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Bush's $17.4 billion Automaker Bailout? Not Good.
Tweet Share on Facebook December 19, 2008 Comment (11)OK, so the White House has apparently come to the momentary rescue of the U.S. auto industry by offering $17.4 billion in loans in exchange for concessions similar to what was in the House bill. So no sweeping wage or benefit or work rule cuts. That will be left to the Obama car czar who'll likely be far easier than a bankruptcy judge. Bailout Nation continues. A few details from the AP:
One official said $13.4 billion of the money would be available this month and next, $9.4 billion for General Motors Corp. and $4 billion for Chrysler LLC. Both companies have said they soon might be unable to pay their bills without federal help. Ford Motor Co. has said it does not need immediate help.
Bush said the rescue package demanded concessions similar to those outlined in a bailout plan that was approved by the House but rejected by the Senate a week ago. It would give the automakers three months to come up with restructuring plans to become viable companies.
If they fail to produce a plan by March 31, the automakers will be required to repay the loans, which they would find very difficult.
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Obama's Wasteful Stimulus Plan
Tweet Share on Facebook December 19, 2008 Comment (11)$850 billion (with a bullet) for what, exactly? Alice Rivlin, a budget director under Bill Clinton, speaks truth to power, courtesy of the WaPo:
Rivlin said she would prefer quick approval of a much smaller [stimulus] package that contains only items that would rapidly push cash into the economy, such as aid to states and the poor and perhaps a payroll tax holiday. That could be followed, she said, by a larger spending package with investments thoughtfully crafted to achieve Obama's broader economic goals. "Mass transit, the high-tech stuff, investment in health IT. Those are all good ideas. But they aren't stimulus," Rivlin said.
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Kudlow: More Mustard Seeds
Tweet Share on Facebook December 18, 2008 Comment (3)Larry Kudlow explains it all:
But if we really want to jolt the economy, there’s a tried and true way to do it. Lower marginal tax rates across-the-board for individuals and businesses. Labor and capital costs will be reduced, risk taking and success will be rewarded, and investment will flow back into the United States. A chronically cheap dollar will simply repel investment, not attract it.
On the other hand, there are some positive mustard seeds that could grow into recovery. For starters, the drop in the CPI is boosting real wages. Of course that is an offshoot of the plunge in retail gasoline prices, which represents a $350 billion dollar tax cut for consumers. This may be why core retail sales rose ½ percent in November, the first positive reading since July. It’s also a big tax cut for corporate profits. In fact, for businesses, the plunge in commodity prices in general has balanced out prices paid and prices received. The CPI/PPI ratio has turned positive in recent months. This is a very good sign for corporate profits. And it may be a key reason why stocks have been rising and why the November 20th bottom looks like the real bottom.
Another mustard seed is the big decline in the 3-month dollar Libor rate, along with declining short-term credit market spreads in general. There is a thaw in the money market freeze up.
Still another mustard seed is the decline in mortgage rates. This, along with lower home prices, has raised housing affordability to its best level in many years. In fact, as economist and Carpe Diem blogger Mark Perry recently pointed out, housing affordability has reached an all-time historical high. In other words, the excesses of the recession are gradually healing.
The mis-investment of the recession is gradually being absorbed. The Fed is adding liquidity and that is another plus. I just don’t want them to go hog wild and destroy the dollar in the process. If we maintain a steady currency and provide a much needed tax rate reduction for large and small businesses, and if we allow market forces work out the rest, then the economic patient will heal. That’s my message.
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CNBC Erin Burnett's Interesting Thought
Tweet Share on Facebook December 18, 2008 Comment (5)I appeared yesterday morning on CNBC's Squawk on the Street with Erin Burnett, along with John Hilsenrath of the WSJ. Erin raised a real interesting point: With Ben Bernanke and the Fed going "all in" to bail out the economy, do we really need Obama's Amazing Fantastic Stimulating Stimulus? A few thoughts:
1) Before any of the stimulus spending really kicks in, the worst of the GDP shrinkage should be over. So we are already too late, in one sense. (And there are some mustard seeds out there like falling credit spreads and lower oil prices and falling mortgage rates.)
2) If you think that our current economic troubles presage a long period of weakness, we should focus our efforts on those policies that help long-term growth. That means not spending money on skating rinks or bike paths. But the electrical grid, as well road and bridges do need an upgrade -- OK then.
3) Pro-growth tax cuts that are deep, broad and permanent.
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Explaining the Dollar
Tweet Share on Facebook December 18, 2008 Comment (1)Superstrategist Andy Busch of BMO Capital Markets enlightens as to the big drop in the greenback:
The greenback has been brutalized since November 21st and remains under attack. The reason I bring up the 21st is that is the day we had a low put in for the Dow and then we had a higher close for the day in an extremely large reversal. ... Simultaneously, we had credit spreads or risk indicators begin to stabilize and improve. ... Clearly, these risk spreads had already improved by the time we were putting in the lows for the equities and therefore one of the major causes/indicators underlying economic/equity weakness had changed. ... Then came the US unemployment data on December 5th. ... Essentially, the markets had priced in the abyss and had no where to go when we faced it. The only thing left was to recognize the dilemma and take profits. When you've gone to the edge and not jumped, the only thing left is to do is to carefully step back. This happened. The last leg on this stool came from the massive de-leveraging that was occurring in the financial system. We know that the hedge fund community has been under duress from investors seeking redemptions. ... Once the equity markets stabilized, then the pressure began to ease on this process. ... If there was no longer these major pressures and flows, then there was no longer a reason to be buying US dollars.
