Obama Bets It All On Failed Banksters

Week in and week out, the best two reads on Bloomberg are Caroline Baum and Jonathan Weil. Please consider Weil's article: Obama Stakes His Fortunes on Failed Banksters.

Now that we have a rough idea how President Barack Obama and his lieutenants plan to prop up insolvent financial institutions using taxpayers’ money, we’re left with a more difficult question: Why?

Why doesn’t the Obama administration force insolvent banks and insurance companies to come clean about their losses first? It’s the “why” that’s so vexing. The who, what, when, and how are mere details, by comparison.

More than anyone else’s, it should be in Obama’s political self-interest to accelerate the worst of the financial crisis and get as much of the inevitable pain behind us as quickly as possible. Every day he waits is one less day he will have between the time we hit rock bottom and the next election. And yet, Obama and his minions are doing all they can to delay the reckoning, which only will make it worse.

When publicly owned companies change management, often the smartest thing a new chief executive officer can do is clear the decks and take a “big bath” charge to earnings. In other words, the company writes off all its worthless assets and reports huge losses, pushing every conceivable drop of red ink into the past. The new CEO gets to blame his predecessor’s dumb mistakes. The company gets a fresh start with the investing public.

Obama could have taken the same approach with the banks the moment he took office, while he still had standing to blame the financial crisis on George W. Bush’s administration, stupid regulators, and corrupt lawmakers -- that is, everyone but himself.

Obama didn’t do that. And now, six months into the government’s Troubled Asset Relief Program, his administration’s approach to the financial crisis is largely indistinguishable from its predecessor’s. The only objective, it seems, is to buy time, in hopes that an economic recovery somehow will materialize and lift the financial system back to health.

....

Whatever the case, as long as the government refuses to remove the cancer of zombie banks from our financial system, there’s little hope the U.S. will return to robust economic growth anytime soon. And the longer our wounded banks are allowed to stagger along with no end-game in sight, the greater the risk for Obama that voters will conclude he’s as responsible for blowing the cleanup as others were for causing the crisis.

He’d better act soon. Time may not be our side any longer.

It's tough arguing with Weil, so I make it a point not to. Indeed I am with him on the zombification of banks, having written about zombie banks for what seems like forever. A good example is Night of the Living Fed from March of 2008 although that was by no means my first post about Zombification.

The key question is "why?"

There are many conspiracy theories circulating on this, the most prevalent of which is these actions are all part of a planned grand scheme for (take your choice) the Fed, Goldman Sachs, or the Bilderberg Group to rule the world.

I dismiss such theories and instead offer misguided belief in Keynesian claptrap. Bernanke and Krugman are also believers in Keynesian claptrap. Krugman even won a Nobel prize.

I am certain that Krugman does not have plans to rule the world or to help anyone else do so.

What makes Krugman especially dangerous is that occasionally he says something that makes perfect sense. See Geithner's Plan, a Gigantic Confidence Game and Geithner's Gift To Pimco for details.

My disagreements with Krugman are many, and deep.

• April 14, 2009 Krugman in Need of Remedial Education
  
• April 07, 2009 Neither Krugman Nor Bernanke Can Distinguish Excessive Printing From Excessive Savings
• March 24, 2009 Krugman's $200 Billion Lunch
• December 29, 2008 Krugman Still Wrong After All These Years
• December 22, 2008 Fiscal Insanity Virus Rapidly Spreading The Globe
• October 21, 2008 Something For Nothing vs. Paradox of Deleveraging

Keynesian and Monetarist theories have been tried many times and have failed miserably on every attempt. It is a perfect record of failure.

The "Keynesian Comeback" is always the same: "The policies were not tried long enough, soon enough, or with enough force."

Please consider a recent statement from Treasury Secretary Geithner: "Congressman this plan will work. This plan because of the authority provided not just by Congress but the treasury and the Fed gives us broad ability to do what you need to do to get through a financial crisis like this. It just requires will; It's not about ability. We just need to keep at it. We just need to work with Congress to make sure we do this on a scale that will make it work."

In Geithner's Plan Can Succeed I made the claim that the plan is a purposeful attempt to dump trillions of dollars worth of toxic assets right into taxpayers' laps, just to bail out the banks that got us into this mess.

Is that a conspiracy between the Fed and the Treasury? Yes it is. However, it is also out in the open, in plain daylight as most conspiracies are. Is this part of a Fed plan to rule the world? I doubt it. Rather, Geithner has a ridiculous idea, and he is stubborn enough and arrogant enough to see his plan through no matter how spectacularly it fails.

Of course it's possible (some might suggest likely) that Geithner and Bernanke simply do not give a damn what happens to taxpayers as long as banks are bailed out.

But regardless of what Geithner and Bernanke are up to, all indications are that Obama will continue to support Geithner no matter what happens. Indeed, president Obama's misguided trust in Geithner may even be his downfall in the next election.

The answer as to "Why?" is simply this: President Obama placed his trust in the wrong person, and the president is too stubborn to change his mind or consider other ideas. Unfortunately, the country is sure to suffer the consequences of a long prolonged L shaped recession as a result.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Krugman in Need of Remedial Education

Paul Krugman is back in his usual form of preaching sheer idiocy with his piece Time for bottles in coal mines.

Krugman is upset that Obama says stimulus projects under budget.

"By the end of next year our investment in highway projects alone will create or save 150,000 jobs, most of them in the private sector," Obama said during an appearance at the Transportation Department to plug his plan.

"What is most remarkable about this effort ... isn't just the size of our investment or the number of projects we're investing in. It is how quickly, efficiently and responsibly those investments have been made," Obama said.

"This government effort is coming in ahead of schedule and under budget," he said.

Obama said fierce competition for the projects had led to bids coming in under budget in many states around the country. The White House said bids have been 15 to 20 percent lower than expected on average.

"Because these projects are proceeding so efficiently, we now have more recovery dollars to go around, and that means we can fund more projects, revitalize more of our infrastructure, put more people back to work," he said.

Logic would dictate that getting more work done for less cost and employing more people to do it would be a good thing. But Noooooooo! Krugman says "Seriously: if the projects really are coming in cheaper than expected, that doesn’t mean we should bank the savings; it means that we need more projects."

Here's the deal. If a road needs patching then patch it. If a bridge needs fixing then fix it. The least amount of money spent the better. That is plain common sense that any eighth grader could easily understand.

Somehow Kurgman believes the more money is wasted on projects the better off we will be. Krugman even cites Keynes' Marginal Propensity To Consume absurdity that burying money in coal mines will stimulate the economy.

If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again, there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing.

What that would do (assuming it could be carried out on a marco scale) is promote malinvestments in digging equipment, and cheapen the dollar while doing so. The stimulus would wear of as soon as the notes were retrieved and the digging tools business would crash. Those who were lucky enough to retrieve the cash might be marginally better off, but at the overall expense of everyone else. Those who borrowed money for digging equipment only to come up empty handed would be back out of work and in worse shape than before. Those who sat on the sidelines uninvolved had to fund this mad proposal with their tax dollars or the dollars had to be conjured up out of thin air causing either inflation now or some massive problem down the road (such as paying interest on the national debt).

In reality, the mine digging proposal is nothing more than another variation on the idea of paying people to do nothing (i.e paying people to dig holes and paying more people to fill the holes back in). Yes, if someone was stupid enough to propose that, and apparently Krugman is, we can indeed have 100% employment (until the economy totally blows up of course). The only real difference that I can tell is the mine digging idea only rewards those who find the money while ditch digging rewards everyone.

I use rewards loosely. With either idea, one must ask "What is the cost?" Krugman and the rest of the Keynesian clowns never address that part of the equation. Where does the money come from to pay for such ridiculousness?

The only way to fund such insanity would be some combination of the following

• Increase taxes on productive businesses
• Increase taxes on goods and services
• Print money and ignore the consequences

The Keynesian solution is invariably the latter: Print money and ignore the consequences.

Once again any eighth grader would understand the folly of paying people to do useless work. Those same eighth graders would understand the idea that if reckless spending got us into this mess, then reckless spending cannot possibly get us out of this mess.

