Category Archives: Politics

Remove Government Intervention And Let’s Get On With It!

After being beaten down by the inevitable regulatory stranglehold that the government imposes on anyone attempting to do anything disruptive and creative that might revolutionize the banking industry, and probably any other, I am inspired to spew my general contempt for government intervention in anything. My apologies in advance.

Through decades of research, American neurobiologist James McGaugh discovered that as humans learn information and encounter new experiences, the part of the brain known a the amygdala plays a key role in retention.  The amygadala is activated primarily by stress hormones and other emotionally arousing stimuli.  Memory consolidation, or the forming of long term memories, is typically modulated very strongly by the amygdala.  Put simply, events that invoke significant amounts of emotion make a bigger imprint on one’s brain.

Emotion, while an important element in man’s array of mental tools, can unfortunately triumph over reason in crucial matters.  Excessive anger can lead to violent confrontations.  Heartbreak can lead a person to do drastic things in order to woo back a lost lover.  In the context of simple economic reasoning, today’s intellectual establishment often disregards common sense in favor of emotional-tinged policy proposals that rely on feelings of jealously, envy, and blind patriotism for validation rather than logical deduction.  “Eat the rich” schemes such as progressive taxation and income redistribution are used by leftists who style themselves as champions of the poor.  Plucking on the emotional strings of envy makes it easier to arouse widespread support for economic intervention via the state.

In the aftermath of the financial crisis of 2008, economic growth predictably slowed down in most industrialized countries.  Many commentators on the political left have grasped onto this opportunity to point to the vast amount of income inequality which exists in the United States and reason that it played a part in causing the crash.  This argument is typically paired with a proposal to raise taxes on the rich to balance out societal incomes.  It is alleged that having government brutes step in order to play the role of Robin Hood is the best and most justified way to alleviate income inequality.

Presently, income inequality in America is at its highest peak in decades.  In 2011, a study by the Congressional Budget Office concluded that after tax income grew by 275% for the top 1% of income earners between the years of 1979 and 2007.  The top-fifth of the U.S. population saw a 10 percentage point increase in their share of total income in the same period while all other groups saw their share decrease by 2 to 3 percentage points.  The data undoubtedly shows that income inequality has been increasing over the past few decades.  New York Times columnist and economist Paul Krugman has latched onto the evidence and is suggesting that rising income inequality plays a part in causing recessions.

Economist Joseph Stiglitz, who recently wrote the book “The Price of Inequality,” has argued that without a fair share of the national income, the middle class is unable to spend enough to keep aggregate demand elevated.  Both economists see income inequality as a danger to the prosperity of a nation.   Such a message is appealing to the greater public because it plays on their perceptions that the world is unfair.  It almost seems intuitive to think that the rich posses too much wealth or that a prosperous society is one in which income is more equalized.  Comfortableness in these beliefs paves the way for income redistribution efforts by the ever-scheming political class.

With income inequality a hot topic of debate going into the fifth year of the biggest economic downturn since the Great Depression, the question remains: does income inequality have a negative impact on society as Stiglitz and Krugman suggest?  And is growing income inequality an inherit part of capitalism?

First and foremost, the idea of equality for man in physical attributes, mental fitness, and material security  is essentially anti-human.  The most appealing aspect of mankind is that every person varies from one another in a myriad of different ways.  Some are better athletes, some are quicker studies, some have outer features that make them generally more attractive.  It follows that some men and women will be more apt at producing or better attuned to the demands of the marketplace.  They will have higher incomes by virtue of their own entrepreneurship or capacity to produce.  So, in a sense, income inequality is a fact of the free market.

But it is the possibility of inequality and the ability to achieve a higher income that makes capitalism work.  Punishing those who excel at making consumers better off punishes the very market mechanism that leads to better living standards overall.  In a free society, income inequality is not good or bad; it is part of the functioning order.  Any attempt to make incomes more equal through state measures is unjustified plunder of the rightful earners of wealth.

But what of the inequality in income that exists in today’s state-corporatist economy?  Did the 1% acquire its wealth solely through hard work?  The answer is hardly in many cases.  Though there are some innovative businessmen who became rich by providing new and better products, the sharp increase in income inequality over the past two decades is due to an economic phenomenon outside of normal market operations.  Krugman and Stiglitz rightfully point out that the greatest periods of income inequality in the United States were the late 1920s and the period since the mid-1990s.  What they fail to mention is that both these periods were not defined by capitalism run amok but by massive credit expansion.

This expansion in credit, aided and abetted by the Federal Reserve’s loose money policy, is the real culprit behind vast income inequality.  Economist George Reisman explains:

“the new and additional funds created in credit expansion show up very soon in the financial markets, where they drive up the prices of securities, above all, common stocks. The owners of common stock are preponderantly wealthy individuals, who now find themselves the beneficiaries of substantial capital gains. These gains are the greater the larger and more prolonged the credit expansion is and the higher it drives the prices of shares. In the process of new and additional money pouring into the financial markets, investment bankers and stock speculators are in a position to reap especially great gains.”

Since it’s so important, the main point just made needs to be repeated: credit expansion creates an artificial economic inequality by showing up in the stock market and driving up stock prices.

Money acts as a medium of exchange but is not neutral in its effects on receivership.  Those first receivers are able to bid up the price of goods before any other market participants.  As the newly created money flows into the economy, the general price level rises to reflect the new volume of currency.  In practice, credit expansion which brings about a reduction in interest rates also increases the amount of time businesses can go without making deductions for depreciation on their balance sheets as they purchase capital goods.  Because investment tends to go toward durable goods during periods of credit expansion, there is less funds left over to devote to labor.  Profits end up being recorded while wages sag behind.  Since credit expansion and inflationary policy go hand in hand in distorting relative prices and must eventually come to an end, the bust that occurs reveals wasteful investment.  Recession sets in shortly thereafter.

