Econ 2009

[ewmayer]

Originally Posted by __HRB__

1. If private insurance does work, why am I forced to subsidize the FDIC?
2. If private insurance doesn't work, why am I forced to subsidize the FDIC?

It`s not an either-or issue. Using health insurance as an analogy: private insurance can work reasonably well if there is genuine competition, but even then the insurers (being for-profit entities) will seek to maximize returns by insuring the least-risky and excluding those who are or seem more risky, e.g. based on pre-existing conditions. (In the U.s. we have the further problem that the insurers enjoy an undeserved exemption from antitrust laws, which was intended to encourage broader coverage, but only served to fatten he insurers` bottom line.) People with large-scale insurance purchasing power (e.g. corporations) will be able to negotiate reasonable terms in such a system on behalf of their employees, but large numbers of folks will be SOL. And - and this is perhaps the best reason to require all banks (i.e. depositors) to pay into an insurance fund - private for-profit companies will always seek to maximize profit by any means possible (so long as it`s not flagrantly illegal), which means they will invariably under-insure against their own risk-taking and risk of failure. If you give drivers freedom to buy as much or as little auto insurance as they like, what do you think will happen? That`s right ... rampant under-insurance will ensue, guaranteed. The problem is that if you crash into me, it`s not just your own ass on the line. Similarly for banks, if the bank takes excessive investment risk and goes belly up, it`s not just their management and shareholders whose assets are put at risk, it`s all of their depositors, and - if the bank is big enough - the entire banking system.

Originally Posted by garo

There was no FDIC in the 1930s. What happened then?

The history of private unregulated credit-based and fractional-reserve banking is a litany of bank runs, wider-scale banking panics and bank failures which left most of the banks` depositors - especially the small ones - penniless. This is reflected (among other things) in much of the historical fiction of the era. If we restrict ourselves just to the period of the great crash of 1929-1933 which led to the creation of the FDIC, here is Wikipedia on the subject - note also the interesting bit about the startegy of "extend and pretend", which is precisely the one being tried by the U.S. government in the context of the present financial crisis:

Much of the Great Depression's economic damage was caused directly by bank runs.[4] The cost of cleaning up a systemic banking crisis can be huge, with fiscal costs averaging 13% of GDP and economic output losses averaging 20% of GDP for important crises from 1970 to 2007.[2]

Several techniques can help to prevent bank runs. They include temporary suspension of withdrawals, the organization of central banks that act as a lender of last resort, the protection of deposit insurance systems such as the U.S. Federal Deposit Insurance Corporation,[1] and governmental bank regulation.[5] These techniques do not always work: for example, even with deposit insurance, depositors may still be motivated by beliefs they may lack immediate access to deposits during a bank reorganization.[6] [EWM: Which s in fact true in the case of an FDIC takeover - you may temporarily lose access to a significant part of your deposits - the FDIC guarantees that you will *eventually* get it all back, although delays of more than a month or so are rare.]
...
Some measures are more effective than others in containing economic fallout and restoring the banking system after a systemic crisis.[2][9] These include establishing the scale of the problem, targeted debt relief programs to distressed borrowers, corporate restructuring programs, recognizing bank losses, and adequately capitalizing banks. Speed of intervention appears to be crucial; intervention is often delayed in the hope that insolvent banks will recover if given liquidity support and relaxation of regulations, and in the end this delay increases stress on the economy. Programs that are targeted, that specify clear quantifiable rules that limit access to preferred assistance, and that contain meaningful standards for capital regulation, appear to be more successful. Government-owned asset management companies are largely ineffective due to political constraints.[2]
...
Many of the recessions in the United States were caused by banking panics. The Great Depression contained several banking crises consisting of runs on multiple banks from 1929 to 1933; some of these were specific to regions of the U.S.[3] Banking panics began in October 1930, one year after the stock market crash, triggered by the collapse of correspondent networks; the bank runs became worse after financial conglomerates in New York and Los Angeles failed in prominently-covered scandals.[14] Much of the Depression's economic damage was caused directly by bank runs,[4] and institutions put into place after the Depression have prevented runs on U.S. commercial banks since the 1930s,[7] even under conditions such as the U.S. savings and loan crisis of the 1980s and 1990s.[15] The Depression's bank runs left a lasting mark on the American psyche, exhibited in sometimes disturbing images such as the bleak scenes where the fictional hero George Bailey contemplates suicide in the movie It's a Wonderful Life.[16]

