the possibility of using interest rates to pop bubbles, “we can never say never,” Bernanke said today. “We have to keep an open mind.”

It's hard to keep an open mind when it is closed to anything but academic formulas and Keynesian and Monetarist claptrap that has no real life application.

The most ridiculous thing Bernanke said was "the Fed is 'attentive' to changes in the dollar’s value and “will help ensure that the dollar is strong.”

There is not a person on the planet that believes that.

Indeed, every time I hear Bernanke speak I wonder the same thing....

Bernanke: Why are we still listening to this guy?

The following video should make people think twice about listening to anything that Chairmen of the Fed Ben Bernanke says. It's a compilation of statements he made from 2005-2007 that will have your head spinning.

Meredith Whitney Calls For Double Dip Recession

Meredith Whitney says Stocks Overvalued, Recession Will Return.

Stocks are overvalued and the US economy is likely to fall back into a recession next year, well-known analyst Meredith Whitney told CNBC.

"I haven't been this bearish in a year," she said in a live interview. "I look at the board and every single stock from Tiffany (TIF) to Bank of America (BAC) to Caterpillar (CAT) is up. But there is no fundamental rooting as to why these names are up—particularly in the consumer space."

I am disappointed in one thing: Her comments about sideline cash were silly. Please see "Buy The Dip" Mentality Fully Entrenched for a discussion of sideline cash.

She is right on several things:

The US consumer was going through the biggest credit contraction ever—even bigger than that during the Great Depression. "That credit contraction is accelerating," she said. "There's nowhere to hide at this point."
The banking sector is not adequately capitalized and will need to raise more capital in the coming year.
The residential real estate market is likely to worsen and remains a much bigger threat than the commercial property market. The government's mortgage modification program won't result in any major improvement in homeowners' ability to stay above water, she added.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Bernanke's Outlook For Recovery and What It Means For Jobs

noreply@blogger.com (Michael Shedlock) — Mon, 16 Nov 2009 19:54:00 +0000

Earlier today, At the Economic Club of New York, Fed Chairman Ben Bernanke gave his Outlook for the Economy and Policy.

His speech contains much self-serving claptrap about how Federal Reserve policy save the day. Nowhere has the Fed admitted its role in creating the mess.

Bernanke thinks printing money and borrowing from the future via cash-for-clunkers can have lasting benefits. I think that if anything lasting comes from cash-for-clunkers, it will be net-negative.

Bernanke is still extremely concerned about commercial real estate, bank lending, and jobs. On those issues he is certainly right to be concerned. Here are a few snips from the speech.

Bank Lending Practices

Access to credit remains strained for borrowers who are particularly dependent on banks, such as households and small businesses. Bank lending has contracted sharply this year, and the Federal Reserve's Senior Loan Officer Opinion Survey on Bank Lending Practices shows that banks continue to tighten the terms on which they extend credit for most kinds of loans--although recently the pace of tightening has slowed somewhat. Partly as a result of these pressures, household debt has declined in recent quarters for the first time since 1951. For their part, many small businesses have seen their bank credit lines reduced or eliminated, or they have been able to obtain credit only on significantly more restrictive terms. The fraction of small businesses reporting difficulty in obtaining credit is near a record high, and many of these businesses expect credit conditions to tighten further.

While I am on the topic of bank lending, I would like to add a few words about commercial real estate (CRE). Demand for commercial property has dropped as the economy has weakened, leading to significant declines in property values, increased vacancy rates, and falling rents. These poor fundamentals have caused a sharp deterioration in the credit quality of CRE loans on banks' books and of the loans that back commercial mortgage-backed securities (CMBS). Pressures may be particularly acute at smaller regional and community banks that entered the crisis with high concentrations of CRE loans. In response, banks have been reducing their exposure to these loans quite rapidly in recent months. Meanwhile, the market for securitizations backed by these loans remains all but closed. With nearly $500 billion of CRE loans scheduled to mature annually over the next few years, the performance of this sector depends critically on the ability of borrowers to refinance many of those loans. Especially if CMBS financing remains unavailable, banks will face the tough decision of whether to roll over maturing debt or to foreclose.

The Job Market

In addition to constrained bank lending, a second area of great concern is the job market. Since December 2007, the U.S. economy has lost, on net, about 8 million private-sector jobs, and the unemployment rate has risen from less than 5 percent to more than 10 percent.6 Both the decline in jobs and the increase in the unemployment rate have been more severe than in any other recession since World War II.

Besides cutting jobs, many employers have reduced hours for the workers they have retained. For example, the number of part-time workers who report that they want a full-time job but cannot find one has more than doubled since the recession began, a much larger increase than in previous deep recessions. In addition, the average workweek for production and nonsupervisory workers has fallen to 33 hours, the lowest level in the postwar period. These data suggest that the excess supply of labor is even greater than indicated by the unemployment rate alone.

With the job market so weak, businesses have been able to find or retain all the workers they need with minimal wage increases, or even with wage cuts. Indeed, standard measures of wages show significant slowing in wage gains over the past year. Together with the reduction in hours worked, slower wage growth has led to stagnation in labor income. Weak income growth, should it persist, will restrain household spending.

The best thing we can say about the labor market right now is that it may be getting worse more slowly. Declines in payroll employment over the past four months have averaged about 220,000 per month, compared with 560,000 per month over the first half of this year. The number of initial claims for unemployment insurance is well off its high of last spring, but claims still have not fallen to ranges consistent with rising employment.

Although economic pain is widespread across industries and regions, different groups of workers have been affected differently. For example, the unemployment rate for men between the ages of 25 and 54 has risen from less than 4 percent in late 2007 to 10.3 percent in October--nearly double the rise in unemployment among adult women. This discrepancy likely reflects the high concentration of job losses in manufacturing, construction, and financial services, industries in which men make up the majority of workers. From the perspective of America's economic future, the effect of the recession on young workers is particularly worrisome: The unemployment rate among people between the ages of 16 and 24 has risen to 19 percent--and among African American youths, it is now about 30 percent. When young people are shut out of the job market, they lose valuable opportunities to gain work experience and on-the-job training, potentially reducing their future wages and employment opportunities.

The Outlook for the Economy and Policy

I return now to the outlook for the economy and policy. As I noted, I expect moderate economic growth to continue next year. Final demand shows signs of strengthening, supported by the broad improvement in financial conditions. Additionally, the beneficial influence of the inventory cycle on production should continue for somewhat longer. Housing faces important problems, including continuing high foreclosure rates, but residential investment should become a small positive for growth next year rather than a significant drag, as has been the case for the past several years. Prospects for nonresidential construction are poor, however, given weak fundamentals and tight financing conditions.

In the business sector, manufacturing activity has been expanding and should be helped by the continuing strength of the recovery in the emerging market economies, especially in Asia. As the recovery takes hold, enhanced business confidence, together with the low cost of capital for firms with access to public capital markets, should lead to a pickup in business spending on equipment and software, which has already shown signs of stabilizing.

I have discussed two of the principal factors that may constrain the pace of the recovery, namely, restrictive bank lending and the weak job market. Banks' reluctance to lend will limit the ability of some businesses to expand and hire. I expect this situation to normalize gradually, as improving economic conditions strengthen bank balance sheets and reduce uncertainty; the fallout for banks from commercial real estate could slow that progress, however.

Jobs are likely to remain scarce for some time, keeping households cautious about spending. As the recovery becomes established, however, payrolls should begin to grow again, at a pace that increases over time. Nevertheless, as net gains of roughly 100,000 jobs per month are needed just to absorb new entrants to the labor force, the unemployment rate likely will decline only slowly if economic growth remains moderate, as I expect.

Mapping The Bernanke Recovery

Inquiring mind just might be interested in mapping those statements. Let's assume it takes 100,000 jobs per month to absorb new entrants, decreasing to 70,000 a month by 2020.

