Unemployment is soaring while the president and Congress contemplate a massive energy tax and regulatory scheme and a government take-over of health care. Investors are watching and seem to have concluded that the economy is not getting better anytime soon:
Stocks have drifted lower in recent days as the market’s confidence about the economy took hits from a poor jobs report for June, waning consumer confidence and plunging commodities prices.
[. . .]
“Uncertainty has crept back into the picture,” said Carl Beck, partner at Harris Financial Group. “We started to get some data that put a damper on some of the optimism that had been growing about the economic recovery and that sort of put everything on hold until we start hearing from companies.”
The Dow fell 161.27, or 1.9 percent, to 8,163.60. It was the lowest finish for the blue chips since April 28.
There is reason to be gloomy when one considers the overall economic picture. The New York Times reports:
“We’re a little concerned,” said Nicholas Bohnsack, sector strategist at Strategas Research Partners. “The economy has moved toward less-bad territory, but it’s struggling to move into good, or a recovery mode.”
[. . .]
Underscoring concerns about financial stocks and consumer credit, the American Bankers Association said that delinquency rates on home equity loans, auto loans and others rose slightly in the first three months of the year as people lost their jobs and fell behind on their debts. In all, 3.23 percent of loans were 30 days behind or more through the end of March, up from 3.22 percent a quarter earlier, the group reported. . . As earnings stagnate and consumers put more of their disposable income into savings — 6.9 percent, according to recent government figures — analysts are concerned that corporate revenue will flatten or keep falling. And many corporations will be able to beat earnings expectations only by cutting jobs and other costs, which could worsen the already weak job market.
The president assures us there is “nothing” he would have done differently on the economy. (Nothing?) His agenda is devoid of any measures to encourage private-sector growth or spur employment. He would rather devote his energies to government-run, universal health-care. But his domestic priorities are spectacularly ill-suited to assist in the economic recovery. As Michael Gerson writes:
Initially, Obama counted on an atmosphere of economic crisis to grease the passage of any legislation he pronounced an economic need. But it hasn’t worked out that way. Whatever their virtues, restricting carbon emissions and expanding the health entitlement do not constitute a direct response to America’s financial and economic failures. No economic theory suggests that a round of new federal regulations and entitlements would result in a burst of economic growth.
Continuing the spend-a-thon and panoply of measures hostile to free-market activity seems doomed to fail. When will it be time to hit the “reset” button on Obama’s domestic agenda? If he does not, the voters may have to in November 2010.
In the end, we’re the ones who’ll have to bail out the whole government (the ones they’ve been waiting for?). If the government does things that reduce our desire and ability to fund it, that biggest bailout won’t happen.
1
Bob Miller Says:
March 24th, 2009 at 8:52 AM
In the end, we’re the ones who’ll have to bail out the whole government (the ones they’ve been waiting for?).
There’s no Bail Out at the end of a Ponzi Scheme,only Default. The Lords of our Economy,Bernie Madoff,no difference.
The alternatives are to ask Congress for even more bailout dollars or to nationalize the banks. Which would you prefer? The administration adopted the one market-based plan that has a shot at working. Contentions may not see the wisdom of the plan, but conservatives do.
#3,
You can’t solve an Insolvancy problem with more debt,the Banks are Insolvant,the “Toxic Assets” are unsaleable unless you’re at 10 cents on the dollar,or less. The only solution for the “Assets” is to burn every scrap of paper that every Derivative is printed on. Then, we burn our worthless currency,and start over.
China calls for new global currency
By JOE McDONALD – 55 minutes ago
BEIJING (AP) — China is calling for a new global currency controlled by the International Monetary Fund, stepping up pressure ahead of a London summit of global leaders for changes to a financial system dominated by the U.S. dollar and Western governments.
http://www.google.com/hostednews/ap/article/ALeqM5h8KoPe1MqwkZWOTIikcwb8Tg2W3AD974D8384
RCAR takes the concern over debt too far, as usual, but his general point certainly applies. It isn’t this scheme, which we should hope will ameliorate the situation somewhat and at least tries to address a real problem, but the remainder of the agenda which indulges every hard left erongeous zone at the cost of many trillions of dollars to people up and down the economic specturm that is the more serious problem.
As for those seniors that invested with some discretion and withdrew from the market early enough to try to ensure some reliable income, good luck with the $$$ of which we will soon need 10s of thousands to buy one of our super stylish No. 1′s (qalitatively) very cheap suits.
“the FDIC would guarantee 72 cents in funding for an asset purchased for 84 cents on the dollar. The feds and private investors would each put up six cents in capital. If the asset rises in value over time, the taxpayer and investors share the upside. If it falls further, then the taxpayers would absorb by far the biggest chunk of the losses.”
I’d like to take a chunk of that dough to a casino and try my luck. How do I apply?
#4, RCAR: “You can’t solve an Insolvancy [Sic!] problem with more debt,the Banks are Insolvant [Sic!]”
You surely can – in some cases.