My Comment: Googling around I also found this interesting academic paper on the subject of the Great-Depression-era bank runs:

Contagious Bank Runs: Evidence from the 1929–1933 Period

This paper empirically examines contagion effects of bank failures by analyzing the behavior of deposit flows in a sample of failed and healthy banks over the 1929–1933 period. We find evidence of contagion for 1930–1932, while none seems to have existed in 1929 or 1933. In addition, the pace of contagion accelerated over 1930–1932. We find that even during 1930–1932, failing-bank deposit outflows exceeded those at a matched control sample of nonfailing banks. This finding is consistent with the presence of a significant number of informed depositors who distinguished among ex ante failing and nonfailing banks.

My Comment: Now the real question is, by which mechanism(s) did these "informed" depositors gain their information? Since no depositor would have access to the bank`s internal financials (this is where a government regulator like the FDIC can and should play a key role), if the history of financial markets is any guide then the main mechanism would be access to inside information, i.e. this represents the bank-run equivalent of insider trading. That further implies that the small depositors will be at a huge disadvantage in such a scenario - precisely what the kind of limited deposit-insurance mechanism I propose would counteract. (And I would suggest making these kinds of bank-withdrawal front-running events subject to the same kinds of insider-trading laws as the equity markets).

[__HRB__]

Originally Posted by ewmayer

People with large-scale insurance purchasing power (e.g. corporations) will be able to negotiate reasonable terms in such a system on behalf of their employees.

It has very little to do with purchasing power and scale economies. Since a corporation does not adversely select its employees for risky behavior, insuring all the employees is less risky for the insurer, than offering each individual employee insurance.

The insurance business is very different form a company that sells widgets. Insurance companies create wealth by diversifying risk. Selling more insurance does not necessarily mean that the insurance will make more money, since total risk increase will eventually overcompensate the increased revenue.

Originally Posted by ewmayer

It`s not an either-or issue. Using health insurance as an analogy: private insurance can work reasonably well if there is genuine competition, but even then the insurers (being for-profit entities) will seek to maximize returns by insuring the least-risky and excluding those who are or seem more risky, e.g. based on pre-existing conditions.

Insurers are trying to avoid adverse selection, and that they are doing this is not a problem, but a necessity!

Requiring everyone to buy insurance removes the incentive for insurances to minimize adverse selection, which means that you are (again) advocating that a society's goal is to create more systematic risk and less diversifiable risk.

Using infinite regression of arguments pro systematic risk, you must believe that it is a good idea for a society to pursue the goal of having 0 (diversifiable) risk for the individuals (everybody is the same) and infinite risk for the whole.

To stay in business insurers must solve the quantitative problem of finding an efficient trade-off between deductibles and premiums. The likelihood that a bunch of (possibly well-meaning) bureaucrats finding regulation that coincides with a good solution approaches zero.

Originally Posted by ewmayer

(In the U.s. we have the further problem that the insurers enjoy an undeserved exemption from antitrust laws, which was intended to encourage broader coverage, but only served to fatten he insurers` bottom line.)

The exemption from anti-trust laws is not the issue, it is the existence of pro-trust laws that create the problem. Thanks to regulation, insurers are forbidden to compete across state borders, thereby supporting implicit collusion among insurers: if you don't compete with me in state X, I will not compete with you in state Y.

Originally Posted by ewmayer

If you give drivers freedom to buy as much or as little auto insurance as they like, what do you think will happen? That`s right ... rampant under-insurance will ensue, guaranteed. The problem is that if you crash into me, it`s not just your own ass on the line.