Bernanke says jobs will be scarce for some time. He did not define "scarce" or give a timeline. However, let's assume jobs will be scarce only for 1 year. Also let's assume unemployment will rise for about a year (while jobs are scarce), level off, then start dropping in accordance with the paragraphs in red above.

Scenario "B"

Scenario "B" Data

click on chart for sharper image

Scenario "B" Suggests 100,000 jobs per month from 2010 through 2013 will be needed to keep up with birthrate and immigration. I took the liberty of helping out Bernanke by assuming demographics would start lowing the number of jobs requited.

I also assumed no bump in the participation rate as discouraged workers currently out of work start looking. Then again, perhaps Bernanke factored that in to his 100,000 estimate. However, judging from other things he has said in the past, I do not believe that to be the case.

Scenario "B" also assumes no double dip recession or any kind of recession for that matter all the way through the end of 2020 even though the Fed must at some point tighten to reduce its balance sheet.

Moreover, in spite of what Bernanke said in his speech about housing and commercial real estate, I have the Bernanke forecast as assuming +100,000 jobs a month starting in 2011, and adding a minimum of 120,000 jobs a month for 6 consecutive years while simultaneously subtracting jobs needed to keep up with the birth rate and demographics all the way through 2020.

Yet even under this optimistic scenario, unemployment will still be above 10% at the end of 2014 and will not dip below 8% until the end of 2020.

To play around with these parameters in a downloadable spreadsheet, please see the addendum to Mish Unemployment Projections Through 2020.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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One Day At The Bank Branch (A short tale by Charles Goyette)

noreply@blogger.com (Michael Shedlock) — Mon, 16 Nov 2009 17:21:00 +0000

I received an Email this morning from Charles Goyette about the state of our banking system.

One Day At The Bank Branch
By Charles Goyette

An old farmer walked into a rural branch of Washington Mutual to open a savings account. Being a conservative sort, he asked, “What happens if Washington Mutual goes broke?”

“Well,” said the branch manager, “in that case I suppose we’d be taken over by somebody like Chase Bank, and they’d make sure you got your money back.”

“But what happens,” asked the farmer, “if Chase goes broke?”

“In that case,” the manager answered, “you’d get your money back from the F.D.I.C.”

Not satisfied, the old farmer asked, “And if the F.D.I.C. doesn’t have enough money?”

“Then your money would be covered by the United States government.”

“And if the government is bankrupt?” he asked suspiciously.

“Then the Federal Reserve would just print you up some new worthless dollars.”

“But what if the Federal Reserve is finally put out of business?” asked the old man.

“Well, in that case, you’d lose all your money,” said the manager. “But really, wouldn’t it be worth it?”

Thanks Charles

Gold in Euros, U.S. Dollars, Australian Dollars, and Yen

All charts with 20 week (100-day) Moving Averages.
Click on chart for sharper image
Chart courtesy of The Privateer

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mapping Unemployment - You Make The Call - Downloadable Spreadsheet

noreply@blogger.com (Michael Shedlock) — Mon, 16 Nov 2009 08:21:00 +0000

Last week in Mish Unemployment Projections Through 2020 I posted a chart and tables of what unemployment might look like in what is best described as an optimistic "muddle through" scenario with no recessions for another decade.

Still even with those optimistic projections I came up with this grim chart of unemployment projections.

Unemployment Scenario 1 Data

Click On Any Chart In This Post For Sharper Image

Downloadable Spreadsheet

Shortly after writing the above article, I received a call form John Mauldin asking if I would post the spreadsheet so people could make their own assumptions and projections about how fast the economy would add jobs.

I thought that was a good idea so I added an addendum to my post.

You can download the spreadsheet and change parameters for the monthly average number of jobs the economy will create, and the number of monthly jobs required just to keep up with the birthrate and immigration and the spreadsheet will produce a chart of what the unemployment rate will look like for your assumptions.

See the addendum in the above link for table usage notes and download instructions.

Mauldin's Scenarios

John Mauldin and I did some playing around over the phone and he mapped out two additional scenarios, one of them a double dip scenario and the second an extremely optimistic scenario.

Let The Good Times Roll

You can see what John came up with in If This is Recovery…

What would it take to get back to 5% unemployment? I played with the spreadsheet and came up with the following numbers, which get us below 5% by 2020. I assume no recessions for the next ten years, and 2 million new jobs a year after 2011, which I start off with almost 1.5 million jobs. Of course, we have never done that, but let’s be optimistic.

And the graph below shows the unemployment numbers for the Good Times
Scenario.

Under John's extremely optimistic jobs creation forecast, unemployment is still above 8% at the end of 2015. Please note that John is not calling for that to happen, instead we played around to see just what it would take to get unemployment to 5% by the end of 2020.

Also note the optimistic assumptions as to how many jobs it would take keep up with the birth rate and immigration. In 2013 we assumed we would only need 110,000 jobs to keep up with population growth, and only 80,000 jobs a month for 2016-2017, and then a mere 60,000 jobs a month all the way through 2020.

That is making some pretty optimistic assumptions about boomers retiring, no longer looking to work.

Of course, boomers might need to work and want to work, but be too discouraged to look for work. In that case, the effect would show up in U-6 unemployment not U-3 (the official unemployment rate) that the spreadsheet maps.

John also mapped a mild double-dip scenario, yet one in which the economy come roaring back immediately afterwards.

Inquiring minds will want to take a look at John's assumptions and also to see he has to say about sales tax data.

Mildly Pessimistic Scenario

Let's see what happens on a mildly pessimistic scenario. I will assume a mild-double dip, followed by reasonably strong growth, no additional recessions through 2020, but with a slightly less optimistic forecast on how many jobs are needed to keep up with birthrate and immigration.

Click On Any Chart In This Post For Sharper Image

For this scenario I assumed a mild double dip where 100,000 jobs a month would be lost, followed by job gains of 120,000, then 170,000, then 150,000 for three years before tapering off. I also decreased the participation rate (indirectly), by assuming the number of jobs needed to keep employment steady would drop a bit slower from 110,000 in 2013 to 70,000 in 2020.

Mildly Pessimistic Chart

Is that possibility so unrealistic? I think not, yet look at the result: Unemployment does not dip below 10% until 2020.

Please download the spreadsheet (available in the top link), read my assumptions, then factor in your own assumptions about job growth, outsourcing, productivity, stimulus plans, housing, etc., whatever you want and see for yourself just how hard it will be to get unemployment under 8%, let alone under 6%.

Remember back a decade or so ago when economists thought it was not possible to have unemployment below 7% without a lot of inflation. What if they were correct and the 5% we have had this decade was an outlier? Is that so farfetched?

If after playing around with the spreadsheet you come to the conclusion that we are going to have structurally high unemployment for a decade, I believe you have come to the right conclusion.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Corporate Bankruptcies Slow With Thaw In Lending

noreply@blogger.com (Michael Shedlock) — Mon, 16 Nov 2009 03:18:00 +0000

Corporations have managed to forestall bankruptcy with new waves of refinancing. Please consider Bankruptcy Rise Slows With Thaw In Lending.

Corporate failures have slowed, as companies once on the verge of default have found a new life. These companies are now refinancing their balance sheets with new debt, pushing out maturities on existing loans or using distressed-debt exchanges to avoid a bankruptcy filing.

Speculative-grade companies -- or those with "junk" credit ratings -- have issued about $123 billion in new bonds this year, compared with roughly $48 billion in all of last year, according to data provider Dealogic. That's on pace to challenge 2006's record issuance of more than $143 billion, Barclays Capital analysts said late last week.

Many analysts worry the refinancing wave is just "kicking the can" down the road, without fundamentally fixing companies' deeper problems. Among weaker companies, about $1.4 trillion in bonds and loans will still come due in the next five years, said Dominic DiNapoli of FTI Consulting, a business advisory firm.

