Thursday, April 23, 2009

Sanity Under Pressure

German chancellor Merkel rejects new stimlus programs as ecnomic data worsens.

"Chancellor Angela Merkel stood firm in rejecting any new German economic stimulus program even as the International Monetary Fund said the recession is worse than previously thought and called for measures to spur demand."

Merkel shrugged off calls for more spending despite a report by Germany’s leading economic institutes which will show tomorrow that Europe’s biggest economy may shrink as much as 6 percent this year -- almost three times the contraction of 2.25 percent forecast by the government in January.

The coalition won’t expand its 82 billion euro ($107 billion) stimulus agreed under two separate programs, Merkel told reporters in Berlin today after a meeting with business leaders and economists. “We shouldn’t talk about a third stimulus package,” Merkel said. “Instead we’ll let current measures take effect.”

While I don't agree with the reasoning behind rejecting more stimulus, I do agree with the action itself. What the IMF and Keynesian economists fail to realize is that there is infinite demand. The problem is not that there isn't any demand, but rather that there aren't the resources to fulfil that demand.

I have demand for a Ferrari, but the lack of financial resources prevent me from making such a purchase. If the government wants me to fulfill my demand for a Ferrari in order to 'grow' the economy by stimulating jobs associated with Ferrari production, the stimulus money that it uses to fulfill these demands must come from somewhere, or more specifically, someone. That someone is a group of people called wage earners who will subsequently be taxed to pay for my new Ferrari. And if there's not enough money coming in from taxes, the rest can be procured by inflating the money supply.

The opportunity costs that arise from distribution of wealth and manipulation of currency, as well as the distortions created to natural supply and demand of goods and services, will, at best, act as a road block to an economic recovery.

Monday, April 13, 2009

Surge in Taxpayer Delinquency

Apparently, more Americans are wary of the U.S. tax man this year.

"Our calls are up 280 percent," said Richard Boggs, founder and chief executive of Los Angeles-based Nationwide Tax Relief, a firm that helps delinquent taxpayers resolve tax issues.

With household balance sheets under pressure, more U.S. households are having trouble keeping up with their day-to-day bills and struggling to pay their taxes.

"Folks are not paying their taxes because they are spending it on necessary living expenses," said Kristin Lavieri, an accountant with Weinstein & Anastasio, PC in Hamden, Connecticut.

Many withdrew funds from 401k and IRA retirement savings accounts before the permitted time, unaware of the punitive taxes and penalties this would generate, said Larry Walker Jr, president of the financial and tax services firm 4-Serenity Inc in Snellville, Georgia.

"Folks are not paying their taxes because they are spending it on necessary living expenses," said Kristin Lavieri, an accountant with Weinstein & Anastasio, PC in Hamden, Connecticut."

These tax burdens will only serve to hinder an economic recovery. Meanwhile, law makers are up to more tax shenanigans - 20% tax on cell phones?!

On a positive note, the Anti-Tax Tea Party movement is gaining traction.

Tuesday, April 7, 2009

Communities Printing Their Own Cash

From an article in USA Today,
"The systems generally work like this: Businesses and individuals form a network to print currency. Shoppers buy it at a discount — say, 95 cents for $1 value — and spend the full value at stores that accept the currency.

Workers with dwindling wages are paying for groceries, yoga classes and fuel with Detroit Cheers, Ithaca Hours in New York, Plenty in North Carolina or BerkShares in Massachusetts."
You read that correctly, they are printing money. They assign it an abritrary value and then they print it. This system is far worse than our national currency, which at least at one point in time was pegged to a real asset.
"Ed Collom, a University of Southern Maine sociologist who has studied local currencies, says they encourage people to buy locally. Merchants, hurting because customers have cut back on spending, benefit as consumers spend the local cash."
But is Mr. Collom aware as to why people are encouraged to spend? Local currencies are doomed from the start. Since local currency is worthless everywhere else, there is no incentive in holding on to it. Whoever is a recipient of a local currency would want to convert it to something that has value everywhere. Thus, no one would really want to hold a local currency. Hyperinflation of that currency will be the only outcome.
"Pittsboro, N.C., is reviving the Plenty, a defunct local currency created in 2002. It is being printed in denominations of $1, $5, $20 and $50. A local bank will exchange $9 for $10 worth of Plenty."We're a wiped-out small town in America," says Lyle Estill, president of Piedmont Biofuels, which accepts the Plenty. "This will strengthen the local economy. ... The nice thing about the Plenty is that it can't leave here." "
Apparently they did not learn their lesson the first time. On the bright side, local currencies will hyperinflate out of existence before they can cause real damage like our current currency is doing. How long will that $0.95 cents on the dollar last? My guess is not long, after all, there will be 'Plenty' more where they came from.