Yet amazingly GDP will rise with such stimulus efforts because by definition all government spending is deemed to be productive no matter how unproductive it is. So take any improvements in GDP later this year as a result of these Obama's stimulus programs with a grain of salt it not a bushel of salt.

I have advice for Krugman: Throw away your years of high-level academic training and the nonsensical equations in Keynes' Marginal Propensity To Consume and take a course in 8th grade math. You seriously need remedial education.

For more on Krugman please see

• Neither Krugman Nor Bernanke Can Distinguish Excessive Printing From Excessive Savings.
• Krugman's $200 Billion Lunch
• Krugman Still Wrong After All These Years
• Fiscal Insanity Virus Rapidly Spreading The Globe

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Retail Sales Plunge "Unexpectedly"

Given that 600,000 to 700,000 jobs have been lost every month for 5 consecutive months, it should not take a lot of brainpower to figure retail sales are unlikely to recover anytime soon. Nonetheless, the headline reads Retail sales fall unexpectedly in March.

Retail sales fell unexpectedly in March, delivering a setback to hopes that the economy's steep slide could be bottoming out. President Barack Obama and Federal Reserve Chairman Ben Bernanke said in separate speeches Tuesday that while other recent economic signs have been hopeful, problems persist and a true recovery will take more time.

The Commerce Department said retail sales dipped 1.1 percent in March. It was the biggest decline in three months and a much weaker showing than the 0.3 percent increase that analysts expected.

A big drop in auto sales led the overall slump in demand. Sales also plunged at clothing stores, appliance outlets and furniture stores.

The overall economy, as measured by the gross domestic product, fell at an annual rate of 6.3 percent in the final quarter of last year, the biggest slide in a quarter-century led by the largest drop in consumer spending in 28 years. Consumer spending is closely watched because it accounts for about 70 percent of total economic activity.

The 1.1 percent drop in retail sales last month followed a revised 0.3 percent increase in February, originally reported as a 0.1 percent fall. Retail sales rose 1.9 percent in January, which followed six straight months of declines.

For March, auto sales fell 2.3 percent, following a 3 percent drop in February. Auto sales in March were 23.5 percent below year-ago levels as automakers struggle through their deepest downturn in decades.

Excluding autos, retail sales fell 0.9 percent after a 1 percent rise in February. That also was worse than analysts' forecasts of a flat reading for last month.

Sales at appliance stores fell 5.9 percent last month and furniture stores reported a 1.7 percent decline. Sales at specialty clothing stores fell 1.8 percent and dipped 0.2 percent at general merchandise stores, a category that includes Wal-Mart Stores Inc., Target Corp. and Macy's.

Sales at gasoline stations fell 1.6 percent, while food and beverage stores saw one of the few increases for the month, a rise of 0.5 percent.

The current recession began in December 2007 and is expected to become the longest downturn in the post World War II period. While many economists believe it could end by this fall, they expect unemployment will keep rising until this time next year, possibly as high as 10 percent.

Calculated Risk has some nice charts on Retail Sales in Retail Sales Decline in March.

On a monthly basis, retail sales decreased 1.1% from February to March (seasonally adjusted), but sales are off 10.7% from March 2008 (retail and food services decreased 9.4%). Automobile and parts sales declined 2.3% in March (compared to February), but excluding autos, all other sales declined -0.9%.

The following graph shows the year-over-year change in nominal and real retail sales since 1993.



click on chart for sharper image

Savings Not Sales Will Fuel Recovery

A true recovery will be dependent not on sales but on savings. Thus President Obama and Bernanke are either clueless or disingenuous with their statements. Moreover, hope that the recession is over by this fall is misguided. If by some miracle (or economic fudging of numbers) GDP rebounds in the 4th quarter it will be short-lived.

Those betting on an "L" shaped recession or a series of "W" shaped recessions where the economy is weak and slipping in and out of recession for another 2-10 years (just as happened in Japan) are more likely to be correct. I made the Case for an "L" Shaped Recession on Apil 8, 2008 and see no reason to change it now. At the time, talk was of a $1 trillion writedown. Fast forward to today ....

Toxic Debts Could Reach $4 Trillion

We have already had $1.29 trillion in writedowns and now the IMF warns Toxic debts could reach $4 trillion.

Toxic debts racked up by banks and insurers could spiral to $4 trillion (£2.7 trillion), new forecasts from the International Monetary Fund (IMF) are set to suggest.

The IMF said in January that it expected the deterioration in US-originated assets to reach $2.2 trillion by the end of next year, but it is understood to be looking at raising that to $3.1 trillion in its next assessment of the global economy, due to be published on April 21. In addition, it is likely to boost that total by $900 billion for toxic assets originated in Europe and Asia.

Banks and insurers, which so far have owned up to $1.29 trillion in toxic assets, are facing increasing losses as the deepening recession takes a toll, adding to the debts racked up from sub-prime mortgages. The IMF's new forecast, which could be revised again before the end of the month, will come as a blow to governments that have already pumped billions into the banking system.

The IMF's jump will come as little surprise to economists who have suggested that the bad debts will be much higher than anticipated. Nouriel Roubini, chairman of RGE Monitor, expects bad debts from US-originated assets to reach $3.6 trillion by the middle of next year. This figure is expected to rise when bad debts from assets elsewhere are calculated, he said.

Given that these writedowns are funded directly on the back of taxpayers who have virtually nothing but job losses to show for the trillions of dollars sloshed around by Bernanke, Geithner, and Obama, those expecting a quick, sustainable economic turnaround are in Fantasyland.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Beware Of "HelpWithMyCredit"

The Debt Slave Act of 2005, better known as the Bankruptcy Reform Act of 2005 has blown sky high. Bankruptcies are soaring in spite of a law designed to prevent that from happening. Credit card writeoffs are soaring as well.

Now Congress is looking to unwind some particularly nasty practices of the credit card industry. In response, banks have started self-serving programs designed to "help" consumers get out of debt.

Let's tie this altogether starting with Bankruptcies surge despite law meant to curb them.

The number of U.S. businesses and individuals declaring bankruptcy is rising with a vengeance amid the recession, despite a three-year-old federal law that made it much tougher for Americans to escape their debts, an Associated Press analysis found.

"There's no end in sight," said bankruptcy lawyer Bryan Elliott of Hickory, N.C., who is working seven days a week and scheduling prospective clients a month in advance. "To be doing this well and having this much business, it is depressing. It's not a laugh-a-minute job."

Nearly 1.2 million debtors filed for bankruptcy in the past 12 months, according to federal court records collected and analyzed by the AP. Last month, 130,831 sought bankruptcy protection -- an increase of 46 percent over March 2008 and 81 percent over the same month in 2007.

Congress voted in 2005 to make bankruptcy more cumbersome after years of intense lobbying from the nation's lenders, who complained that people were abusing the system. Before the move to change the law, bankruptcies were running at what was then an all-time high of about 1.6 million per year.

The tighter requirements initially appeared to work, with bankruptcies plummeting from a record-shattering 2 million cases in 2005 -- a total that reflected a rush to file before the new law took effect -- to 600,000 in 2006. But now bankruptcies are booming again.

In March, bankruptcy filings jumped the highest across the West. In Arizona, filings rose 91 percent from a year ago. They were up 84 percent in Idaho, 82 percent in California and 79 percent in Nevada, though those were trumped by Delaware, home to many large corporations, which saw a 127 percent jump.

Under the 2005 law, Congress imposed higher fees on those seeking bankruptcy and began requiring credit counseling sessions and a means test to assess debtors' ability to pay what they owed.

Lawless, the Illinois law professor, said his research found that the law simply increased the cost of filing by 50 percent and led many more people to cling to false hope longer.

Also, the law's test of a person's ability to pay off debts appears to have failed at one of its goals: steering debtors from Chapter 7, which allows people to sell off their assets to repay what they can and start again debt-free, and into Chapter 13, which places the filer in a repayment plan that can last for years. Chapter 7 cases accounted for 69 percent of all filings in the past year, compared with 71 percent in 2004.

