Friday, March 27, 2009

Treasury Financing Falters

Wednesday was an interesting day in the treasury financing market. The five year auction was a disaster and the 30 year treasury bond lost more than two percent of its value in a single day. The malaise of the US treasury market followed on the heels of the failure of a British gilt (their equivalent of treasuries) auction. The British auction on Wednesday failed to get a "cover" bid, which means there were fewer bids a the auction than securities offered for sale. Where is this headed?

This year, the US Treasury will sell three times as much debt, an estimated $ 2.5 trillion, as has ever been sold in a single year in US history. Wednesday's auction suggests their could be big trouble ahead. It is increasingly clear that there is serious doubt about the financial stability of the US government. The Chinese chief economic minister alluded to this prospect two weeks ago, when he decried the incredible level of deficit financing planned by the Obama Administration. Even the Democratically controlled Congressional Budget Office has sounded the alarm about the Obama budget and its potentially disastrous effect on the credit standing of the US government.

Ironically, in its purported effort to deal with an over-leveraged economy, the Obama Administration is seriously risking a US bankruptcy. Such an eventuality can no longer be ruled out. If the British default on their national debt, which is now a real possiblity, all eyes will turn to the US Treasury financing. It is now distinctly possible that the new administration is on a clear path to national bankruptcy. Watch the treasury auctions as they attempt to sell all of this paper.

One way out is for the Federal Reserve to buy much, much more of the debt. Ultimately, however, the result will be the same -- a flight from the dollar, a flight from US treasuries, and eventually the bankruptcy of the US government. This would have been an impossibility just six months ago, but the Obama budget plan makes a national bankruptcy an ever more likely possibility.

Tuesday, March 24, 2009

Some Positive Signs

President Obama seems to be backing away from his war on Wall Street. He has even tempered his "outrage" at the AIG bonuses, which as George Will noted in his column today in the Washington Post, were "legally earned." So, maybe there is some hope after all. Other encouraging signs were Paul Volcker's remarks reported in the Wall Street Journal today disparaging the government takeover of the financial sector. Volcker's comments seemed directly contradictory to Obama policy, which is very encouraging.

There is some, albeit slim, hope that our new president will listen to reason and stick with capitalism. It would be a great historical irony if the only remaining defender of capitalism is the chief economic minister of the People's Republic of China. China's economic policies certainly make a lot more sense than those of the Obama Administration.

It is still the case that this is an ordinary recession with extreme distress in the financial sector but very little extreme distress elsewhere. The mortgage foreclosures, such as they are, are mostly in areas where extreme speculation occurred in the housing market. The cure for extreme speculation is mortgage foreclosures. When that happens, the right people pay the piper. Obama should let this happen, instead of rewarding people who made bad decisions. There is no other way for people to learn to make the right decisions.

What are the facts on the ground? Lets take housing. Last month's housing starts were 35 percent above street expectations. The street was calling for 450,000 new starts, they got 588,000 new starts. On Monday of this week, existing home sales, expected to be flat, were up by the best margin in six years -- five percent in a single month. On both counts, housing is doing far better than expectations. Most housing markets around the US are beginning to show signs of life again and, for most markets, the housing bust will bottom out in the next two to three months.

This is not the great depression. This is not even a particularly serious recession, unless you work on Wall Street. Unemployment was much, much worse in 1981 than it is now -- much worse. It is laughable to compare this recession to the situation in 1979-81. To speak of depression is to speak foolishly and ignorantly. Unemployment would have to triple to get to depression levels. Admittedly, the Obama budget might be able to pull that off. But, let's hope that is not where we are headed.

This is not the great deflation. January CPI was up an annualized four percent. February was even stronger -- an annualized five percent. These aren't remotely deflation numbers. Inflation is the real problem, not deflation. Soon the 30 year treasury bond will figure this out and our deficit problems will magnify beyond the imagination of this young neophyte in the White House. He thinks he can fund trillions of dollars of new debt at rates between zero and four percent. What a joke! Sadly the joke is on the US taxpayer. I don't think the president even thinks about these things and even if he did, I don't think he would understand the problem anyway.

So, what do we have. An economy that, if left to its own devices, would be on the mend by late summer at the latest. The recovery could come sooner. The doomsayers have this recession lasting until late 2010. We shall see. Watch the stock market. The liquidity flooding the market (from Fed activity), will create a huge rally, driven higher by short covering and panic buying by all the newly created bearish investors. They will surge back. Look for the market to scale the 11,000 mark by summer. That's right -- 11,000 by summer.