Despite the lull in corporate failures, there have been signs in recent weeks that bankruptcies could tick upward again. There have been several high-profile filings, including Capmark Financial and CIT. Already, five big companies have filed in November.

It remains unclear "how long the window will stay open" for weaker companies to borrow, said Barclays Capital restructuring chief Mark Shapiro. "Six months ago, no one thought that many of these companies could access the high-yield market." For the time being, he said, it's helping a lot of companies avoid "bankruptcies that would have otherwise occurred in the next year."

Distressed companies were shut out of credit markets in the winter as investors demanded yields on junk bonds that typically exceeded 20%. Now, average yields are closer to 10%, according to the Merrill Lynch U.S. High-Yield Master II Index.

According to the article, casino operators Harrah's and MGM Mirage, homebuilder Beazer Homes, Michaels Stores, and Ford were all able to roll over their debt.

Given rampant overcapacity everywhere, all this does is postpone the problems. Thus, bankruptcies will come later rather than sooner. However, as I have said before, as long as the corporate bond market remains healthy, equities are likely to fetch a bid.

Still, most of those companies are deep in junk territory and revenues are questionable at best. Much of these refinancings will eventually go to debt heaven. It's just a matter of time. In the meantime, note that there is still $1.4 trillion in bonds and loans will still come due in the next 5 years. In spite of a near-record year in corporate financing, we are only on pace to refinance $143 billion or so.

At some point the corporate bond market will choke on the amount of junk that needs to be rolled over. It's just hard to say when.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Manhattan Institute Says "New York must declare a financial emergency"

noreply@blogger.com (Michael Shedlock) — Sun, 15 Nov 2009 06:39:00 +0000

E.J. McMahon, director at the Manhattan Institute says New York deficits amount to financial emergency.

New York state's huge and growing budget gap requires government to take drastic actions to correct it, said E.J. McMahon, director of the Empire Center for New York State Policy at the Manhattan Institute.

McMahon spoke to the Council of Industry, a regional trade group, Friday at the Powelton Club.

He charted flat revenues against expected spending if nothing is changed and showed a $20 billion gap looming by 2012-13.

McMahon said the state must declare a financial emergency and enact a statutory freeze on public-sector wages for at least three years. State law allows this and enables contracts to be voided, he said. It would save at the rate of $2 billion a year for state, local and school taxpayers.

McMahon also called for shutting down the state's pension systems to new entrants and giving them instead a plan similar to one of the alternatives for the State University system, in which a stable amount is contributed by the state and employees can add their own.

He said some parts of the state's Taylor Law, governing labor relations with public employees, should be repealed, including compulsory arbitration for police and fire unions. Other laws should also be targeted for repeal because they're costly, including the rule requiring that on most public work the "prevailing wage" be paid, usually the union scale.

State spending should be capped by changing the state constitution, he said, recommending the "tax expenditure limitation" approach exemplified by Colorado.

He laid blame on politicians.

"It's their failure to stop the growth in spending that is the underlying problem," he said. "New Yorkers are voting with their feet and heading for the exits."

Tax Expenditure Limitation Analysis

There is surprisingly little in the way of current analysis of TEL analysis. I did find this TEL Impact Study by the Cato Institute that seems to predate 2000.

The existence of a TEL may not be sufficient to influence the size of government. The way a TEL is written can have an important impact on its effectiveness. Hidden loopholes may make it easy for a state legislature to work around the law. For example, expenditures can be shifted to an off-budget agency.

Empirical studies through 1990 found mixed results as to the effectiveness of TELs. Papers by Abrams and Dougan (1986), Cox and Lowery (1990), and Bails (1990) found TELs to be ineffective. These studies, however, are empirically weak. Abrams and Dougan along with Cox and Lowery use cross-sectional data. Bails does not adequately control for other factors that might influence government behavior (e.g. the business cycle).

The early findings that TELs are ineffective may be due to the fact that high-spending states are more likely to pass TELs, or because TELs may reflect a shift in voter preferences for less spending. In the latter case, it is not the TEL, but the change in voter preferences that causes a reduction in spending. In this case, TELs do not play a causal role in reducing spending. This TEL endogeneity issue may have a significant impact on statistical inference, biasing the results. Work by Reuben (1995) attempts to address this issue.

Poterba (1994) suggests that TELs may impact how a state adjusts its budget to unexpected negative economic shocks. Using data for the period from 1988 to 1992, he finds that states with TELs experience lower tax increases in the face of negative economic developments. A $1.00 increase in the budget deficit results in a $0.47 tax increase in TEL states. In non-TEL states, the increase is much higher--$1.03. TELs appear to have no impact on the size of spending reductions.

Impact Of Tax Expenditure Limitations

Cleveland State University has a more recent (2006) review of Tax Expenditure Limitations and their Impact on State and Local Government.

The PDF is 78 pages. Here are a couple pages of snips.

What drives the creation of TELs?

Tax and expenditure limitations are generally the result of voter dissatisfaction with the cost of state government. The public finance environment has experienced two discernible waves of tax limitation efforts, the late 1970s and the early to mid 1990s. In both eras, dynamic individuals dedicated to reducing the size of state government led citizen tax revolt efforts.

How do TELs work?

In general, tax and expenditure limitations have three main components. The first component is a spending limit. TELs typically tie annual spending limits to a combination of the inflation rate and the population growth rate. While TELs are the most common form of state spending limitation, three other limiting methods are also employed: (1) limit growth to some percentage of current general fund receipts, (2) limit spending growth to the same rate as personal income growth, or (3) limit growth in projected revenues.

In some cases unspent money, up to a designated percentage, is placed in a budget stabilization or rainy day fund. In the event that the state exceeds the predetermined percentage dedicated to the budget stabilization fund, the taxpayers of the state would enjoy a refund. However, in the case of Colorado’s TABOR, all unspent money is automatically refunded to taxpayers in the next budget year. The third component is a mechanism to adjust tax rates. TELs oftentimes require voter approval for any new taxes, tax increases, or changes in the tax structure.

Types of TELs

There are three broad categories of TELs: tax/revenue limits, expenditure limits,
and revenue and expenditure limits.

The most common type of restriction is an expenditure limitation. As of this publication, there were 30 expenditure or revenue limitations in place, with many states employing more than one restriction. Expenditure limitations are oftentimes tied to the combined annual growth in population and inflation, growth in personal income, or the size of the previous year’s budget. While these limitations predominate, several states have “appropriations to revenue” limits. These limitations restrict actual appropriations to a percentage of projected revenues. Finally, there are two states, Colorado and Washington that have a combination of revenue and expenditure limitations. These two states have garnered considerable attention, primarily due to their rigid budgetary environments. In both cases, spending is tied to growth in population plus inflation; what makes these states
different is that Colorado provides immediate refunds to taxpayers with surplus revenue, while Washington places the surplus in a budget stabilization fund.

California’s Proposition 13

Popular interest in state tax and expenditure limits was stimulated by the antiproperty tax campaign spearheaded by Californian Howard Jarvis in 1978. Jarvis
captured populist anti-tax sentiment with his cry of “I’m mad as hell and I won’t take it any more.”1 Jarvis’ Proposition 13 grabbed the attention of California voters and the national press. He argued that he was defending hardworking Californians who could no longer afford their property tax payments and led a very public campaign.

Proposition 13 passed by a nearly two-thirds majority. The act slashed property taxes by 57 percent, by limiting property tax rates to one percent of assessed value. Property assessment increases are limited to two percent annually. When a house or commercial property is sold a new tax value is established using the sales price as the valuation. The property tax is then limited to one percent of the property’s new value and annual increases in property taxes are limited by restricting annual increases is the assessed valuation to two percent per year. Proposition 13 shifts the property tax burden to new owners and away from long-time property owners. Proposition 13 was critical in convincing the residents of other states to adopt their own revenue-limiting measures.