Be Careful Of What You Ask

Greedy card issuers got everything they asked for and then some in 2005. Having gotten their wish, banks went on a tear extending credit to the least credit worthy borrowers knowing that bankruptcy would be harder to declare and debts harder to discharge.

At long last this tactic has blown up in their faces.

Credit Card Reforms

On March 31, 2009 a Senate panel passed tough new rules to curb abuses.

Some major provisions approved would:

• Prohibit "universal default," a practice through which issuers use a consumer's history with another creditor to raise interest rates
• Prohibit "anytime, any reason" hikes in rates
• Prohibit charging interest on debt that has been repaid
• Require 45 days of notice before any rate increase
• Require full disclosure in statements of payment due dates and late-payment penalties
• Prohibit issuing credit cards to consumers under 21 unless they show they can repay the debt, or complete a certified financial literacy course
• Prohibit double-cycle billing, a practice in which charges are computed based on outstanding balances in billing cycles before the most recent cycle
• Limit certain abusive fees and penalties, such as charging interest on credit-card transaction fees, or charging a fee to allow a consumer to pay a credit-card debt

I wrote about those credit card reforms in New Credit Card Rules.

The credit card industry is getting what it deserves for their practices, even though a case can be made that such things ought to be left to the "free market" to solve. Then again self-modifying contracts under such terms hardly seems to be a "free market construct".

Moreover, the reason people can get credit lines way bigger than they deserve stems from the Bankruptcy Reform Act of 2005 whose sole purpose was to make people debt slaves forever. That act is now blowing up, just as I predicted it would.

Discover Card Affected By 2-Cycle Billing Revisions

I consider 2-Cycle billing to be a huge ripoff. With 2-cycle billing you end up paying interest on debt before it is even due. For more on 2-Cycle Billing please see Read the Fine Print On Credit Cards.

Hopefully the law passes as outlined above and Discover Card and other 2-cycle card issuers are forced to end their consumer unfriendly practices.

Can We Be Friends?

I warned banks (in advance) of banks getting what they asked. Now I am warning consumers of banks pretending to be friends. Inquiring minds are reading that Banks are willing to help strapped cardholders.

However, it's the subtitle that's really important: But credit-aid effort doesn't provide consumers the whole story. Let's take a look.

TV and print ads invite credit-card holders struggling to make payments to visit HelpWithMyCredit.org or call 1-866-941-1030.

The coalition sponsoring the campaign, by Weber Shandwick's in-house New York ad agency Sawyer Miller, includes Bank of America (BAC) , Citigroup (C) , MasterCard (MA) , Visa (V) , Capital One (COF) and Discover (DFS). The coalition offers to pick up the tab for a caller's first credit counseling visit at participating accredited agencies.

"Overall, they (banks) are doing more to advance consumer financial literacy than they did before and that's good for the country," acknowledges Robert S. Green, a partner in the law firm of Green Welling LLP, San Francisco.

But Green, whose firm has multiple class-action lawsuits pending against banks, warns that the "HelpWithMyCredit.org" Web site lacks important educational information.

"People should know this is slanted from the bank's point of view," he says. For example, the Web site mentions the features and benefits of some credit cards, but fails to mention that cards come with arbitration clauses and class-action waivers. Such features, he says, may prevent cardholders from protecting their rights.

The "Help With My Credit" campaign comes as banks vehemently fight credit card consumer protection legislation making its way through Congress.

Green suggests that another less biased educational credit card resource is Consumer Action.

Consumers Union has established a Web site, Credit Card Reform, to encourage consumers to contact their lawmakers to stem abusive credit card practices.

Beware Of Bank Offers To Help

Rule to live by: Whenever banks appear to be offering help, the odds are overwhelming that they are really offering to help themselves to your pocket book.

To be fair, I am quite certain some people benefit from these programs. However, when that happens, it's best to consider it an accidental byproduct of banks doing what is in their best interest, not yours.

When it comes to credit card counseling or foreclosures, your best option may be bankruptcy or walking away, not deals to pay back more than you can afford.

Only unbiased organizations will be looking out for you. That Bank of America, Capital One, and Discover are sponsors of "HelpWithMyCredit" is all you need to know to figure out the last thing you are going to receive is unbiased credit help.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

S&P 500 (SPY) Max Pain Analysis For April 2009

Here is an interesting chart of SPY options from Rob Roy at Atlantic Advisors.

SPY Options Expiring Worthless At Each Strike Point




click on chart for sharper image

Rob writes:

Well, it’s options expiration week again – so time to look at where all of the options bets have been placed. Even with the move dramatically higher in equities, we can see from the chart above that there are about 65% more puts outstanding than there are call options (orange is much greater than blue area). The open interest in SPY options is showing that people are quite cautious about the move higher and are overall wanting to protect these gains.

With the SPY closing Friday at $85.81, the greatest number of options would expire worthless if the SPY were to fall to $80 which would be a drop of 6.77% this week. Nearly as damaging to option holders overall would be a fall to $82 which is only a drop of 4.44%. With 5 days of trading, this is all quite possible.

There are two concepts at play during expiration week which we will watch. The first (and most devious) is the idea that the government likes to intervene in the market during expiration week because the panic that ensues can create the greatest effect on the market. This seems to be a consistent theme to keep in mind, but one that is hard to predict.

Secondly, the concept of pin risk is the effect that the underlying share price will be pulled in the direction of the option strike with the greatest number of contracts outstanding. This is a function of traders having built delta neutral positions and needing to manage the exposure to risk either through unwinding the option position or by adjusting their position in the underlying stock. The potential effects of pin risk grows as you get closer to the moment of expiration, and as the underlying price is close to a strike price that has a lot of option contracts outstanding. Wikipedia has a very nice explanation of Pin Risk.

Expiration week is always interesting, so keep your eyes open.

Rob Roy
President

Atlantic Advisors, LLC

In addition to Pin Risk causing gravitation towards the strikes causing the most options to expire worthless (maximum pain), there is also a possibility of a melt-up or melt-down scenario in the event of a strong move away from maximum pain.

For example, PUT owners could decide the market is going higher and start selling their PUTs to get what they can for them (before they expire worthless). The selling of puts would force the hedgers to cover short positions providing a lift to the market. These kinds of things often feed on themselves during option expirations week.

One often hears the claim 90% of options expire worthless. While that may be true, the cemeteries are lined with those selling cheap out of the money options attempting to collect premiums.

For example, a CALL buyer has a known risk. A CALL seller's risk is theoretically unlimited. Nearly every month some option on some random stock soars from $.10 to $3.00. All it takes to wipe one out is to be overleveraged on the wrong side of such an event.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Japan PPI Signals Deflation

Japan has fallen back in deflation. This was obvious well over a year ago, but those viewing things through the myopic eyes of prices are just catching on now. Please consider Japan Producer Prices Fall at Fastest Pace Since 2002.

Japan’s wholesale prices fell at the fastest pace in almost seven years, adding to signs the world’s second-largest economy may return to deflation.

My Comment: There is no "may". What there is, is "is". Japan, the US, UK, and EU are all in deflation as measured by any practical measure. See Humpty Dumpty on Inflation for details, if you are confused.

Producer prices, the costs companies pay for energy and raw materials, sank 2.2 percent in March from a year earlier, the biggest slide since May 2002, the Bank of Japan said in Tokyo today. That compares with a median estimate of 27 economists surveyed by Bloomberg News for a 1.8 percent decline.

The Bank of Japan’s quarterly Tankan survey this month showed manufacturers expect the costs they pay for goods and materials to fall to the lowest level in seven years. Expectations of lower prices ahead can prompt consumers to delay purchases, eroding corporate profits and forcing firms to cut wages, causing a downward spiral in demand.

My Comment: Which came first" consumers delaying purchases (i.e. sentiment) or lower prices? I propose it is consumer sentiment. People stopped buying stuff they could not afford or did not need. In response prices fell. Saying that consumers are holding off buying stuff because prices are falling has it backwards.

