Econ 2009

[ewmayer]

...But before we get to my modest proposal, tentatively titled "A Surefire Way to Improve Personal Expenditures via Subsidies", today`s news roundup:

Interesting mini-interview and non-mea-culpa ("It`s really someone else`s culpa") with former chief NAR shill David Lereah:

Confessions of a Real Estate Bull:

I’m reminded of Thomas Mann’s famous novel, "Confessions of the confidence man Felix Krull". Not that he actually takes any responsibility for perhaps promoting the mentality which helped drive the housing bubble, mind you – the old self-distancing “mistakes were made” ploy. Dubya Bush is using that one quite frequently these days, too.


I see the post-disappointing-holiday-retail sales rolling of heads has begun in earnest:

Borders replaces CEO amid weak sales: The book superstore shakes up management, appoints Ron Marshall, a turnaround specialist, as CEO.


Governors ask Uncle Sam for $1 trillion: Five Democratic leaders seek aid for all 50 states to maintain education, welfare, infrastructure, as recession worsens.

The governors of New York, New Jersey, Massachusetts, Ohio and Wisconsin - all Democrats - said the initiative for the two-year aid package was backed by other governors and follows a meeting in December where governors called on President-elect Barack Obama to help them maintain services in the face of slumping revenues.

Gov. David Paterson of New York said 43 states now have budget deficits totaling some $100 billion as tax revenues plunge.

"It`s clear that the federal government needs to step in and jump-start the economy," said Gov. Deval Patrick of Massachusetts.

The latest package calls for $350 billion to create jobs by building or repairing roads, bridges and other public works; $250 billion to maintain education; and another $250 billion in "counter-cyclical" spending such as extending unemployment benefits and food stamps, which are typically a responsibility of the states.

The remainder would be used to fund middle-class tax cuts, stimulate the embattled housing market and stem the tide of home foreclosures through a loan-modification program.

My Comment: I want a pony, pleeeeeeeeeeeeaaase ... seriously, the same folks who (along with their typically-dysfunctional-even-in-good-times state legislatures) somehow managed to piss away all the windfall tax revenues which accrued during the housing bubble and got precisely zilch of value for their non-state-employee citizenry from the massive spending increases, now wants the biggest bailout in history. Time to really crank up the Federal money-printing presses ... we might even need to lease some from Zimbabwe, I hear that money-printing is the one industry in that country which is thriving. I`d suggest hunting around for some vintage Weimar-era money-printing equipment, but I fear that would not be able to handle the high-tech antiforgery innovations needed for today`s soon-to-be-worthless currency. One hopes that all the high-tech innovations of the past half-century won`t interfere with the lovely clean-burning abilities of the paper currency, though - at least in Weimar and Zimbabwe, the money was still useful for lighting fires with.

Interesting bit about the "counter-cyclical spending", though - so that would seem to imply that in the boom years, the states were busy sending all that money left over from their of-course-prudent spending on education, infrastructure, unemployment and food stamps back to the Federal government, yes? "No, no, take it - our property tax revenues are up 20% from last year, we`ve got way more money than we know what to do with...". Yeah, I though not.

And speaking of ways to blow an even more colossal hole in the already-shredded federal current-account deficit, followed by my above-promised economic A.S.S.W.I.P.E. stimulus program:

Obama: $300 billion in tax cuts: President-elect begins push on Hill for rescue proposal. On tap: Breaks for workers and businesses, energy and road and school construction.

Obama would offer a tax cut equal to $500 a year for individuals and $1,000 for couples. The credit would work essentially as a payroll tax credit, meaning the money could be delivered fairly quickly. Companies could simply reduce the tax they withhold from employees` paychecks.

The tax credit is likely to be offered only to those below a certain income level, but the Obama team hasn`t specified where the cut-off point would be. The credit also would be refundable, meaning that even tax filers without any tax liability -- typically very low-income workers -- would receive one.

Business break for losses: Obama is considering a tax break for businesses that book losses in 2008 and 2009.

The stimulus plan may extend what`s called the net-operating loss carryback to five years, up from two years currently. The provision lets companies apply their losses to past and future tax bills so that they can get money back on taxes they`ve already paid or would otherwise have to pay.

My Comment: How about funding the tax break for the middle class by repealing the Bush tax cuts for the wealthy, and going after corporations using offshore accounting schemes to bilk the government out of hundreds of billions of dollars per year? Ah yes, I`d forgotten, this needs the proper amount of pandering to Republicans in order to "have bipartisan support".