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Study: Potential Big 3 Job Losses Vastly Overblown
Tweet Share on Facebook December 17, 2008 Comment (2)I have been waiting for this one. Big Three bailout proponents claim that bankruptcy by the automakers could lead to a loss of 3 million jobs. Not so, says Jeffery Werling, a University of Maryland economist. This from a U. of M. press release:
The impact of a Big-3 bankruptcy and restructuring would be severe, but frequently-quoted job loss figures are misleading and overstated, according to a new projection by the University of Maryland's Inforum economic research unit. In the worse case scenario, peak job dislocation from restructuring would be half of the 3 million commonly cited in the media. "There will be plenty of economic pain from the inevitable restructuring of the U.S. auto industry, but the figures that are usually discussed are highly unrealistic," says University of Maryland economist Jeffrey Werling. "If 100 percent of the manufacturing capacity of the Big Three totally disappeared in a puff of smoke, about three million jobs could indeed be eliminated," he says. "However, we think that at most 40 percent of the Detroit-3 auto manufacturing capacity would be lost, and that this would mean a peak loss of 1.5 million jobs. But we think the more likely figure is just under a million."
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The Worst Economy Leaders of 2008: Warren Buffett Edition
Tweet Share on Facebook December 17, 2008 Comment (24)OK, so yesterday I posted this story on the "dopiest" business and economics leaders of the year. But apparently some people have other ideas. Looking at my comments, readers nominated President Bush, Franklin Raines, Chris Dodd, the American consumer, and, of course, me. And my pal the fabulous Fausta Wertz has her own nominee, Warren Buffett:
The reason I'm picking on Buffett is that even when Berkshire Hathaway paid (at least according to Forbes) 2.5% of all taxes collected in 2003 while making only 1.2% of total corporate income that year, and the top 25% of all taxpayers currently pay 86% of all taxes, last May he famously called for an increase on both business taxes and on even more progressive personal taxes. While one may argue that "that was last May", Buffett has been calling for this for years now, and I haven't heard him change his mind now that we're into a recession. The most he's said recently is that Congress won't be raising taxes for now, but eventually it'll have to and "this would "be no disaster," and that it "wouldn't change most peoples' lives." ... When Buffett talks, policymakers listen. Until I hear him push for less government spending instead of higher taxes, I give him an honorary mention.
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Bernanke's Gone Nuclear, But Will Obama?
Tweet Share on Facebook December 17, 2008 Comment (1)The econpundits are telling us Ben Bernanke has "gone nuclear" in his efforts to stave off a mini-depression. Economist Mike Feroli puts the Fed's actions in this context:
At last year's December meeting rates were cut to 4.25% and no bias of risks was given by the committee. In the twelve months since then, the Fed has travelled the distance that the BoJ covered in over a decade -- getting to zero interest rates and more explicitly engaging in quantitative easing.
So we are moving way faster than Japan did in the 1990s when dealing with a banking/real estate crisis. Fine. But will Obama go all in? Will Obama go nuclear? Yes, he will be pushing for a $1 trillion stimulus package. But the infrastructure path didn't work for Japan, and Obama economist Peter Orszag has in the past been skeptical of such a stimulus plan.
Two big questions: 1) Will Obama push for a taxpayer-financed homeowner bailout via lower mortgages rates, especially if the Fed's actions can't push them deep into 4 percent territory?; and 2) Will Obama push for expanded tax cuts? I think "yes" to the first, "no" to the second.
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The 10 Dopiest Business and Economy Leaders of 2008
Tweet Share on Facebook December 16, 2008 Comment (54)¡Ay, caramba! In a year when Wall Street imploded, the Big Three automakers neared collapse, and the economy plunged into its worst downturn in at least a generation, finding business and economy "leaders" who messed up badly isn't too hard. But these 10 might well be the worst of the worst.
1) Bernard Madoff. If the federal government's accusations prove correct, Madoff also belongs on a list of America's most active and energetic senior citizens. The 70-year-old money manager was arrested by the FBI for allegedly running the largest Ponzi scheme this side of Social Security, losing an estimated $50 billion in client money. Investigators say Madoff told them that his business was just "one big lie." Terrible news for numerous wealthy individuals, banks, and charitable foundations. A perfect way to cap off a perfectly terrible year on Wall Street.
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Housing Market Implosion Continues
Tweet Share on Facebook December 16, 2008 Comment (4)It only gets worse. From IHS Global Insight:
1) Housing starts plummeted 18.9% in November, to a seasonally adjusted annual rate (SAAR) of 625,000 units.
2) Data revisions lowered October's estimate by 20,000 to 771,000.
3) Single-family starts dropped 16.9%, to a record low 441,000 units (SAAR); multiple-unit starts fell 23.3%.
4) Permits dropped 15.6%. Single-family permits—the key number in the report—fell 12.3%.
5) By region, starts plunged 34.6% in the Northeast, 23.1% in the Midwest, 16.8% in the West, and 15.6% in the South.
6) The permits estimates point to a possible double-digit drop in starts in both December and January.
Outlook: This may be the worst housing report ever (data starts in 1947). Not only did housing starts, housing permits and single-family starts plunge to all-time lows, the double-digit drop in permits points to further two-digit drops in starts in December and January.