“Price declines will probably gather momentum toward the middle of the year,” said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “People are going to become more concerned about the risk of deflation in coming months.”

No one should be concerned about falling prices except unfortunately those deep in debt betting on or needing rising asset prices. Moreover, falling prices on goods and services are exactly what's needed. If prices drop far enough people will buy stuff. It amazes me that 99% of economists cannot figure this out.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Enough Is Enough: Let The Tax Revolts Begin

Shortly after I posted a Nationwide Tax Revolt Is Coming, Jack Dean at Pension Tsunami replied "My friends at the Orange County Register agree with you about a revolt brewing."

With that, inquiring minds are reading how tax-crushed Californians are joining the nationwide revolt against ever-higher taxes and spending. Please consider Editorial: Is this Prop. 13 all over again?

A tax revolt is brewing, and the tax-and-spenders in Sacramento and Washington appear oblivious – just as in 1978 when overtaxed Californians overwhelmingly passed Proposition 13, the landmark property-tax limitation initiative.

The revolt is long overdue. Even a prosperous populace has its limits, particularly as prosperity evaporates in the most severe recession since the Great Depression.

Like the proverbial frog in a gradually boiling pot of water, Californians apparently didn't notice taxes being elevated incrementally until they now have the highest income tax rate in the nation, the highest sales tax rate and the sixth-highest overall tax burden among the 50 states. Incredibly, tax-happy state legislators now want taxpayers to add another$16 billion in taxes to their burden by approving an initiative the lawmakers put on a May 19 special election ballot, on the heels of $12.9 billion in new taxes the Legislature itself imposed only two months ago.

Enough is enough.

Recipe For Tea Parties

The USA Today picked up on the theme in Tax revolt a recipe for tea parties.

What started out as a handful of people blogging about their anger over federal spending — the bailouts, the $787 billion stimulus package and Obama's proposed budget — has grown into scores of so-called tea parties across the country. The biggest demonstration so far drew 6,000 people in Cincinnati.

A nationwide protest in 500 cities and towns is scheduled for Wednesday, the deadline for filing federal income tax returns.

The goal is to pressure Congress and states to reject government spending as a way out of the recession and build an anti-spending coalition around regular taxpayers.

"The tea parties are a means, not an end," says Mark Meckler of Grass Valley, Calif., a lawyer.

Organizers say they were not pleased by former president George W. Bush's performance on spending, either, but what moved them from yelling at the TV to rallying in the streets was Obama's proposed $3.6 trillion budget, a package the Congressional Budget Office says would produce record breaking deficits of $9.3 trillion over 10 years.

Bridgett Wagner, director of coalition relations at the conservative Heritage Foundation, sees a possible reprise of the tax revolt of the 1970s and '80s, when a California movement to slash and cap property taxes led to successful ballot measures from the West Coast to Michigan and Massachusetts.

"These movements in the past have shown that when people have finally had enough, even the politicians at some point have to listen," says Wagner, calling it a "bottom-up" phenomenon.

2009 Tea Parties

Freedom Works has a Google Map of all the Tea Party Sites. Another good site for Tea Party information is Tax Day Tea Party. Attend if you can.

No one should expect miracles from this. However, it's a start. Let The Tax Revolts Begin.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Time To Breakup Goldman Sachs

It's time to breakup Goldman Sachs, Citigroup, and for that matter any bank or holding company deemed too big to fail. It's not just the "too big to fail" hazard that is troubling, it's also the power these corporations have and the potential to abuse that power that is also troubling.

Please consider the article Incredibly Shrinking Market Liquidity as posted on the Zero Hedge blog.

A very interesting data point, also provided by the NYSE, implicates none other than administration darling Goldman Sachs in yet another potentially troubling development. The chart below demonstrates the program trading broken down by the top 15 most active NYSE member firms. I bring your attention to the total, principal, customer facilitation and agency columns.



Key to note here is that Goldman's program trading principal to agency+customer facilitation ratio is a staggering 5x, which is multiples higher than both the second most active program trader and the average ratio of the NYSE, both at or below 1x. The implication is that Goldman Sachs, due to its preeminent position not only as one of the world's largest broker/dealers (pardon, Bank Holding Companies), but also as being on the top of the high-frequency trading/liquidity provision "food chain", trades much more often for its own (principal) benefit, likely in tandem with the other top dogs on the list: RenTec, Highbridge (JP Morgan), and GETCO.

In this light, the program trading spike over the past week could be perceived as much more sinister. For conspiracy lovers, long searching for any circumstantial evidence to catch the mysterious "plunge protection team" in action, you should look no further than this.

Readers know that I am not a subscriber to Plunge Protection Team (PPT) theory. However, I am open to the idea that it is possible for Broker Dealers or Bank Holding Companies to be trading their own accounts ahead of customer accounts and/or advising clients (or the public) one way (and trading the other), on purpose.

That is not a direct accusation. Instead it is a statement of what is possible due to lack of sufficient separation between trading groups, advisory groups, and a myriad of hedge funds sponsored by the broker dealers and bank holding companies.

That Goldman, Citigroup, and the now defunct Bear Stearns and Lehman, etc, could ever be in a position to front run trades based on analysis they know they are going to publish, and/or to purposely make recommendations to ignite short squeezes or selloffs based on positions they hold is simply wrong.

Citibank to Investors: We Suggest You Bet Against Us

Please consider the following horrendous advice last week by Citigroup. Flashback March 31, 2009 Citibank to Investors: We Suggest You Bet Against Us.

March 31 (Bloomberg)Investors should buy put options on financial companies because derivatives-market trading suggests the industry will retreat after a 43 percent surge since March 6, Citigroup Inc. said. He recommended puts giving the right to sell the Financial Select Sector SPDR Fund [XLF], an exchange-traded fund that tracks a basket of bank stocks, for $8 before May 15.

XLF Daily Chart



click on chart for sharper image.

With Citigroup, one should never rule out sheer incompetence as the most likely answer for anything it says or does, but one also cannot help but wonder if Citigroup was on the winning side of that recommendation as a market maker.

Inquiring minds will note that Citigroup's advice came out just before a ruling on mark-to-market accounting that was expected to be (and was) very favorable to every company in the XLF. The chart shows that XLF exploded North.

Was this sheer incompetence by Citigroup or something more sinister? What about recommendations from Goldman? Can anyone say for sure? Even if someone thinks they can, are the answers believable?

Goldman Harasses Mike Morgan

Blogger Mike Morgan of MorganFlorida and owner of website GoldmanSachs666 is being threatened by Goldman Sachs. Please consider Goldman Sachs hires law firm to shut blogger's site.

Goldman Sachs is attempting to shut down a dissident blogger who is extremely critical of the investment bank, its board members and its practices.

The bank has instructed Wall Street law firm Chadbourne & Parke to pursue blogger Mike Morgan, warning him in a recent cease-and-desist letter that he may face legal action if he does not close down his website.

Florida-based Mr Morgan began a blog entitled "Facts about Goldman Sachs" – the web address for which is goldmansachs666.com – just a few weeks ago.

In that time Mr Morgan, a registered investment adviser, has added a number of posts to the site, including one entitled "Does Goldman Sachs run the world?". However, many of the posts relate to other Wall Street firms and issues.

According to Chadbourne & Parke's letter, dated April 8, the bank is rattled because the site "violates several of Goldman Sachs' intellectual property rights" and also "implies a relationship" with the bank itself.

Foolish Tactics By Goldman Sachs

I am not a lawyer but I suggest Goldman is about to make fools out of themselves. To allege the site "implies a relationship" with Goldman Sachs is complete nonsense. The opening statement on Morgan's website is "This website has NOT been approved by Goldman Sachs, nor does this website have any affiliation with Goldman Sachs."

If I was the judge handling this case, I would throw out the lawsuit, chastise Goldman's lawyers for wasting court time, order Goldman to reimburse Mike Morgan, and fine Goldman for good measure to make sure they do not do this again to anyone else.

If nothing else, Goldman's tactics are going irritate others into digging into what Goldman is doing and publicizing it. In fact, Goldman's ridiculous harassment of Mike Morgan, is what inspired this post.

