Re: What about the Depression?


[Skip to the end]

Yes, and gasoline consumption went up a bit as well. Down only 4% year over year.

The deficit is also ‘automatically’ getting larger as well.

We could stop declining as fast and just go into ‘muddle through’ mode at higher levels of unemployment.

And this could encourage the mainstream to do what it can to minimize any fiscal response as the await ‘market forces and monetary policy kicking in.’

Obama recently stated we needed a fiscal stimulus to get things going, but then focus on ‘fiscal responsibility’ when the economy is growing again.

And they all say one of the major problems of the US government is the high level of debt.

Obama is also backwards on trade, as he talks about protecting US workers and opening new markets for US exporters.

Still hoping for the best!

Merry Christmas!

>   
>   On Thu, Dec 25, 2008 at 1:37 PM, mauer195 wrote:
>   
>   Everybody keeps focusing on the disastrous season that
>   retailers are supposed to be having, but then there’s this
>   news:
>   

Consumers Spend More As Gasoline Prices Fall

By Annys Shin

Consumers increased their spending last month for the first time since spring, as falling gas prices helped boost their purchasing power, new data showed yesterday.

On an inflation-adjusted basis, consumers spent 0.6 percent more in November than they did the month before, the Commerce Department reported, the first increase since May. Disposable income also rose on an inflation-adjusted basis, by 1 percent, compared with an increase of 0.7 percent in October.

But even as consumers returned to stores and shopping malls, analysts cautioned that the data did not signal the start of a turnaround for the economy. Because energy prices are unlikely to sink at the same clip they have over the past few months, Americans won’t be able to pocket much more savings at the pump.


[top]

Review of today’s government actions


[Skip to the end]

Two ‘bailouts’ today, the Fed asset purchase program and Citibank:

Comments on the asset purchase program:
Major theme- the answer to the housing and automobile issue is consumers with enough income to be able to afford their mortgage payments and car payments along with expanding employment prospects to ensure the ability to repay in full over time.

The Fed’s function is to set the interest rate. This is all in the realm of monetary policy. Income adjustment at the macro level is a function of fiscal policy.

Specifically on the securities purchase announcement:
They finally got it right – the Fed purchases the financial assets, not the treasury. The TARP should have been a Fed operation.

What the fed does is set interest rates. It’s about the price of money, not quantity of money.

Buying agency collateral will lower the interest rates on agency mortgages. It does not ‘pump in money’ or anything like that.

Buying other collateral will lower interest rates for those types of lending.

This is what ‘monetary policy’ is all about – setting interest rates in the economy, and not quantity adjustments.

This does not directly add to the demand for mortgages or the demand for other loans.

It does lower interest rates for those loans with the hope that the lower interest rates increase borrowing to spend on houses, cars, and other purchases.

They could have done this a year ago before it became a crisis with no ill effects if there was no crisis.

Letting the crisis happen first did not serve public purpose.

This foot dragging due primarily to not fully understanding the fundamentals of monetary operations has contributed to the crisis.

While this ‘top down’ approach does improve the operations of the financial sector, it does not give them what they fundamentally need, which is borrowers with sufficient incomes to make their payments, aka declining delinquency rates.

This is directly achievable by the likes of a payroll tax holiday where the treasury makes all FICA contributions, or direct spending via revenue sharing to the states for their operating budgets and infrastructure projects.

Comments on the Citibank bailout:
What they did right is break the pattern of taking 79.9% of any remaining shareholder equity, which has meant the government has been the hand of death for shareholders. There is enough risk priced into stocks with that questionable addition.

What they did wrong is complicate matters by doing more than buying a sufficiently large preferred equity position to accomplish exactly what the rest of the relatively complex package accomplished.

This was probably done to minimize usage of funds allocated under the TARP.

They are also perhaps starting to acknowledge that a substantial part of Citibank’s difficulties are due to the failure of government to sustain reasonable levels of output and employment.

Assets that were not problems a year ago have become problems today as the economy has deteriorated due to a lack of aggregate demand.

This might be a good first step towards government fessing up and taking responsibility for the collateral damage of its own fiscal and monetary policies, and stop blaming the victims by putting them to death when they require assistance. In fact, if I were Obama I would take this approach.

The government already gets 30% of all earnings through the corporate income tax. If they want more, they can raise that tax rather than demand a percentage of the outstanding shares.


[top]

Thoughts on the bailout of Freddie Mac and Fannie Mae


[Skip to the end]

It comes down to public purpose.

The agencies were set up to provide low cost funding for moderate income home buyers.

They have done that reasonably well.

However, for probably 20 years I’ve been saying the agencies should fund themselves directly with the Treasury or Fed financing bank (same as Treasury). This both lowers their cost of funds, which would get passed through to the home mortgages they originate, and eliminates the possibility of a liquidity crisis.

