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Bank Holidays, Dollar Devaluation, Nationalization, Oh My!
Tweet Share on Facebook February 17, 2009 Comment (5)The always-entertaining James Howard Kunstler gives the bear case on the economy:
What is dogging many of us who supported Mr. Obama is the delayed entrance of much-vaunted change. At this moment of "stimulus" and TARP-II, it seems to have been about a desperate attempt to preserve the hypertrophic debt economy of "miracle" mortgages, blue-light-special shopping on credit cards, and endless happy motoring at all costs. And by "all costs" I mean literally bankrupting our society at every level to keep on living as if it were still 1999. This naturally alarms those of us who perceive a need for more drastic reprogramming in American life. ... He is faced with the immediate crushing problem of appearing to do something while a tsunami of catastrophic debt deleveraging sweeps away the first outlier nations and their economies and bears down on the G-7. I suspect that in a few weeks, or possibly even a few days, Mr. Obama will have to start announcing all kinds of new and more drastic measures that will shock the stunned American public -- things like bank holidays, nationalizations, possibly even dollar devaluation.
Me: Expect to hear more of this sort of thing, especially from the "deep green" elements of the environmental movement who are against economic growth, big families, rising standard of livings, etc. Kunstler writes as if all these dreadful things are inevitable, and they certainly are not.
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Japan's Drunk Finance Minister and Geithner
Tweet Share on Facebook February 17, 2009 Comment (2)Joke #1: "Hey, did you hear the stock market is plunging again?" "Hey,I didn't know Treasury Secretary Geithner was giving another speech!"
Joke #2: "Did you see that rambling, incoherent finance minister on TV?" "Hey, I didn't know Treasury Secretary Geithner was giving another speech!"
Me: Jokes aside, the financial markets are clearly suffering a confidence deficit that appears to be getting worse. Here is Andy Busch of BMO Capital Markets this morning:
More importantly, the biggest oomph that the President Obama may have missed comes from how the package was sold. Saying this is a catastrophe and waving sigs saying the "END IS NEAR" does not , repeat, does not engender confidence. This is what is so maddening about the first weeks of the Obama administration. They were incredibly adept at messaging during the campaign, we all assumed they would be continuing that skill into office. The Geithner press conference was a wake up call for everyone.
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Brzezinski: U.S. Recession Could Lead to Riots
Tweet Share on Facebook February 17, 2009 Comment (29)Zbigniew Brzezinski, former National Security Adviser to Jimmy Carter, thinks America's rich people should get together and create a fund to give money to America's non-rich people. Pay it forward -- or else. Here is what he alarmingly said today on MSNBC's Morning Joe program (thanks to FinkleBlog):
Where is the monied class today? Why aren’t they doing something: the people who made billions, millions. I’m sort of thinking of Paulson, of Rubin. Why don’t they get together, and why don’t they organize a National Solidarity Fund in which they call on all of those who made these extraordinary amounts of money to kick some back in to [a] National Solidarity Fund?... And if we don’t get some sort of voluntary National Solidarity Fund, at some point there’ll be such political pressure that Congress will start getting in the act, there’s going to be growing conflict between the classes and if people are unemployed and really hurting, hell, there could be even riots.
Me: For a second, Brzezinski reminded me of Peter Venkman from "Ghostbusters": "This city is headed for a disaster of biblical proportions. ... Human sacrifice, dogs and cats living together... mass hysteria!" Now I have a better suggestion: How about the government let the "monied class" and everybody else keep more of what they earn so it can be spent or saved or invested.
