Econ 2009

[__HRB__]

Originally Posted by ewmayer

If you make it too easy, credit markets will shut down, because no with money and in possession of their wits will want to lend money. Oh wait, that's exactly what's been happening for the past 2 years...

Credit markets will not shut down for businesses that are credit worthy and more importantly if the risk is uncorrelated to the other borrowers. Good banks were able to identify that the risk investing in real-estate is highly correlated, so they limited their exposure.

Concerning the consumer credit business...for the lenders this was pretty much: easy come, easy go. Again, the banks' job is to diversify the risks, and there are always sectors that are booming.

Originally Posted by ewmayer

When someone defaults (e.g. bankruptcy), what do you think happens to the debt? The magic "debt writeoff fairy" waves its magic wand and makes the debt go "poof", and some accountant marks an red X in a dusty ledger and no one is the worse off?

The consequence is that the lender gets punished for foolish behavior. If all his borrowers file for bankruptcy, this mechanism guarantees that he won't remain in the lending business.

Consider, that the problem is not only that foolish lenders would have to write off bad loans, but that financial intermediaries who do their job well, are not able to take command of the (future) resources.

Basically you want to get people to declare bankruptcy quickly, so that the incompetent lenders are also forced out of business as fast as possible.

[ewmayer]

Originally Posted by __HRB__

Basically you want to get people to declare bankruptcy quickly, so that the incompetent lenders are also forced out of business as fast as possible.

That would require some faint semblance of a free-enterprise system to be in place - I'm afraid none of the world's leading economies fall into that category these days. here in the U.S. the government is busy rewarding the most-outrageously-bad actors in the financial sector by deeming them "too big to fail" and guaranteeing their debts ... privatized profits and socialized losses, it's the new American Way. Heck, beyond doing everything in its power to keep the TBTF Banks on life support, the government is actively encouraging them to make even *more* risky loans, because the U.S. Ponzi Economy requires a neverending expansion of consumer debt to "function".

------------------

Geithner`s gift to Wall Street: As the first TALF-backed deals for Ford, Honda and Harley`s debt hit the market, professional investors see an opportunity to make a killing.

NEW YORK (Fortune) -- Imagine if you were not really in the market for a house but the government came along and said that it would finance 94% of a home`s purchase price with a mortgage rate of less than 3%. Still not interested? Wait, Uncle Sam has some additional sweeteners: if you do the deal and buy the house for only 6% down, you also get the equivalent of rental income every month to the tune of at least an annualized yield of 10% of the purchase price.

But wait there`s still more: if, say, after two years, you decide you don`t want the house any longer, you can just walk away from it. No need to pay the balance of the mortgage (it won`t affect your credit rating), and you can keep the rental income received to date.

That`s essentially the deal that Treasury Secretary Timothy Geithner has offered qualified professional investors who participate in the so-called TALF (Term Asset-Backed Securities Loan Facility). Two months into the program as the first TALF- backed deals hit the market, you can see why the likes of hedge fund Fortress Investment Group are drooling over it. "I`m a big believer in the impact that TALF can and should have," Fortress CEO Wes Edens said on a May 6 investor call, adding that he expects that Fortress will be "a big participant" in the TALF program "three to six months from now."
0:00 /24:35Geithner opens up

The first few TALF deals -- one for Ford Credit (the financing arm of the automaker), another for American Honda Receivables Corp., a third for the student loan company Sallie Mae and a fourth for motorcycle icon Harley Davidson -- shed some light on our tax dollars at work.

"I`ve had accounts that dropped everything they were doing to take a look at this TALF financing," one Wall Street trader explained. "It was like nothing they had ever seen. It beats any financing that the private sector could ever come up with. I almost want to say it is irresponsible."

My Comment: Allow me to finish the TraydaBoyz` quote: "...but I`m making too much of a killing on it to allow myself any serious qualms about 'taxpayer rape' and such."


EU economy shrinks 2.5%: Recession deepens in Europe, but economists say the first three months of 2009 may be the low point.

PARIS (Reuters) -- Europe sank to what may be the recession's low point in the first quarter of the year as tumbling German exports and investment plus further sharp drops in output elsewhere sped up the pace of a year-old contraction.

Official estimates on Friday showed the first quarter was the worst on record at European level, although more up-to-date business surveys suggest that early 2009 may prove to be the low point of the first global recession since World War Two.

"Although we are nowhere near the peak in unemployment, we can safely assume that the first quarter was the worst in terms of the pace of decline," said Martin van Vliet, an economist at ING bank.

My Comment: Ah yes, the old "second derivative" argument there - BTW, our English-speaking readers may be interested to know that the German for "Green Shoots" is "Grün schießt". (I before E ... I before E ... although I`m sure Herr Grün does the other, as well.)