Colorado TABOR

The state of Colorado enacted its TABOR in 1992 under the leadership of
California-transplant Douglas Bruce. Bruce’s efforts provide insight into the three-part formula to enact radical public policy change: an articulate policy entrepreneur who has staying power, enough money to run numerous campaigns, and a policy window. Bruce began advocating for tax and spending limitations around 1988, but it was not until the “window of opportunity” presented itself, with the combination of an economic downturn, putting income pressures on voters coupled with an organized campaign; then Bruce seized the opportunity to introduce his form of fiscal restraint to Colorado’s voters.

Policy entrepreneurs, when they are skilled politically, engaging, and thoughtful, have enjoyed marked success in selling their policy innovations in the policy arena.

TEL: A Historical Timeline

The starting point of the legislative timeline is set as 1971. The table below
(Table 1) includes not only TELs, but also includes other major state tax cuts that
indicate voter restiveness with state and local taxing.

[See article for multi-page table]

State Profile – Colorado

Citizen groups came together to develop the first ballot initiative aimed at limiting the size of state government in 1986. The 1986 proposed constitutional amendment would have reduced the taxing authority of state and local governments by requiring voter approval for any new or increased tax. The initial amendment drive was disconnected, inadequately funded, and ultimately failed at the polls. Citizen groups, led by California native Douglas Bruce, came together to support his first ballot initiative aimed at limiting state government in 1988. Bruce’s goal was to implement a constitutional restriction on the size of state government, in terms of both taxing and spending capacity. This time the initiative was more aggressive and far more restrictive.

The 1988 limitation again required voter approval for any new or increased taxes but also reduced state income taxes by 10 percent, limited local residential property taxes, and rolled back any state and local tax increases adopted between 1986 and 1988 that were not approved by voters.15 Although better organized and well funded, this initiative also failed. Bruce was undeterred, championing a third initiative in 1990.

The 1990 initiative proposed a limit on state spending growth, a cap on local property taxes, and voter approval for new taxes. While the 1990 amendment enjoyed the greatest voter support of the three initiatives (49 percent), it also failed.

The fourth try was the charm; a successful campaign was finally realized in 1992. Bruce mounted a well-funded and organized campaign, and a consensus developed among residents that taxes were too high. The Taxpayer’s Bill of Rights (TABOR) became a national model for the voter-initiated TELs.

The economic and political climate in Colorado during the early 1990s was ideal for the passage of TABOR. The state had slipped into a recession, Bruce secured support from the state’s Republican establishment, and polling showed that more than 63 percent of residents thought taxes were too high. In addition to these factors, there was little organized opposition to TABOR. Roy Romer, the governor at the time, was more concerned with passing a sales tax increase earmarked for education than he was in coordinating an opposition effort to TABOR. This meant that TABOR was largely unopposed, without alternatives for voters to consider. This recipe proved successful at the polls in 1992.

TABOR remains the most stringent tax and expenditure limit employed by any state. Colorado’s TABOR is fundamentally a revenue limit and has three main provisions or components. First, it restricts growth in state revenue and spending to inflation plus the percentage change in population. The growth formula appears to be designed to keep real per capita state spending constant over time. For the purposes of TABOR, inflation is determined by The Bureau of Labor Statistics inflation rate for the Denver-Boulder area. The population rate is limited to the reported state population growth rate. Second, TABOR requires that surplus revenue above the defined limit be rebated to taxpayers. This is done in the year after the surplus has been accumulated. This revenue is commonly referred to as the TABOR surplus. Third, simple majority voter approval is required for new taxes, tax rate increases, extensions of expiring taxes, and any change in tax policy that results in a revenue gain by government.

TABOR was politically popular during years of economic expansion, but when the 2001 recession hit the state, it created an extremely challenging fiscal environment. When the recession hit, revenue surpluses quickly disappeared. As surpluses disappeared and tax revenues continued to plummet, the state was still required to provide TABOR rebates for the previous year, while concurrently implementing reductions in state spending. TABOR proved to be a fiscal accelerator rather than a fiscal stabilizer, exacerbating the state’s financial difficulties. To further complicate matters, the state did not maintain a budget stabilization (or rainy day) fund from which to withdraw funds, cushion the effects of the recession, or make the TABOR rebate payments. Therefore, there were little to no reserves to tap when revenues declined.

Spending “ratcheted down” in Colorado

While TABOR ratchets down the amount of revenue the state can spend, constitutional Amendment 23 ratcheted up state spending on K-12 education. In 2000, voters approved Amendment 23, a provision requiring annual growth in expenditures for K-12 education by a rate of inflation plus one percent through 2010 and just by the inflation rate thereafter. The new K-12 money comes from tax revenues, is earmarked for educational purposes, and is exempt from the TABOR spending limit. Further intensifying the situation are the state’s constitutional provisions requiring a balanced budget and the prohibition of most forms of debt.

Many critics of TABOR claim that the precarious balance between competing interests has led to the state’s worst fiscal crisis in decades. The effect of TABOR on state expenditures has been remarkable. Because more than two-thirds of state revenues are allocated by mandates to K-12 education, Medicaid, and corrections, the state legislature controls less than one-third of the budget. According to a study done by the Colorado Legislative Council staff, general fund spending on K-12 education has increased from 37 to 42 percent of the budget since the inception of TABOR.

Buying Votes

The problems in Colorado is not with TABOR but rather with Amendment 23, and with increasing spending elsewhere just because the lawmakers can. When laws allows spending to increase by % of population, inflation or whatever, politicians will spend every dime of it.

Ask any politician if he is in favor of reducing taxes and a balance budget. The answer will always be "of course".

Then why did it take 4 concerted efforts to pass TABOR? The answer is easy: politicians like to buy votes. The more money they can slosh around, the more votes they can buy.

No politicians wants to stand up to public unions, teachers, fire fighters, or police. Those wanting handouts vote, and vote in mass.

In addition, politicians also like the patronage jobs they can hand out to their friends and relatives. Politicians also like campaign donations wherever they can get them. The more money you slosh around, the more votes you can buy.

Taxpayers suffer. Until they revolt.

Politicians typically react by promising Armageddon if spending is reduced. The reality is Armageddon comes when spending runs out of control and promises are made that cannot be kept.

Armageddon has arrived and no one wants to do what it takes: Cut spending, slash programs, renegotiate union contracts, privatize city services, and cut pension benefits.

Instead, politicians and the select few beneficiaries want to increase taxes. It won't work. You can't squeeze money out of an unemployed turnip.

Prevailing Wage Insanity

By the way, I certainly am in favor of scrapping prevailing wage laws. For details please see Thoughts on the Davis Bacon Act.

...
...

In 1999 Ron Paul introduced the Davis-Bacon Repeal Act.

Mr. Speaker, I rise today to introduce the Davis-Bacon Repeal Act of 1999. The Davis-Bacon Act of 1931 forces contractors on all federally-funded contraction projects to pay the `local prevailing wage,' defined as `the wage paid to the majority of the laborers or mechanics in the classification on similar projects in the area.' In practice, this usually means the wages paid by unionized contractors. For more than sixty years, this congressionally-created monstrosity has penalized taxpayers and the most efficient companies while crushing the dreams of the most willing workers. Mr. Speaker, Congress must act now to repeal this 61-year-old relic of an era during which people actually believed Congress could legislate prosperity. Americans pay a huge price in lost jobs, lost opportunities and tax-boosting cost overruns on federal construction projects every day Congress allows Davis-Bacon to remain on the books. ....

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Bair: "Bank Bailout NOT a good thing"; Pension Benefit Guaranty Corp (PBGC) Bailout Coming

noreply@blogger.com (Michael Shedlock) — Sat, 14 Nov 2009 18:06:00 +0000

Yesterday I stated FHA Bailout By Taxpayers On The Way. The FHA denies a bailout is coming.