You got the wrong way around. If anything, more insurance will cause more reckless driving, if crashing into someone doesn't cost anything (and people don't care about their your own ass).

Originally Posted by ewmayer

Similarly for banks, if the bank takes excessive investment risk and goes belly up, it`s not just their management and shareholders whose assets are put at risk, it`s all of their depositors, and - if the bank is big enough - the entire banking system.

My ass is not on the line if you do not have health insurance or if you do not have deposit insurance. Stupid behavior has no external effects in these cases, so the analogy is inappropriate.

[ewmayer]

Originally Posted by __HRB__

If anything, more insurance will cause more reckless driving, if crashing into someone doesn't cost anything

Sorry, but that`s just about the silliest thing I`ve ever heard ... having your car totalled is at best a tremendous inconvenience, and carries significant risk of personal injury which hurts quite a bit even if "insurance covers it".

My ass is not on the line if you do not have health insurance or if you do not have deposit insurance. Stupid behavior has no external effects in these cases, so the analogy is inappropriate.

Your wallet (or society`s collectively) is very much on the line if significant numbers of people lack health insurance. This is well documented ... instead of getting routine checkups and preventative care and normal treatment, uninsured folks tend to wait until their health issues reach crisis level and then go to the nearest ER, which makes for a far greater expense than normal insurance and treatment. Similarly, lack of any sort of deposit insurance mechanism makes the banking system much more prone to bank runs and panics which feed on themselves. This is all well-documented, so I suggest your back up your usual anarcho-tinged claims with some actual research.

And, based on your writings, one would assume you live somewhere in the wilderness, growing your own food and making your own clothing and requiring none of the benefits of modern societies. so some questions for you:

1. Do you work for wages? If so, in what field? If not, how do you obtain your food/shelter/etc?

2. Do you have medical insurance? If so, through whom? If not, have you signed a legal waiver renouncing any medical care you cannot pay for yourself for the duration of your natural life?

3. Do you have money? If so, where do you keep it?

4. Do you require transportation? If so, in what form?

5. You obviously use the internet quite a bit. What form of internet access do you have?

[__HRB__]

Originally Posted by ewmayer

1. Do you work for wages? If so, in what field? If not, how do you obtain your food/shelter/etc?

1. I sell recreational drugs to people who enjoy getting high.
2. I sell fireworks to residents of the NY state.
3. I run an escort service for zoophiles at www.adultsheepfriendfinder.com
4. I employ 14 year-olds (male or female), who have children of their own to feed, as prostitutes.
5. I smuggle embryonic stem-cells and organs across borders.

If you are willing to exclude society "make work" I will also add:

6. I smuggle messages from the captives at Guantanamo to their loved ones.
7. I am a hit man with the specialty of terminating judges, district attorneys, jury members and expert witnesses who are responsible for handing out a death penalty to an innocent person.

Originally Posted by ewmayer

2. Do you have medical insurance? If so, through whom? If not, have you signed a legal waiver renouncing any medical care you cannot pay for yourself for the duration of your natural life?

I pay an illegal immigrant (originally a veterinarian) for basic surgery. Part of the deal is, that if you croak during a procedure he gets to keep your organs. Type III body armor keeps most of society's bullets from hitting anything important during raids. If you get shot in the head, it's only fair that society pays for the medical bills, and provides free room and board in the safest prison it can find.

Otherwise, I self-diagnose and I self-medicate. I buy medical supplies with my phony M.D. certificate via a phony office in a foreign county.

Originally Posted by ewmayer

3. Do you have money? If so, where do you keep it?

I have 20Kg in gold, 200Kg of silver, 500Kg of TNT and 1000Kg of roofing nails buried in a secret place for emergencies, so that society can't steal it.

The TNT and nails are part of the booby-trap mechanism in case society manages to torture me into revealing the location.