The main negative is the president and his policies. His budget could sink us. Our best hope is that middle of the road Democrats, if there is such a thing, will beat back the tremendous expansion in government that is implanted in the Obama budget. If the Obama budget passes more or less as proposed, then America will be a different place and true economic progress will be a thing that we read about in history books in the pre-Obama America. Hopefully, the Obama budget will not survive and America can resume its rightful place as the economic engine of the world. Again, we shall see.

But there are hopeful signs. One of the most hopeful is that it looks as if Goldman Sachs and possibly JP Morgan will soon repay the TARP money. That will tell us a lot, even though it will cause consternation in this White House. Obama needs to back off and let the market bring this economy back to full steam. Only free markets can do that, not government.

Monday, March 23, 2009

Another Muddle Headed Plan -- Geithner's Folly

The plan released today by Treasury Secretary Geithner is absurd on the face of it. Recall that there are two types of assets that are currently called "toxic:" 1) debt assets that are performing with no indication of default...they are toxic because of FASB rules and government intimidation...many of these assets are currently trading at prices between 50 cents on the dollar and 80 cents on the dollar; 2) debt assets that are not performing and therefore are in default.

On the former set of assets, what conceivable motive could induce a bank to sell such assets? (Recall that banks are extremely liquid right now...they don't need cash except for the absurd Tier 1 rules interacting with mark-to-market inanities). Holding these assets to maturity means that the banks can make a huge return just by sitting still. What's the motive to sell? On the latter set of assets, how in the world is the government in any position to value distressed assets? There is an entire industry in the private sector already in place to buy these assets with a ton of money to deploy, if the government would simply get out of the way.

Finally, who wants to partner with the government anyway. Look at the "outrage" over Merrill and AIG bonuses. There will be many more such "outrage" incidents fueled by the Obama Administration to soften the public up for more and more government control of the private sector. The private sector is well aware of the risks they might take on by participating in the Geithner plan and then facing ex-post facto laws and Obama-Frank-Dodd-Cantor outrage over their compensation plans for off-site meetings with clients or their top producers. Nobody wants to be in the headlights with this administration and Congress in charge.

This plan will only add to a more corrupt, inefficient and dishonest government than we already have and will do nothing for the nation's banking system. Another government false step and taxpayer disaster looming.

Sunday, March 22, 2009

The AIG Bonuses

The American public is furious with AIG executive bonuses. They should redirect their anger to where it really belongs. The decisions as to what the bonuses should be at AIG should be made by the bondholders who should be running AIG -- not Mr. Liddy and not the taxpayer.

The grand mistake was providing AIG with $85 billion back in mid-September and then adding another $ 115 billion along the way. The plan was: the government will provide some temporary funding, take over 80 percent ownership in AIG (as a way to make money), and AIG would liquidate its various divisions over time and everyone would walk away happy. The taxpayer would get his money back and the various divisions of AIG, most of whom were very profitable back in September, would go forward toward prosperity. What a joke!

If the bondholders had taken over AIG in a controlled bankruptcy (which is what should have happened), then the bondholder committee would be making these decisions not Tim Geithner or Barney Frank or anyone in AIG's current management. The decision would then be none of our (the taxpayer's) business. That's the way it should have worked, back in the bad old days when capitalism was in vogue.

Now, Obama and the Congress are busily destroying the AIG brand name and franchise (that the taxpayer now owns) by making the AIG name synonomous with greed and corruption. Thanks guys. Now AIG is worth a lot less than it would have been if you had stayed out of all of this.

Why is it Obama's and the Congress's business what AIG pays its employees? Because Bernanke, Obama, and the Gongress poured a ton of money into AIG. That was the stupid decision -- $ 200 billion down a rat hole. The bonuses are less than one-tenth of one percent of that amount. What about the $ 200 billion Mr. Obama and Mr. Congressman? Where's your outrage over that? And how much more is going to be poured down that rathole, before you admit that you have singlehandedly turned a great firm into a worthless shell. Thank you.

By the way Republicans, at least the Republican leadership in the House, is behaving no better than Obama and the Congressional lynch mob. America looks ridiculous when the leadership of both parties behave like Republicans and Democrats are currently behaving. We now have decent folks who received a contractual bonus for their work being villified by a bunch of politicians who are leading the country to fiscal ruin and wrecking our financial institutions.

That's where the outrage ought to be. We should go see where these politicans live. Mr. Obama bought a $ 2 million home in Chicago after his lucrative career as a community organizer. I am surprised that Harvard Business School doesn't actively seek out recruiters within the community organizing profession, since that profession apparently pays top dollar (but not necessarily better than government work). Obama should be ashamed and the Congressional Republicans and Democrats should be ashamed. Leave the AIG bonuses alone. Quit bailing out companies and then proceeding to destroy them through a campaign of villification and vituperation.

How is any of this going to help the economy recovery? Is this the new post partisanship politics -- the politics of hate and anger?