Bunds Beating Treasuries for First Time Since 2005 as ECB Lags Behind Fed: European bonds are beating Treasuries for the first time in four years as the European Central Bank lags behind the Federal Reserve in efforts to revive contracting economies.

My Comment: Don`t forget to check out the accompanying exercise video, "Bunds of Steel".


Historical Perspectives: Did Roosevelt`s Policies Hinder Recovery From The Great Depression?

Interesting link on Mish`s blog today:

UCLA economists calculate FDR's policies prolonged Depression by 7 years: Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

[__HRB__]

Originally Posted by ewmayer

That would require some faint semblance of a free-enterprise system to be in place - I'm afraid none of the world's leading economies fall into that category these days.

That's true, but I'm not convinced that a society with a free-enterprise system is not possible.

It took a while for "separation of church and state" to get accepted as a good idea, so I see no reason why a "separation of enterprise and state" won't eventually be accepted as a good idea, too.

Of course, like all other good ideas, this will be under constant attack. But, since you know that I'm convinced that reality is darwinistic, I am convinced that it is only a matter of time until the opposition has been wiped out.

BTW, it isn't relevant which is the leading economy today, but to identify the best candidate for leading economy of tomorrow, to go there and make it happen. When people like Jim Rogers find reasons relocate to Singapore, taking profits and leaving is at least worthy of consideration.

My current "Nearest Neighbors" are 1932 and 1976, so depending on whether 2012 resembles 1980 or 1936, I'm staying or I'm definitely outta here.

[only_human]

This is a brief followup to the Alternative Fuel Tax Credit abuse by paper mills that has so outraged me in this thread.

Paper Firms Cashing In Before Loophole Plugged

the Joint Committee on Taxation has had to raise its estimate of the cost of the credit nearly 50-fold, from $61 million to $3.3 billion. Wall Street analysts put the cost as high as $8 billion.

Paper mills produce a byproduct called "Black Liquor" that they burn for energy and because leaks of it are toxic to fish. By adding a minuscule amount of diesel fuel to the "Black Liquor" they qualify for this $.50 credit for each gallon of "Black Liquor" that they have been burning since the '30s. What's a few billion here and there? Well at over $3 billion, that is $10 per man, woman, and child in the United States. I wonder how many lives would be saved if the equivalent funds were devoted to, say, flu shots.

Obama Seeks to Halt Alternative Fuel Tax Credit for Paper Industry

As part of its fiscal year 2010 budget proposal, the administration rewrote the alternative fuel provision to exclude the paper industry. If approved by Congress, that would take effect Oct. 1. To end the payments earlier, lawmakers would need to write the change into another piece of legislation.

The alternative fuels provision, originally part of the 2005 highway bill and expanded in the 2007 energy bill, said that any company mixing alternative fuels with even a tiny bit of traditional fossil fuels would qualify for a 50 cent a gallon tax credit. The provision is scheduled to expire at the end of 2009.

Companies began filing papers with the Internal Revenue Service late last year and early this year to qualify, and payments and credits quickly mounted. International Paper said recently that it received $540 million in the first quarter alone, including $145 million in direct payments from the Treasury. Temple-Inland estimated that it could receive payments for 550 million to 650 million gallons this year, which would amount to about $300 million. Because the tax credit is refundable, companies with no profit or tax liability can get direct payments.

[ewmayer]

Cornell economist: How to solve the financial crisis: Robert H. Frank explains why a culture of excessive risk taking flourished - and what might push everyone from money managers to homebuyers to act more prudently.

As a writer and an economics professor at Cornell University, Robert Frank has been trying for years to bridge the gap between the classroom and the real world. Though he has proved his command of the essentials of his profession - he wrote a textbook with Federal Reserve Board chief Ben Bernanke back in 2000 - his vision of economics is broader and more thought-provoking than most.

In "The Winner-Take-All Society" (1996) and "Luxury Fever" (2000), Frank analyzed the economic logic underlying sky-high salaries in business, sports, and entertainment, and the effects of luxury spending on middle-class Americans. In "The Economic Naturalist" (2007), he used economic principles to explain quirky questions of everyday life, like why drive-through ATMs have Braille buttons.

My Comment: Hmmm ... why *do* drive-thru ATMs have Braille buttons? My first guess would be that they are essentially the same make as non-drive-thru ATMs (which require Braille buttons), so it`s simply easier to go with a single kind. I must remember to also the Professor about the hot-button issue currently is roiling the field biblical scholarship - i`m referring of course to the question of whether Adam & Eve had navels.