I hope Karl Denninger at The Market Ticker, Yves at Naked Capitalism, and Barry Ritholtz at the Big Picture Blog all chime in on both aspects of this post:

1) The potential for improprieties at the Broker Dealers and Bank Holding Companies.
2) The ridiculousness of Goldman's lawsuit against Mike Morgan and various (equally ridiculous) lawsuits against Aaron Krowne at Mortgage Lender Implode-O-Meter. Please see Scrappy Mortgage Blogger Fights Bad Court Ruling as well as New Hampshire Court Tramples on Constitution for details.

Citigroup, Goldman, etc, all maintain their trading units are adequately separated from their research units and those units do not talk to each other. Really? Even if it is true, who can believe it? The only way to permanently get rid of allegations of improprieties is to break up the corporations so that it is physically impossible for such improprieties to occur. Goldman Sachs and others need to be broken up.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Nationwide Tax Revolt Is Coming

Cities, states, and municipalities have a huge budget problem. That problem is caused by too much spending. The sensible thing to do would be to reduce expenditures.

Instead Cities Turn to Fees to Fill Budget Gaps.

After her sport utility vehicle sideswiped a van in early February, Shirley Kimel was amazed at how quickly a handful of police officers and firefighters in Winter Haven, Fla., showed up. But a real shock came a week later, when a letter arrived from the city billing her $316 for the cost of responding to the accident.

“I remember thinking, ‘What the heck is this?’ ” says Ms. Kimel, 67, an office manager at a furniture store. “I always thought this sort of thing was covered by my taxes.”

It used to be. But last July, Winter Haven became one of a few dozen cities in the country to start charging “accident response fees.” The idea is to shift the expense of tending to and cleaning up crashes directly to at-fault drivers. Either they, or their insurers, are expected to pay.

With the economy flailing and budgets strained, state and local governments are being creative about ways to raise money. And the go-to idea is to invent a fee — or simply raise one.

Ohio’s governor has proposed a budget with more than 150 new or increased fees, including a fivefold increase in the cost to renew a livestock license, as well as larger sums to register a car, order a birth certificate or dump trash in a landfill. Other fees take aim at landlords, cigarette sellers and hospitals, to name a few.

Wisconsin’s governor, James E. Doyle, has proposed a charge on slaughterhouses that would be levied on the basis of each animal slaughtered.

Washington’s mayor, Adrian M. Fenty, has proposed a “streetlight user fee” of $4.25 a month, to be added to electric bills, that would cover the cost of operating and maintaining the city’s streetlights. New York City recently expanded its anti-idling law to include anyone parked near a school who leaves the engine running for more than a minute. Doing that will cost you $100.

The “accident response fee” idea could spread, too. A company in Dayton, Ohio, called the Cost Recovery Corporation specializes in setting up collection systems for municipalities that bill for police and fire responses. (The company keeps 10 percent of billings.) Inquiries have tripled in the last year, says the company’s president, Regina Moore.

Tax Capital of the World

In a game of leap-frog between New York and California, once again New York has the dubious honor as The Tax Capital of the World.

Like the old competition to have the world's tallest building, New York can't resist having the nation's highest taxes. So after California raised its top income tax rate to 10.55% last month, Albany's politicians leapt into action to reclaim high-tax honors. Maybe C-Span can make this tax competition a new reality TV series; Carla Bruni, the first lady of France, could host.

They can invite politicians from the at least 10 other states that are also considering major tax hikes, including Oregon, Illinois, Wisconsin, Washington, Arizona and New Jersey.

In New York, Assembly Speaker (and de facto Governor) Sheldon Silver and other Democrats will impose a two percentage point "millionaire tax" on New Yorkers who earn more than $200,000 a year ($300,000 for couples). This will lift the top state tax rate to 8.97% and the New York City rate to 12.62%. Since capital gains and dividends are taxed as ordinary income, New York will impose the nation's highest taxes on investment income -- at a time when Wall Street is in jeopardy of losing its status as the world's financial capital.

Mr. Silver says of the coming tax hikes: "We've done it before. There hasn't been a catastrophe." Oh, really? According to Census Bureau data, over the past decade 1.97 million New Yorkers left the state for greener pastures -- the biggest exodus of any state. New York City has lost more than 75,000 jobs since last August, and many industrial areas upstate are as rundown as Detroit. The American Legislative Exchange Council recently said New York had the worst economic outlook of all 50 states, including Michigan. And that analysis was done before these $4 billion in new taxes. How does Mr. Silver define "catastrophe"?

This is advertised as a plan of "shared sacrifice," but the group that is most responsible for New York's budget woes, the all-powerful public employee unions, somehow walk out of this with a 3% pay increase. The state is receiving an estimated $10 billion in federal stimulus money, and Democrats are spending every cent while raising the state budget by 9%. Then they insist with a straight face that taxes are the only way to close the budget deficit.

Taxing Your Way Into A Deeper Hole

Cities and states are taxing themselves in to an ever deepening hole. It is fiscally irresponsible to do anything but shrink government salaries and privatize all services that cannot be eliminated.

Irresponsibility in Vallejo, California

The unions of Vallejo, California got part of what they have coming when a Judge Ruled Vallejo Can Void Union Contracts.

Not surprisingly, a self-serving website sponsored by the Vallejo Police Officers Association, Firefighters Local 1186, and IBEW Local 2376 is pleading the case for raising taxes so they can receive ridiculous, unjustified salaries and pensions at taxpayer expense.

Taxpayer Resentment Is Growing

Resentment towards unjustified property taxes, sales taxes, income taxes, and fees is building. At some point, I just do not know when, there is going to be a massive taxpayer revolt to throw the bums out, privatize services, and end the powerful grip public unions have over our lives.

Private pension plans have gone the way of the dinosaur, it's long overdue that public sponsored pension plans and public unions follow suit.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

America's Love Affair With Malls Ends; Toxic Drywall; Halted Projects; and Vacant Dealerships

Four hundred of the 2,000 largest shopping malls have closed; construction is halted on hi-rise construction projects; and no one knows what to do with the increasing number of vacant auto dealership lots.

Let's take a look at each of those commercial real estate disasters starting with The Vanishing Shopping Mall.

Enclosed shopping centers, long the cathedrals of American consumerism, are closing their doors by the hundreds as the recession continues to clobber retail sales. Is America’s love affair with the mall over?

The vital signs are not good. Even before the recession hit, consumers had developed mall fatigue, and the classic enclosed shopping mall was in decline. More than 400 of the 2,000 largest malls in the U.S. have closed in the past two years. The last new major mall in the U.S. opened in 2006, and only one big mall is scheduled to open this year—the troubled Xanadu mega-mall in Rutherford, N.J. With some 150,000 retail stores projected to fail in the U.S. this year, more mall closings are imminent. Mall mainstays such as Mervyn’s department stores, Linens ’n Things, and KB Toys have already disappeared into bankruptcy, and mall vacancy rates topped 7 percent last year, the highest level since 2001. “It’s an absolute disaster,” says Howard Davidowitz, an investment banker specializing in retailers. “What a mall represents is discretionary spending, and discretionary spending is in a depression.”

Is it really that bleak?

The data suggests that it is. For decades, American consumers could always be counted on to spend more than they did the year before—the only question was, by how much. But in the past 12 months, retail sales in the U.S. have dropped an unprecedented 9.8 percent. The economic collapse has landed especially heavily on the old-line department stores, such as Sears and JCPenney, that anchor many malls. As their sales and profits have tanked, they’ve been pulling out of malls, to the distress of the smaller merchants that depend on the larger stores to feed them traffic. The Turfland Mall in Lexington, Ky., recently lost Dillard’s as an anchor tenant, setting off a cascade of closings. “We have no choice but to leave now that Dillard’s is leaving,” says Bill Parker, who just closed his shoe store.

If malls go, could downtowns come back?

In this economy, not likely. Some developers have already tried building “lifestyle centers” in downtown areas left blighted when stores and shoppers fled to the outskirts. But there is no single “big fix” that will pump life back into downtowns full of boarded-up stores, says development expert Teresa Lynch.