Everyone Get Aborad the A.S.S.W.I.P.E. express:

But I have a better idea: Since everyone in mainstream economics agrees that the key to getting out of the recession is to get American consumers spending like mad again, why do all this complicated "targeted spending and tax cuts" flummery? I say cut straight to the heart of the matter, and cut a government check for one million dollars - that`s right, a cool million - to every American taxpayer. THAT`s the way to stimulate consumption, THAT`s the way to perk the housing market back up into bubbleicious territory - instantly tax revenues for every level of government would rise dramatically, states would have no trouble closing their budget deficits, all those tax revenues would leave plenty over for infrastructure spending - problem solved. You only need to get someone to buy a hundred trillion dollars` worth of newly-minted government debt - and hey, if that proves to be a tough sell because the tightwad Asians and Russians balk at buying the tidal wave of New! Improved! Now even-lower-yielding zero-yield 100-year coupons, no problemo - you just print the needed funds. See how easy that was? Sheesh, why do people have to make things so damn complicated?

Aside: We contemplated calling the new program the "Widescale Million-Dollar Economic Stimulus Program" or WMD ESP for short, but someone suggested that that might be too easily confused with the Bush administration's post-9/11 "we just know that Saddam has WMDs and is in bed with Al Qaeda - trust us, our psychic hotline is never wrong" Iraq Intelligence boondoggle.

[CRGreathouse]

Originally Posted by Fusion_power

Before this is over, you may say "wish this was 1930".

I take it you've cashed out your retirement portfolio, then?

Myself, I'm looking for ways to invest more heavily in the US stock market.

[garo]

CR I would hold off another year if I were you. But then I am not you, so .....

[fivemack]

There are certainly some ways in which it looks as if the October drop was a separate event to the ongoing slump, and some companies (particularly in the energy sector) which have managed to treat October as a V-shaped groove in a reasonably flat share price.

I bought in quite heavily in November, have managed to relax as things went down a further 10%, and they've now made that back; I admit to adjusting the parameters of my stop-loss orders most evenings when I see that something's made a profit. The Lloyds TSB bet has not been a good one.

[ewmayer]

German billionaire commits suicide: One of top 100 richest people in world, Adolf Merckle ran into deep financial trouble with his companies amid the economic crisis.

German billionaire Adolf Merckle, one of the richest men in the world, committed suicide on Monday after his business empire got into trouble in the wake of the international financial crisis, Merckle's family said Tuesday in a statement.

Merckle, 74, was hit by a train in the southwestern town of Ulm, police said.

His family said the economic crisis had "broken" Merckle.

He was number 94 on the Forbes list of the world's richest people, with a business empire that included interests as diverse as cement-maker HeidelbergCement and generic drug-maker Rationpharm. But he lost hundreds of millions of dollars, including company capital, betting against Volkswagen stock last year.

The state government of Baden-Wuerttemberg rejected his petition for financial assistance, and he entered bailout talks with several German banks.

"The financial troubles of his companies, induced by the international financial crisis and the uncertainty and powerlessness to act independently which the financial problems brought about, broke the passionate family business man, and he took his own life," his family wrote in a press release.

My Comment: The ultimate form of "gambler`s ruin" there. Interested readers should see my notes in the Global Financial Crisis thread about the vicious short squeeze in VW shares last Fall.


U.S. Factory Orders, Home Sales Contract as Companies, Consumers Retrench: The U.S. economy ended the year in a steep decline, with factory orders, home sales and service industries all contracting further, reports showed today.

Financial-Industry Lies and the Lying Financial-Industry Liars Who Tell Them:

[Apologies to Mr. Al Franken]

Why Wall Street could go to jail: Corporate officers were making reassuring statements about financial prospects just days before Armageddon hit their companies -- and investors` portfolios. Here's some prominent cases.

AIG: Saved by federal bailout on Sept. 16, 2008, with federal loan commitments and investments now totaling $150 billion. Under scrutiny by federal prosecutors and the SEC.

"It is hard for us, without being flippant, to even see a scenario ... within any kind of realm of reason that would see us losing $1 in any of these [credit default swap] transactions." -- Joseph Cassano, head of AIG Financial Products, August 2007

"We are confident in our marks and the reasonableness of our valuation methods. We have a high degree of certainty in what we have booked to date." -- CEO Martin Sullivan, Dec. 5, 2007

Outside auditors had warned Sullivan a week earlier of possible "material weaknesses" in AIG Financial Product's accounting.

-----------

Bear Stearns hedge funds: After two funds collapsed, portfolio managers Ralph Cioffi and Matt Tannin were charged by Brooklyn federal prosecutors with securities fraud. They have pleaded not guilty.