But getting back on-theme, the money quote for me was when Frank suggested why salary caps are a bad idea in every industry *but* Big Finance:

In the case of, say, the software industry, there's a link between earnings and the extent to which good employees benefit the economy. In the finance industry there's no such link. Those companies earn more when they hire smarter people largely because smarter people can figure out more devious ways to unload risk onto other people.

Anytime it looks as if individuals are generating huge profits for a financial firm, I think the presumption should be that there's some market failure they're exploiting. Regulation can eliminate those failures and therefore those profits. Pay caps are a clumsy instrument. But if you had them in the financial industry, life would go on.

Casey Report: U.S. Government Tax Revenues Tanking

After combing through the past 25 editions of the “Monthly Treasury Statement of Receipts and Outlays of the United States Government,” which is compiled and published by the Treasury Department’s Financial Management Service, we created the following chart.

Here’s what’s going on:

* In 2007 and 2008, government tax revenues averaged about $633.15 billion per quarter. For the first quarter of 2009, however, the numbers just in tell us that tax receipts totaled only about $442.39 billion -- a decline of 30%.

* Looking to confirm the trend, we compared the data for April – the big kahuna of tax collection months – to the 2007-2008 average, and found that individual income taxes this year were down more than 40%. The situation is even worse for corporate income taxes, which were down a stunning 67%!

* When you add in all revenue from all sources (including Social Security revenue, government fees, etc.), the fiscal year-to-date – October through April – revenue shortfall comes to 19%, vs. the 14.6% projected in Obama’s budget. If, however, the accelerating shortfall apparent year-to-date, and in April in particular, continues, the spread between projected and actual tax receipts will widen considerably.

Tellingly, for the first time since 1983, the U.S. government posted a deficit in April. That’s a big swing in the wrong direction, as the bump in personal tax collections in April historically results in a big surplus -- on average about $68 billion.

What are the implications of this tanking tax revenue?

For starters, it means the federal government deficit is going be as bad or worse than the $2.5 trillion Bud Conrad, chief economist of Casey Research, projected it to be last year.

If the shortfall in individual and corporate tax revenue persists -- and we expect it will -- then the deep hole the government is already digging for itself will be that much deeper.

Using the government’s own expense projections, the revenue shortfall, even if it doesn’t worsen further, would push the fiscal 2009 budget deficit up to about $1.958 trillion. For reasons we’ve discussed at some length in The Casey Report, those expense projections are likely to be significantly understated.

Case in point, in January the government projected a $1.2 trillion deficit for fiscal year 2009… in March, just three months later, they upped the projection to $1.8 trillion. That $600 billion “adjustment” alone totaled more than any full-year budget deficit in the nation’s history.

Yet, the real fly in the ointment is that the actual borrowing by the Treasury is likely to be at least half a trillion dollars more than the deficit.

That’s because the Treasury is buying toxic paper (mortgage, credit card loans, etc.) and putting them on the books with a higher value than the market is willing to assign. While that makes the budget deficit appear smaller, it doesn’t negate the fact that the government still must borrow the money needed to buy the toxic paper in the first place. The additional revenue shortfall means they have to raise that much more money. Based on the struggle they had pushing the $14 billion in long-term notes at the latest auction, it becomes increasingly apparent that when push comes to shove, the only way the government is going to come up with the money needed to meet its aggressive spending is to print it up.

My Comment: Mirror image of what is happening at the state and municipal level. The California special election on the ballot measures related to the compromise budget agreement of March (a.k.a. "desperate lawmakers try to punt the real decision-making to voters") is occurring as we speak. Despite dire warnings from governor Schwarzenegger and lawmakers that failure to pass the supplemental budget resolutions - which include nifty sleights-of-hand such as "borrowing $5 billion against future state lottery proceeds" - polls indicate nearly all the measures are likely to fail. This could be the opening salvo in the first of what are likely to become many state-level tax revolts.

But the Obama administration is promising to "cut the deficit in half" over the next few years - yeah, good luck with that. But who cares ... we can just print our way to prosperity, assuming we can sweet-talk Zimbabwe into selling us some of that hoard of blank linen currency-paper which they cornered the market on.


Moron(s) of the Week: This week`s economic booby prize is a dual award to a pair of deserving economists, for preaching the virtues of high inflation ("Making people`s savings dwindle in purchasing power will provide an incentive for them to stop their un-American savings-glut accumulation and go out and spend, spend, spend!"):

Fed Should Fuel Faster Inflation to Help U.S. Economy, Mankiw, Rogoff Say: What the U.S. economy may need is a dose of good old-fashioned inflation.

So say economists including Gregory Mankiw, former White House adviser, and Kenneth Rogoff, who was chief economist at the International Monetary Fund. They argue that a looser rein on inflation would make it easier for debt-strapped consumers and governments to meet their obligations. It might also help the economy by encouraging Americans to spend now rather than later when prices go up.