Market discipline should not be on the liability side. It subjects them to risk of a ‘liquidity crisis’ where those funding you can decide to go play golf one day and cut you off for no reason and put you out of business. (And any entity subject to private sector funding to continue operations is subject to this kind of liquidity risk.) Regulation should focus instead on the asset side with assets and capital fully regulated.

This was done for the most part, and this is the same as the general banking model which works reasonably well. Yes, it blows up now and then as banks find flaws in the regulations, but the losses are taken, regulations adjusted, and life goes on.

The agencies made some loans to lower income borrowers as that went bad.

Even with this, most calculations show that at today’s rates of mortgage default they still have adequate capital to squeak by – the cash flow from the remaining mortgages and their capital is pretty much adequate to pay off their lenders (those who hold their securities).

But if defaults increase their ‘cash flow net worth’ could turn negative; hence, it would currently not be prudent for the private sector to fund them.

Paulson has now moved funding to the Treasury where it should have been in the first place.

This removes the possibility of a liquidity crisis and allows the agencies to continue to meet their congressional charge of providing home mortgages for moderate and lower income borrowers at low rates.

There was no operational reason for Paulson to do more than that, only political reasons.

The agencies could then have continued to function as charged by Congress.

If there were any long-term cash flow deficiencies, they would be ‘absorbed’ by the Treasury as that would have meant some of the funding for new loans was in fact a Treasury expense as it transferred some funds to borrowers who defaulted.

Congress has always been free to change underwriting standards.

In fact, the program was all about easier underwriting for targeted borrowers.

If there were any ultimate losses, that was the cost of serving those borrowers.

To date there have been only profits, and the program has ‘cost’ the government nothing.

With Treasury funding and a review of underwriting standards the program could have continued as before, which it might still do.

The entire episode was a panic over a possible liquidity crisis due to the possibility of the Treasury not doing what it did, and what should have been done at inception.

I don’t think the Treasury getting 79.1% of the equity after making sure it took no losses and got a premium on any ‘investment’ it made served any non-political purpose.

There was no reason current equity holders could not have gotten the ‘leftovers’ after the government got its funds and a premium also determined by the government.

Equity IS the leftovers and could have been left alone. (It wouldn’t surprise me if some of the shareholders challenge this aspect of the move.)

Yes, holders of direct agency securities were ‘rescued’, but they were taking a below market rate to buy those securities due to the implied government backing and lines of credit to the government.

I don’t see it as a case of ‘market failure’ but instead poorly designed institutional structure with a major flaw that forced a change of structure.

It’s a failure of government to do it right the first time, probably due to politics, and much like the flaw in the eurozone financial architecture (no credible deposit insurance – another form of allowing the liability side of the banking system to be subject to market discipline), also due to politics.

As for compensation, that too was ultimately under the control of Congress, directly or indirectly.

Lastly, in the early 1970s, with only 215 million people, housing starts peaked at 2.6 million per year.

Today, with over 300 million people we consider 2 million starts ‘gangbusters’ and a ‘speculative boom’.

And in the early 1970s, all there were was bunch of passive S&Ls making home loans – no secondary markets, no agencies, etc.

Point is, we don’t need any of this ‘financial innovation’ to further the real economy.

Rather, the financial sector preys on they real sectors, in both financial terms and real terms via the massive brain drain from the real sectors to the financial sector.

At the macro level, we’d be better off without 90% or more of the financial sector.


[top]

Reuters: Nominal growth to support asset prices


[Skip to the end]

Nominal growth continues and will continue to support asset prices over time.

To the extent there is not a sufficient desire to spend income, the government has the options to either cut taxes to increase private spending and/or increase government spending with a bid for those idle resources.

Government deficits are slowly rising worldwide, as these ‘automatic stabilizers’ function to reduce slack and restore growth.

However, the widening income distribution also serves to move the output toward goods and services for those with spending power.

And none of the candidates seem to be directly addressing this fundamental issue.

World’s richest got even richer last year


by Joseph A. Giannone

NEW YORK (Reuters) The old saying holds true: The rich do get richer.

Even as world financial markets broke down last year, personal wealth around the world grew 5 percent to $109.5 trillion, according to a global wealth report released on Thursday by Boston Consulting Group.

It was the sixth consecutive year of expanding wealth. The fastest growth was among households in developing regions, such as China and the Gulf States and among families who were already rich.

That wealth also is increasingly concentrated among the richest.

The top 1 percent of all households owned 35 percent of the world’s wealth last year. Meanwhile, the top 0.001 percent, ultra-rich households holding at least $5 million in assets, commanded $21 trillion — a fifth of the world’s wealth.

The planet also continues to mint new millionaires rapidly. The biggest jumps in 2007 came from emerging countries in Asia and Latin America. Overall, the number of millionaire households grew 11 percent to 10.7 million last year.


[top]