Republicans Are No Better

Remember: the Republicans started the ball rolling down hill last September with the TARP program. Enthusiastically endorsed by President Bush and Republican presidential candidate John McCain, the TARP program made politically acceptable the idea of ramming hundreds of billions of dollars of bailout money through Congress without anyone really asking any serious questions. Both Bush and McCain and the entire Republican Congressional leadership supported this rush to catastrophe.

Now, the Republican leadership has joined in the demagoguery surrounding the AIG bonuses. These bonuses, whether you like them or not, were: 1) contractually agreed to; 2) well known both to the president and to the Congressional oversight committees. They learned nothing new in the last two weeks, except that the public did not like the bonuses. The public, of course, was in the dark, which I presume was what the president and the Congress intended.

90 Republicans, including the Republican House leadership supported tossing the Constitution overboard and punishing AIG executives who earned and were owed under contract their bonuses. So much for contract law, so much for the Constitution, so much for Republican Party leadership. How are these folks any better than the Democrats? The truth is they aren't.

Only Senator Richard Shelby of Alabama has maintained his composure in this Republican race to me-too the Democrats.

Welcome Back, Carter

According to Obama, the financial system is not good enough. We need to return to the policies of Lyndon Johnson, Richard Nixon, and Jimmy Carter. Those were great years for the financial markets, weren't they?

Were they? In 1964, three months after Lyndon Johnson took office, the Dow Jones scaled the 1,000 level for the first time. By the end of Jimmy Carter's reign, seventeen years later, the Dow Jones was in the 800s. Those were great years for the financial markets? The Johnson-Nixon-Carter years were years of high taxation (on the rich), massive regulation, historic expansion in entitlement programs, massive increases in federal spending, deficits and the national debt. (These are exactly the policies that the Obama administration is pursuing now). Unemployment averaged over seven percent during this seventeen year stretch. Inflation by 1979 exceeded fourteen percent on an annual basis.

Welcome back, Carter.

Obama is eager to return to the stagnation of the 1970s, brought on by: 1) high taxes (on the rich); 2) massive regulation of the financial world; 3) unchecked federal reserve monetary expansion; 4) massive increases in federal deficits and the national debt. These are the policies Obama is now pursuing plus more.

(The latest wrinkle is the Obama initiative to be released on Monday that puts more restrictions on the rights of shareholders to pay management what shareholders think is appropriate. What do the owners of the business (the shareholders) know? Big daddy government knows better, according to our new president. Heck, it worked in Venezuela didn't it? This is the Putin strategy adapted to the American economy).

Meanwhile, how did shareholders fare during the Reagan-Bush-Clinton-Bush years? From a low of 780 on the Dow Jones in August of 1982, the market today, even after one of the worst stock sell offs in history, stands at 7495. Had you invested when Reagan took office, at this point, even at the low in the market, you would have earned 9.1 percent per year! How does that compare to the 17 years of the Johnson-Reagan-Carter years which turned $ 1,000 into $ 800? Which would you prefer?

We know which of these outcomes Obama would prefer. He has said so. Heck, Americans don't need the stock market to provide for them, when they can simply borrow from their grandchildren by running $ 9.3 trillion in new deficit spending (according to the Democratically-controlled Congressional Budget Office).

Welcome back, Carter.

Saturday, March 21, 2009

Chaos In The Obama Administration

Everywhere you look the Obama Administration seems to be coming apart at the seams. The slip this week into dime store demagoguery is just the latest in a long list of policy disasters that began with the swearing in of the new president.

Now, even the mainstream press is beginning to recognize that this administration is way off kilter. Joe Nocera opines this morning in the New York Times: "Now, I'm worried that the political response is making the crisis worse. The Obama Administration appears to have lost its grip on Congress, while the Treasury Department always seems caught off guard by bad news. And Congress, with its howls of rage, its chaotic, episodic reactions to the crisis, and its shameless playing to the crowds, is out of control. This week, the body politic ran off the rails."

Obama's strongest supporters including Stromberg of the Washington Post are beginning to panic. In this morning's Washington Post, Stromberg says that "Peter Orszag, President Obama's budget director, acknowledged that earlier federal revenue estimates were too optimistic...This about-to-explode political bomb couldn't have come at a worse time for the president -- and, once it goes off, Obama might even have to battle with sections of his own party."

The wheels are coming off of the administration after less than 100 days in office. About the only thing Obama seems to do these days that works, is party at the White House...he seems to like that...and make late night television appearances. Even the latter could not be accomplished without the new president insulting the handicapped through his slur of the Special Olympics program. What next?

The lack of experience of the new administration and its radical political agenda combine to produce the worst first 100 days in presidential history. The recovery could be in doubt if this administration continues this pattern of incompetence.