Printed money is not the same as accumulated savings which would otherwise fund sustainable lines of investment.  And it is only through adding to the economy’s pool of real savings that productive capacity is able to increase in the long term.  The wealthy have a higher propensity to save precisely because they have a higher income.  It is through their savings that new business ventures are funded and the economy is able to grow without the faux profits from government-enabled credit expansion.  This is why raising taxes on the rich is a backwards solution to income inequality.  Taxation only funnels money out of the productive, private sector and into the public sector which focuses on spending to meet political ends rather than consumer satisfaction.  All government spending boils down to wasted capitalThe truth is that capital is always scarce; there is never enough of it.

Pointing out this fact is by no means corporate shilling.  Many corporations and well connected businesses lobby for tax increases in order to burden their competitors.  Currently in California, Governor Jerry Brown is campaigning for a ballot measure which would raise taxes on the state’s richest residents.  According to the Wall Street Journal, companies such as Disney, NBC, Warner Bros., Viacom, CBS, and Sony have each already pitched in $100,000 for the initiative.  Various energy companies are financially supporting the ballot measure to make sure that a 25% tax on natural gas and oil extraction isn’t next.  As the scope of government becomes all the more encompassing, big business starts seeing profit opportunity in using its forceful authority to better its own competitive position.  In their unceasing tirades over income inequality, Stiglitz and Krugman recognize the trouble rent-seeking poses to competitive markets yet both reason that the problem doesn’t lie with the state but with those politicians and bureaucrats who occupy its enforcement offices.

To put it bluntly, this notion isn’t just juvenile; it rests on the fallacious assumption that government is staffed by only the most well-meaning of individuals in society.  As history and reason dictate however, good souls are not attracted to positions of absolute power.  The state, by Max Weber’s definition, holds the monopoly over force in a given area.  Practically every action taken by state officials introduces violence or the spoils from violence into an otherwise free society.  It follows that only those seeking to use state authority for their own benefit naturally gravitate toward politics.

Krugman and Stiglitz believe, as most do, that Americans should be born with the opportunity to succeed.  To create an environment of fairness, they propose a variety of government policies so that even the most impoverished individuals will have a shot at the American Dream.  Their arguments rest largely on emotion instead of reason and are aimed at inspiring reactionary protest.  What they fail to see (or refuse to acknowledge) is that the free market provides the best opportunities for someone to make a decent living by providing goods and services.

In a totally uninhibited market, profits come only to those who satisfy consumers more than their competition.  Contrary to Stiglitz’s suggestion, Henry Ford wasn’t a great businessman because he paid his workers a high wage.  He made his fortune by streamlining the process from which cars were built in order to sell them at a lower price.  The employees at Ford were able to increase their productivity, and thus wages, through the previous accumulation of capital and investment in machinery.  Ford’s massive profits didn’t last long however as domestic and foreign competition copied the mass production model and were able to attract market share of their own.  The greater the amount of cars on the market meant lower prices for all consumers in the end.

Again, in a truly free market the only way to maintain a rising income is to continually produce at a more efficient and more innovative rate.  In an economy plagued by the heavy hand of government, the market becomes rigged in favor of those connected to the ruling establishment.  Competition is decreased by the rising cost of adhering to regulations, innovation stagnates, and more income flows to the top.  Through central banking and credit expansion, profits are able to be recorded by the financial industry and first receivers of money before the rest of the population; which in turn leads to further evidence of income inequality.

No matter how you slice it, taxation is theft It is indiscernible from highway robbery and devoid of any moral justification.  Income inequality is a problem not because the government isn’t doing enough to combat it but because politicians and bureaucrats never tire of intervening into the private affairs of society.

With government intervention present in practically all market transactions, the solution to income inequality is to remove the intervention; not empower the state further by increasing the amount of funds at its disposal.


I Gotta Wear Shades!

My partner Tim, hammered me today on a recent post where I thought I had been sharing my optimistic view of the future, when in fact I apparently only underscored the notion that if this is optimism, who needs pessimism.

So, I thought that maybe I should look into the  Milken Institute‘s annual Global Conference, which was held this week in Los Angeles and was attended by many of the world’s most influential investors, economists, CEOs, innovators and policymakers, who met to discuss some of the most imminent and dire problems facing America and the world.

These same people were asked what makes them most optimistic about the America today. There was a predictably wide-range of responses, but it certainly was all positive.  

Here’s what they said:

Niall Ferguson

Professor, Harvard University

“The thing that makes me optimistic about the United States is technology and the ability of the United States still to be at the cutting edge. But of course that is quite geographically localized. That is a Silicon Valley story.”

T. Boone Pickens

Founder, BP Capital

 “It’s energy. I mean, today the United States has the cheapest energy in the world. We got the cheapest oil. We got the cheapest gas. And we got the cheapest gasoline.”

See? If it wasn’t for me, you wouldn’t know Mitch Daniels from Mitch Williams. 

Mitch Daniels

Governor, Indiana

 “The resilience of the American economy over time. We still give birth to more new businesses than other places [and] that we still have a core of innovation.”

Raghuram Rajan

Professor, University of Chicago

 “I think the strength of corporations [and] how much cleaning up they have done of their balance sheets, their work force and improving productivity is a hidden upside for the U.S. economy. If we can realize that over the years to come, I think there is substantial potential for growth.”

James Barth

Senior Finance Fellow, Milken Institute

 “I would agree (with Rajan) but I think that strength depends upon eliminating a lot of uncertainty. I think that’s the biggest barrier right now to the growth and after all it is an election year and one would expect a lot of uncertainty. There’s much more than there needs to be.”

Richard Fisher

Dallas Federal Reserve President

 “We are growing our population. We have an enormous Hispanic population that’s coming in. We are still the magnet for anybody that wants to work hard in the world. And we create, and we innovate, and we are masters of creative destruction. As long as government won’t interfere with that adjustment, and let the American genius go to work, we’ll win.”

Charles Murray

Author, Coming Apart: The State of White America

 The Tea Party to me is certainly as originally developed was this utterly spontaneous movement and all of my connections were that these were not racist, these were not Homophobes, all those social issues were off the table. They were talking about free enterprise, opportunity, liberty in very traditional ways. And that that much energy could be sparked with no direction just welled up is for me…wonderful. That’s my source of optimism.”