Originally Posted by ewmayer

4. Do you require transportation? If so, in what form?

I have a helicopter coated with radar absorbent paint, to stop society from tracking and shooting me down.

Originally Posted by ewmayer

5. You obviously use the internet quite a bit. What form of internet access do you have?

I was on cable until society broke into my house because someone had googled "kiddieporn" through my TOR exit-node. Society has a court order that makes it illegal for me to use said Internet. Luckily, my neighbor has promised to use weak passwords on his WIFI network in exchange for me watering his lawn when he's away. As a perk, by bartering we minimize the odds of society demanding its share in 'protection money'.

Originally Posted by ewmayer

Sorry, but that`s just about the silliest thing I`ve ever heard ...

What you call silly, economics calls "moral_hazard". The presence of insurance will skew the behavior of the insured towards the more risky, not less. You obviously understand that MH is a significant problem when the society forces deposit insurance on banks. What you don't understand, is that MH is not a phenomenon that only appears in finance.

[ewmayer]

Originally Posted by __HRB__

Blah blah blah, blah blah blah...

Yeah, I figured you`d evade answering any question which might reveal whether you have the courage of your (stated) convictions.

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

New York Fed = Criminal Enterprise

New York Fed’s Secret Choice to Pay 100% for AIG Swaps Hits Taxpayers

By Sept. 16, 2008, AIG, once the world’s largest insurer, was running out of cash, and the U.S. government stepped in with a rescue plan. The Federal Reserve Bank of New York, the regional Fed office with special responsibility for Wall Street, opened an $85 billion credit line for New York-based AIG. That bought it 77.9 percent of AIG and effective control of the insurer.

The government’s commitment to AIG through credit facilities and investments would eventually add up to $182.3 billion.

Beginning late in the week of Nov. 3, the New York Fed, led by President Timothy Geithner, took over negotiations with the banks from AIG, together with the Treasury Department and Chairman Ben S. Bernanke’s Federal Reserve. Geithner’s team circulated a draft term sheet outlining how the New York Fed wanted to deal with the swaps -- insurance-like contracts that backed soured collateralized-debt obligations.

CDOs are bundles of debt including subprime mortgages and corporate loans sold to investors by banks.

Part of a sentence in the document was crossed out. It contained a blank space that was intended to show the amount of the haircut the banks would take, according to people who saw the term sheet. After less than a week of private negotiations with the banks, the New York Fed instructed AIG to pay them par, or 100 cents on the dollar. The content of its deliberations has never been made public.

The New York Fed’s decision to pay the banks in full cost AIG -- and thus American taxpayers -- at least $13 billion. That’s 40 percent of the $32.5 billion AIG paid to retire the swaps. Under the agreement, the government and its taxpayers became owners of the dubious CDOs, whose face value was $62 billion and for which AIG paid the market price of $29.6 billion. The CDOs were shunted into a Fed-run entity called Maiden Lane III.

Habayeb, who left AIG in May, did not return phone calls and an e-mail.

The deal contributed to the more than $14 billion that over 18 months was handed to Goldman Sachs, whose former chairman, Stephen Friedman, was chairman of the board of directors of the New York Fed when the decision was made. Friedman, 71, resigned in May, days after it was disclosed by the Wall Street Journal that he had bought more than 50,000 shares of Goldman Sachs stock following the takeover of AIG. He declined to comment for this article.

In his resignation letter, Friedman said his continued role as chairman had been mischaracterized as improper. Goldman Sachs spokesman Michael DuVally declined to comment.

AIG paid Societe General $16.5 billion, Deutsche Bank $8.5 billion and Merrill Lynch $6.2 billion.

The New York Fed, one of the 12 regional Reserve Banks that are part of the Federal Reserve System, is unique in that it implements monetary policy through the buying and selling of Treasury securities in the secondary market. It also supervises financial institutions in the New York region.