Friday, March 20, 2009

The CBO Examines the Obama Budget

The Obama Budget has stumbled on a major public relation disaster. The Congressional Budget Office, controlled by the Congressional Democrats, has, quoting the NY Times today, "calculated that the White House's tax and spending plans would create deficits totaling $ 2.3 trillion more than the president's budget projected for the next decade....Mr. Obama's budget predicted total deficits for the next decade of nearly $ 7 trillion. The Congressional Budget Office analysis of his plan put the figure at nearly $ 9.3 trillion, or a third higher."

The Obama deficits, by this projection, will be four times the budget deficits of the Bush Administration. That's change you can believe in. It will take the deficit to over 5 percent of GDP, which even the White House budget chief Peter Orszag says is "unsustainable." "Unsustainable" is a code word for impending national bankruptcy.

Obama promised more transparency in the fiscal budget. Like much else that promise was left behind on the campaign cutting floor.

At what point, one wonders, will this president express some concern for the future of the country. This president has declared war on business, on the financial community, and on the fiscal soundness of the country. I guess this is "change." No president in American history has ever showed such contempt for the private sector and for the fiscal soundness of the country.

Thursday, March 19, 2009

The Fed is Late to the Party

Where has Bernanke been? Throughout 2007 as the credit markets deteriorated, Bernanke focused his attention on inflation. Now that the credit markets have begun improving dramatically and the major commercial banks are knocking the cover off the ball with after tax earnings, Bernanke decides to spend a trillion dollars to get things going? Where has he been?

Bernanke has said over and over again recently that deflation is the great bugaboo. Really? You couldn't tell that from the CPI readings for January and February, up 0.3 % and 0.4 % respectively. That's about a 4 to 5 percent annual rate. Is that deflation? Oil and commodity prices have begun to spurt up again and the dollar has started to implode. Is that deflationary?

Has Bernanke got a crystal ball that no one else has seen? Why is deflation now public enemy number one? Is he kidding?

This recession will soon hit botton -- within two to three months at the latest (assuming Obama's budget package runs into trouble, which I expect). Then what? The Bernanke binge will lead to signficant commodity inflation and asset price inflation.

The Obama-Congress sideshow on AIG bonuses is embarrasing. They complain about 1/10 of a bilion dollars of bonuses after they threw $ 200 billion into AIG without asking any questions. Who is kidding who? Is this issue really worth the attention that it is getting? Is this the statesmanship-like approach to the issues that Obama promised in his candidacy or is this just more of what seems to be an unending campaign of villification of the private sector by this president? Is this adminstration all about theatrics and vindictiveness? That's what it seems.

Saturday, March 14, 2009

Do Facts Matter?

If you ask anyone these days about how consumer spending and retail sales are doing, what answer do you get? If you watch the business news and the regular nightly news what do you hear? That consumers are frozen and have retrenched and are hanging on to every dollar. Is that true?

Lets begin with retail sales. December was weaker than previous Decembers but still not so bad. Then what happened? Did January see a collapse in retail sales? No! Retail sales rose 1.8 percent in January over December. That includes a significant slide in auto sales and is not inflated by price increases. In fact prices fell, so the a real quantities of sales increased more than 1.8 percent. What about February? Because auto sales collapsed, the overall retail sales declined (barely) by 0.1 percent. Wow! Is that a collapse? Overall, then, since December, retail sales are up nearly two percent and much, much higher than that, if auto sales are excluded.

What about consumption spending overall? You keep hearing that savings are rising dramatically while consumption spending is collapsing. Is that true? No, in fact, real consumption spending rose during the first two months of 2009 and for the quarter as a whole, as Barrons noted today, "this component of GDP (consumption expenditures) could make the first positive contribution to overall growth since the second quarter of last year." Is this what you hear when you listen to the news or to our new President?

Even better, preliminary data shows that inventories are declining dramatically. This suggests that new orders will, sooner rather than later, force positive feedback to production. Are you hearing this from the news media or the White House?

No doubt, real GDP will decline in the first quarter. There is no doubt about that. We are in a recession after all. But are things even remotely as bad as the President and the Congress and the media are telling us? Why doesn't the President speak more optimistically about this economy? Is President Obama cheerleading for the economy to collapse? Is this what he wants?

The actual facts are far, far better than what the press and the politicians are saying. But the fact have no agenda. They are simply the facts. Here they are: retail sales are up not down; consumption spending is up not down; bank lending is up not down, credit markets are improving not weakening; commercial banks are making huge profits not collapsing. President Obama, are you listening?