"If we believe the [Bear Stearns internal report is] ANYWHERE CLOSE to accurate, I think we should close the funds now.... If [the report] is correct, then the entire subprime market is toast." -- Tannin in internal e-mail to Cioffi on April 22, 2007

"So from a structural point of view, from an asset point of view, from a surveillance point of view, we`re very comfortable with exactly where we are." -- Tannin to investors on April 25, 2007

-----------

Bear Stearns parent: Sought emergency funding from the Federal Reserve on March 13, 2008, and was then sold to J.P. Morgan. Brooklyn U.S. prosecutors poked around, but there appears to be no active inquiry.

"Our liquidity and balance sheet are strong.... We don`t see any pressure on our liquidity, let alone a liquidity crisis." -- CEO Alan Schwartz to CNBC on March 12, 2008, less than 36 hours before the company`s collapse

-----------

Countrywide Financial: Sold to Bank of America on Jan. 11, 2008, after its stock price had fallen almost 90% over eight months. Now under scrutiny by SEC and state AGs.

An analyst report suggesting that Countrywide faced liquidity problems "was totally irresponsible and baseless." On the contrary, "every one of these [crises] you come out of stronger, better, and with less competition." -- CEO Angelo Mozilo to CNBC on Aug. 23, 2007

-----------

Fannie Mae: Regulators seized Fannie and Freddie on Sept. 7, 2008. Now under scrutiny by Department of Justice investigators and the SEC.

"There are no current plans to go back to the market for capital because we have all of those other levers that are turned on, producing capital, putting us into an increasingly - into a comfortable position based on where we are in the market right now." -- CEO Daniel H. Mudd, Feb. 27, 2008

"We will go into the belly of this cycle with about $48 billion in core capital, which is about $17 billion above our statutory capital level." -- CEO Mudd seeking $6 billion in new capital on May 6, 2008

-----------

Lehman Brothers: Filed for Chapter 11 protection on Sept. 15, 2008, the largest bankruptcy in history. Now under scrutiny by federal prosecutors in Brooklyn, Manhattan, and Newark.

"We are on the right track to put these last two quarters behind us." -- CEO Richard Fuld on Sept. 10, 2008, five days before the bankruptcy filing

"Our liquidity pool also remains strong at $42 billion.... Throughout the market volatility of the past six months, our liquidity and funding framework has served us extremely well, and we remain focused on increasing the funding available in our bank entities and mitigating any liquidity risks to our secured and unsecured funding positions." -- Lehman Brothers CFO Ian Lowitt, Sept. 10, 2008

-----------

Merrill Lynch: After taking more than $30 billion in writedowns, Merrill agreed to be sold to BofA on Sept. 15, 2008. Now under scrutiny by SEC and state AGs from New York and Massachusetts.

"I think proactive, aggressive risk management has put us in an exceptionally good position.... We have seen significant reductions in our exposure to lower-rated segments of the market." -- CFO Jeffrey N. Edwards, July 17, 2007

-----------

Wachovia: On Sept. 29, 2008, Wachovia agreed to sell its bank units to Citigroup in a deal backstopped by the FDIC. The whole company was later sold to Wells Fargo instead. Not believed to be under investigation.

"They are obsessed with conservative underwriting.... They have no subprime origination." -- CEO G. Kennedy Thompson, announcing the acquisition of giant mortgage lender Golden West Financial on May 8, 2006

"Our view regarding the quality of the Golden West underwriting practices has just continued to grow stronger." -- Chief risk officer Don Truslow on April 16, 2007

"Because the way these [`pick a payment option,` adjustable-rate mortgage] loans are underwritten, we`re not seeing any meaningful increases in losses in the portfolio, and we don`t expect to see any rises in losses as we look forward over the next few quarters." -- Truslow on July 20, 2007

-----------

Washington Mutual: Seized on Sept. 25, 2008, by bank regulators, the largest bank failure in U.S. history. Then sold to J.P. Morgan. Under scrutiny by federal prosecutors in Seattle and by the SEC.

"As you`ll recall, I have been pretty pessimistic on the housing market for the last couple of years... so... we`ve been diversifying our mix of businesses.... We tightened underwriting, we decreased production volume by about half in the subprime area... and we decreased the subprime portfolio.... As the housing market has softened as expected, what I have really seen is a continued very good performance out of most parts of the portfolio." -- CEO Kerry K. Killinger on Jan. 17, 2007

My Comment: Let`s not forgot Merrill Lynch CEO John Thain`s repeated lies last year about Merrill`s alleged non-need for further cash-raising, But of course when it comes to repeated and egregious lying, our own soon-to-be-former U.S. Treasury Secretary Hnery Paulson is without peer, and thus deserving of the Most Mendacious Megalomaniac Award for 2008. But the "there appears to be no active inquiry", "Not believed to be under investigation" and the even-more-laughable "Now under scrutiny by [the] SEC" notes above indicate that few if any of these crooks will see the inside of a jail cell, much less even face any fines.