Whether they can in this case, remains to be seen…
8contra Says:
March 24th, 2009 at 10:09 AM
#4, RCAR: “You can’t solve an Insolvancy [Sic!] problem with more debt,the Banks are Insolvant [Sic!]”
Our system is Capitalism;so where is the Capital lurking? The only Capital the US Government has left is its Gold. The problem is that we(The Public) don’t know how much,if any,Gold we have because an Accounting of our Gold has been thwarted by Government regulators. To your point,somewhere along the line,debt has to produce assets if we are going to climb out of Insolvancy;do you really see that happening? Be Honest.
The way this looks to me (no financial genius, for sure) is that the government is asking the same people who made money hand over fist getting us into this mess (large hedge funds, multi-billionaires, etc.) to share in whatever upside windfall will come from these toxic asset sales. So the same people who ran our economy into the ground by taking on no risk while making huge profits are allowed to participate in, well, a chance to make huge profits without taking on any risk. And they are not just allowed to do it, we’re begging them to do it! The problem is the little guy – Joe Taxpayer – is screwed either way. If the assets end up appreciating in value, the big money Wall Street guns take the lion’s share (without any concomittant risk), and the politicians take the rest (to spend on their favorite playthings), and Joe Taxpayer is left without even an opportunity to buy into this potential pot of money (have to be a billionaire or a government entity to do that). If the assets end up in the crapper, Joe Taxpayer is on the hook for the entire bill.
You can’t trust anything this Government says.
#9: “debt has to produce assets if we are going to climb out of Insolvancy”
Agreed (except for the spelling of insolvency).
“do you really see that happening?”
In the best possible scenario, yes. Some “toxic” assets may
recover, making money for their buyers. I am not predicting
this – or any other outcome. I don’t know enough to predict;
what is more, I suspect that in this situation, nobody knows
enough, we are in uncharted waters…
My point was that in principle it is possible for someone
to get out of insolvency with borrowed money;
this has often happened.
I’ll make another, somewhat related point:
in an important sense, the world’s fundamentals are
more than sound. I’ll make it in another post, not to distract attention.
#12,”In the best possible scenario, yes. Some “toxic” assets may
recover, making money for their buyers. I am not predicting
this – or any other outcome.”
I’ll bet you didn’t think of this one:just because the “toxic assets” are purchased,that doesn’t detoxify them,they remain toxic. (From Peter Morici on CNBC last night. The other panel members were so stunned by the concept,well,not a peep.)
# 13
Maybe no one responded because the concept is wrong. “Toxic assets” are not called “toxic” beause they are underperforming. They are called “toxic” because they make the institution that holds them on its balance sheet an unreliable counterparty. Moving the poison from a bank, where counterparty confidence is key, to the US Treasury, where counterparties don’t care about it, does indeed “detoxify” them.
#14,” to the US Treasury
Morici was referring to the Private purchases of the TAs under Geithner’s Public-PRIVATE plan.
Right, and the PPPs have no counterparties, so the assets have no toxicity in their hands. And you, of all peoplle, should know that the US Treasury is the muscle behind the PPPs.
“I’ll make another, somewhat related point:
in an important sense, the world’s fundamentals are
more than sound. I’ll make it in another post, not to distract attention.”
Technical progress is real and rapid, even if our financial institutions
are rotten; and technical progress is the true motor of the world.
I don’t believe conventional economic indicators adequately
measure this progress.
We are in a post-industrial, information-processing era.
The world’s information processing
doubles, probably, every two or three years.
(This is a guesstimate, but its precision is not essential
to the argument.)
This is doubling of real measurable assets;
information quantity is no less objective a measure than GDP
or inflation-adjusted income.
Or consider – just for example – another measure: the
depth of ocean drilling. A few decades ago, the limit
was a couple of hundred feet – then it grew apace; now it is
as deep as the ocean is deep – many miles – and then miles
under the floor, and slantwise in whatever direction.
These are real measurable fundamentals.
So is, e.g., the world’s fleet of some ten thousand space satellites.
all built in recent decades, and vitally necessary to the modern
way of life.
So is the newly abundant food production: worldwide, more people
suffer from obesity now than from hunger! Compare that
with the Ehrlich-Holdren global famine predictions of circa 1970,
with a much smaller world population.
Or take housing – but forget the “bubble” for the moment:
there’s more square feet of living space per person
in the USA than ever before.
Or take life expectancy – increasing, in advanced countries,
by a couple of months per year; in developing countries faster.
These are true assets; and if statistics tell us the average person is
getting poorer year by year, then statistics deceive.
No, the average person of today is really richer than
a billionaire was in the sixties or seventies.
All of the latter’s billions would not buy him the Internet
access that we are enjoying at this moment.
An if his heart failed, he couldn’t buy an angioplasty which
is routine today.
There are zillions of such vital, necessary assets that we take
for granted, whose absence young people cannot even imagine,
but which have been created very recently; and others are being
created now. Such fundamental progress will, I hope, pull us out of
the crisis – if we only let it.