Monday, April 6, 2009

Timothy Geitner: "Don't Believe Us!"

On a speech given at 11:10am on April 6, 2008, Timothy Geitner advised Americans to

" wary of any organization that claims to guarantee success and demands upfront fees."

The only organizations that I can think of that fit that description is Bernie Madoff's Hedge Fund and the Federal Government. In fact, when testifying before Congress, Tim Geitner repeatedly stressed two facts: 1) That his plan will work. 2) That it requires upfront funds provided for by the tax payer.

Saturday, April 4, 2009

Housing Bubble + FASB Solution Analogy

Taken directly from BoomBustBlog. Enjoy:

Heidi is the proprietor of a bar in Detroit. In order to increase sales, she decides to allow her loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around about Heidi's drink-now pay-later marketing strategy and as a result, increasing numbers of customers flood into Heidi's bar and soon she has the largest sale volume for any bar in Detroit. By providing her customers' freedom from immediate payment demands, Heidi gets no resistance when she substantially increases her prices for wine and beer, the most consumed beverages. Her sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes these customer debts as valuable future assets and increases Heidi's borrowing limit.  He sees no reason for undue concern since he has the debts of the alcoholics as collateral. At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS - all rated AAA by Snooty's Investor Services, Snitch and Standard and Get Poor's - for a fee, of course. These securities are then traded on security markets worldwide. Naive investors don't really understand the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, their prices continuously climb, and the securities become the top-selling items for some of the nation's leading brokerage houses.

One day, although the bond prices are still climbing, a risk manager at the bank (subsequently fired due his negativity), decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. Heidi demands payment from her alcoholic patrons, but being unemployed they cannot pay back their drinking debts. Therefore, Heidi cannot fulfill her loan obligations and claims bankruptcy.

DRINKBOND and ALKIBOND drop in price by 90 %. PUKEBOND performs better, stabilizing in price after dropping by 70 %. The decreased bond asset value destroys the banks liquidity since the banks borrowed up to 32x their initial capital to buy the bonds (even more in their off balance sheet bar companies) and a mere 20% drop in these bonds would wipe them clean, save government intervention. The events effectively prevent it from issuing new loans since the market won't give them more than 30 cents on the dollar for the best of them. The suppliers of Heidi's bar, having granted her generous payment extensions and having invested in the securities are faced with writing off her debt and losing over 80% on her bonds. Her wine supplier claims bankruptcy, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 50 workers. The Detroit stock market drops, then rallies vociferously as the Fantasy Accounting Standards Boards states, under duress and a sleeper choke hold from honest politicians that causes them to tap out (UFC style), that the bank may now use their discretion in valuing these bonds due to the fact that no on in the entire world wants to buy them really has no bearing on their true value!

The bank and brokerage houses are saved by the Government following dramatic round-the-clock negotiations by leaders from both political parties. The funds required for this bailout are obtained by a tax levied on employed middle-class non-drinkers.

Finally an explanation that alI can understand...

Wednesday, April 1, 2009

Zero Credibility

Straight from the horses' mouths, a quick time line of Paulson's & Bernanke's economic assessments:

February 28, 2007 - Dow Jones @ 12,268

March 13th, 2007 – Henry Paulson: “the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."