The New York Fed board, which normally consists of nine directors, in November 2008 included Jamie Dimon, chief executive officer of JPMorgan Chase & Co., and Friedman. The directors have no direct role in bank supervision. They’re responsible for advising on regional economic conditions and electing the bank president.

My Comment: ...and for making sure they`re first in line for any government bailout money. The fact that none of this has yet led to a single criminal indictment (nor even to an FBI investigation) is further indicative of the U.S.` slide into financial fascism and bankster-run banana-republic status. And if you think "fascism" is too strong a term, let`s consult the experts, shall we?

"Fascism should rightly be called Corporatism, as it is the merger of corporate and government power" -- Benito Mussolini

Does that principle sound familiar? Quite descriptive of what`s happened in the U.S., is it not?


Houston, We Have A Problem

City of Houston is Bankrupt (So are California, Oregon, and Pension Plans in General)

The City is in this dangerous financial position because its total spending since fiscal year 2003 has greatly outstripped its total revenues in that period. And the rate of growth in the City’s total revenues since 2003 has, in turn, greatly outstripped the City’s rate of growth in population plus inflation.

Thus the City’s problems are a result of greatly overspending and not a result of insufficient revenues. All of this occurred before the current severe recession. Now the City has the added burden of the recession.

The City is in a real financial dilemma, because now its two principal sources of general fund revenues are in trouble---sales taxes and property taxes. Sales tax revenues already are dropping significantly and property tax revenues will commence dropping at an even more rapid rate after the next annual appraisal and assessment process. And the City will have to go to the voters for any contemplated rate increases in either the sales tax rate or the portion of the property tax rate allocable to operations.

It appears to us that there may be no viable alternative to bankruptcy proceedings and thereby positioning the City to regain control over its overspending, through addressing structural spending problems such as overstaffing and overly generous employee benefits.

My Comment: The accounting breakdown of the rampant overspending on city employee benefits and pensions is especially damning, and is summarized thusly: "...as of June 30, 2008, the City’s elected officials essentially had transferred financial ownership of the City from the taxpayers to the City’s employees, about 43.7% of whom do not live in the City". The report`s authors go on to compare the per-capita liabilities with another well-known bankrupt entity: "At June 30, 2008 (date of the City’s last audited financial statements), the City’s total Citywide debt per capita of $5,338 was over twice the $2,528 debt per capita of the now bankrupt State of California." Mish`s summary of the report goes further: "It is highly likely that nearly every pension plan in the country is busted."

[__HRB__]

Originally Posted by ewmayer

Yeah, I figured you`d evade answering any question which might reveal whether you have the courage of your (stated) convictions.

You might be content with people snooping into every aspect of your life, but I refuse to answer any question where I consider the answer to be private. Maybe I misunderstood your intention, but I thought it was obvious that you were attempting to demonstrate how beneficial an authoritarian society is, by pointing out that, e.g. if society didn't have fiscal robber knights, homo divinis superioris Al Gore could not have created Teh Intertubes.

So, what did you expect me to answer? There is little point in pulling a Timothy McVeigh, not because regulations stop smart people from figuring out how to blow stuff up (check out http://www.tsa.gov/blog/2009/10/resp...k-cartoon.html, for the magnitude of surrealism one must defeat), but because smart people are more likely to recognize that there is an exact analog to the problem in classical mythology:

...realizing that he could not defeat the Hydra in this way, Hercules called on his nephew Iolaus for help. His nephew then came upon the idea (possibly inspired by Athena) of using a burning firebrand to scorch the neck stumps after each decapitation. Hercules cut off each head and Iolaus cauterized the open stumps.

Your proposed solution, i.e. to keep cutting off heads and hoping that you'll eventually get one that won't bite off your arm when you offer it a doggie-biscuit, is not going to work very well, unless you can regrow limbs at a faster rate than Hydra can regrow heads.