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Saving the Banking System in Four Easy Steps
Tweet Share on Facebook February 13, 2009 Comment (7)Those bank CEOs may have been, as my friend Larry Kudlow put it, "dead men walking into a Soviet show trial," but something of use came out of it -- an idea on how to fix the banking system from Citigroup CEO Vikram Pandit. He wants bank mark-to-market losses to be realized over time rather than immediately. Vinny Catalano tell us how that process might work:
1) Bank surrenders certain “toxic assets” to the PPIB
2) Bank declares such assets as a “loss” but does not record the entire loss to its income statement
3) Bank writes down a portion of the “loss” immediately and schedules to do same over the life of the asset
4) Bank retains the ability to revalue such assets over time via a note from PPIB In dollars and cents,
Here's how this works:
1) “Toxic assets” held on the books for $0.80 on the dollar are surrendered to PPIB at $0.30 on the dollar
2) PPIB (Treasury and investors) own the assets at $0.30 Bank lists a $0.50 off-balance sheet “loss” that is amortized at 10% per year, or $0.05 to the income statement (and then to the balance sheet)
3) Over time, markets become more normalized, the economy recovers and the “toxic assets” rise in value to $0.60, where they come due and cease to exist
4) Bank, which has written down the loss over several years, say $0.30 cents in total, now realizes a $0.10 gain ($0.60 cents final value, $0.50 amortized value still on the books, $0.10 gain)
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Great Recession or Great Depression?
Tweet Share on Facebook February 13, 2009 Comment (5)Nariman Behravesh, chief economist at IHS Global Insight:
This is the Great Recession, not the Great Depression 2.0 and not Japan in the last decade. We’re seeing a different policy response than what we saw during the Depression and Japan in the 1990s. It took Japan seven years to deal with its banking crisis. The U.S. has moved in a matter of months and it’s had some fiscal effect. Our fiscal stimulus may not be enough or the right kind, but it’s much different than the Depression or Japan.
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Does Obama's Stimulus Really Cost $3.3 Trillion?
Tweet Share on Facebook February 13, 2009 Comment (10)What is the true cost of the stimulus bill from Obama and the Obamacrats? Go over to the Congressional Budget Office website and you'll find this interesting tidbit: Rep. Paul Ryan, a Wisconsin Republican, asked the CBO to project the 10-year cost of the House version of the stimulus bill if 20 key, hard-to-eliminate provisions were permanently extended. Stuff like the Making Work Pay Tax Credit, Head Start, the Earned Income Tax Credit and so forth. Making those provisions permanent, it turns out, costs $2.527 trillion. Then tack on another $744 billion in interest costs, and the true total comes to $3.3 trillion.
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Coming Soon: Obama's Next Stimulus Plan
Tweet Share on Facebook February 12, 2009 Comment (24)Sen. Judd Gregg is hardly the only American to have big problems with the $800 billion stimulus package coming from President Obama and the Obamacrats on Capitol Hill. Even after a major P.R. push by the White House, including the warnings of economic catastrophe if the package didn't pass, still only 44 percent of us approve of the plan vs. 40 percent who don't, according to Rasmussen.
But now that he's reengaged as part of the loyal opposition, Gregg may yet have a chance to shape a ginormous stimulus package more to his liking. Here's why:1) There's a good chance that the Obama administration's $800 billion stimulus package won't be its last bite at the apple. Even when the economy starts growing again, unemployment will surely continue to rise no matter how successful the stimulus. According to Team Obama's own analysis, the nation's unemployment rate should peak at about 8 percent this year before falling to 6.8 percent at the end of 2010. To put it another way, three years after the recession started, the jobless rate would still be at levels not seen since the early 1990s.
2) What's more, many private forecasts are even gloomier. Goldman Sachs now thinks unemployment will surge to 9.5 percent by the fourth quarter of 2010. "Indeed, double-digit unemployment could well be reality sometime next year," the firm's econ team said in a recent research note. Think many Americans are going to be giddy about the economy come the next midterm elections? Probably not.
3) Also, a case could be made that the weakling recovery, with its persistently high unemployment, might downshift again in 2011. Here's the scenario that Northern Trust economist Paul Kasriel paints: The economy begins to expand by the end of this year. But all that hot money flooding into the economy, particularly from the Fed, sends inflation soaring. So in the first half of 2010, the Fed begins to aggressively hike interest rates. "This is what we believe will trigger the next official recession," Kasriel explains in recent report.
4) And don't forget about those Bush tax cuts from 2001 and 2003 due to expire at the end of next year. Granted, Obama pledged to let taxes on income and investments rise for only wealthier Americans. And he's left the timing fuzzy. But listen to what Treasury Secretary Larry Summers had to say on Meet the Press recently: "I don't think there's any question they have to be repealed. The country can't afford them for the long run. ... They can't be part of the long-run budget picture. ... The president's inherited a trillion-dollar deficit, and a deficit with a baseline that is terrible as far as the eye can see."