Friday, March 13, 2009

Larry Summers Speaks

Finally....the President's chief economic advisor has been heard from. I have been wondering where Summers was hiding when all of the bizarre economic proposals were put forth by the Obama Administration. So, it was with some interest that I read today of Summer's speech before the Brookings Institution. Would Summers defend the "mortgage cram down" proposal that trashed the mortgage market last month and vitiates centuries of standing contract law? How would Summers defend "cap and trade" and all of the other huge taxes in the new proposed budget?

Interestingly, Summers did not refer to the "mortgage cram down." I think he was smart to pretend that he wasn't aware of that foolish proposal, recently passed by the Pelosi House of Representatives. Perhaps, Summers forgot about it or maybe he just doesn't know about it.

On "cap and trade," Summers describes this as "realistic" (as opposed to what, he did not say) and would "reduce our energy vulnerability." Summers seemed to have a bit of a memory (or was it an intellectual) lapse when discussing the cap and trade proposal (which he (jokingly?) referred to as "market based"). Summers apparently decided to ignore the implications of cap and trade for the electricity bills that ordinary Americans will face when this nightmare becomes a reality. Some areas of the country will face electricity bills two to three times higher than their current bills. Wonder why Summers forgot to mention that. Nearly a year ago, Obama himself referred to the "astronomical increases in electricity bills" that his cap and trade proposal would require. Perhaps Obama forgot to mention the electricity bill problem to Summers? Or perhaps, Summers is unaware of the issue? Maybe he doesn't know what the "cap and trade" proposal is?

Summers presentation was surreal. His talk could have been given by John Kerry or Teddy Kennedy or Tom Daschle. But, it is not a talk that could have been given by an economist. Forget about counting on Larry Summers to restrain the foolish economics of the current White House. Summers is enjoying the limelight. Like Obama, he's just having a good time.

Wednesday, March 11, 2009

The Big Banks Show Life

Citibank closed Monday at $ 1.05 per share. On the same day, Citi's Chairman, Viktor Pandit announced that Citi would earn $ 1.50 per share in the first quarter of 2009. That's just in the first quarter. Does that sound strange to you?

A similar set of facts exists at Bank of America. Their earnings are superstrong this quarter, well in excess of their market capitalization.

What about the other banks? Jamie Dimon of JP Morgan said today that January and February were the best months in JPM's history in the bond markets. They are expecting very good earnings first quarter of 2009.

I thought the financial system was collapsing and needed all that TARP money. How can these banks be failing yet have huge operating earnings? Easy. Create a regulatory bureacracy with completely absurd accounting rules and then give those accounting rules the ability to shut down a business. That is basically what has happened to the US commercial banking system. C and BAC do not need bailout money. The whole idea of the government's cash infusion was to rebuild the balance sheets that had been savaged by arbitrary and stupid accounting rules. C and BAC have plenty of cash and don't need any help from the government.

What the banks need is relief from the government, not help. Anytime the government puts cash in a bank or an insurance company it just guarantees that no private capital will show any further interest in the company and the company's stock drifts toward zero.

How to handle a bank that may truly be in trouble (not arbitrarily put in trouble by non-sensical accounting rules)? Do a controlled bankruptcy by forcing bondholders to trade in their bonds for new bonds that are worth less than their original bonds with the balance made up of toxic assets (from the bank's balance sheet) which are now distributed directly to the bondholders in exchange for the part of the original bond value that is surrendered.

This solution, posed in the above paragraph, forces stock and bond holders to bear the brunt of the so-called "bad assets" of the commercial banking system and enables the banks to emerge healthy and gung ho. Equity and bondholders suffer, but they should suffer. They didn't do their homework. They bought stock and bonds in a company they probably should not have.

Leave the poor taxpayer alone. He/she should not pick up the tab. The tab should be borne by those who made the bad decisions.

Anyway, the commercial banks are showing life and may well triumph over government...the jury is out. Hopefully, the better banks will quickly pay off the TARP money and tell Obama and the Congress to get a life.

Monday, March 9, 2009

Roubini on the Future

Nouriel Roubini was the keynote speaker this morning at the CBOE Risk Management Conference in Laguna Niguel, California. I was there listening attentively.

Roubini has become the icon for economic gloom and doom in the world economy. Professor Roubini (NYU Business School) has been gloomy a long time. In 2004, he made a famous talk at the Davos summit predicting a world financial collapse and so it came to pass. What does he say now? More of the same.

According to Roubini, the aggregate US banking system is "insolvent." If by "insolvent," he means liabilities exceed assets, then that certainly is not the case currently. Could it become true? The answer depends upon the way in which accounting rules are applied. As they are now applied, there is that possibility.