March 28th, 2007 – Ben Bernanke: "At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained,"

March 30, 2007 - Dow Jones @ 12,354

April 20th, 2007 – Paulson: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained." , "All the signs I look at" show "the housing market is at or near the bottom,"

April 30, 2007 - Dow Jones @ 13,063

May 17th, 2007 – Bernanke: “While rising delinquencies and foreclosures will continue to weigh heavily on the housing market this year, it will not cripple the U.S.”

May 31, 2007 - Dow Jones @ 13,627

June 20th, 2007 – Bernanke: (the subprime fallout) ``will not affect the economy overall.''

July 12th, 2007 – Paulson: "This is far and away the strongest global economy I've seen in my business lifetime."

August 1st, 2007 – Paulson: "I see the underlying economy as being very healthy,"

October 15th, 2007 – Bernanke: "It is not the responsibility of the Federal Reserve - nor would it be appropriate - to protect lenders and investors from the consequences of their financial decisions."

December 31, 2007 - Dow Jones @ 13,265

January 31, 2008 - Dow Jones @ 12,650

February 14th, 2008 – Paulson: (the economy) "is fundamentally strong, diverse and resilient."

February 28th, 2008 – Paulson: "I'm seeing a series of ideas suggested involving major government intervention in the housing market, and these things are usually presented or sold as a way of helping homeowners stay in their homes. Then when you look at them more carefully what they really amount to is a bailout for financial institutions or Wall Street."

February 29th, 2008 – Bernanke: "I expect there will be some failures. I don't anticipate any serious problems of that sort among the large internationally active banks that make up a very substantial part of our banking system."

March 16th, 2008 – Paulson: "We've got strong financial institutions . . . Our markets are the envy of the world. They're resilient, they're...innovative, they're flexible. I think we move very quickly to address situations in this country, and, as I said, our financial institutions are strong."

March 18th, 2008 - Bear Stearns Bailout Announced

May 7, 2008 – Paulson: 'The worst is likely to be behind us,”

May 16th, 2008 – Paulson: "In my judgment, we are closer to the end of the market turmoil than the beginning," he said.

May 30, 2008 - Dow Jones @ 12,638

June 9th, 2008 – Bernanke: Despite a recent spike in the nation's unemployment rate, the danger that the economy has fallen into a "substantial downturn" appears to have waned,

July 16th, 2008 – Bernanke: (Freddie and Fannie) “…will make it through the storm”, "… in no danger of failing.","…adequately capitalized"

July 20th, 2008 – Paulson: "it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."

July 31, 2008 - Dow Jones @ 11,378

August 10th, 2008 – Paulson: ``We have no plans to insert money into either of those two institutions.” (Fannie Mae and Freddie Mac)

September 8th, 2008 - Fannie and Freddie nationalized. The taxpayer is on the hook for an estimated 1 - 1.5 trillion dollars. Over 5 trillion is added to the nation’s balance sheet.

September 16th, 2008 - $85 Billion AIG Bailout “Loan”

September 19th, 2008 - $700 Billion Bailout Plan Announced

September 19th, 2008 – Paulson: "We're talking hundreds of billions of dollars - this needs to be big enough to make a real difference and get at the heart of the problem," he said. "This is the way we stabilize the system."

September 19th, 2008 - Bernanke: "most severe financial crisis" in the post-World War II era. Investment banks are seeing "tremendous runs on their cash," Bernanke said. "Without action, they will fail soon."

September 21st, 2008 – Paulson: "The credit markets are still very fragile right now and frozen", "We need to deal with this and deal with it quickly.", "The financial security of all Americans ... depends on our ability to restore our financial institutions to a sound footing."

September 23rd, 2008 – Paulson: "We must [enact a program quickly] in order to avoid a continuing series of financial institution failures and frozen credit markets that threaten American families' financial well-being, the viability of businesses, both small and large, and the very health of our economy,"

September 23rd, 2008 – Bernanke: "My interest is solely for the strength and recovery of the U.S. economy,"

October 31, 2008 - Dow Jones @ 9,337

March 31, 2009 - Dow Jones @ 7,609

If Bernanke and Paulson were doctors, and our economy was the patient, they would be in jail for malpractice.