Please consider Inside the FHA's financial audit, with David Stevens, FHA commissioner and CNBC's Diana Olick.

The Term Bailout Does Not Apply

David Stevens: "Bailout is a term widely used with financial institutions. FHA is a government agency so let's just be clear. .... FHA does not operate under the same context as a typical financial institution. So the term bailout really just does not apply technically"

Lovely

Given that Fannie Mae and Freddie Mac are institutionalized, I guess the term bailout technically no longer applies to them either.

This is good news because it means no bailout will be needed for PBGC either.

Bair calls U.S. bank bailout "not a good thing"

Inquiring minds note that Bair says U.S. bank bailout "not a good thing"

Leading U.S. bank regulator Sheila Bair said on Friday that the government's capital injections into the largest banks was "probably not a good thing."

Bair, the chairman of the Federal Deposit Insurance Corp, said the billions of dollars of capital infusions last year had a terrible impact on public perception of the financial industry and government regulators.

"I think at the time it sounded like the right thing to do and, again, it was part of an international effort, but I just see all the problems it's created," Bair said during an interview with PBS NewsHour. "I think we would have tried to dissuade Treasury from making these capital investments."

Public outcry followed the investments, which largely came to be referenced as government bailouts. Lawmakers raced to attach more conditions, such as restrictions on compensation, to the capital injections.

"It's had a terrible, terrible impact on public attitudes toward the financial system, toward the regulatory community," Bair said. "It's created all sorts of issues about government ownership of these institutions, what happens if they get in trouble again."

PBGC $22 Billion In The Hole

Inquiring minds are reading the PBGC Annual Management Report for Fiscal Year 2009

The Pension Benefit Guaranty Corporation (PBGC) ended fiscal year 2009 with an overall deficit of $22 billion, according to the agency's Annual Management Report submitted to Congress today. The result compares with the $11.2 billion deficit recorded at the previous fiscal year-end on September 30, 2008.

In an interim report to Congress in May, the agency showed a record deficit of $33.5 billion, based on unaudited numbers at the fiscal year mid-point on March 31.

The main factors for the year-over-year decline in the single-employer program's net position included a $10.6 billion charge due to an unfavorable change in interest factors, $4.2 billion in losses from completed and probable terminations, a $3.9 billion charge due to passage of time, and $383 million of administrative and other expenses.

The Passage Of Time

Please note that $3.9 billion of the deficit is due to "passage of time". You can't make this stuff up, it's too bizarre.

Also note that the deficit was $35 billion in March. Hmmm. Guess what happens if the stock market goes down again.

Finally note that a "$10.6 billion charge due to an unfavorable change in interest factors." Think 0% interest rates has anything to do with this?

Calculated Risk says "With companies moving away from defined benefit plans, there will be fewer companies paying for insurance in the future - and the 'long-term solution' will probably involve some sort of bailout."

Clearly Calculated Risk is not thinking technically, and neither am I. A huge bailout is coming and the next market decline will exacerbate the losses.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Obama Wants Spending Cuts, He Should Start With Military

noreply@blogger.com (Michael Shedlock) — Sat, 14 Nov 2009 01:00:00 +0000

After Democrats lost two Gubernatorial elections, Obama claims to have found fiscal religion. I will believe it when I see it.

Please consider Obama wants domestic spending cuts in next budget.

The Obama administration, mindful of public anxiety over the government's mushrooming debt, is shifting emphasis from big-spending policies to deficit reduction. Domestic agencies have been told to brace for a spending freeze or cuts of up to 5 percent as part of a midterm election-year push to rein in record budget shortfalls.

Yet with the economy still in distress and unemployment pushing past 10 percent, prospects for making a dent in a trillion-dollar-plus annual deficit seem slight. And since the Pentagon and Department of Veterans Affairs would likely be shielded from such cuts, overtures toward trimming the deficit may hold more symbolic value than substance.

President Barack Obama is expected to make post-recession spending restraint a key theme of his State of the Union address in January and an important element of the budget he submits to Congress a few weeks later. He is under increasing pressure, including from moderate and conservative members of his own party, to show he is serious about tackling a deficit that has become both an economic and political liability.

White House budget director Peter Orszag on Friday told The Associated Press it is imperative to start curbing the flow of red ink. But he called it a balancing act and said acting too fast could undercut what appears to be a fledgling economic recovery.

Democratic officials in the White House and on Capitol Hill say options for locking in budget savings include caps on the amount of money Congress gets to distribute each year for agency operating budgets. They spoke on condition of anonymity to frankly discuss internal deliberations.

The White House told agencies to submit spending plans that would, at the very least, freeze their budgets, and to prepare for cuts as high as 5 percent. That edict is but one round in internal administration deliberations on the budget. Cabinet heads are sure to seek exemptions, and Orszag warned that firm budget decisions haven't been made.

Congress will soon vote on legislation to raise the debt ceiling -- the limit on how much the government can borrow -- above the present $12.1 trillion. On Friday, the nation's overall debt stood at $11.99 trillion. Some fiscally conservative lawmakers have said they would not vote for further increases in the debt ceiling until the administration took deficit-cutting steps.

The national debt is the accumulation of annual budget deficits. The deficit for the 2009 budget year, which ended on Sept. 30, set an all-time record in dollar terms at $1.42 trillion.

The flow of red ink has been increased by war spending for Iraq and Afghanistan, recession-fighting stimulus and bank bailout spending and by reduced tax revenues from high unemployment and reduced personal and business income.

Polls show rising public concern over deficits. Exit polls from elections earlier this month showed clear majorities of Virginia and New Jersey voters said they were worried about the direction of the nation's economy. In both states, Republicans won gubernatorial seats that had been held by Democrats.

Republicans are seeking to capitalize on this month's Democratic election setbacks and rising voter concerns over the burst in federal spending. House Minority Leader John Boehner, R-Ohio, said the Democrats' "so-called `war on deficits' comes about a year late and more than a trillion dollars short."

"Spending in Washington has been out of control for years, and instead of changing it as they promised they would, Speaker Nancy Pelosi and President Obama have stepped on the accelerator," Boehner said in a statement.

Caps and Freezes No The Answer

Caps and freezes are not the answer. For Christ's sake, the deficit is $1.42 trillion. Raising taxes is not the answer either. Obama is on exactly the wrong path.

Small businesses are suffering and will suffer more if health care legislation passes as is. Instead of reducing military spending that does no one any good, he is increasing it. The list goes on and on.

U.S. defense bill would pay Taliban to switch sides

In one of the most insane proposals ever, U.S. defense bill would pay Taliban to switch sides.

The defence bill President Barack Obama will sign into law on Wednesday contains a new provision that would pay Taliban fighters who renounce the insurgency, Senate Armed Services Committee Chairman Carl Levin said on Tuesday.

Under the legislation, Afghan fighters who renounce the insurgency would be paid for "mainly protection of their towns and villages," Levin said.

Does anyone think paying people to switch sides can possibly work? What happens as soon as we stop paying them?

Hell bells, is there any accounting of where the money goes in the first place? This proposal is beyond idiotic.

Massive Defense Spending Leads to Job Loss

The Center For Economic And Policy Research says Massive Defense Spending Leads to Job Loss.

Defense spending means that the government is pulling away resources from the uses determined by the market and instead using them to buy weapons and supplies and to pay for soldiers and other military personnel. In standard economic models, defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.

Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased. Construction and manufacturing were especially big job losers in the projections, losing 210,000 and 90,000 jobs, respectively.

The scenario we asked Global Insight to model turned out to have vastly underestimated the increase in defense spending associated with current policy. In the most recent quarter, defense spending was equal to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. Our post-September 11th build-up was equal to 3.2 percentage points of GDP compared to the pre-attack baseline. This means that the Global Insight projections of job loss are far too low.

The projected job loss from this increase in defense spending would be close to 2 million. In other words, the standard economic models that project job loss from efforts to stem global warming also project that the increase in defense spending since 2000 will cost the economy close to 2 million jobs in the long run.