Let me give you a simple example. Imagine that there only two banks in the entire world, banks A and B. Suppose the assets of each bank consist of a $ 100 billion loan to the other bank and $ 20 billion of cash. Now suppose the market price for each loan falls by 25 percent. Now each bank is insolvent: assets equal $ 75 billion for the loan, marked to market, plus $ 20 billion in cash minus $ 100 billion in liabilties. Each bank is now insolvent with a net worth of minus $ 5 billion. Suppose you combined the banks into a single bank and simply cancelled the two $ 100 billion loans between themselves. Then instead of two minus $ 5 billion banks, you now have one bank worth $ 40 billion. Does that kind of accounting make good sense? Don't think too long to answer that one.

This, in a nut shell, is what is wrong with mark-to-market accounting. The liabilities don't get written down, only the assets. In the aggregate, they balance one another, so that in a true aggregated balance sheet it is ridiculous to argue that the entire banking system is insolvent. But, bank by bank, with absurd accounting rules, it can, in principle happen, with the current regulatory regime.

Got any ideas? How about changing the current regulatory regime?

By the way similar nonsense occurs when you require the expensing of stock options, as almost all S&P500 companies have learned. If the options are never exercised, you still have to reduce earnings by their existence. So when they expire worthless, nothing has ever happened. It is exactly as if the options were never issued in the first place, except that reported earnings have been reduced for every single year that the options existed (they are typically amortized). Does this make sense? An event that turns out to be exactly the same as if nothing had happened at all has a major impact on the income statement of most companies? Again, don't think too long to get to the answer to this one.

It is not the "absence of regulation" that leads to the above absurdities, it is the existence of an overbearing and irrational regulatory regime.

Sunday, March 8, 2009

Alan Blinder on Nationalization; Ben Stein in Fantasy Land

Today's New York Times has an interesting article opposing nationalization of US banks. I recommend it. Princeton University Professor Blinder, it is worth noting, is an Obama supporter and cannot be accused of genuflecting to the "laissez-faire or bust" philosophy.

Why is Blinder against "nationalizing" the banks? Remember that Alan Greenspan and other worthies have suggested that nationalization might be a good idea. Blinder's main argument is that if you nationalize banks 1, 2, 3, 4, then you create problems for banks 5, 6, 7, and 8, who were not nationalized. Why? Because a nationalized bank gets to borrow at much lower rates than a bank that is not nationalized. After all, one has the full faith and credit of the US government behind it and the other does not. So, what happens is that nationalizing banks 1, 2, 3, 4 creates a crisis for banks 5, 6, 7, and 8, who are unable to compete with nationalized banks and are forced to pay higher rates just to survive. Eventually, banks 5, 6, 7, and 8 will need the same government relief that has overtaken banks 1, 2, 3, 4.

What Blinder blissfully ignores is that this problem is exactly what we have now. By putting a ton of money into Citi, you create a problem for BAC. By putting a ton of money into BAC, you create a problem for JPMorgan and Wells Fargo. By putting a ton of money into AIG, you create a problem for GE. And on and on and on. Once the government is assumed to be backing a company deemed "too big to fail," it makes the competitors of that company the next candidate for "too big to fail." This is a process without end (except when the country doing it, itself, falls into bankruptcy...not a pleasant thought).

Blinder is on the right track. He doesn't draw the obvious conclusion: Stop subsidizing and bailing out these institutions! Otherwise, there is no end to this process.

I hope someone listens to Professor Blinder and thinks this one through.

As for Ben Stein's article in the New York Times. He argues that the US should limit short selling, by bringing back the uptick rule, clamp down on the CDS market and obliterate the mark-to-market rules. While mark-to-market rules probably need to be revisited, especially the requirement that performing assets need to be written down, the idea that the market decline is to be attributed to the rampant misbehavior of speculators (and accountants) is absurd.

Broadly speaking, the stock market over the last six months has two messages: 1) financial institutions and their customers took far too much risk and now must pay the piper; and 2) the Obama Administration's economic proposals could put could the US economy into the deep freeze for generations to come. No amount of tinkering with trading rules and accounting procedures can alter these concerns of stock markets world wide.

Friday, March 6, 2009

Another Mandate from Obama

Buried in the Obama budget among other nightmares is a requirement that all businesses with ten or more employees are mandated to provide an automatic enrollment program for employees into a retirement savings plan. Employees can choose to opt out. Businesses cannot opt out. One more reason not to have employees -- brought to you by the Obama budget. I am not sure that you really need any more reasons, given the rest of the Obama budget, but what the heck, maybe you were still foolishly thinking of employing some one. Think again.

If you were considering hiring that tenth employee, you might want to give that idea a little more thought. If you have twelve folks on the payroll, I would take a hard look at all twelve and see if you can't get that number down to nine. Nine is kind of a neat number in this context. I'm willing to predict that the number of firms with nine employees is the only size firm that will grow in the Obama years. There won't be many firms with ten or eleven employees...that's for sure!