But, when they were asked if there are any future events that might impact their outlook, they all said  that the one caveat to their answer, was the hindrance of political dysfunction in Washington and its negative drag on prosperity in America.

What? You don’t feel good about Technology? You don’t live in magical Silicon Valley, where the wealth just trickles down like an endless river? You don’t love that cheap gas, which is on its way to a $4 national average? All those new businesses and that core of innovation got you down? You don’t believe in the strength of those corporations you love? Come on now, just look at how strong and powerful Goldman-Sachs has become. I mean we’re talking insane productivity and ridiculously clean balance sheets. How can you not love that?

And, the population growth? The Hispanic population doubles every year. Making babies, man. Creating and innovating. That’s where its at. What about letting that American Genius get back to work. That’s happening, right? All that energy sparked with no direction, welling up everywhere. And gosh, that Tea Party WAS a thing of beauty. And, no Homophobes. Can’t beat that with a stick.

OK. I’m just being silly now, because finally they did actually say, “There’s always that pesky Iranian problem and our probable backing of Israel’s inevitable bombing of that country, and the resulting spike in global oil prices, along with the coming European breakup and flight from the Eurozone, Germany’s probable rise to supremacy in the wake of the collapse, global warming and the probability of a double-dip recession here at home, which will exacerbate the current unemployment problem and drive civil unrest, and the unchecked corruption of Wall Street bankers and the Congress”.

But all in all, according to these brilliant thinkers, the future looks pretty bright.

 


New Tax Burden: Pay For The Rich!

 

The Brookings Institution has analyzed the new tax system overhaul that Mitt Romney has proposed and concluded that it would give big tax cuts to high-income households and increase the tax burden for middle- and lower-income households

Because Romney has yet to propose an actual tax plan, the researchers modeled a revenue-neutral income tax change that incorporates some of Mr. Romney’s proposals, which include lowering marginal tax rates, eliminating both the alternative minimum tax and taxation of investment income of most taxpayers, eliminating the estate tax and repealing the additional high-income taxes passed with the Affordable Care Act.

All by themselves, these cuts to personal income and estate taxes would reduce total tax revenue by $360 billion in 2015 relative to what is expected of current policy, according to the Brookings scholars.

Mr. Romney has said that his plan will include offsets to the revenue losses from his proposed lower tax rates, although he has not specified what kinds of policies would offset those cuts (that is, how he would come up with an additional $360 billion to offset the lost $360 billion in tax revenue).

Ann thinks this is funny.

The Brookings analysis assumes that those offsets would be achieved chiefly through reducing or altogether eliminating other tax breaks — like the mortgage interest tax deduction or the child tax credit — and does not factor in spending cuts as a means to offset lost tax revenue.

But even if all possible loopholes for households earning more than $200,000 were eliminated, this group would still be a net gainer under Mr. Romney’s plan, since the marginal tax rate decreases and other changes lop off so much of its tax burden.

As a result, middle- and lower-income households — the 95 percent of the population earning less than about $200,000 annually — would have to make up the difference.

“It is not possible to design a revenue-neutral plan that does not reduce average tax burdens and the share of taxes paid by high-income taxpayers under the conditions described above, even when we try to make the plan as progressive as possible,” write the study’s authors, Samuel Brown, William Gale and Adam Looney.

If the elimination of tax breaks starts with those affecting the top earners, the authors estimate, those earning under $200,000 a year will see their cash income fall by about 1.2 percent, as shown in the chart below. The very top earners — those earning more than $1 million a year — will by contrast see their cash income rise by 4.1 percent.

This analysis assumes that base-broadening -- eliminate of tax expenditures -- occurs “starting at the top” so that tax preferences are reduced or eliminated first for high-income taxpayers in order to make the resulting plan as progressive as possible.

This analysis assumes that base-broadening — elimination of tax expenditures — occurs “starting at the top” so that tax preferences are reduced or eliminated first for high-income taxpayers to make the resulting plan as progressive as possible.

Mitt Romney looked out the window as he chatted with the traveling press corps aboard his campaign's charter plane on Monday.

And still, all of the guys in the top 2-3% make out, while the rest of us get screwed as usual. Don’t vote for Mitt. Please.

 


The Great Bailout Debate.

The great bailout debate.

Tim Geithner, claims that bank bailouts were a critical part of getting the economy running again, while Neil Barofsky, says the Obama administration should have spent more time bailing out underwater homeowners who were crushed by the housing bust. Who’s right?

Well, like it or not, the banks had to be bailed out, the same way you’d bail out electrical utilities rather than let everyone go without electricity. They’re just too important to the rest of the economy. They clearly should have been more punitive but frankly, given the speed at which the tide rose back in the closing chapter of the Bush administration, there wasn’t time to structure anything. Morally right or wrong, we needed to spend a ton of money to rescue the banks, and stop the bleeding. Did they do what anyone would do if someone handed over a bag of money? Of course they did.

On the other hand, Mr. Barofsky makes a good point: consumer debt overhang has been hobbling the recovery ever since 2008, and it’s outrageous that so little money was spent rescuing consumers right along with the bankers. Obama should have pushed a lot harder for “cram down” legislation; Fannie and Freddie should have been enlisted to rewrite mortgages; money should have been airlifted into consumer pockets, either to spend or to pay down debt; and schemes should have been set up for homeowners who were too far gone, that allowed them to rent their homes back from the banks that foreclosed on them. In fact, my earlier proposal was and still is, force the banks to re-finance all mortgages at current assessed market values without owner qualification.

So, they are both right, but neither of them can get us out of this mess. The only way we are going to start this thing up again is for the US Government to force banks to open their credit spigots, ignore strategic mortgage defaults, start loaning money to sub-700’s again, and re-write all of the existing mortgages, essentially marking them to market (lovely irony here).

And we need to do this before Europe crashes and burns next year. How? We have leverage. What do the banks want more than anything? Where is their greatest source of potential profit? Investment banking. We make a devil’s bargain. The banks come to the credit and mortgage table, and the Government lets them continue to operate as a single entity, with commercial and investment combined.