For some reason, no one has chosen to highlight the job loss associated with higher defense spending. In fact, the job loss attributable to defense spending has probably never been mentioned in a single news story in the New York Times, Washington Post, National Public Radio, or any other major media outlet. It is difficult to find a good explanation for this omission.

"We just marched in we can just march home"

Please consider Ron Paul on Forbes: Be Prepared For The Worst; On Larry King Discussing Michael Moore

"We just marched in we can just march home. Besides, I will win this argument. We are bankrupt and cannot afford it."

"Let's quit this militarism around the world. We are in 130 countries and 700 bases around the world and we cannot sustain these. It's pumped out by the left and the right. There is conservative Keynesianism and liberal Keynesianism which always fails and gives us the financial crisis we are in."

Ron Paul has it correct.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

FHA Bailout By Taxpayers On The Way

noreply@blogger.com (Michael Shedlock) — Fri, 13 Nov 2009 23:00:00 +0000

Taxpayers may was well brace for an FHA bailout. It is all but guaranteed. With current FHA practices it is likely to be a big one.

On November 5, the Richmond Register was asking What does the FHA think it is doing?

Exactly who made Bernadine Shimon think that she could buy a new house shortly after declaring bankruptcy and losing another home to foreclosure? The American taxpayer, that’s who.

Without a Federal Housing Administration willing to guarantee a $125,000-plus mortgage, this Denver-area schoolteacher’s recurring “dream of homeownership” could not come to pass. Shimon’s down payment was a tiny 3.5 percent.

This single mother is so strapped that she had to cash in her retirement savings to come up with the 3.5 percent. Her case was cited in a New York Times article about, not surprisingly, the sad shape the FHA finds itself in.

Of course, no sane private lender would take on such risk without a sucker-of-first resort, again the taxpayer. It happens like this: Private companies make their loans. The FHA buys the mortgages, and then rolls them into Ginnie Mae Mortgage Backed Securities. Sold around the world, these bonds are rock-solid investments because they carry an “explicit” taxpayer guarantee. Fannie Mae and Freddie Mac securities came with only an “implicit” guarantee (though as we saw in the recent bailouts, those “implicit” guarantees are for all intents and purposes “explicit”).

Much of the blame for the housing bubble-then-bust goes to these government agencies: They let private lenders make mortgages without adult supervision, then guaranteed them.

Kenneth Donohue, inspector general of the Housing and Urban Development Department, seemed to be shaking his head. “What does the FHA think it is doing by asking only 3.5 percent?” he asked. (FHA is part of HUD.)

With nearly a quarter of FHA loans insured in the last two years now in trouble, you’d think that the agency would show more discretion in deciding which homebuyers to help. And you’d think that Democrats running the House Financial Services Committee would be more upset over the way the FHA still hands out taxpayer guarantees.

But committee Chairman Barney Frank of Massachusetts insists that these mortgages are needed to “keep prices from falling too fast.” Thing is, we can’t support real-estate values with shabby lending practices. That’s what got us into trouble.

Another good idea is to demand that banks take a hit for the first 10 percent of losses on the mortgages they originate. That would put their skin in the game. It would spur them to engage in responsible lending practices -- and not just collect a bunch of fees upfront, then unload the risk onto the taxpayers.

Home prices are falling precisely because houses people bought homes they could not afford.

Note however, the thought process of Barney Frank: We have to keep selling houses to people who cannot afford them in order to keep home prices from falling.

That mentality all but assures a bailout of the FHA is coming. It will not take too much longer to realize it either.

FHA Says Cash Reserves Are Down Sharply

In light of the above, no one should be surprised by the New York Times headline Housing Agency Says Cash Reserves Are Down Sharply.

The Federal Housing Administration said Thursday morning that its cash reserves had dwindled significantly in the last year after a record drop in home prices.

Still, agency executives stopped short of saying that a direct bailout would be needed. The F.H.A., which insures loans made by private lenders, guaranteed more than $360 billion in mortgages in the last year, four times the amount in 2007.

“We are prepared to enact reforms that ensure the F.H.A.’s financial health,” the secretary of Housing and Urban Development, Shaun Donovan, said Thursday.

“As a credit expert, I have seen this movie before, and the ending is always the same,” said Edward Pinto, a former executive with the government mortgage giant Fannie Mae.

The results of the F.H.A.’s annual audit showed the agency’s capital reserves to be 0.53 percent, far under the 2 percent minimum mandated by Congress. A year ago, the capital reserves were 3 percent.

Nearly one in five loans made in 2007 are seriously delinquent, the agency said.

HUD FHA Report On Finances

Inquiring minds are considering preposterous statements made by HUD and the FHA in the HUD Secretary, FHA Commissioner Report On Finances.

“FHA is playing a critical role in restoring health to the housing market by helping working families access mortgage finance when private capital is tight,” said Secretary Donovan. “This is a temporary role which FHA has played in previous economic downturns. The Administration is committed to ensuring that the FHA steps back as private capital returns to the market. With this temporary increased role comes increased risk and responsibility. That’s why we are committed to closely monitoring market behavior patterns and economic risks so that we are prepared to enact reforms that ensure the FHA’s financial health moving forward.”

“There are real risks to the FHA and we are aggressively addressing those real risks with real reforms,” Commissioner Stevens said.

Changes Enacted via Mortgagee Letter, Effective January 1, 2010

Require Submission of Audited Financial Statements by Supervised Mortgagees
Modify Procedures for Streamline Refinance Transactions
Require Appraiser Independence in Loan Origination
Modify Appraisal Validity Period
Enable Appraisal Portability

Unaddressed Issues

Do you see anything being done to address 3.5 percent down payments?
Borrowed down payments?
Seller assisted down payments?
Salary requirements?
Mortgage serviceability requirements?
Debt to income ratios?
Homeowner suitability?

On June 12, 2008, I wrote the Case for Abolishing the FHA and GSEs

In the case of the FHA, lives are being destroyed when they approve 65% DTI [Debt To Income] loans with borrowed down payments. Those loans are bound to fail, and are failing, leaving people will bad credit marks for years to come.

In regards to Fannie Mae, does anyone even remember what their mission statement is? Here it is:

We are a shareholder-owned company with a public mission. We exist to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market.

Fannie Mae exists to expand affordable housing.

Is there any doubt Fannie Mae has failed the mission? The mission HAD to fail. The very act of government sponsorship of housing contributed to rising home prices. Every affordable home program in history has failed.

Finally, the FHA and the GSEs are both moral hazards. Should either blow up, risk is high there will be a bailout at taxpayer expense. Now there is talk in Congress of expanding the role of the both. Instead, both should be abolished. Neither Fannie Mae nor the FHA serves any purpose that cannot be served by the free market.

At the time I wrote that, Fannie Mae had not officially imploded. It has since done so.

The FHA is on the same path. It's just a matter of time, and probably not much time at that. An FHA bailout by taxpayers is on the way. There's no stopping it now.

Addendum

The above appeared on Financial Sense on Thursday.

Since then I have been exchanging emails with Aaron Krowne at Implode-O-Meter regarding HUD and the FHA.

Aaron writes:

The bill to make the practice of seller-funded FHA downpayment assistance (SFDPA) legal was introduced in 2008 as HR 6694. It did not pass in that session of congress, so it was re-introduced as HR 600. HR 600 also left the implementation of a subprime-like fee structure to the FHA itself, rather than putting it out in the legislation where it was attracting criticism.

However, the Congressional Research Service during that session of congress came out with a rather scathing report on the seller-funded DPA practice. The CRS reports directly to congress, advising on legislation. Their advice seems to have been heeded. Indeed, there seems to be no continuance of HR 600 in the current session of congress. So thankfully that may have killed it.