Of course, for companies, that set up such a program, whatever expenses they have at the margin will simply lower their effective demand for labor. Employers look at the total costs of employees. If you're going to mandate certain costs, then employers will factor that in and adjust worker's pay accordingly. At first employers will simply adjust down their workforce (that's a polite way of saying they will fire people). Then, later, they will hire people at a wage that is substantially lower than what they would have paid before the mandate. Given all the mandates that have been added to the cost of having employees (and the enhanced possibility of litigation), the take home pay of employees has fallen over the years while the costs to employers has risen. This trend will only get worse with more mandates.

Card check, of course, is the next stage. Why should employees have any say in whether or not a union represents them? It's none of their business. Obama knows, because some Harvard Law professor told him, that employees are better off with a union. The steelworkers and autoworkers can vouch for that...the few that still have jobs. But, there is certainly no reason to let employees make the decision. What do they know?

I think the plan here is that the US is tired of being second rate to Europe in percentage unemployment. After all, we have traditionally half the level of unemployment of the typical Western European country. Why not catch up with them? I think Obama is probably going to be successful in this endeavor. He's half way there already. Maybe that's why Obama is always smiling when the subject of unemployment comes up.

Unemployment Numbers in Line with Expectations

No surprise this morning. Unemployment has now reached 8.1 percent. Normally, we would be getting close to the trough of this recession. Absent the Obama policies, we would have expected to begin to see some light at the end of the tunnel. But, the inconsistency and incompetence of Bush Administration policy has been replaced by downright punitive policies of the Obama Administration.

Not content to simply carry on the worst of the Bush policies, which have accomplished nothing more than waste taxpayer money, the Obama folks have decided to declare war on business and finance and the folks they have declared war on are getting the message.

This was a patient with a serious headache. The Obama answer is to get out a baseball bat and starting hitting the patient on the head with it. No more headache. No more patient.

It's hard to see how any businessman would want to hire anybody given the plans and ideas of the Obama administration. What is becoming toxic in this Administration are employees. Don't look for hiring to return for a generation at least if the Obama Administration policies are adopted.

Thursday, March 5, 2009

Party Time

The White House is having an usually good time. There are elaborate dinner parties with famous celebrity singers and musicians night after night. Obama turns out to be a terrific host and entertainer and they certainly don't spare the expenses in this White House. When discussing the stock market on Tuesday, the young President smiled as if he knew something we didn't. He probably does.

It is a wonderful time for the President and for his allies in Congress. I don't think Barney Frank has had this much fun since he coerced Fannie Mae and Freddie Mac into accelerating their massive move into lending to the bottom of the credit barrel. That worked pretty well. It induced enough bad mortgage loans to give Barney something to do. Lord knows, he needed something to do.

Meanwhile, business folks and investors are facing the prospects of an economic ice age. First came the $ 787 billion "aid to my supporters" bill, followed by the "judicial cram down." The judicial cram down would get even with all of those awful folks in the financial service industry including those terrible insurance companies. We can do without all those financial service firms! What do we need them for anyway in this new America of change?

"Cap and Trade" should destroy at least one million jobs. Who needs jobs anyway? After all, we just raised unemployment compensation. That should do the trick. And, if that doesn't get it done, the new health care mandates and their costs will shrivel up what's left of American small business and create a whole new world of demand for outsourcing. Want a job? Move to China. Or, perhaps India. There is no "card check" or "cap and trade" over there. Only America is going with "cap and trade." The Chinese and the Indians understand the economics of climate change. That's why neither country has any interest in walking off the cliff of "cap and trade." That's America's suicide mission. It will be fun to watch, but why participate?

Meanwhile, back at the White House, things are going very well, thank you. The polls are still shining as the financial system crumbles into the dust. They worry too much about the "day to day" activity of Wall Street, muses our new President. What does it matter? If we can just get to twenty percent unemployment before the next election, then I can complete the rest of my "agenda for change." On to "card check!" There are still businesses out there left to destroy! It's a great time to be alive (and in the White House).

It's a Great Country

The NY Times reports today that "people with mortgages as high as $ 729,750" will qualify for the mortgage relief plan. There's more. "Interest rates on loans could go as low as 2 percent..." Hold on, that's not all. "In addition, the Treasury Department said it intended to follow up with a plan to help troubled borrowers with second mortgages, which many homebuyers used as 'piggyback' loans to buy houses with no money down."

If the above doesn't get it done for you, then simply file bankruptcy and the judge may simply cancel your mortgage and you can have your home free.

I guess this does represent "change."

