Today Bernanke highlighted that which most of us know already - the health of US banks is THE key to a recovery. So far, all we can really say with accuracy is that measures taken Q4 prevented a melt down. But that’s it.
There are several proposals on the drawing board for the banks. One solution may be to model on past successes: the S&L and banking crisis of the 80's and 90's. Policies implemented then worked. In 1989 Congress provided funds to close insolvent S&L’s and created the RTC to work out remaining troubled assets. Likewise, the FDIC was able to close insolvent banks without direct taxpayer assistance. Both agencies bought capital certificates from problem institutions that the agencies thought viable. (The rest were junked) They paid for the certificates by issuing FSLIC or FDIC senior notes. As the banks recovered, the certificates were redeemed in exchange for the notes. We will see, but our guess is that some variation of this may be adopted.
Or, perhaps outright nationalization for some. Take them over and recapitalize with taxpayer money. Fire current management. Once restructured, taxpayers might actually make a killing. Can the government pull this off, do they have the talent? Not sure, but the FDIC has a pretty darn good history of seizing insolvent institutions.
And for the rest of us? The rest of the economy will heal itself and in spite of the so-called stimulus package. The "stimulus" package amounts to interference and is at best a wash. It is also a fraud. The more government interference in the US real sector, the longer the recovery. Next, voters must tell their respective legislators to stop this and that "bailout" (now the pilots want to line up). These are not bailouts, merely instruments to delay the inevitable. Naturally the auto sector comes to mind. Our initial response was "Drop Dead". We were right. These companies carry a fatal flaw. They will continue to try to panic Congress - if they go, it all goes. But of course. They’re looking out for their own necks.
So should we by denying them theirs.
Robert Craven
Tuesday, February 24, 2009
Wednesday, February 18, 2009
Goodbye
With this issue we move on to analyze the administration’s attempt to resuscitate the banking sector. We say goodbye to the "stimulus" package, understanding that we as a nation will receive little spark, little bang for the buck from this bill. Our readers know the details - much of the spending is delayed. Even for near-term spending the largest outlays amount to just writing checks to state governments. Finally, there is no evidence that gov’t spending creates a multiplier anyway, but plenty that it does not. What the bill did accomplish however is something on the order of $30,000 in new debt for every American household.
From Gary Becker, the 1992 Nobel laureate and professor of economics at the University of Chicago: "....political considerations are especially important in a spending package adopted quickly while the economy is reeling, and just after a popular president took office. Many Democrats saw the stimulus bill as a golden opportunity to enact spending items they've long desired. For this reason, various components of the package are unlikely to pass any reasonably stringent cost-benefit test." Indeed.
Despite a genuine emergency this bill is focused on dispensing goodies to Democrat interest groups; it is a fraud. Sen Charles Schumer (D, NY) called it "porky," an understatement if there ever was one. Our last blog under National Politics addressed the Democrat’s process; our title was "Shameful". Decent folk from the left have been betrayed. Their party has betrayed all of us.
Robert Craven
From Gary Becker, the 1992 Nobel laureate and professor of economics at the University of Chicago: "....political considerations are especially important in a spending package adopted quickly while the economy is reeling, and just after a popular president took office. Many Democrats saw the stimulus bill as a golden opportunity to enact spending items they've long desired. For this reason, various components of the package are unlikely to pass any reasonably stringent cost-benefit test." Indeed.
Despite a genuine emergency this bill is focused on dispensing goodies to Democrat interest groups; it is a fraud. Sen Charles Schumer (D, NY) called it "porky," an understatement if there ever was one. Our last blog under National Politics addressed the Democrat’s process; our title was "Shameful". Decent folk from the left have been betrayed. Their party has betrayed all of us.
Robert Craven
Monday, February 16, 2009
Stimulus Plan - An Overview
The administration claims that we might not recover at all if a trillion dollar (w/ interest) package is not passed. World market psychology responds always in the extreme, especially to scare tactics, making the president’s habit of talking down the economy a reckless one. If the credit crisis had not been addressed promptly then indeed we would have experienced a melt down, something we warned about early on. This - the real sector - is something different altogether. Consider that during the 1973-1975 and 1980-1982 periods the unemployment rate almost doubled (4.6-9.0 percent, 5.6-10.8 percent, respectively). Reagan inherited a jobless rate above 10% for goodness sake; we are at 7.6%.