We stop talking about Glass-Steagall, and we stop threatening to regulate derivatives. The banks open their checkbooks to small business, and they re-write all of the underwater mortgages. That stops the bleeding in housing, jump-starts the small-ball economy, and boosts consumer confidence.

Short of such a drastic measure, we head into 2013, sailing a doomed ship following a doomed course on a fatal journey into the abyss. 


Liars, Gamblers, and Suckers.

I just finished reading a piece by Goldman Sachs urging investors to charge into the housing market.

Here is what they said back in March of 2012:

Headline reads: The housing recovery will have to wait a little bit longer. Goldman Sachs just pushed back its estimated date of the bottom.

In December 2011 G-Sax published a new house price model for 147 metro areas that pointed to a decline of around 3% from mid-2011 through mid-2012 before stabilizing in the year thereafter. Since publication of the model–which was based on Case-Shiller house price data up to 2011Q2–the decline in house prices has reaccelerated slightly. In today’s (February 29) comment they updated their forecast in light of this and also used the opportunity to make a couple of technical changes to the model.

They now project that house prices will decline by around 3% from 2011Q3 until 2012Q3, and by an additional 1% in the year thereafter. As a result, the expected bottom in house prices is pushed out from end-2012 to mid-2013. Although the house price outlook has weakened very slightly, they go on to say that they believe that the house price bottom remains in sight.

That was in March, after predicting that we would hit the “bottom” in 3Q12. Here is what they said on Monday of this week. Headline: Goldman Sachs predicting ‘strong’ U.S. housing recovery. Construction up, existing home sale supply down.

Article goes on to say that U.S. home builders are an attractive investment as the housing market starts a “strong” recovery that may drive a surge in new-home sales, Goldman Sachs Group Inc. said in a report Monday.

Housing has a “long list of positives,” including rising prices, job growth, supportive government policies and a decline in the so-called shadow inventory of homes, Goldman Sachs analysts Joshua Pollard and Anto Savarirajan wrote in a note to clients. They raised their rating on the homebuilding industry to attractive from neutral.

As a gentle reminder, these are the same people (different suits) who urged investors to buy Collateral Default Obligations and Credit Default Swaps back in 2007. Anything sound familiar here?

For those not punch-drunk on Wall Street’s propaganda, here is what is actually going to happen:

Housing will not hit bottom until somewhere north of 2015. Why? Banks are holding a ton of shadow inventory that they dare not release to the market for fear of creating insane downward pressure on pricing. In addition, there are still tons (millions) of homes crawling their way through the foreclosure process. Are there pockets of good news? Of course. Just like the fact that not everybody lost their asses in the real estate or stock markets since 2008, there are real estate markets like Pebble Beach and San Francisco and Long Island that are still holding prices up. But, the real real estate market is in the crapper and will stay that way or get worse in the coming months.

Until the November U.S. presidential elections of this year, there will be a deceptive calm before the storm, as every major economy plagued with severe fiscal problems continues to kick the can down the road. Come 2013, there will be a convergence of several major negative metrics.

These include the worsening Eurozone debt crisis, leading to the exit of Greece from the monetary union. China will face a hard economic landing, and the United States — its economic growth and job creation performance already anemic — will face a very high probability of a renewed economic recession, particularly in a political environment favoring austerity.

In addition to those economic factors, there is one other element in the turbulent brew that comprises my prediction of a perfect economic storm in 2013: Iran. If the Iranian nuclear issue is not resolved peacefully, which at present seems highly doubtful, there is a high probability of a military conflict occurring in the region, which will add further strains upon the global economy, particularly if oil prices spike to highly elevated levels.

I am not alone in this view. A guy who got it right the last time has the exact same predictions for 2013. Nouriel Roubini, or Dr. Doom, has issued a characteristically gloom-laden warning about likely economic trends for 2013. Unlike the pontificators among the politicians, Wall Street glad-handlers and central bankers, Roubini’s analysis of future economic trends does have the virtue of reasoned logic as opposed to overly-optimistic rhetoric. Nouriel Roubini’s record in predicting future trends impacting the global economy and financial system has been inherently more reliable than the forecasts offered by the U.S. Federal Reserve, as well as by the policymakers in America and Europe.

He emerged in the months prior to the global financial and economic crisis that erupted in the fall of 2008, warning of a deadly convergence of troubling economic and financial dangers.

Roubini’s prediction that the contraction in housing prices in the U.S. housing market would metastasize into a devastating financial hurricane seemed so incomprehensively dire, the pundits and eternal optimists on Wall Street wrote him off. Was it because they insist on driving markets in spite of the realities before them? Do they care, as long as they are betting on the right side of the dice? Don’t forget, those traders who touted CDOs and CDSs were making a killing on insuring against their performance.

Will you listen to Goldman Sachs or Nouriel Roubini?

 

 

 


Euro Leaders Ready For Another Vacation.

Europe is on the brink again. The region’s debt crisis flared today, as fears intensified that Spain would be next in line for a government bailout.

 

A recession is deepening in Spain, the fourth-largest economy that uses the euro currency, and a growing number of its regional governments are seeking financial lifelines to make ends meet. The interest rate on Spanish government bonds soared in a sign of waning market confidence in the country’s ability to pay off its debts.

 The prospect of bailing out Spain is worrisome for Europe because the potential cost far exceeds what’s available in existing emergency funds. Financial markets are also growing uneasy about Italy, another major European economy with large debts and a feeble economy.

Stocks today,  fell sharply across Europe and around the world. The euro slipped just below $1.21 against the dollar, its lowest reading since June 2010. The interest rate on its 10-year bond hit 7.56 percent in the morning, its highest level since Spain joined the euro in 1999.

Spain’s central bank said today that the economy shrank by 0.4 percent during the second quarter, compared with the previous three months. The government predicts the economy won’t return to growth until 2014 as new austerity measures hurt consumers and businesses.

On top of that, Spain is facing new costs as a growing number of regional governments ask federal authorities for assistance. The eastern region of Valencia revealed Friday it would need a bailout from the central Madrid government. Over the weekend, the southern region of Murcia said it may also need help.