[Fusion_power]

I object to placing Daniel Mudd in company of most of the scalawags you listed Ewmayer. Don't get me wrong, he made egregious mistakes, but I believe a case can be made that he was doing his best to meet the mandate of his business. In other words, active larceny (lehman and others) is not the same as stupidity.

Whether for good or bad, Merckle is now dead. His previous actions are now written off.

DarJones

[Xyzzy]

Financial-Industry Lies and the Lying Financial-Industry Liars Who Tell Them:

Unfortunately, they lack the finesse and wit of the Iraqi Minister of Information. Imagine the possibilities.

[xilman]

Originally Posted by Xyzzy

Unfortunately, they lack the finesse and wit of the Iraqi Minister of Information. Imagine the possibilities.

Ah, Comical Ali. I remember him well. Where is he now?


Paul

[cheesehead]

Originally Posted by Fusion_power

I object to placing Daniel Mudd in company of most of the scalawags you listed Ewmayer.

That was, of course, a choice of the Fortune article author, Roger Parloff, not Ernst's decision. All Ernst did was refrain from excluding any of the nine cases included by that author.

[ewmayer]

$1.2 trillion deficit looms: Housing collapse and financial turmoil leads to steep rise in estimated U.S. shortfall for '09, Congressional Budget Office says.

The U.S. budget deficit in 2009 is projected to spike to a record $1.2 trillion, or 8.3% of gross domestic product, the Congressional Budget Office said Wednesday.

The dramatic jump compares to a $455 billion deficit in fiscal year 2008 and $161 billion in 2007. The estimate does not account for the massive spending and tax cuts proposed in President-elect Barack Obama's economic rescue plan.

The CBO's deficit forecast for fiscal year 2010 is better, but still at historically high levels. The agency projects that the annual budget shortfall will be $703 billion, or 4.9% of GDP.

My Comment: Given that the CBO`s latest estimate is more than double their previous one, any forecast for 2010 is a complete joke - just take whatever they say, double it to get a wildly optimistic lower bound, add a trillion to account for all the off-balance-sheet accoutning tricks used by the government to hide e.g. the true costs of the Iraq war, and then you might be somewhere in the right ballpark. But what`s a trillion plus or minus? The Treasury printing presses are cranking away at high speed and can easily handle the added demands. Zimbabwe-nomics, we'll call it.


Fortune.com has a hilariously disingenuous article today about Social Security not-really-being-a-Ponzi-scheme:

Social Security a Ponzi scheme? No way: Some commentators are finding a tempting comparison between the Madoff scandal and the Social Security system. Here`s why it`s wrong.

It was inevitable that once the phrase "Ponzi scheme" returned to the news in the wake of Bernard Madoff`s alleged swindle, a chorus of angry voices would rise to condemn Social Security as, in their words, "the biggest Ponzi scheme of them all."

Their argument -- gaining momentum on the web, among some television commentators, and elsewhere (for examples, see "The Ponzi Scheme That is Social `Security,` " "The Real `Mother Of All Ponzi Schemes`: Social Security" or "Madoff only the No. 2 Ponzi scheme") -- has a certain appeal because there are indeed some superficial similarities.

Essentially, here`s their pitch: a Ponzi scheme is a fraud in which money from one group of people is used to pay promised returns to another group of people. The money isn`t invested, it`s just transferred, and at some point the scheme collapses because there`s not enough income to satisfy withdrawals. (Madoff reportedly confessed to one of his sons that his $50 billion investment business fit that description.) Social Security`s critics say it`s a multitrillion-dollar Ponzi scheme because although individuals have "accounts," in fact the government uses income from current workers to pay benefits. When benefits exceed income, they say, the system will crumble, just like Madoff`s.

It`s hard to knock down such a persistent and seemingly elegant analogy. But since it creates a false impression of Social Security, and since I for one consider real Ponzi schemes too important and interesting to obfuscate, it`s worth rebutting this myth.

My Comment: Which "myth", exactly? That Social Security is in fact using current payments to pay benefits rather than saving them for the payers is a fact, not a myth. So it sure sounds like a Ponzi scheme in the sense that is is effectively functioning like one - in effect that is as intended by its creators - from the first of the linked articles above:

"In 1935, President Roosevelt introduced a controversial “social insurance” to prevent the crushing poverty that hit many Americans in their old age during the Great Depression. As part of his New Deal, Social Security provided benefits to retirees and the unemployed, financed by taxes on current worker’s wages."