There are many ways listed by us and other observers to spark this economy - cut the payroll tax, cut the corp tax, suspend the cap gains & dividend tax, expand our trade agreements, etc. Substantial tax cuts have obviously worked before (Kennedy - Johnson / Reagan). Yet we are perhaps stuck with the administration’s response. Roughly a third of that are "tax cuts". Most tax cuts aimed at individuals are will not benefit a single taxpayer until their taxes are filed in 2010 -- if there is any benefit at all. Other than a tax credit of $7,500 for families buying a plug-in hybrid vehicle, there is little that is clear, straightforward tax benefit, either for corporate or individual.
That leaves spending. Roughly 25% of this $ is targeted to be spent in fiscal 09, another 45% in 2010. You kidding me? Then 30% in 2011 or later, when even the more pessimistic forecasters expect the economy to be in full recovery.
OK, let’s look at implementation. Take the Energy Department. It will play a key role in the plan. The bill could pump as much as $170 billion into projects such as highways, Internet broadband and public-housing repairs. Of that some $40 billion will go to the Energy dept. The agency would be under the gun to swiftly hand out money to projects for example to modernize the electric grid, build electric cars and make homes and buildings more energy efficient. Yet the Energy dept has had limited experience pulling off big projects. Most of the department's $25 billion budget goes toward maintaining the nation's nuclear stockpile, cleaning up former weapons plants, and doing basic research. "The DOE is going to have to dramatically change how it does business if it hopes to push all this money out the door," says Karen Harbert, a former senior Energy Department official who now directs the U.S. Chamber of Commerce's lobbying efforts on energy issues. "They are going to need more people, more oversight and more freedom to waive regulations." And last month, the Government Accountability Office cited the agency's "inadequate management and oversight of its contractors" when it put the department on its list of agencies at "high risk" for waste, fraud, abuse and mismanagement.
Sound promising? Yet sadly, there are still those who believe that the gov’t can spend more efficiently than private sector. This leads us to the final section of this sketch: Even if implemented, will it work? There is no evidence that it will. It didn't work in Japan in the 1990s as we all know - 10 stimulus packages implemented over an eight year period failed to prevent the "lost decade".
It didn’t work in the US in the 30's. Henry Morgenthau, FDR’s Sect of the Treasury, testifying before the House Ways and Means Committee in May 1939: "We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot."
And our view is that it won’t work now. The Congressional Budget Office concludes that the cost of servicing the bill's nearly trillion-dollar debt will shrink the economy within a decade. Harvard economist Robert Barro, candidate for the 03 Nobel, calls the legislation "probably the worst bill that has been put forward since the 1930s." "I mean it's wasting a tremendous amount of money," he said in an interview with the Atlantic. "I don't think it will expand the economy. . . . I think it's garbage." Agreed.
Most disturbing however are the implications this legislation holds for future generations. We will take that up over the near term.
Robert Craven
There are many ways listed by us and other observers to spark this economy - cut the payroll tax, cut the corp tax, suspend the cap gains & dividend tax, expand our trade agreements, etc. Substantial tax cuts have obviously worked before (Kennedy - Johnson / Reagan). Yet we are perhaps stuck with the administration’s response. Roughly a third of that are "tax cuts". Most tax cuts aimed at individuals are will not benefit a single taxpayer until their taxes are filed in 2010 -- if there is any benefit at all. Other than a tax credit of $7,500 for families buying a plug-in hybrid vehicle, there is little that is clear, straightforward tax benefit, either for corporate or individual.
That leaves spending. Roughly 25% of this $ is targeted to be spent in fiscal 09, another 45% in 2010. You kidding me? Then 30% in 2011 or later, when even the more pessimistic forecasters expect the economy to be in full recovery.