Spain has already required an emergency loan package of up to €100 billion ($121 billion) to bail out its banks. But that aid hasn’t quelled markets because the government is ultimately liable to repay the money. It had been hoped that responsibility for repayments would shift from the government to the banks. But that shift is a long way off — a pan-European banking authority would have to be created first and that could be years away.

Yet it is far more than Spain’s struggle that has unnerved markets.

Greece is still struggling with a mountain of debt and international creditors will visit the country tomorrow to check on the country’s attempts to reform its economy. There is concern that officials from the European Commission, European Central Bank and the International Monetary Fund will find that Greece is not living up to the terms of its bailouts and could withhold future funds.

Italy has also been caught up in fears that it may be pushed into asking for aid. Italy’s economy is stagnating and markets are worried that it may soon not be able to maintain its debt burden of €1.9 trillion ($2.32 trillion) — the biggest in the Eurozone after Greece. Interest rates on Italy’s government bonds rose steeply Monday while its stock market dropped 2.76 percent.

The collapse in stock prices in Italy and Spain prompted regulators to introduce temporary bans on short-selling — a practice where traders sell stocks they don’t already own in the hope they can make a profit if the stock falls in price.

Pascal Lamy, director of the World Trade Organization, said after a meeting with French President Francois Holland that the situation in Europe is ‘‘difficult, very difficult, very difficult, very difficult.’’

Ireland, Greece and Portugal have already taken bailout loans after they could no longer afford to borrow on bond markets. Yet those countries are tiny compared to Italy and Spain, the third- and fourth-largest economies in the Eurozone. Analysts say a full bailout for both could strain the other Eurozone countries’ financial resources.

Spain has already received a commitment of up to €100 billion from other Eurozone countries to bail out its banks, which suffered heavy losses from bad real estate loans. Eurozone finance ministers signed off on the aid Friday and said €30 billion would be made available right away. But that incremental step cuts little ice with investors. If Spain’s borrowing rates continue to rise, the government may end up being locked out of international markets and be forced to seek a financial rescue.

 ‘‘Events since Friday have been a clear wake-up call to anyone who thought that the Spanish bank rescue package had bought a calm summer for the euro crisis,’’ analyst Carsten Brzeski said.

The Eurozone’s bailout fund, the European Stability Mechanism, has only €500 billion in lending power, with €100 billion potentially committed to Greece. Italy and Spain together have debt burdens of around €2.5 trillion. And the ESM hasn’t yet been ratified by member states plus Eurozone governments have made it clear they won’t put more money into the pot.

 

That once again pushes the European Central Bank into the frontline against the crisis.

On Saturday, Spain’s Foreign Minister José Manuel García Margallo pleaded for help, saying that only the European Central Bank could halt the panic. But the ECB has shown little willingness to restart its program to purchase the government bonds of financially troubled countries. The central bank has already bought more than €200 billion in bonds since May 2010, with little lasting impact on the crisis.

The central bank has also cut its benchmark interest rates to a record low of 0.75 percent in the hope of kick-starting lending. Yet many economists question how much stimulus this provides as the rates are already very low — and no one wants to borrow anyway.

There has been speculation the ECB could eventually have to follow the Bank of England and the U.S. Federal Reserve and embark on a program of ‘‘quantitative easing’’ — buying up financial assets across the Eurozone to increase the supply of money. That could assist governments by driving down borrowing costs as well.

But so-called QE is fraught with potential legal trouble for the ECB — a European treaty forbids it from helping governments borrow.

In the case of Greece, the country is dependent on foreign bailout loans to pay its bills. A cutoff of aid over its inability to meet the loan conditions would leave it without any source of financing — and could push it to exit the euro so it can print its own money to cover its debts. Really?

 

Germany’s economy minister, Phillip Roesler, said the prospect of Greece leaving the euro was now so familiar it had ‘‘lost its horror’’ and that he was skeptical Athens would meet conditions for continuing rescue money.

The deteriorating situation follows a summit June 28-29 that many hoped would convince markets political leaders were getting a handle on things. The summit agreed on easier access to bailout money and to set up a single banking regulator that could take the burden of bank bailouts off national governments. Yet many of those changes will take months or years to introduce — and there has been no increase in bailout money.

It is an echo of a similar summit in July 2011, when leaders agreed on a second bailout and debt reduction for Greece, only to see borrowing costs spike dramatically as leaders headed off for August vacations.

Stephen Lewis, chief economist at Monument Securites Ltd, said that ‘‘events are following a pattern often repeated in the course of the Eurozone’s troubles, in which the powers-that-be hail progress only to see confidence, almost instantaneously, plumb fresh depths.’’

Must be time for another vacation, I guess.


EU Regulators Focus On Desk Chairs While The Titanic Sinks.

I love it. Europe is quickly falling into the financial crapper of a lifetime, and instead of focusing on ways to revive their economies and develop a central governing body, they are focused on things like this:

 

EU regulators, investigating Google for alleged anti-competitive behavior, want the internet search giant to offer concessions that cover all platforms, including computers, tablets and mobile devices, two people familiar with the issue said on Friday. What concessions?

If Google is not able to provide satisfactory concessions, it will face charges and potentially severe fines, the EU’s competition commissioner, Joaquin Almunia, has said.

Almunia wants remedies for all computing devices that have access to the Internet and provide a search capability, one of the people said. Remedies? For what? Where’s the damages?

Earlier this month, the world’s most popular search engine proposed concessions in a bid to settle an 18-month long investigation fueled by complaints from rivals including Microsoft. Neither Google nor the EU have said what those concessions were. Ahh, yes.

The European Commission is now examining the offer. The EU watchdog has said Google may unfairly favor other Google services over rivals and may have copied material from other websites, such as travel and restaurant reviews without permission. Then sue them.

It is also concerned that Google’s advertising deals may exclude third parties from concluding similar deals with rivals while contractual restrictions on software developers may prevent advertisers from transferring their online campaigns to rival search engines. And, what? Google should be punished for making a good deal with advertisers? These people ARE crazy.