The last mega-mall?

Talk about bad timing. June is supposed to mark the opening of the Xanadu mall on a stretch of New Jersey swampland just across the Hudson River from Manhattan. But it might not happen. When developer Larry Siegel broke ground on the $2.2 billion, 2.4-million-square-foot mall in 2004, he promised that Xanadu would be the ultimate “shoppertainment” experience, with an indoor ski slope, a fishing pond, and even a 30-foot-high chocolate waterfall. But as the recession has deepened, plans have been repeatedly scaled back. Prospective tenants, including Virgin Megastore and Borders, have bailed out, and no anchor tenants have yet been signed. Siegel is vowing to carry on. “We’re not building this for the next 18 months,” he says “but the next 50 years.” The chocolate waterfall, though, has been scaled down to 4 feet.

I predict near immediate bankruptcy if and when this boondoggle is complete. There's lots more details in the article. It's well worth a read. In other commercial real estate news ....

Construction Financing Ceases To Exist

Oregon Live is reporting Construction of downtown Portland high-rise is halted by tight credit.

Construction of the Park Avenue West tower in downtown Portland has stopped, with the project frozen three floors below ground.



Tom Moyer, one of Portland's most successful real estate developers, will halt work Monday on his 32-floor tower now under construction in downtown Portland. Moyer's decision to pull 350 workers off the Park Avenue West is a stunning sign that no city, no person and no block is spared from this recession.

"Construction financing does not exist right now," said Vanessa Sturgeon, president of TMT Development, Moyer's company, which is building Park Avenue West.

"I get a little bit mad about it," said Bart Eberwein, vice president at Hoffman Construction Co., general contractor on the project. "The banks are getting the money, but they're not lending it out. Until private lending picks up, we are going to be in a prolonged slump."

Moyer had expected to pay for the construction himself and had kept up payments to his contractors.

Real estate brokers had taken to saying that Park Avenue West would be built by the "Bank of Tom Moyer." Moyer owns land throughout the Willamette Valley, and Sturgeon said the company planned to borrow against some of those holdings to fund the Park Avenue West.

But even the "Bank of Tom Moyer" has its limits.

Sturgeon said the book values of Moyer's other land holdings have fallen. Plus, lenders have tightened their requirements on loans and cut the amount of debt that borrowers can incur. In past years, lenders would allow developers like Moyer to borrow up to 75 percent of a property's value. Now, it's 45 percent, Sturgeon said.

"It's unprecedented," she said.

At the job site Friday, the concrete, mechanical and iron workers left the site about 3 p.m. with the building 15 percent finished. It remains just a parking garage, frozen for now about three floors below ground.

Another "immune" city goes down hard.

Honk If You Need Land

Vacant car lots are piling up, so Honk If You Need Land

It appears that vacant auto dealerships may soon join obsolete enclosed malls and the growing inventory of empty big-box stores on the list of former robust retail properties in need of an alternative use.

Already at overcapacity, automakers have been trying to reduce the number of dealerships for years with mixed success. The recession will likely do what the automakers could not -- bring the number of dealerships in line with demand. President Obama's call for more extreme turnaround measures for both General Motors and Chrysler is only expected to add to the number of un-needed dealerships.

According to the National Automobile Dealers Association (NADA), approximately 900 dealerships closed and 200 dealerships opened in 2008, for a net loss of 700 dealerships, leaving the country with approximately 20,000 franchised auto dealers. According to Detroit-based research and advisory firm, Urban Science, 2008's decline in auto dealership count is the largest the firm has recorded since it started collecting data in 1991. For 2009, the NADA forecasts a net loss of 900 additional dealerships.

According to CoStar Property Professional, 5.4% of auto dealership properties across the country are vacant and another 3.7% are available for lease, bringing total availability to 9.1%, or 1,023 "spaces" for lease; this compares to 3.5% vacancy about one year ago. Additionally, CoStar COMPS data shows that there are currently 1,861 auto dealership properties actively listed for sale across the country.

Unfortunately, CoStar's statistics show that auto dealership properties coming onto the market aren't going anywhere fast. The current "for sale" inventory not only dwarfs the number of auto lots that have sold so far this year (only 95), but is about equal to the total number of auto dealership properties that sold during 2008, 2007, and 2006 combined. Additionally, auto dealership properties currently for lease have already been on the market for an average of 9.6 months.

Chinese Drywall Poses Health Risks

Here's a bonus residential housing story to consider: Chinese drywall poses potential risks.

At the height of the U.S. housing boom, when building materials were in short supply, American construction companies used millions of pounds of Chinese-made drywall because it was abundant and cheap.

Now that decision is haunting hundreds of homeowners and apartment dwellers who are concerned that the wallboard gives off fumes that can corrode copper pipes, blacken jewelry and silverware, and possibly sicken people.

Shipping records reviewed by The Associated Press indicate that imports of potentially tainted Chinese building materials exceeded 500 million pounds during a four-year period of soaring home prices. The drywall may have been used in more than 100,000 homes, according to some estimates, including houses rebuilt after Hurricane Katrina.

The drywall apparently causes a chemical reaction that gives off a rotten-egg stench, which grows worse with heat and humidity.

So far, the problem appears to be concentrated in the Southeast, which blossomed with new construction during the housing boom and where the damp climate appears to cause the gypsum in the building material to degrade more quickly. In Florida alone, more than 35,000 homes may contain the product, experts said.

A Florida Department of Health analysis found the Chinese drywall emits "volatile sulfur compounds," and contains traces of strontium sulfide, which can produce the rotten-egg odor and reacts with air to corrode metals and wires.

Dr. Patricia Williams, a University of New Orleans toxicologist hired by a Louisiana law firm that represents plaintiffs in some of the cases, said she has identified highly toxic compounds in the drywall, including hydrogen sulfide, sulfuric acid, sulfur dioxide and carbon disulfide.

Prolonged exposure to the compounds, especially high levels of carbon disulfide, can cause breathing problems, chest pains and even death; and can affect the nervous system, according to the CDC.

John Willis is moving out, even though he can hardly afford to walk away from a house he's owned for just three years. He cries as he speaks of his 3-year-old son's respiratory infection, which eventually required surgery.

"They basically took out a substance that looked like rubber cement out of my 3-year-old son's sinuses," he said. "My wife and I are now faced with the choice between our children's health and our financial health. My children are always going to win on that."

The subdivision's builder, WCI Communities, is in Chapter 11 bankruptcy restructuring and can do little more than log complaints, said spokeswoman Connie Boyd.

Add drywall to the list of tainted products coming from China. That list includes tainted cough syrup, toxic pet food, toys decorated with lead paint, and now toxic drywall. Lawsuits are going to fly over this story, as well they should.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Bernanke's Scorecard Revisited

In Bernanke's Deflation Preventing Scorecard I noted how Bernanke has fired every bullet from his 2002 “helicopter drop” speech Deflation: Making Sure "It" Doesn't Happen Here.

Yet the outcome was still deflation. Bernanke was a perfect 13 of 13.

Susanne Trimbath writing for NewGeography takes a different approach on the success of Bernanke in The Rogue Treasury.

The U.S. Treasury took enormous powers for itself last fall by telling Congress they would use it to “ensure the economic well-being of Americans.” Six months after passage of the Emergency Economic Stabilization Act of 2008 Americans are worse off. Since it was signed into law on October 3, 2008, here are the changes in a few measures of our economic well-being:



The U.S. government has already paid out $2.9 trillion, with further commitments to raise the total to over $7 trillion – a number that Senator Max Baucus (D-MT) said “is mind-boggling, indeed it is surreal. It’s like having a second government.” The money Treasury is passing out is more than all government spending in 2008. The Senate Finance Committee, of which Baucus is chair, held a hearing on March 31 (TARP Oversight: A Six Month Update). The three parties established as monitors in the 2008 legislation were there to testify. Without exception they “are deeply troubled by the direction in which Treasury has gone.”