However, the overall housing industry may have gotten essentially what they wanted in the form of the First Time (and now "Move Up") Homebuyer Tax Credit.

It is similar to SFDPA in that it gives "cash" to those who buy. It is also worth noting that something around half of ALL loans being issued now are through FHA (and of course, everything else is still backed by Fannie and Freddie, which are in government conservatorship) -- so this is still a major consideration for taxpayers.

Supposedly the money can only count towards some closing costs, not the downpayments -- but I'm not sure how enforceable that is. And we all know this is undoubtedly propping up home prices beyond fundamentals, so these people (who didn't have much up-front money in the first place) are at much higher risk of foreclosure.

The one plus side in all of this is that no longer are we letting third parties come in, launder money from seller to buyers, and specifically motivate mark-ups to cover the downpayment expense.

Calculated Risk addressed DAP (Downpayment Assistance Programs) in FHA on DAPs: "Too many homeowners not equipped for home ownership"

The FHA commented on the damage caused by the Downpayment Assistance Programs (DAPs) today. These DAPs circumvented the FHA down payment requirements by having the seller funnel the "down payment" to the buyer through a "charity" (for a small fee of course). The FHA attempted to stop this practice, but thanks to Congress, the DAPs led to billions of losses. .....

The 2009 vintage is just getting started, but the FHA has tightened standards (higher FICO scores), and DAPs were banned at the end of 2008 - and that will help. Also the stabilization in house prices is helping with fewer delinquencies.

However many of these recent homebuyers probably aren't ready to be homeowners, and the delinquency rate will probably rise sharply - especially if house prices start falling again.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mish Unemployment Projections Through 2020 - It Looks Grim

noreply@blogger.com (Michael Shedlock) — Fri, 13 Nov 2009 09:04:00 +0000

Inquiring minds are interested in figuring out how long it might take to get back to "full employment" defined as 5%.

John Mauldin touched upon this theme in Welcome to the New Normal.

John's analysis stopped short of making actual projections as to when full employment would return, or the detailed path it would take to get there year by year. However, I thank John for providing a nice starting point for discussion.

In Scarred Job Market Expected to Weigh on Economy The Wall Street Journal offers this look at how long it would take to return to employment levels before the start of the recession. Please consider the long road back.

The Long Road Back

Click On Any Chart In This Post For Sharper Image

The Journal states ...
"On average, the economists don't expect unemployment to fall below 6% until 2013"

The Journal goes on ...

"On average the economists -- not all of whom answered every question -- expect the unemployment rate to peak at 10.2% in February. But even once the employment situation stops getting worse, economists expect recovery to come slowly. "It could take until 2014-15 before we see a 5% handle on unemployment again," said Diane Swonk at Mesirow Financial."

6% by 2013?!
5% by 2015?!
Really?

Mapping Unemployment

To map unemployment projections year-by-year from now through 2020 there are a huge number of variables to take into consideration.

Factors Affecting Unemployment Projections

Current Hiring Trends
Demographics
Working Age Population Growth Projections
Boomer Retirements
Participation Rate
Part-Time Employment
Drivers For Jobs
Housing
Commercial Real Estate
Global Wage Arbitrage
Outsourcing
Double Dip Recession
Productivity
Manufacturing

Let's start our analysis with a look at monthly job growth trends from 1999 through 2009. John Mauldin posted the following chart, I filled in averages and outlined in blue previous recession periods.

Monthly Job Growth 1999-2009

Chart courtesy of BLS. Annotations by me, numbers are in thousands.

The areas in deep blue mark recessions. The last recession ended in November, 2001. The economy shed jobs for the next 21 months. Is there any reason for it to be different this time?

At the height of the internet bubble with a nonsensical Y2K scare on top of that, the economy managed to gain 264,000 jobs a month.
At the height of the housing bubble in 2005, the economy added 212,000 jobs a month.
At the height of the commercial real estate bubble with massive store expansion, the economy added somewhere between 96,000 and 178,000 jobs per month depending on where you mark the peak.

Neither the housing boom, nor the commercial real estate boom is coming back. Nor is there going to be another internet revolution. If anything, outsourcing of internet jobs to Asia is likely to remain intense.

Finally, consider all the financial engineering jobs, banking jobs etc, that are not coming back.

No Genuine Driver For Jobs.

The retail sector has massive overcapacity. We do not need more Home Depots, WalMarts, Lowes, Sears, Pizza Huts, Targets, Safeways, etc etc.
Commercial real estate is flooded with vacant offices and plagued by falling rents.
Housing inventory is enormous.
Boomers will be looking to downsize their lifestyles.
There is not going to be another internet boom.

What about manufacturing? As an imperfect proxy for manufacturing, let's take a look at light vehicle sales and employment.

Motor Vehicle Sales

Calculated Risk has this interesting chart of Light Vehicle Sales.

Notice the huge recent spike caused by cash-for-clunkers that has since been given back. Are auto sales going back to where they were? I don't think so? In terms of jobs, will it matter even if they do?

The Department of Energy has an interesting chart on Declining Automotive Manufacturing Employment.

Those automotive and auto parts jobs are gone for good regardless of whether or not sales increase.

Peak Growth In Jobs Is In

The peak growth in jobs, based on an analysis of jobs that are never coming back is clearly in.

The internet boom peaked at 264,000 jobs per month in 1999.
The housing bubble boom peaked at 212,000 jobs per month in 2005.
The commercial real estate boom peaked at 178,000 jobs per month.
The next peak will be lower yet.

Let's be generous and suggest 150,000 jobs per month for an entire year at the peak of the next cycle. That is actually exceptionally generous given we have not yet taken into consideration boomer demographics, part-time jobs, the participation rate, and other such factors.

Current Picture

Please consider the October 2009 Employment Report including household data, the civilian labor force, the unemployment rate, part-time employment, and trends in the participation rate.

Table A Household Data October 2009

The civilian labor force is 153,975,000.
82,575,000 are not in the labor force.
Those base numbers will be used in charts a bit later.

Table A-12

Table A-12 is where one can find a better approximation of what the unemployment rate really is. Let's take a look

click on chart for sharper image

Grim Statistics

The official unemployment rate is 10.2% and rising. However, if you start counting all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

It reflects how unemployment feels to the average Joe on the street. U-6 is 17.5%. Both U-6 and U-3 (the so called "official" unemployment number) are poised to rise further although most likely at a slower pace than earlier this year.

For the purpose of this post, I will be charting and predicting U-3 the official unemployment number.

Table A-5 Part Time Status

click on chart for sharper image

The chart shows there are 9.28 million people are working part time but want a full time job. A year ago the number was 6.8 million.

Note the trend in part-time work. It is inching up. In a recovery it should be headed down quickly. The reason is employers increase the hours of part-time workers before they start hiring full-time workers.

The key take-away from this series are the millions of workers whose hours will rise before companies start hiring more workers.

Table B-2. Average weekly hours of production and nonsupervisory workers on private nonfarm payrolls

Table B-2 is another measure of part-time employment. Companies will expand workweeks to 40 hours and even add a bit of overtime before hiring new employees.

The current workweek is down to 33 hours. That represents a lot of people who will not be hired as the economy picks up steam.

Population Estimates

According to the Census Bureau Population Estimates we are going to add about 2.5 million working age (16 years old and up) citizens a year from now until 2020.

The numbers varies slightly year to year. I used an estimate of the average summing up the buckets from 16 to 100+ for the years in question and rounding the result.

Civilian Participation Rate

The participation rate is a measure of how many of those aged 16 and older are working vs. the entire pool of those 16 and older.

The participation rate soared from 1960 to 1990 as women started working and two wage earner families became the norm as the following table shows.

Year   Men    Women
1960   83.3   37.7
1970   79.7   43.3
1980   76.3   51.5
1985   76.3   54.5
1990   76.1   57.5

As boomers head into retirement the participation rate should be expected to decline.