This smells to me like a complete red herring and a way for Europe to extort some sheckles from the Googs to help with their sovereign defaults. Don’t give in, Googs. This one will go away.

 

 


Housing Bust Is Over! Not So Fast.

The housing experts, Ben Bernanke, the Obama administration, and the Wall Street Journal all want us to believe that the housing market has turned—at last.

 

The next thing out of his mouth will be Quantitative Easing, Round 3.

Headlines like this are in the news this week: “The U.S. finally has moved beyond attention-grabbing predictions from housing “experts” that housing is bottoming. The numbers are now convincing.”

And this: “Nearly seven years after the housing bubble burst, most indexes of house prices are bending up. “We finally saw some rising home prices,” S&P’s David Blitzer said a few weeks ago as he reported the first monthly increase in the slow-moving S&P/Case-Shiller house-price data after seven months of declines.”

Housing starts rose 6.9 percent to a 760,000 annual pace after a revised 711,000 rate in May that was faster than initially estimated, the Commerce Department reported today in Washington. The median forecast of 79 economists surveyed by Bloomberg News called for a 745,000 rate. Which means they were off by 2%. I don’t think this grounds for celebration.

Nearly 10% more existing homes were sold in May than in the same month a year earlier, many purchased by investors who plan to rent them for now and sell them later, an important sign of an inflection point. In something of a surprise, the inventory of existing homes for sale has fallen close to the normal level of six months’ worth despite all the foreclosed homes that lenders own. The fraction of homes for sale that are vacant is at its lowest level since 2006. Which means nothing since the 2006 number was normal, and banks have been holding on to property that they have foreclosed in order to not flood the market and drive up inventory.

In other words, these numbers are completely manipulated by the banking industry in an attempt to normalize the markets.

“Even with the overall economy slowing,” Wells Fargo Securities economists said, cautiously, in a note to clients, “the budding recovery in the housing market appears to be gradually gaining momentum.”

Housing is still far from healthy despite the Federal Reserve’s efforts to resuscitate it by helping to push mortgage rates to extraordinary lows: 3.62% for a 30-year loan, according to Freddie Mac‘s latest survey. Single-family housing starts, though up, remain 60% below the 2002 pre-bubble pace. And, by the way, try qualifying for a mortgage these days. Ha!

Americans‘ equity in homes is $2 trillion, or 25%, less than it was in 2002 and half what it was at the peak, in 2006. More than one in every four mortgage borrowers still has a loan bigger than the value of the house, though rising home prices are reducing that fraction very slightly.

Still, the upturn in housing is a milestone, a particularly welcome one amid a distressing dearth of jobs. For some time, housing has been one of the biggest causes of economic weakness. It has now—barely—moved to the plus side. “A little tail wind is a lot better than a headwind,” says economist Chip Case, the “Case” in Case-Shiller.

 

From here on, housing is unlikely to be the leading drag on the U.S. economy. It will instead reflect the strength or weakness of the overall economy: The more jobs, the more confident Americans are about keeping their jobs, the more they are willing to buy houses. “Manufacturing had led growth and construction had lagged,” JPMorgan Chase economists said last week. “Now the roles are reversed: Manufacturing growth has slowed as private construction comes to life.”

Unfortunately, as we see fewer jobs, all of the new construction will result in a huge inventory of new homes and further bloat an already bloated market.

The biggest threat is that large shadow inventory of unsold homes, homes which owners won’t put on the market because they are underwater, homes that will be foreclosed eventually and homes owned by lenders. Another threat is the holdback that the banks have been managing around homes already in foreclosure, so as to not flood the market. They have been trickling onto the market, slowed in part by government efforts to delay foreclosures; a flood could reverse the recent rise in prices. Or the still-dysfunctional mortgage market could get even worse. 

Don’t believe what you read, folks. The housing bust is far from over.

 


Let’s Do This Thing!

Everybody keeps telling me to write something positive and to stop harping on gloom and doom in our future.

I really wish I knew how to do that, because every day I search for some signs, or any sign that there is some hopeful event on the horizon that will create a positive impact on our future, but I can’t find any.

I turn on the TV News and without fail, there are varying degrees of sterilized coverage of some economic event that happened three days earlier that will have far greater impact than the newsies imply and is of far greater complexity than they can possibly understand or communicate.

So, they don’t, and America does what? Goes about their business placated by the blind faith that their leaders will figure out how to prevent the world from ending before it does?  Do they say to themselves, “Hey, how bad could it get? After all, we went through some deep shit in the 30’s and we came out alright.”

Cable news is marginally better because at least they have a longer segment in which to explore the charts, data, directions, patterns, history, etc., but it is still not enough. Then, I have to remind myself every day that people just don’t care. Here is what people care about:

TRENDING NOW (from Yahoo web searches ranked by popularity) on this fine day in July:

01 Mariah Carey

02 Sigourney Weaver

03 Harrison Ford turns 70

04 Michelle Obama threat

05 Chevy buy-back

06 F-22 hypoxia

07 Bonnie and Clyde guns

08 Bankruptcy protection

09 GOP vice-presidential candidates

10 Rheumatoid arthritis

So, it is obviously more important to the American people that Mariah Carey and Sigourney Weaver are celebrating Harrison Ford’s 70th birthday, while Michelle Obama has threatened a Chevy buy-back and some pilots are still experiencing hypoxia when they ride in the cockpit of a jet the military never wanted, and Bonnie and Clyde have hidden their guns and filed for bankruptcy protection because the GOP VP candidates have rheumatoid arthritis.

THIS is what the people care about.

How can that be? I haven’t a clue.

And, if I believe we are truly headed for hell, then why don’t I write about what we can do about it and instead of warning people all the time, point out some things that people can do once they know it.

OK. Here goes: If you have a job, no matter how shitty, keep it and shut-up about how shitty it is. You are blessed. It isn’t like they promised it would be. So, what? If you are still in school, stay there. Slow it down. Take fewer courses. Get Mono. Avoid graduation like the plague. Yes, even if you are at Harvard or Stanford. And, yes, even if you will have an MBA. Particularly if you have an MBA. Stay on your parents’ health care plan as long as you can. If you have a government job, you are even more blessed.