OK, let’s look at implementation. Take the Energy Department. It will play a key role in the plan. The bill could pump as much as $170 billion into projects such as highways, Internet broadband and public-housing repairs. Of that some $40 billion will go to the Energy dept. The agency would be under the gun to swiftly hand out money to projects for example to modernize the electric grid, build electric cars and make homes and buildings more energy efficient. Yet the Energy dept has had limited experience pulling off big projects. Most of the department's $25 billion budget goes toward maintaining the nation's nuclear stockpile, cleaning up former weapons plants, and doing basic research. "The DOE is going to have to dramatically change how it does business if it hopes to push all this money out the door," says Karen Harbert, a former senior Energy Department official who now directs the U.S. Chamber of Commerce's lobbying efforts on energy issues. "They are going to need more people, more oversight and more freedom to waive regulations." And last month, the Government Accountability Office cited the agency's "inadequate management and oversight of its contractors" when it put the department on its list of agencies at "high risk" for waste, fraud, abuse and mismanagement.
Sound promising? Yet sadly, there are still those who believe that the gov’t can spend more efficiently than private sector. This leads us to the final section of this sketch: Even if implemented, will it work? There is no evidence that it will. It didn't work in Japan in the 1990s as we all know - 10 stimulus packages implemented over an eight year period failed to prevent the "lost decade".
It didn’t work in the US in the 30's. Henry Morgenthau, FDR’s Sect of the Treasury, testifying before the House Ways and Means Committee in May 1939: "We are spending more money than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. We have never made good on our promises. I say after eight years of this administration we have just as much unemployment as when we started and an enormous debt to boot."
And our view is that it won’t work now. The Congressional Budget Office concludes that the cost of servicing the bill's nearly trillion-dollar debt will shrink the economy within a decade. Harvard economist Robert Barro, candidate for the 03 Nobel, calls the legislation "probably the worst bill that has been put forward since the 1930s." "I mean it's wasting a tremendous amount of money," he said in an interview with the Atlantic. "I don't think it will expand the economy. . . . I think it's garbage." Agreed.
Most disturbing however are the implications this legislation holds for future generations. We will take that up over the near term.
Robert Craven
Tuesday, February 10, 2009
A Plan?
Geithner jumped the gun. It was a huge mistake. The financial stability "Plan"? Geithner is apparently not acquainted with the dictionary. Webster: plan - to devise procedures for achieving a given objective.
From Larry Kudlow: "Geithner would have been better off not giving a speech until he could put real meat on the bones. What he pulled Tuesday was a classic rookie move that will further erode the public’s trust in his capabilities. Following the controversy over his late payment of taxes, this bank-plan blunder could be another nail in his coffin."
We have provided a background on the "stimulus" package, along with our own REAL stimulus package. We have yet to receive the call that is was accepted. OK. So we waited this am for something of substance from the administration re the bank plan, a plan which is far more key for the near-term health of our economy than any stimulus anyway.
All the market wanted to know today is how the administration will be able to help banks with their so-called toxic assets (the result of the complicity between an accommodating wall st and the left’s refusal to reform F/F mortgage creation - ground zero) while not having taxpayers get ripped off in the process. Instead, Geithner failed 1) to say how much $ will be on offer to invest in the banks themselves and on what terms, and 2) how and on what terms a public-private "bad bank" will work and how it will price these toxic assets it intends to buy.
"Details": This bad bank will be seeded with Treasury capital but largely funded by private equity or hedge funds. Geithner spoke vaguely about what amounts to a public/private investment fund that will use OUR MONEY and provide financing for private investors, who are then supposed to buy toxic assets. These investors then would have to figure out the right value. If they are right, they could get all of the upside. They would also take some (we don’t know how much) of the downside.
As another part of the deal Geithner did note that the Fed’s facility to buy collateralized consumer loans will be expanded. That is a good thing for consumers.
Finally, there was little re the mortgage market aside from a promise of a detailed plan later.