Tuesday, March 3, 2009

Obama Makes a Market Call

Each day is a new revelation. Now the White House is making market calls. Today, the young President said that "buying stocks is potentially a good deal." Wow! Since his election the market has sagged 30 percent, so that almost half of the market's collapse is now dated from the moment that investors realized that Obama was going to be the new President. This has not been a "recession stock market" since November. This is an "Obama stock market" as investors, terrified of Obama's new tone in Washington race for the exits. If the Obama budget passes look for employers to push many, many more employees to the exits. An Obama budget victory could produce a generation or two of economic stagnation.

Obama's comment on the stock market may have been prompted by musings of Jim Cramer of Mad Money who calmly noted today that the Obama Budget, which Cramer referred to as a "radical agenda," would "create the greatest wealth destruction by a President." I guess Cramer doesn't like the Obama budget.

Cramer was pretty tame compared to comments from the legendary investor Jim Rogers. Rogers see its this way: "I think it's astonishing, they're ruining the US economy, they're ruining the US government, they're ruining the US central bank and they're ruining the US dollar. You are watching something in front of our eyes, very historically, which is basically the destruction of New York as a financial center and the destruction of America as the world's most powerful country....The idea that you have too much debt, too much borrowing and too much consumption and you're going to solve that problem with more debt, more consumption and more borrowing? These people are nuts."

I guess Jim Rogers doesn't like the Obama budget (or much else about the Obama adminstration) either.

The public seems to have an opinion as well. The much ballyhooed NBC/WSJ poll, released today, which the headlines said supported Obama, actually reached a much different conclusion about the Obama agenda. Over 60 percent feared the government would spend too much while only 30 percent thought the government would spend too little. Wonder how they will feel when they find out what is in the Obama budget.

i still believe that the President is well meaning. I think he believes all of these programs that he is pushing are good for the country.

The folks that I no longer think are well meaning are Larry Summers and Paul Volcker. I have always been a great admirer of these two, but no longer. Nothing in their history is consistent with the absurd programs of the Obama Administration. I can only conclude that they are maintaining their silence to protect their prominent positions in the new administration, not exactly an admirable thing to do given the potential consequences to the country of the Obama budget.

I have to wonder about Warren Buffett. Is this budget and mortgage "cram down" program what he voted for and donated money to promote? Does he really thing trillions of new taxes on business and households is just what the doctor ordered? Does he support letting judges toss out legal contracts between borrower and lender? Why don't we offer that alternative to the companies whose bonds he owns? Perhaps Goldman should be able to go to court and change the terms of Buffett's preferred investment that he made last fall. After all, Goldman is a needy firm.

Obama can be forgiven because he has no background for any of this. It's like putting a junior high school class president into the role of President of the United States. I can see why he doesn't know what he's doing. He's just having a good time. It's the folks around him and that have supported him like Summers, Volcker, Geithner, Buffett, Clinton, Bernanke, various so-called moderate Democrats. Is this their agenda too? Or do they just like the limelight and the economy be damned.

The Markets in Free Fall

With the S&P barely hugging onto 700, the markets are clearly expecting a dismal future. It isn't just a year or two of bad earnings that is plaguing the market and is no longer just the financials. Everyone is running for the exits. Why? and Why Now?

It is strange that the regular press has not made the connection, but the financial press certainly has. It is not just Rick Santelli, although he makes his points well. It is all across Wall Street and all across the business community of the US. Everyone is scared to death of the new White House. While what Obama says is what we want to hear: "the highest ethical standards in history"..."tomorrow, Secretary Geithner will lay out a plan that you can rely on..."...."we need to get this deficit under control"...etc.

His words, when he is not being specific sound great: a new America, a new vision, post partisanship, high ethics, responsible budgets. These are things we all want. But, it is not clear that Obama wants any of them.

We are now six weeks into this Adminstration and thus far, it is the singularly most inept Adminstration in American history. President Obama entered the White House with the best wishes of everyone - Republicans and Democrats. But, apparently he came to this White House with a very limited understanding of economics and a deep seated antipathy to free markets. He has chosen to be the most partisan and dividing political figure of the modern scene. He listens to no one. The last 3000 points on the Dow are his. He earned them.

It is a growing concern that what is happening -- the collapse of our financial markets -- is not something that disturbs this new President. It is not at all clear that this President is bothered by the complete chaos that he and his Administration have created in the financial markets. Obama is probably not bothered by any of this, because he probably doesn't really consider Wall Street or the stock market very important. He has nothing but contempt for anyone who has ever dirtied his hands in the business world. Someone should pull this President aside and explain to him how jobs get created in the private sector. So far, he doesn't seem to have a clue (or maybe he just doesn't care).

The market will rally at some point just because it's tired of going down. But real economic progress and a vibrant stock market are getting less and less likely with this President. He makes Jimmy Carter look good.