“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”

My Comment: Classic punish-the-prudent-in-order-to-bail-out-the-profligate scensario. So much for the U.S. Constitution protecting one from government confiscation of property without due compensation, eh? But I do so relish the delicious turn of phrase "good old-fashioned inflation". Yep, I remember the good old inflationary days back in Weimar ... when a simple wheelbarrow was sufficient to carry all you needed ... to buy a loaf of bread. That crisp new money made for a clean-burning fire on those cold winter nights, too.

[__HRB__]

In the case of, say, the software industry, there's a link between earnings and the extent to which good employees benefit the economy. In the finance industry there's no such link. Those companies earn more when they hire smarter people largely because smarter people can figure out more devious ways to unload risk onto other people.
Anytime it looks as if individuals are generating huge profits for a financial firm, I think the presumption should be that there's some market failure they're exploiting. Regulation can eliminate those failures and therefore those profits. Pay caps are a clumsy instrument. But if you had them in the financial industry, life would go on.

Bull. Bull! Bull!!

1. In money terms all trades are zero-sum, but markets allocate risk according to the degree of risk-aversion, so, as the many people playing the lottery are actually willing to pay for risk, it is not surprising that markets deliver risk to those idiots. As strategies with negative pay-off are sub-optimal, markets make sure that people who play them run out of resources as fast as possible, which is a good thing: stupid people simply shouldn't have money.

This is not market failure. In fact it's the opposite!

2. Regulation needs to be enforced and therefore isn't free.

3. Adverse selection leads to regulation failure: people in favor of regulation are - by definition - losers, who are not smart enough to "unload risk", so regulation will always be at least one step behind.

4. Financial markets have no borders, so the smart people will simply move outside of US jurisdiction which wouldn't stop them from unloading risk unto dumb Americans.

[cheesehead]

Originally Posted by ewmayer

My Comment: Hmmm ... why *do* drive-thru ATMs have Braille buttons?

(* sigh *)

It's so that the blind passenger in the taxicab's back seat can do his/her own transactions, after the taxi driver has stopped with the back door window opposite the ATM keyboard, without needing someone else to press the buttons for him/her.

(Sheesh ... do folks think that blind people walk all the way every time they want to get somewhere?)

I must remember to also the Professor about the hot-button issue currently is roiling the field biblical scholarship - i`m referring of course to the question of whether Adam & Eve had navels.

... and why Adam had testicles when he was created (Before Eve) ...

[xilman]

Originally Posted by cheesehead

(* sigh *)

It's so that the blind passenger in the taxicab's back seat can do his/her own transactions, after the taxi driver has stopped with the back door window opposite the ATM keyboard, without needing someone else to press the buttons for him/her.

(Sheesh ... do folks think that blind people walk all the way every time they want to get somewhere?

Even if we hypothesize that blind people do indeed walk all the way every time, it would still be cheaper for ATM manufacturers to produce only one style of keypad buttons and to install them in all their machines.

Paul

[cheesehead]

Originally Posted by xilman

Even if we hypothesize that blind people do indeed walk all the way every time, it would still be cheaper for ATM manufacturers to produce only one style of keypad buttons and to install them in all their machines.

ATMs I've seen^* usually have the Braille embossed into (or taped onto) the facade surface next to the buttons rather than on the buttons themselves (which project through holes in the facade). Besides, there has to be Braille identification next to the separate openings for cash dispensing, card insertion (or swiping), receipt dispensing and deposit envelope insertion anyway, and all that would be on the facade next to those openings.

(Just as with floor buttons in elevators.)

- - -

^* - I used to program ATM terminal handler software.

[R.D. Silverman]

Originally Posted by Uncwilly

Many of theses folks had no ablity to buy. The lenders got greedy. They made fast money on them. So did loan brokers, as did real estate agents. All of them are supposed to act as a sanity check. Auto dealerships run ones credit before selling.

Those in professional positions that took greed over their knowledge and training are the guilty ones.

Adults are responsible for their own actions. Noone put a gun to the
heads of people and forced them to buy a house they could not afford.

Mortgage costs are KNOWN. Computing them involves simple arithmetic.

It is not the responsibility of lenders to protect people from their own
stupidity.

[__HRB__]

Drive-through ATMs have braille because it's required by law. To be specific, section 4.34.4 of the ADA Accessibility Guidelines for Buildings and Facilities (Appendix to Part 1191, 36 CFR Chapter XI, issued pursuant to the Americans with Disabilities Act of 1990) says, "Instructions and all information for use [of an automated teller machine] shall be made accessible to and independently usable by persons with vision impairments."

The regulation exists primarily for appearance. If you're blind, these regulations are next to useless.