The participation rate is also affected by those wanting work but not actively seeking work. The difference between U-5 and U-3 in Table A-12 above shows the effect of a falling participation rate.

In theory, economists claim the participation should rise as the economy recovers on grounds that people who want jobs but stopped looking will again start looking.

Theory is one thing and practice is another as the following charts show.

Participation Rate 1950-Present

Civilian Participation Rate Detail

So much for theory about participation rates rising as a recovery starts.

If history repeats, expect the participation rate to keep declining after this recession ends. Then because of demographic trends of boomer retirement, I expect the participation rate to continue declining through 2020.

Table A-1 Employment Status

Table A1 shows the civilian noninstitutional population (those over 16 not in prisons), the participation rate, unemployment rate, employed, those not in the labor force, and those who want a job. Those numbers form starting numbers for the charts below.

Unemployment Classifications

People are classified as employed if they did any work at all as paid employees during the reference week; worked in their own business, profession, or on their own farm; or worked without pay at least 15 hours in a family business or farm. People are also counted as employed if they were temporarily absent from their jobs because of illness, bad weather, vacation, labor-management disputes, or personal reasons.

People are classified as unemployed if they meet all of the following criteria: They had no employment during the reference week; they were available for work at that time; and they made specific efforts to find employment sometime during the 4-week period ending with the reference week.

Past Predictions

Past history does not guarantee future results but let's take a look at who said what, when.

Wednesday, April 22, 2009: Leaking and Reeking of Stress

Note that the adverse scenario assumes a 10.3% unemployment rate at the end of 2010. Hells bells, it's highly likely unemployment far exceeds 10.3% before the end of 2009.

Sunday, June 07, 2009: Optimistic Unemployment and Housing Forecasts Looking Downright Silly

Economics may be the "dismal science" but economists as a group sure seem to be an optimistic lot.

The consensus forecast of unemployment for 2009 was 8.4%. The Blue Chip Forecast, a survey of America's leading business economists that costs $875 annually. Blue Chip had the unemployment rate at 8.3% for 2009 and 8.7% for 2010.

the Fed had a mere 10% chance the unemployment numbers get as high as the adverse scenario. The adverse scenario for 2009 has already been exceeded unless you think unemployment has peaked and is going lower over the next several months.

Meanwhile the Survey of Professional Forecasters pegged the unemployment rate at 8.4% for 2009 and 8.8% for 2010 (now revised much higher as is always the case).

Across the board, the Fed's adverse scenarios were a cakewalk, especially the unemployment forecasts.

Friday, October 02, 2009: Jobs Contract 21th Straight Month; Unemployment Rate Hits 9.8%

Sorry folks, I was one month early. In January I forecast the unemployment rate would hit 9.8% by August. Meanwhile, even though it was clear the Fed was wildly off base in its adverse scenario, the Fed upped it total to a mere 9.2% to 9.6% for the year as noted on May 21, 2009 in Fed's Economic Forecast Worsens; Still Ridiculously Optimistic.

The Fed's forecasts, released as part of the minutes from its April meeting, show that its staff now expects the unemployment rate to rise to between 9.2% and 9.6% this year. The central bank had forecast in January that the jobless rate would be in a range of 8.5% to 8.8%, but the unemployment rate topped that in April, hitting 8.9%.

Assumptions

In light of all of the above...

Job losses are likely to continue for a minimum of another year.
When job gains start, they will be very slow at first, then pick up.
An extremely generous monthly job gain stat over the course of the year would be 150,000 jobs.
A falling participation rate will continue to mask reported unemployment.
Starting in 2013 the labor pool will start decreasing because of boomer demographics.
The noninstitutional population will rise by 2.5 million workers a year

Historical Recap

Currently the official unemployment rate is at 10.2%

Past history shows unemployment will keep rising for another year, perhaps 2 years even as the economy begins to add jobs.

Labor Pool Analysis

Labor pool analysis is somewhat tricky analysis because it is governed by two variables: demographics and the participation rate.

As discussed above, it is hard to know if and when discouraged workers will re-enter the workforce. Meanwhile, boomer demographics alone suggests the rate of change in the labor pool will start declining at an accelerated pace starting somewhere between 2013-2015.

Together the number of jobs it will take to keep the unemployment rate steady will decline from now until 2020.

Dave Rosenberg's Outlook

In Breakfast with Dave on November 11, Dave Rosenberg says "U.S. Unemployment Rate Headed For 12.0-13.0%."

I think that is a reasonable estimate but let's take a more optimistic viewpoint that unemployment will peak between 11-12%.

Scenario Number One

Somewhere along the line I called for unemployment to peak at about 11.5% so for the sake of this analysis let's keep that approximate target in mind as one distinct possibility.

Let's also assume that unemployment will peak in December 2011 about 2 years from now.

This is what scenario number one looks like

Unemployment Scenario 1 Data

Click On Any Chart In This Post For Sharper Image

Notes:

The unemployment rate is defined as the Number of Unemployed / Labor Pool
The Base Labor Pool number 153.98 million is from the BLS
The Labor Pool Population increases by 2.5 million a year
Jobs and the monthly labor pool numbers are estimated

Extremely Generous Assumptions

I am assuming there will be job gains (on average) in 2010 even though history suggests otherwise.
I have the number of jobs gained per month increasing to 170,000 jobs per month for 2013 even though I think 150,000 is a more realistic maximum target for an entire year.
I have +150,000 jobs for 4 consecutive years through 2016.
I have the Labor Pool decreasing dramatically as a result of boomer demographics starting in 2014.This acts to lower the unemployment rate.
I have the participation rate falling every year, accelerating rapidly starting in 2014 all the way through 2020.

Labor Pool, Jobs, Participation Rate Projections

I was going to map a scenario number 2 that includes a double dip recession but I do not want to frighten everyone to death.

Bear in mind that I think a double dip recession is very likely. Alternatively, we just ramble along for years. Moreover, even if we do not have a double dip, the odds of a second recession at some point the coming decade has to be amazingly high.

We cannot run $trillion deficits every year forever. It just won't work. And as soon as the Fed steps off the gas and/or Congress steps off the stimulus we will see this recovery for the hot air it really is.

Yet, in spite of all those generous assumptions, no double dip recession, no second recession, high rates of job growth and falling participation rates all the way through 2020, and unemployment peaking at 11.6% not 13%, the best I can do is suggest the unemployment rate will be over 10% all the way through 2015 and never dip below 8% all the way out through the end of 2020.

"On average, the economists don't expect unemployment to fall below 6% until 2013."

It could take until 2014-15 before we see a 5% handle on unemployment again," said Diane Swonk at Mesirow Financial."

Yeah Right.
Happy Job Hunting

Addendum:

John Mauldin asked me to post the spreadsheet for people to download an try themselves. I think that is a good idea.

Click Here to download the Unemployment Excel Spreadsheet

Usage Notes:

All fields are derived or static except columns E - Monthly Labor Pool Increase and H- Jobs Gained/Lost Per Month

E - Monthly Labor Pool Increase = Your estimate of how many jobs the economy must produce each month to hold the unemployment rate relatively steady. Because of baby boomer demographics, I have this as a falling number.

H- Jobs Gained/Lost Per Month = Your estimate as to how many jobs the economy will gain per month, on average for each year

All other fields like unemployment rate and participation rate will be modified when you change those columns.

Numbers are in Millions
e.g. A monthly labor pool increase of .12 = 120,000 persons

Misc Notes:

Column J is the civilian noninstitutional population (those over 16 not in prisons). I have that rising at a constant 2.5 million per year, closely matching a BLS forecast.

The unemployment rate is the number of unemployed / labor pool = (D/G)*100

There will be a slight drop in the unemployment rate year to year if the jobs gained/lost per month = the monthly labor pool increase. The reason is the number of unemployed remains constant while the labor pool increases slightly. The effect is less than .1% per year.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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