That didn't sound to me like Summers was just talking about rich people. After all, repealing just those taxes affecting higher-income folks only gets you around $40 billion a year vs. $300 billion a year if you repeal the whole shebang. (Those totals don't assume any injury to the economy causing tax revenues to fall short of estimates.) Using a computer model, Goldman Sachs ran a simuluation where it assumed all the Bush tax cuts expired, and watched how the economy reacted as 2011 began. What did the firm find? Well, in the first quarter of 2011 the economy dropped 3 percentage points below what it would have been otherwise. "Absent a tailwind to growth from some other source," the analysis concludes, "this would almost surely mark the onset of a recession."
Bottom line: Bad economy, and elections looming at the end of 2010. Kind of sounds like the sort of environment where, if you were a Washington politico, you might push hard for Son of Stimulus. Any such package might look a lot like a paint-by-numbers sequel to the 2009 version. And the White House itself keeps saying that the $800 billion stimulus is merely a "down payment" for future spending on things like green energy and healthcare.But another option would be a growthier package that would improve the long-term productivity of the economy and help families in the near term. Here are a few ideas: 1) eliminate capital-gains taxes so that the income tax would be transformed into a de facto consumption tax that encourages investment; 2) dramatically cut or eliminate business taxes so that U.S. companies could better compete globally; 3) index Social Security benefits to inflation and extend the retirement age, allowing a big cut in payroll taxes for the middle class; 4) create government-funded "innovation prizes" for key technology challenges; and 5) give universities financial incentives to create more science geeks and offer grad students free-floating fellowships to choose the field with the best prospects.
Now, you wouldn't call this plan a "new New Deal," certainly. But wouldn't it be great if in 2010 we could call it "Obamanomics, New and Improved"?
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Departure Day: Judd Gregg Out at Commerce, Joanna Pacitti Out at 'Idol'
Tweet Share on Facebook February 12, 2009 Comment (3)I saw both these coming. Sen. Judd Gregg has withdrawn his nomination to be commerce secretary over a) concerns about the ginormous $800 billion stimulus package and b) the decision to have the director of the 2010 Census report to the White House, as well as to the commercy secretary. But will his departure get crowded out by the disqualification of raven-haired Joanna Pacitti from American Idol. And you know, these things always come in threes ...
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Two Cheers for Wall Street. That's Right!
Tweet Share on Facebook February 12, 2009 Comment (4)Geostrategist Tom Barnett, whose great new book "Great Powers: America and the World After Bush" just came out, has some wisdom on the current credit crisis:
Developing ever more complex and sophisticated risk instruments is a very good thing for this massive entity we call the global economy, and if America isn't taking that lead, who will? Do we make mistakes along the way? Geez, that's the entire history of finance in America--finding new ways to create bubbles amid real booms by working around the rules already in place. You want advance? Then live with experimentation. ... To me, innovations don't go away. They just get better regulated. Investment banks are a good example: we lose all the biggies in the crash but that doesn't equal the end of investment banking--just those behemoths. Already you see all sorts of smart money articles about the coming rise of "boutique investment houses."
Me: That, my friends, is what we call "creative destruction." The ground may looked scorched, but the green shoots are already appearing.
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Why You Should Buy Stocks
Tweet Share on Facebook February 12, 2009 Comment (3)I wish I was as optimistic as the guys at Strategas Research:
At the moment, it appears unlikely that we will repeat the mistakes of the 1930s in the U.S. when a combination of a one-third decline in the money supply, protective tariffs, and increases in marginal tax rates compounded our economic problems for a decade. Japan a decade ago may be more relevant to our own experience now, but here again it appears that there is a far greater sense of urgency in recapitalizing the banks and reliquifying consumers. If one believes, as we do, that the unprecedented extent of fiscal and monetary stimulus will lead to eventual reflation, stocks should also act as a decent hedge against potential government induced inflation in the future. It’s almost become cliché, but stocks have provided the best returns among all asset classes in both clear skies and stormy weather.