Senator Chuck Grassley (R-IA) suggested [referring to former-Secretary Paulson] that Congress “was awed by a person who comes off of Wall Street, making tens of millions of dollars. … You think he knows all the answers and when it’s all said and done you realize he didn’t know anything more about it than you did.”

Repeating the closing remarks from my take ....

Bernanke has failed. "It" has happened. The proof is irrefutable as detailed in Humpty Dumpty On Inflation and Fiat World Mathematical Model.

What now Ben? More of the same stuff that failed miserably before, only on a grander scale?

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Bernanke's Revolution

Inquiring minds are reading a long and glaringly misguided post by the Washington Post on How Bernanke Staged a Revolution.

Bernanke's ability to understand and synthesize the views of his colleagues goes a long way toward explaining how he has revolutionized the Federal Reserve, which under his leadership has deployed trillions of dollars to try to contain the worst economic downturn in 80 years.

Famously soft-spoken, Bernanke is an unlikely revolutionary. He is, after all, a career economics professor who lacks the charisma of a skilled politician.

Yet in the past 18 months, Bernanke has transformed that stodgy organization, invoking rarely used emergency authorities. His decision to do so has drawn criticism -- he has transcended traditional limits on the role of a central bank, stretched the Fed's legal authority and to some, usurped the responsibility of political authorities in committing vast sums of taxpayer dollars.

More than a few times over the past year, senior Fed staff members have logged into their e-mail accounts to find an unusual message. Subject: Blue Sky. Sender: Ben S. Bernanke.

The point of the e-mails has been to encourage them to think of creative ways that the Fed can guard the economy from the downdraft of a financial collapse.

This is an institution that not long ago could spend the better part of a two-day policymaking meeting deciding whether its target for short-term interest rates should be 5.25 percent or 5 percent. But in this crisis, rate cuts, the most common tool for helping the economy, have lacked their usual punch. The Fed already has dropped the rate it controls essentially to zero, meaning there is no room left to cut.

That's why Bernanke's Fed has been trying to dream up ideas out of the clear blue sky. The result has been 15 Fed lending programs, many with four-letter acronyms, most of them unthinkable before the current crisis.

"For many months, the chairman was asking 'how can we escalate?' " said William C. Dudley, president of the New York Fed. "There was a general consensus that we were getting to the point where traditional monetary policy tools might not be sufficient."

"In a crisis, the task a chairman assigns is 'Find a way to do this.' It's not a question of 'Can we do this?' " said Vincent Reinhart, who was a senior Fed staffer until 2007 and is now a resident scholar at the American Enterprise Institute.

Nowhere does the article point out that Bernanke and the Fed are responsible for this problem. Bernanke did not dissent one time with Greenspan or his policies. Bernanke was late to see every problem we now face, even to the point of frequently cheerleading right along with the housing buffoons that subprime would be contained. Of course nothing was contained. And it was the Fed's policy of bailing out banks and throwing money at every problem that led to this crisis.

Eventually, throwing money at problems stops working. Moreover, Bernanke along with Geithner want banks to increase lending, right now, when it was reckless lending and Fed sponsorship that is causing bank failures right now.

Rather than praising Bernanke for stretching legal authority, the Washington Post ought to be scared to death by it.

The Beatification of Ben Bernanke

Dean Baker gets it right in a short and sweet rebuttal of the Washington Post article in The Beatification of Ben Bernanke.

The Washington Post gave a glowingly positive account of Ben Bernanke's efforts to deal with the economic crisis. Missing from this discussion was any mention of the fact that he deserves a large part of the blame for this crisis.

Bernanke was a persistent and vigorous bubble denier, first in his capacity as a member of the Board of Governors and then on his becoming Fed chair in January of 2006. Even as the bubble began to unwind in the winter of 2007 he gave assurances that the problems would be contained in the subprime market. After he engineered the takeover of Bear Stearns in March of 2008, Bernanke told Congress that he did not see another Bear Stearns out there. Needless to say, he was surprised by the collapse of Lehman and the market's response six months later.

The media have a tendency to write glowing accounts of people in positions of power in the United States. Unfortunately, reporters often seem to believe that it is their job to promote confidence in the people in power. It isn't.

Well stated Dean. Thanks.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Bartering Services to Combat the Recession

A new trend of bartering services or simply offering good deeds without pay to others less fortunate is catching on. Please consider Trading Good Deeds At Estonia's Bank of Happiness.

To become a client [of the Bank of Happiness], an Estonian must register online, listing the useful things that he can do for others (eg, grocery shopping, walking a dog, fixing cars) and those that he would like done unto him (eg, having a suit darned or windows cleaned).

“We call it a bank because we want to bring forth a new set of values”, says Tiina Urm, a 26-year-old who helped to think up the idea and is the closest thing that the Bank of Happiness has to a manager. “We just want to create a network where people don’t pay for what they need but get it from each other. It’s a way of allowing people, especially those who have lost their jobs, to keep doing what they do — and to bring people together.”

The Bank of Happiness is not necessarily peddling reciprocation — a teenager might fetch a weekly shop for an elderly neighbour, even if the neighbour would be unable to do much in return. Instead, a stranger who has seen the good deed listed by the neighbour online will step in to help the teenager.

The bank is hoping to create virtuous arcs, rather than circles, of unadulterated altruism all over Estonia, with the feeling of goodness serving as its own reward. The helper also receives tangible evidence of his kindness: a “banknote” — printable from the bank’s website — offered by the grateful recipient in lieu of money, inscribed on the back with the date and nature of the deed. The note can then be passed on to another good Samaritan. And there is no system of equations to codify how one deed compares with another; the system will be self-regulatory.

If you think that this sounds like a recipe for freeloading, then you, like me, underestimate the optimism running through Estonian veins. Every young person I stopped to ask about it — the older ones tended not to speak English — said that they would register.

Airi Kivi, a psychologist and family therapist working with Urm, reveals that they considered releasing only a prescribed number of BOH banknotes — each marked Tanutaht, meaning “thank you” — into circulation. But they ran into legal problems, because a limited print run made it resemble a real currency. An infinity of banknotes is, anyhow, appropriate to the cause; the milk of human kindness should come in a bottomless jug.

Another figure closely identified with the Bank of Happiness is Rainer Nolvak, an Estonian internet entrepreneur who now runs Curonia Research, a company that specialises in technology start-ups.

Nolvak, already well-known in his home country, he came to international prominence last year when he suggested a national clean-up day called Let’s Do It 2008. On May 3 last year, 50,000 Estonians — 3 per cent of the population — rallied to the cause, arriving at the dumps with spades and plastic bags. An operation that would otherwise have taken three years and cost about £20 million took one day (give or take a few months of planning) and cost only £500,000.

Nolvak realised that the clean-up day achieved much more than pristine forests. “On that day, people were happy afterwards. It made me think — this is how work was done 100 years ago,” he says. “It wasn’t just boring old work, it was done collectively and gave us a feeling of connectedness.”

And so the idea of the Bank of Happiness was born: “It is based on the assumption that doing good is good for you. It will touch everyone with a conscience.”

He believes that anyone taking advantage of the scheme will soon be “outed” online. After all, trust is the key component of an altruistic economy and those abusing it are no better than fraudsters.

Money-free trading systems exist all over the world, including in the UK. Here they are known as local exchange trading systems (lets) and each has its own notional currency (in Milton Keynes it is the “concrete cow”, or CC). Members of MKLetNet pay £10 for mailings plus 20 CCs to get a directory listing what other people want and can offer, with contact details. The exact details of each transation are left to members but, once agreed, the deals are registered with a lets accountant.

The trouble with a money-free system is working out how different services compare. For example, how does a babysitter, who may charge £8 an hour, exchange services with a plumber, who may charge £40 an hour?

One solution is to value everyone’s time equally; this is the basis of time banks. One hour equals one time credit; the aim is to maintain a balance of zero, meaning that you have given as much time as you have received. An estimated 300 lets and time banks operate in Britain, numbering 100,000 people.

The time banking movement was set up Dr Edgar Cahn in America. Cahn’s view was that “the real work of society, which is caring, loving, being a citizen, a neighbour and a human being” was not addressed by market economics.