[ewmayer]

US 3rd-Quarter GDP +3.5%, "Better than Expected"

My Comment: Nearly half of that "growth" was a direct result of the government cash-for-clunkers subsidy, which Edmunds.com estimates cost taxpayers $24,000 per extra car purchased, since roughly 5 in 6 of those vehicles sold would have sold even without the free-money giveaway. Drilling down into the details, much of the rest of the "robust rebound" in GDP appears dubious at best ... as Denninger notes in his analysis, the stated numbers for export and import growth do not jibe with reported container volumes and freight loadings for U.S. ports. But at least for one day, the gamblers in the Wall street casino are streaming back to the craps tables again. Mission accomplished! Growthitude, changefulness and hopium and all that.


GMAC Continues to Bleed

GMAC Asks For 3rd Government Bailout: GMAC Inc., the lender that received two government bailouts totaling $13.5 billion, is negotiating with the Treasury Department for a possible third lifeline

“GMAC’s insolvent, it has been, and I don’t know that we can inject enough money into it to fix it,” said Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California, firm that evaluates banks for investors. “The company, frankly, needs to be restructured and liquidated.”

My Comment: But that would represent a dangerous lurch toward "free-market capitalism" on the part of the U.S. government ... that would be bad, it would send a message that other ill-run companies which take excessive risk and have it blow up in their faces might actually be allowed to - brace yourselves - suffer the consequences of their own stupidity. That would be downright un-American, dammit.


Iceland Solves Its Obesity Epidemic

Reykjavik will survive without McDonald's

Europhiles point to Iceland as a terrible warning to us all of what happens to a small open economy in a global crisis outside the safe port of EMU. They are – of course – making much of McDonald’s decision to shut down its outlets on the Island.

This places Iceland with Albania, Bosnia, and Armenia as burgerless no-hopers.

What the company actually said was that it can no longer compete with Icelandic fast-food joints that rely on local produce – and which make delicious beef samlokas, as I discovered at a stand in downtown Reykjavik in August.

McDonald’s imports its supplies from Germany. It is being undercut. Simple as that.

The weak krona is doing exactly what it should do. Iceland’s exports are recovering. Import substitution is going gangbusters.

The currency shock-absorber is performing its magic. If I hear one more person claim the crash in the Icelandic krona has been a disaster, I think I will punch them.

Iceland’s economy is recovering faster than those of Ireland, Latvia, and Lithuania, which are all stuck with fixed exchange rates – in or out of the euro. This will become ever clearer over the next two years.

My Comment: Who said dismantling of an overleveraged banking sector and hard reversion to living within one`s means was a bad thing? Short-term pain is the price for long-term sustainability ... Icelanders are a tough bunch, they`ve been through much worse crises than this in their history, ones in which significant portions of the population starved to death. That puts the pain of cutting up one`s credit cards and slashing personal expenditures for a few years in stark perspective.

[axn]

Originally Posted by ewmayer

My Comment: Nearly half of that "growth" was a direct result of the government cash-for-clunkers subsidy, which Edmunds.com estimates cost taxpayers $24,000 per extra car purchased, since roughly 5 in 6 of those vehicles sold would have sold even without the free-money giveaway

Wasn't the "cash" given for getting "clunkers" off the street as opposed to getting a new car on the street? Whatever boost in car sales was just a nice side effect.

Also, if 5/6 of c4c sales are not to be credited against c4c, then why credit the 50% growth to c4c? Seems a bit disingenuous. Makeup your mind, which line of argument you want to pursue.

[ewmayer]

Originally Posted by axn

Wasn't the "cash" given for getting "clunkers" off the street as opposed to getting a new car on the street? Whatever boost in car sales was just a nice side effect.

No, c4c required one to trade in a vehicle in good working order and with insurance current in for a new one which gets better gas mileage - the mpg difference needed to qualify for the minimum $3500 subsidy was a mere 4 mpg (old vehicle gets <= 18 mpg, new must get >= 22 mpg).

Also, if 5/6 of c4c sales are not to be credited against c4c, then why credit the 50% growth to c4c? Seems a bit disingenuous. Makeup your mind, which line of argument you want to pursue.