If you are an Airline Pilot, a Doctor or Lawyer, you are just fine. Not making very much money, but fine. Don’t buy anything you don’t need. Don’t buy real estate, yet.

If you are an investment banker, you are also fine. In fact, you are great. There will be tons of money to be made on the craziest gambles you’ve ever seen. Derivatives? Nah, child’s play. China? Gold? Corn? Salmon? Copper? You betcha.

If you are a commercial banker, you are screwed. Too bad.

If you are unemployed, find something that only you can do and offer it for sale. Try Fiverr, or the like. Make something up. “I will sing Happy Birthday in my silly hat for $5”. Really.

Stop looking for work if you haven’t already. It is bad for your soul. If you’ve been out of work for a year, you undoubtedly have erectile dysfunction. You may have already joined many who have considered suicide. Don’t do it.

Get creative. Find others and band together in some common cause. Like tearing down the government. Don’t do it like the Occupy movement did. Actually form a political party and talk to the media. Use simple words. Talk slowly. Even though it makes no sense, talk about the government making jobs. Or, find a bunch of people and start a business that capitalizes on the GREATEST DEPRESSION EVER. Put people in need together with people who have. Make something up. Now is the time. Bend rules. The law will be so busy chasing truly bad guys, it won’t have time to worry about you. And, where would they put you? Jail? Who would look after you? They are all out of work too.

If you are a teacher, you are doomed, but at least 40% of you still have jobs. Try to stay out of site and don’t ever complain.

If you’re in the military, stay in the military. Re-up. For anything.

If you are upside down on your house, walk away and start over somewhere. If you have a ton of debt, declare bankruptcy before they change the law again and make it even harder. If you are lucky enough to be on unemployment or other government welfare programs, revel in it and stay on them. They are NOT entitlements. You paid for them in taxes. They are yours. You have earned them.

If you have a ton of money, you will have fun and be able to make lots more by betting against all fiscal progress and economic recovery. Bet against Greece. Bet against European banks surviving. Bet against the dollar. Bet against every bank stock, and bet on every European sovereign bond default.

Oh, that’s not what you meant, huh?

OK. The truth is we live in the modern world. And, no matter what happens in Washington or in our State Capitols, this is still the modern world (it would be easy to say this is still America, but technology now allows our freedoms to enable behavior around the world, so I call this the modern world). We can do anything we want here. You want to know what to do? Then, page down to the end, and I’ll tell you.

In the meantime, the cracks in the ice are getting bigger.  At this point it is really hard to have much confidence in the global financial system at all.  The lying leaders told us that MF Global was an isolated incident.  Well, the horrific financial scandal over at PFGBest last week is essentially MF Global all over again.  And, either no one was watching or no one was telling. They told us that we would not see a huge wave of municipal bankruptcies in the United States.  Well, three California cities have declared bankruptcy in less than a month, and many more are on their way.  They told us that we could have faith in the integrity of the global financial system.  Well, now we are finding out that global interest rates have been fixed by insiders for years, including our own Treasury leader. 

They told us that Greece was an isolated problem and that none of the larger European nations would experience anything remotely similar.  Well, what is happening in Spain right now looks like an instant replay of exactly what happened in Greece.  So who are we supposed to believe?  Why does it seem like nearly everything that “the authorities” tell us turns out to be a lie?   What else haven’t they been telling us? I think I know.

Look, tens of millions of American families are about to go through economic hell and most of them don’t even realize it. For some weird reason, most Americans don’t spend a whole lot of time thinking about things like “monetary policy” or “economic cycles”.  The vast majority of people just want to be able to get up in the morning, go to work and provide for themselves and their families.  Most Americans realize that things seem “harder” these days, but most of them also have faith that things will eventually get better.  Why? I have no idea.

Unfortunately, things are NOT going to get any better.  The number of good jobs continues to decline, the number of Americans losing their homes continues to go up, people are having a much more difficult time paying their bills and our federal government is drowning in debt.  Sadly, this is only just the beginning of how bad it is going to be.

Since the financial collapse of 2008, the Federal Reserve and the U.S. government have taken unprecedented steps to stimulate the economy.  But even with all of those efforts, we are still living in an economic wasteland.

So what is going to happen when the next wave of the economic crisis hits?

If you look at the economic relapse that’s going on right now, look at last week’s abysmal job numbers, look at the housing numbers, understand that all of this is taking place with record monetary and fiscal stimulus. What happens if we remove those supports? What do you think will happen?

Last month, the Federal Reserve’s quantitative easing program ended (QE2 for those of you still counting).  The U.S. Congress and state legislatures from coast to coast are talking about budget cuts.  The amount of borrowing and spending that has been going on is clearly unsustainable, but will the U.S. economy start shrinking again once the current “financial sugar high” has worn off? QE3? It won’t work. Trust me.

Already, most economic news has been bad and almost all true economic indicators are turning south.  And, finally, the American people are becoming increasingly restless.  One new poll has found that 59 percent of the American people disapprove of Barack Obama’s handling of the economy (which is a new high).  According to another recent poll, 63% of Americans say that they feel “not good” or “bad” about how the U.S. economy is performing. It is not surprising that my buddy, Jimmy Carville is predicting a civil uprising.

The official unemployment rate just went up to 9.1 percent, but that figure only tells part of the picture.

There are some areas of the country where it seems nearly impossible to find a decent job.  Millions of Americans have fallen into depression as they find themselves unable to provide for their families.

According to CBS News, 45.1 percent of all unemployed Americans have been out of work for at least six months.  That is a higher percentage than at any point during the Great Depression. Just two years ago, the number of “long-term unemployed” in the United States was only 2.6 million.  Today, that number is up to 6.2 million.

Can you imagine being out of work for 6 months or more? How would you survive? Do you have enough money in the bank to last 6 months with no income? 89% of Americans don’t. Should I repeat that?