My Comment: That would be fine if payouts were managed in such a way that the system does not consistently pay out more per worker currently receiving benefits than said worker [on average, including interest] contributed, i.e. that is does not require and ever-greater influx of workers/payments in order to remain long-term viable. That is not the case, and the system`s own trustees readily admit as much. Also from the above linked article:

"There’s one similarity between Social Security and Ponzi scheme that is irrefutable: the early investors/retirees get the better end of the deal. The first person to receive monthly retirement check was Ida May Fuller of Ludlow, Virginia. Ida retired in November 1939 at the age of 65 and started collecting her checks in January 1940. She lived to be 100 years old, and during her lifetime, she collected $22,888.92 in Social Security benefits. Ida put in a total of $24.75 into the system, thus giving a return of over 90,000%!"

My Comment: Of course that is an extreme case, but persistently paying out even a few % more per beneficiary than they paid in makes the system unsustainable, and thus effectively a Ponzi scheme.

First, in the case of Social Security, no one is being misled. Madoff allegedly falsely claimed to have discovered a "black box" method of earning impressive results, and by doing so enticed individuals and organizations to invest with him. Social Security is exactly what it claims to be: A mandatory transfer payment system under which current workers are taxed on their incomes to pay benefits, with no promises of huge returns. (Of course, it's true that if Madoff had the power to require participation, he would have had an easier time keeping his alleged scheme rolling.)

My Comment: So even though the 2 schemes function in essentially the same Ponzi-like way, the fact that Madoff, lacking the Federal government`s power to compel participation, actually had to resort to clever pitching to attract participants, somehow makes his scam more egregious? Oof, we are on slippery ethical turf here, folks.

Second, Social Security isn`t automatically doomed to fail. Played out to its logical conclusion, a Ponzi scheme is unsustainable because the number of potential investors is eventually exhausted. That`s when the last people to participate are out of luck; the music stops and there`s nowhere to sit.

It`s true that Social Security faces a huge burden -- and a significant, long-term financing problem -- in light of retiring Baby Boomers. (The latest projections anticipate Social Security tax revenues to fall below costs in 2017 and the Social Security Trust Funds to be exhausted in 2041.) But Social Security can be, and has been, tweaked and modified to reflect changes in the size of the taxpaying workforce and the number of beneficiaries. It would take great political will, but the government could change benefit formulas or take other steps, like increasing taxes, to keep the system from failing.

My Comment: So having the power to increase the amount the required participants are forced to pay in order to keep the scheme viable somehow makes it less of a Ponzi scheme? Again, the logic there escapes me.

Third, Social Security is morally the polar opposite of a Ponzi scheme and fundamentally different from what Madoff allegedly did. At the height of the Great Depression, our society (see "Social") resolved to create a safety net (see "Security") in the form of a social insurance policy that would pay modest benefits to retirees, the disabled and the survivors of deceased workers. By design, that means a certain amount of wealth transfer, with richer workers subsidizing poorer ones. That might rankle, but it's not fraud.

Charles Ponzi, for whom the scheme is named, was unencumbered by such high-minded ideals.

My Comment: Oh, boy, that`s gotta be the best one yet - Social Security is not a Ponzi scheme because unlike a "real" Ponzi scheme, its ideals are "high-minded". I say bullshit - that simply means that Social Security is a Ponzi scheme which by fiat happens to be legal, just like it would be illegal for you or me to print U.S. currency to pay our debts (irrespective of whether they are "high-minded" debts or not), whereas the U.S. Treasury is allowed to do so. But just because the government has rigged the system to make it legal, does not make it "morally right". And it`s not just "leftist antigovernment bloggers" who are calling Social Security what it is - congressman Ron Paul, perhaps the only one of the recent batch of presidential candidates who has a realistic grasp of how bad the fundamentals of the U.S. economy are, calls both Social Security and Fractional Reserve Banking what they are, namely Ponzi schemes. Having the power to designate a scam as "legal" and to compel lots of people to participate, does not make it less of a scam.

[jasonp]

I have seen others claim that the stock market is also a Ponzi scheme: people who are getting older sell off their stocks into other things that are more stable, and a new generation of younger investors who think they can handle the long term risks buy them, at higher and higher (inflation-and-speculation-adjusted) prices. Of course, that may not even be true on average anymore, with all the huge institutional investors passing giant blocks of equities back and forth.

Really, what other choices does anyone have nowadays for accumulating enough to live on as retirement approaches? Social Security inflation-adjusted upwards about 6% this year; seen any bank accounts that pay 6% interest after taxes?