The GDP report said that there was a 1.66% *boost* to GDP from c4c ... that translates to "extra vehicles sold over what would be expected without the subsidy". There is no contradiction.

[__HRB__]

Originally Posted by axn

Wasn't the "cash" given for getting "clunkers" off the street as opposed to getting a new car on the street? Whatever boost in car sales was just a nice side effect.

Also, if 5/6 of c4c sales are not to be credited against c4c, then why credit the 50% growth to c4c? Seems a bit disingenuous. Makeup your mind, which line of argument you want to pursue.

The point is that the 5/6th of the growth generated by c4c for will simply be missing in the following months. On the other hand cash-flow is 6/6ths of c4c today, so your objection to Ernst's arguments makes the unrealistic assumption that the 5/6ths of c4c beneficiaries will kindly give back $4000 to the taxpayer in the next period, because they didn't actually need the incentive.

[ewmayer]

It appears the Edmunds.com report about the cash-for-clunkers subsidy released yesterday touched a nerve:

White House fights back on Cash for Clunkers: Obama administration goes to battle with Edmunds.com on Cash for Clunkers analysis, saying the program contributed heavily to last quarter`s economic expansion.

NEW YORK (CNNMoney.com) -- The Obama administration on Thursday lashed out at a prominent critic of its Cash for Clunkers program, arguing that the popular trade-in initiative helped give the auto industry and the economy a much needed boost in the past few months.

In a blog post on whitehouse.gov, the administration argued that a report on Clunkers by automotive Web site Edmunds.com "doesn`t withstand even basic scrutiny" and is based on "implausible assumptions."
...
But the White House fired back, saying Thursday`s Commerce Department report that showed auto sales contributed 1.7 percentage points to the economy`s 3.5% growth rate in the third quarter is proof that Cash for Clunkers had a meaningful impact on both auto sales and the broad economy.

"Edmunds.com has released a faulty analysis," the blog post said. "This is the latest of several critical analyses of the Cash for Clunkers program from Edmunds.com, which appear designed to grab headlines and get coverage on cable TV."

The administration argued that Edmunds` conclusions were incorrect because the study assumes that the market for cars that didn`t qualify for Clunkers was unaffected by the program.

"In other words, all the other cars were being sold on Mars," said the administration.

The administration`s blog post argued that Clunkers helped to lower auto prices on the rest of the vehicle market as well, a fact the administration said Edmunds ignored. The White House also said that people were drawn into dealerships because of the program and ended up purchasing cars even if their trade-in didn`t qualify for the program.

Cash for Clunkers will have a long-term impact on the overall economy, since automakers increased their production through the end of the year to meet demand created by the program, the administration said.

Finally, the administration said the Edmunds' report flies in the face of independent analyses, and the administration's Council of Economic Advisers. The blog urged readers to "put on your space suit and compare the two approaches yourself."

My Comment: Wait ... who`s engaging in "implausible assumptions" here? If the White House wants to claim that c4c lowered auto prices on the rest of the vehicle market, where are the actual data backing up that claim? Nowhere to be seen. If the White House wants to claim that Edmunds` report "flies in the face of independent analyses", show us these "independent analyses". Again, none to be seen ... instead we get a redirect to the oh-so-independent "analysts" on administration's Council of Economic Advisers. This is pure spin, denial, obfuscation and use of the white House`s bully pulpit as a propaganda tool.

Edmunds is not backing down:

In response, Edmunds.com said Thursday that its figures were correct, and that the growth in GDP had more to do with naturally recovering auto sales and not with incentive programs.

The company also said that there was no hard evidence of consumers buying cars after discovering they didn't qualify for the rebate.

"It does, after all, seem a bit odd that masses of consumers would elect to buy a vehicle because of a program for which they don't qualify -- doubly so when you add in the fact that prices shot up during Cash for Clunkers, creating a disincentive to buy," Edmunds said in a statement.