A real problem for us is that the presentation was laced with partisan politics and a misguided ideology to boot. How can any of us respect this individual? He started out by attacking supply siders and the Bush tax cuts, adding that these have only added to our problem, "..only helped lead us to the crisis we face right now." Blaming the Bush tax cuts for the crisis is false, it is a partisan construct and a lie. Naturally our pals from the left, reciting the party line pretend to abhor tax cuts, relying less on scholarship than sound bites fed to them by the DNC. They may not recall, or pretend not to recall the super successful Kennedy-Johnson tax cuts of the 60's nor the successful Reagan tax cuts of the 80s. But Geithner knows better.
Robert Craven
From Larry Kudlow: "Geithner would have been better off not giving a speech until he could put real meat on the bones. What he pulled Tuesday was a classic rookie move that will further erode the public’s trust in his capabilities. Following the controversy over his late payment of taxes, this bank-plan blunder could be another nail in his coffin."
We have provided a background on the "stimulus" package, along with our own REAL stimulus package. We have yet to receive the call that is was accepted. OK. So we waited this am for something of substance from the administration re the bank plan, a plan which is far more key for the near-term health of our economy than any stimulus anyway.
All the market wanted to know today is how the administration will be able to help banks with their so-called toxic assets (the result of the complicity between an accommodating wall st and the left’s refusal to reform F/F mortgage creation - ground zero) while not having taxpayers get ripped off in the process. Instead, Geithner failed 1) to say how much $ will be on offer to invest in the banks themselves and on what terms, and 2) how and on what terms a public-private "bad bank" will work and how it will price these toxic assets it intends to buy.
"Details": This bad bank will be seeded with Treasury capital but largely funded by private equity or hedge funds. Geithner spoke vaguely about what amounts to a public/private investment fund that will use OUR MONEY and provide financing for private investors, who are then supposed to buy toxic assets. These investors then would have to figure out the right value. If they are right, they could get all of the upside. They would also take some (we don’t know how much) of the downside.
As another part of the deal Geithner did note that the Fed’s facility to buy collateralized consumer loans will be expanded. That is a good thing for consumers.
Finally, there was little re the mortgage market aside from a promise of a detailed plan later.
A real problem for us is that the presentation was laced with partisan politics and a misguided ideology to boot. How can any of us respect this individual? He started out by attacking supply siders and the Bush tax cuts, adding that these have only added to our problem, "..only helped lead us to the crisis we face right now." Blaming the Bush tax cuts for the crisis is false, it is a partisan construct and a lie. Naturally our pals from the left, reciting the party line pretend to abhor tax cuts, relying less on scholarship than sound bites fed to them by the DNC. They may not recall, or pretend not to recall the super successful Kennedy-Johnson tax cuts of the 60's nor the successful Reagan tax cuts of the 80s. But Geithner knows better.
Robert Craven
Tuesday, February 3, 2009
The Stimulus Plan - A Background
We have three theaters to monitor: 1) The Fed, 2) the Bank Rescue plan and 3) the Stimulus plan. The Fed runs the only game in town, for now (see earlier sketch). Nothing else is working. The administration’s Rescue plan is to be fleshed out in 10 days or so, armed with roughly half of the original $700 bln. We will follow that over the near term. Below is a guide to the Stimulus plan, taken up by the Senate this week.
There is ample evidence that tax cuts spark economic activity; there is very little that gov’t spending can do the same. Roosevelt’s programs did next to nothing to fetch the economy from the Great Depression. WWII did the trick. Some observers maintain that the government can increase its spending only by reducing private spending equivalently. From Rich Wagner at George Mason Univ, "Whether government finances its added spending by increasing taxes, by borrowing, or by inflating the currency, the added spending will be offset by reduced private spending. Furthermore, private spending is generally more efficient than the government spending that would replace it because people act more carefully when they spend their own money than when they spend other people's money."
Wagner may be correct but this is lost on Congress. Tax cuts amount to only one third (1/3) of the package ($500 credit for individuals/$1000 for couples). The balance is direct gov’t spending, or transfers. The CBO and the Joint Committee on Taxation have calculated that only $170 billion, or about one-fifth of the $816 billion package will be spent in fiscal 2009. An additional $356 billion will be spent in 2010. That leaves $290 billion to be spent when even the most pessimistic forecasters think the economy will be in recovery mode. Some of the longer-term investment projects proposed may be quite worthy; some are not. Either way, they are not stimulus. What the House Democrats have done is write down every single item on their wish list, append dollar amounts next to the items seemingly at random, and call it "stimulus." Nancy Pelosi was on TV recently justifying the "stimulus." "How," asks the reporter from CBS, "does $335 million in STD prevention stimulate the economy?"