Government Wants Its Cut

In the US, the Bank of Happiness would likely get raided by the IRS. Participants would be subject to an official crackdown asking for back taxes and huge penalties.

To understand why, please see Internal Revenue Service guidelines on Topic 420 - Bartering Income.

Bartering occurs when you exchange goods or services without exchanging money. An example of bartering is a plumber doing repair work for a dentist in exchange for dental services. The fair market value of goods and services received in exchange for goods or services you provide must be included in income in the year received.

The Internet has provided a medium for new growth in the bartering exchange industry. This growth prompts the following reminder: Barter exchanges are required to file Form 1099-B for all transactions unless certain exceptions are met.

If you receive income from bartering, you may be required to make estimated tax payments. Refer to Publication 525, Taxable and Nontaxable Income, for additional information.

Bartering Services Required To Report Members

Please note that bartering services are required to report members as per IRS Tax Requirements for Barter Exchanges.

Under Regulation 1.6045-1(f)(i), barter exchanges are required to make a return of information reporting the name, address, and taxpayer identification number of each member or client providing property or services in the exchange, the property or services provided, the amount received by the member or client for such property or services, the date on which the exchange occurred and other information required on Form 1099-B. This means that multiple Forms 1099-B may be required for member clients with multiple bartering transactions during the year. To learn more about 1.6045-a(f)(i), Returns of Information of Broker and Barter Exchanges, visit the Electronic Code of Federal Regulations site, click on "Simple Search" and enter 26 in the Title and "Returns of information of brokers and barter exchanges." in the "Search for" field.

Penalty for Not Filing or Filing Incorrect Forms 1099-B

Failure to file Forms 1099-B can result in significant penalties under Internal Revenue Code Section 6721. The penalty is based on when correct information returns are filed. The penalties are:

• $15 per information return if filed correctly within 30 days of the specified due date with a maximum penalty of $75,000 per year ($25,000 for small businesses).
• $30 per information return if filed correctly more than 30 days after the due date, but by August 1 with a maximum penalty of $150,000 per year ($50,000 for small businesses).
• $50 per information return if filed after August 1, or not filed, with a maximum penalty of $250,000 per year ($100,000 for small businesses).
• A minimum of $100 for each unfiled information return for intentional disregard.

If you want to barter in the US, Uncle Sam wants to tax you on it. For private individuals to be subject to this sort of nonsense is of course ridiculous.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

How To Take Advantage of Low Mortgage Rates

President Obama declares "good news" and says Timing right for millions to refinance.

Declaring "good news" in the midst of an economic meltdown, President Barack Obama on Thursday urged families to take advantage of near-record low mortgage rates by refinancing their home loans.

"We are at a time where people can really take advantage of this," Obama said, seated with a handful of homeowners who have already lowered their bills.

But he also warned people to watch out for scam artists, cautioning, "If somebody is asking you for money up front before they help you with your refinancing, it's probably a scam."

Rates on 30-year mortgages inched upward this week but remain near the lowest level in decades, allowing borrowers with strong credit and stable jobs to save money if they refinance.

The average rate on a 30-year fixed-rate mortgage rose to 4.87 percent this week, up from 4.78 percent last week, Freddie Mac reported Thursday. That was the lowest in the history of the survey, which dates back to 1971.

Low rates have sparked a surge in refinancing activity, with nearly 80 percent of new home loan applications coming from borrowers seeking to refinance. Freddie Mac's sibling company, Fannie Mae, refinanced $77 billion in loans last month, nearly double February's volume.

"The main message we want to send today is there are 7 to 9 million people across the country who right now could be taking advantage of lower mortgage rates," Obama said in a photo opportunity in the Roosevelt Room. "That is money in their pocket."

What's The Rate?

Inquiring minds are asking "What's the rate?"



The above table is courtesy of Bloomberg. The quotes are from Bankrate.

What's The Real Rate?

The above table is an interesting but not particularly accurate reflection of the mortgage market.

A Certified Mortgage Planning Specialist who I respect a great deal (let's call him "MJ") informs me he was locking loans yesterday at 4.5% with 1 point interest. Today the rate was 1/8 point higher at 4.625%.

A second mortgage broker who I trust is David Donhoff at NoBullFinancial. Email: David at NoBullFinancial.

David Donhoff tells me that yesterday he could get rates as low as 4.25% on a 30 year fixed with 1 point (1%). Today the buydown would be 1.8%. In other words, rates change all the time.

Shop The Broker, Not The Rate

The best way to lock in a rate is to work with a knowledgeable broker who understands the business. That person can work for you (rather than for himself) and and will be willing to lock in a rate for you on dips. In other words, shop the broker not the rate.

Someone shopping rates will have to keep at it every day and still might miss the lows because rates change intraday. Furthermore, one needs to keep track of details like buydown points. The difference between a 1.8% buydown and 1% buydown can be a huge dollar savings on a big mortgage.

Finally, rates change based on FICO scores and other factors on a day to day basis as well. Someone shopping rates may not be able to sort this all out unless they are very familiar with the mortgage market.

Currently, FICO scores above 660 are needed and to get the best rate FICO scores above 680 are needed. Donhoff informs me that there is no additional benefit for FICO scores above 740.

Loan rate details can change at any time.

Extremely Attractive Rates

These rates are extremely attractive. But they are skewed. For example, interest only loans are close to 6.25% while 30 year rates are as much as 2% lower. This spread is unprecedented, as are 30 year rates at 4.25-4.5%. Both Donhoff and "MJ" think this is the bottom (or at least close to it) for mortgage rates.

Artificially Low Rates

Rates are low and people should take advantage of them while they can. But it's important to understand why rates are low. Please consider the following chart.

Fannie Mae 30 Year 4% Debt



Fannie Mae debt is on a tear. Remember that yield and price move in inverse fashion. Thus a price rally in bonds equates to lower yields. "MJ" notes that mortgage rates are 150 basis points (1.5%) better than November.

However, these prices are artificial. The government is buying Fannie Mae and Freddie Mac debt to force down yields.

30 Year Rate Lowest On Record

Bloomberg is reporting U.S. MBA Mortgage Applications Index Rose 4.7 Percent Last Week.

Mortgage applications in the U.S. rose last week to the highest level in three months as borrowing costs near record lows boosted home sales and refinancing.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 4.7 percent to 1,250.6 in the week ended April 3, a fifth straight gain, from 1.194.4 the prior week. The group’s refinancing gauge rose 3.2 percent and its purchase measure jumped 11 percent.

The average rate on a 30-year fixed loan rose to 4.73 percent from 4.61 percent the prior week that was the lowest level since the group began records in 1990.

At the current 30-year rate, monthly borrowing costs for each $100,000 of a loan would be $520.44, or $65 less than the same week a year earlier, when the rate was 5.78 percent.

$750 Billion Commitment

The Fed has committed to buying $750 billion in mortgage-backed bonds. Furthermore, Fannie and Freddie are willing to refinance at up to 105% the value of the home. 100% loans will come at a higher rate or with higher fees and points but the key point is the risk of default is now being forced on the backs of taxpayers.

Nonetheless, for those with good credit who meet the required conditions of the “Making Home Affordable" program, now is a great time to be taking advantage of these historically low rates.

Eligibility Requirements

• You are the owner occupant of a one to four unit home.
• The loan on your property is owned or securitized by Fannie Mae or Freddie Mac.
• At the time you apply, you are current on your mortgage payments (current means that you haven’t been more than 30-days late on your mortgage payment in the last 12 months or, if you have had the loan for less than 12 months, you have never missed a payment).
• You believe that the amount you owe on your first mortgage is about the same or slightly less than the current value of your house.
• You have income sufficient to support the new mortgage payments.
• The refinance improves the long term affordability or stability of your loan.

The "Making Home Affordable" program is a huge moral hazard that is going to cause further taxpayer bailouts down the road. However, if you meet the above conditions, you may as well take advantage. And even if you don't meet those conditions, it will not hurt to see if you can get a better deal than the one you are in.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List