My Comment: One presumes that Edmunds is referring to prices on cars qualifying for the rebate, which makes perfect sense ... If people think they are getting a great deal because of the rebate, it gives sellers room to jack up prices due to the artificially stimulated demand.

In the end, Edmunds said the report actually shows that there is some good news about the auto industry -- the recovering economy is helping boost auto sales even without the help of Clunkers.

"With all respect to the White House, Edmunds.com thinks that instead of shooting the messenger, government officials should take heart from the core message of the analysis: the fundamentals of the auto marketplace are improving faster than the current sales numbers suggest."

America's Grossly Distorted Product

One of the key components of GDP which got no coverage to speak of in the MSFM was "disposable personal income", which tumbled at an annualized rate of 7.4% (!) How can there be any kind of real economic revovery with hundredes of thousands of people still losing jobs every month (and in a net-jobs sense, i.e. jobs are being destroyed far faster than they are being created) and personal money-left-to-spend-after-basic-expenses is plummeting at a rate like this? The answer is of course "there can`t", which is of course why the MSFM retained their myopic-laser-like focus on the "headline number" without dissecting any of the uglier underlying details, like the fact that nearly all of that GDP "growth" was due to government spending and government inducements to spend, i.e. debt creation. How many of the folks who took advantage of the c4c subsidy traded in a perhaps-no-longer-running-great but paid-off vehicle for a new one needing debt financing? "Most of them" is my guess.

The WSJ`sd Liam Denning weighs in on yesterday`s government-release Q3 GDP numbers:

If the Obama administration were managing a company, it might have hoped the latest gross-domestic-product numbers would be greeted with cries of "great quarter, guys!"

At least the stock-market obliged, rising on the back of better-than-expected GDP data Thursday morning. But then bulls have become used to looking to Washington for inspiration. Zero rates and stimulus programs boost economic data as well as nudge money toward riskier assets.

Fully 2.2 percentage points of the third quarter's 3.5% growth figure related to vehicle purchases and residential construction, both juiced by government support. Federal spending added 0.6%.

If these GDP data were company earnings, they would be what analysts euphemistically call "low quality." Investors buying into the market off the back of them are ignoring weekly unemployment-claims data that came in above 500,000 again on the same day.

The danger is that all these short-term fixes leave the economy dangerously addicted to taxpayer-funded steroids. The circularity in the housing market, whereby Washington provides tax breaks to first-time buyers, guarantees most of the mortgages written, and then buys most of those, beggars belief, and suggests a worrying case of amnesia following the bursting of the housing bubble.

My Comment: The steroid-addiction analogy reminds of both the massive government spending of the 1930s and of the Japanese post-RE-crash perma-stimulus phenomenon. Keynesians like Paul Krugman look at the slide back into deep recession in the late 1930s as a sign that the government "eased up on its stimulus spending too soon" ... I would argue that that is precisely the wrong lesson to be drawn from that time in history. Rather, the massive make-work debt spending created little or no organic economic growth, kept many zombie corporations and economic sectors propped up when they should have been allowed to fail, and generally represented a colossal mis-allocation of capital, which in fact delayed the real economic recovery which can only result when private enterprise and capital are directed efficiently. (And Austrian economic theory asserts that *only* private enterprise - via the collective actions of manifold individuals "pursuing happiness" and using their intimate knowledge of local and sector-specific business conditions to efficiently deploy labor and capital - can provide the kind of efficient capital allocation required for organic economic growth and true wealth creation.)

One of Barry Ritholtz`s readers sums it up nicely:

" As a gang of marauding starving homeless former Goldman Sachs investment bankers beat Mr. Krugman about the head with his Nobel Prize, he can try to explain to them how another trillion of stimulus would have done the trick. Every decision made by our “leaders” in the last year has been a short-term solution without worrying about future consequences. This has been the politicians’ response for decades. Amazingly, the people that inhabit the halls of Washington and live in the ivory towers of academia actually believe that debt will cure a disaster created by too much debt."