Stimulus has to stimulate, right? Yet consider education. Of the $140 billion spending on education, some may move rather quickly, say the $13 billion over two years for Title I schools and for special education under the Individuals With Disabilities Education Act. Maybe. But also included are programs that even under the most optimistic timetable will take longer to complete, like $20 billion for school renovations. These would provide ZERO near-term help for the economy. Similar scrutiny could be trained on health care and especially on alternative energy programs. A large chunk of health care spending would not start until 2012 or later.
How may Congress best provide the spark? Well, try cutting the U.S. corporate tax rate -- at 35%, among the highest of all industrialized nations -- in half. Suspend the capital gains tax for a year to provide the incentive for new investment. Any fool knows this would work. Postponing the scheduled increase in the tax on dividends and capital gains would raise share prices, leading to increased consumer spending and, by lowering the cost of capital, more business investment.
Or, if Congress insists on spending, make it rapid, and, on something that needs to be done. How about including higher defense outlays, including replacing and repairing supplies and equipment, needed after five years of fighting? The military can increase its level of procurement very rapidly. Yet the proposed spending plan includes less than $5 billion for defense, only about one-half of 1 percent of the total package.
Robert Craven
There is ample evidence that tax cuts spark economic activity; there is very little that gov’t spending can do the same. Roosevelt’s programs did next to nothing to fetch the economy from the Great Depression. WWII did the trick. Some observers maintain that the government can increase its spending only by reducing private spending equivalently. From Rich Wagner at George Mason Univ, "Whether government finances its added spending by increasing taxes, by borrowing, or by inflating the currency, the added spending will be offset by reduced private spending. Furthermore, private spending is generally more efficient than the government spending that would replace it because people act more carefully when they spend their own money than when they spend other people's money."
Wagner may be correct but this is lost on Congress. Tax cuts amount to only one third (1/3) of the package ($500 credit for individuals/$1000 for couples). The balance is direct gov’t spending, or transfers. The CBO and the Joint Committee on Taxation have calculated that only $170 billion, or about one-fifth of the $816 billion package will be spent in fiscal 2009. An additional $356 billion will be spent in 2010. That leaves $290 billion to be spent when even the most pessimistic forecasters think the economy will be in recovery mode. Some of the longer-term investment projects proposed may be quite worthy; some are not. Either way, they are not stimulus. What the House Democrats have done is write down every single item on their wish list, append dollar amounts next to the items seemingly at random, and call it "stimulus." Nancy Pelosi was on TV recently justifying the "stimulus." "How," asks the reporter from CBS, "does $335 million in STD prevention stimulate the economy?"
Stimulus has to stimulate, right? Yet consider education. Of the $140 billion spending on education, some may move rather quickly, say the $13 billion over two years for Title I schools and for special education under the Individuals With Disabilities Education Act. Maybe. But also included are programs that even under the most optimistic timetable will take longer to complete, like $20 billion for school renovations. These would provide ZERO near-term help for the economy. Similar scrutiny could be trained on health care and especially on alternative energy programs. A large chunk of health care spending would not start until 2012 or later.
How may Congress best provide the spark? Well, try cutting the U.S. corporate tax rate -- at 35%, among the highest of all industrialized nations -- in half. Suspend the capital gains tax for a year to provide the incentive for new investment. Any fool knows this would work. Postponing the scheduled increase in the tax on dividends and capital gains would raise share prices, leading to increased consumer spending and, by lowering the cost of capital, more business investment.
Or, if Congress insists on spending, make it rapid, and, on something that needs to be done. How about including higher defense outlays, including replacing and repairing supplies and equipment, needed after five years of fighting? The military can increase its level of procurement very rapidly. Yet the proposed spending plan includes less than $5 billion for defense, only about one-half of 1 percent of the total package.
Robert Craven
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