 

So is there any realistic expectation that things will get any better?  Well, there were only about 3 million job openings in the United States during the month of April.  Normally there should be about 4.5 million job openings.  The economy has slowed down once again.  Good jobs are going to become even more rare. Unless we can generate 160,000 new jobs each month, we fail to satisfy new demand. And, that is just NEW demand. It says nothing about existing unemployment. In other words, every new job we fall short of 160,000 is one more added to the unemployment number. So, yes, unemployment is growing. It is not coming down as many in the Obama administration would like to believe.

There are millions of other Americans that are “underemployed”.  All over the United States you will find hard working Americans that are flipping burgers or working in retail stores because that is all they can get right now. Most temp jobs and most part-time jobs don’t pay enough to be able to provide for a family.  And there are not nearly enough full-time jobs for everyone.

Sadly, the number of “middle class jobs” is about 10 percent lower than a decade ago.  There are simply less tickets to the “good life” than there used to be. And without good jobs, the American people cannot afford to buy homes. Without good jobs, the American people cannot even afford the homes that they are in now. And, these jobs are NEVER COMING BACK.

U.S. home prices have fallen 33 percent since the peak of the housing bubble.  That is more than they fell during the Great Depression. 28 percent of all homes with a mortgage in the United States are in negative equity at this point.  There are millions of American families that are now paying on mortgages that are for far more than their homes are worth. Millions of American families literally feel trapped in their homes.  They can’t afford to sell their homes, and they are afraid to simply walk away, because as things stand now, nobody will approve them for new home loans for many years to come.

Many Americans are sticking it out and are staying in their homes until they simply can’t pay for them anymore. As the number of good jobs continues to decline, the number of Americans that are losing their homes continues to rise. For the first time ever, more than a million U.S. families lost their homes to foreclosure in a single year during 2010. As the economy slows down once again and millions more Americans lose their jobs, this problem is going to get a lot worse. WORSE THAN TODAY.

Even if they aren’t losing their homes yet, millions of other Americans families are finding it increasingly difficult to pay the bills. Wages have been very flat over the past few years and yet the cost of most of the basics just seems to keep going up and up. According to Brent Meyer, a senior economic analyst at the Federal Reserve Bank of Cleveland, the cost of food and the cost of energy have risen at an annualized rate of 17 percent over the past six months. Have your wages gone up by 17 percent over the past six months?

As 2009 began, the average price of a gallon of gasoline in the United States was $1.83.  Today it is $3.77. American families are finding that their paychecks are going a lot less farther than they used to, but Ben Bernanke keeps insisting that we have very little inflation in 2011.

Most Americans don’t care much about economic statistics – they just want to be able to do basic things like sit on their porch and have a beer, and take their children to the doctor. According to one recent survey, 26 percent of Americans have put off doctor visits because of the economy. Sadly, soon a lot more American families will not be able to afford to go to the doctor. But, ironically, not because Doctors are earning and charging more, but because Insurance companies are.  Doctor’s wages continue to trend down while Insurance company profits continue to trend up.

As the economic situation has unraveled, an increasing number of people are being forced to turn to the federal government for assistance. One out of every six Americans is now enrolled in at least one anti-poverty program run by the federal government. Some of the hardest hit members of our society have been our children.  Today, one out of every four American children is on food stamps. At the moment, approximately 44 million Americans are on food stamps.

But our federal government cannot afford to spend money like this forever.

According to a recent USA Today analysis, the U.S. federal government took on $5.3 trillion in new financial obligations during 2010.  USA Today says that the U.S. government now has $61.6 trillion in financial obligations that have not been paid for yet. Yes, that is trillion! $61.6 TRILLION.  Who is going to end up paying that bill? I know; you don’t care. And neither do I. What I care about is where my next meal is coming from, and how I am going to afford that next gallon of gas. I suspect you do too.

So with so much bad news and with all economic indicators pointing in the wrong direction, are our leaders alarmed?

According to Federal Reserve Chairman Ben Bernanke, “growth seems likely to pick up somewhat in the second half of the year.” I swear to God, the man is on drugs or has a contract clause that forces him to keep repeating the same mantra, no matter what happens. He, and his buddies in Washington and in your State capitol are part of the same disease. The disease that brings us closer every day to Armageddon.

So, what do we do? I said I would tell you what to do, right?

OK. This may seem silly to some of you, but there is absolutely no reason why we cannot all start a new business that is independent of anyone else and relies only on our own creativity and energy. This is not a plug for Crowdfunding. This is a plug for entrepreneurship.  There are many websites around now that provide the ability to post a project and solicit funds to launch it. Kickstarter, Indiegogo and RocketHub are three American sites joined by several in the UK and elsewhere that facilitate anyone with a dream to test the water in the Crowd for enthusiasm about your project. Here’s an example:

http://www.kickstarter.com/projects/readmatter/matter — Might not be your style? How about this one: http://www.kickstarter.com/projects/1220832022/bloc-socks?ref=popular … or … this one: http://www.rockethub.com/projects/8479-social-action-10-months-in-tel-aviv

The point is that you can, and should … DO SOMETHING! Stop waiting for somebody else to do it for you. Stop looking for a job. Stop feeling sorry for yourself.

Grab some buds, and get a dialogue going around some pet idea that you have had in the back of your mind. Maybe it comes from your frustrations as a single mother, as a cabdriver, as a fireman, a teacher, a bricklayer, whatever. There must be 99 ways to whatever you do better, faster, cooler, bigger or more. You can come up with something that maybe a few hundred other people think is a good idea also.

Then, you can post it on these sites and maybe, just maybe, you will raise enough money to start a little company doing that thing. Maybe it takes off. Maybe it flops. In the meantime, you might raise enough to sustain yourself to get to the second or third idea. You know? The one that really works.

This beats sitting around, feeling sorry for yourself and looking at want-ads, doesn’t it? And, you know that will never work anyway, and all it does is bring you closer to depression. Don’t be that guy. Don’t do the stuff that brings you closer to depression. Start something. It takes zero cash. You can do this.

And, though I realize you really don’t care, it is also the way in which we re-start this country and throw all of the old paradigms about banking and central government out the window. It is up to us now. Let’s do this thing!