Unless socialist reactionaries, with their medieval notions of a
windmill economy, and equally medieval anti-greed policies,
stop the engine of progress; or unless terrorists do the
same with some WMD, I am optimistic – whatever happens
with financial instruments, with debts, banks and currencies.
Those are very important things, but not the most important.
RCAR: just because the “toxic assets” are purchased,that doesn’t detoxify them,they remain toxic.
This does not detoxify them, but time may.
Their buying also buys time…
I put “toxic” in quotes. It is not a fully objective characteristic.
What appears toxic now, may prove non-toxic later.
There are debts that are “toxic” because they are risky. The risk,
however, may pay off – though it may not.
There are packages that bundle good and bad debts – and the good
are tainted with the bad. Time may help disentangle them.
To repeat: I make no prediction. This is a problem for the experts –
but the experts are somewhat discredited now – and even if they
were not, the problem may be new to them.
The stock market is, apparently, undecided, too. It gained yesterday
on the new possibility that this might work. If it were dead
sure (as you seem to be) that it cannot work,
then there would probably have been no gain.
#16, and the PPPs have no counterparties.
Thanks for the Info,I hope you’re right. Could Counterparties sue the PPPs? Do they have any legal leverage?
The Geitner turd securities bailout plan will have two effects: (1) It will demonstrate a (heavily subsidized) “market” price, the best of all possible “market” prices, which if not accepted by a bank will (2) cause a further write-down of the particular securities, something those banks’ auditors will insist occur (unless mark-to-market becomes mark-to-make-believe-”judgement” as recently proposed by the Financial Accounting Standards Board). Consequently, this plan might well two-tier the banking system, bailing out those smart enough to sell, but leading to forced mergers (nationalization without the n-word) of those not smart enough to sell. Either way, this will not change bank management, except in the banks forced to merge with an arguably stronger or better subsidized bank. The idiots generally will be left in place to stampede into the next lemming-like financial instrument, a repetitive process occurring every 10-15 year due to bankers’ desperate search for allegedly stable fee income to offset the business cycle swings in loan income. No one is dealing with the search for fee income, which is the perpetual heart of systemic bank problems.
btenney at #11 is right. With bills of attainder now to be presented at whim, and the prohibition on ex post facto laws having gone out the window, who would put the health of his business in Congress’ hands?
Unfortunately, it has come to this: I would not trust or do business with any company that joined in Geithner’s scheme. I’m afraid there will be a lot of us in that category. If Congress is willing to abrogate lawful employee contracts — and go back on its own word — for transient demagogic demonstrations, how can we expect Congress to respect the rights of clients or shareholders?
A bankruptcy judge sounds like a pillar of refuge right about now.
#20 -
I think you have it backwards. The banks that don’t sell can use the prices that the selling banks got to re-mark their own assets, getting not only the benefit of a write-up but the opportunity to profit if the assets in fact perform better than the market value says they will. (Remember, the PPP will pay (significantly) less than the manager thinks the assets will produce, so if the managers are right in their pricing, a bank would be right to hold onto the assets if it can afford to have them on its balance sheet at the PPP offering price.
RCAR #21 – As far as I can tell, the PPPs are investment pools. They hold assets and have no liabilities. They have no counterparties, so no counterparties can sue them. The counterparty issue relates to future deals that a bank may want to do. It can’t borrow because potential lenders (i.e., counterparties) don’t trust its balance sheet, and they don’t trust its balance sheet because it has toxic assets on it.
The Geithner plan detoxifies the assets that are sold by putting them in the hands of an entity who does not borrow. But it also detoxifies bad assets in the hands of banks by establishing a value for them. I recognize that the market value offered by the PPP is bogus in the sense that the PPP is a subsidized purchaser, but event that bogus price will be less than the PPP manager thinks the bonds will produce on a discounted PV basis. Thus, a counterparty deciding whether to lend to a bank that holds these assets can treat the asset as being “worth” at least the PPP offering price in assessing the bank’s ability to repay loans.
In this sense, the PPP is really substituting its judgment for the discredited ratings agencies by saying, in effect, “we at PIMCO have kicked these tires, and we think the loans will pay off sufficiently to cover our offering price and then some.” That is a source of confidence to potential bank counterparties, and that’s why it detoxifies the loans.
Only a “progressive” administration could get away with a plan that represents an enormous distribution of wealth to the absolute wealthiest in society – the largest planned transfer this country has ever seen.
Its clear that the people behind the scenes are playing this administration like the amateurs they are. The federal government does not need private capital to buy bank assets. Swapping low yielding treasuries for cheap mortgage securities could easily be done without enriching the man behind Moveon.org and other large hedge funds who just happen to be democratic supporters. Its breathtaking what they can get away with when they are dealing with an administartion that doesnt understand how governemt finances and monetary policy work.
Sean – “Its breathtaking what they can get away with when they are dealing with an administartion that doesnt understand how governemt finances and monetary policy work.”
Geithner and Bernanke understand what they’re doing. And Obama understands perfectly well what he wants them to accomplish. He may be hazy on the technicalities; but he can read the total on a campaign contribution check, and he learned in Chicago politics that it’s only polite to reciprocate.