Posted by Michael A. Kamperman on July 29, 2009
The current health-care reform debate is stuck with one-dimensional thinking. For example, President Obama is stating that if we don’t reform health-care then the Medicare Trust Fund will run out of money within 10 years. But doesn’t the “Medicare Trust Fund” exist on paper only. It’s not like the Medicare Trust Fund is an endowment with a diversified portfolio. For years the federal government has been including the revenues collected for Medicare and Social Security in its budget and issuing them IOU’s in the form of Treasury bonds. Let’s face it, both Medicare and Social Security are programs of the federal government and neither will run out of money unless the federal government runs out of money. The federal government is not going to run out of money within the next 10 years. The next form of one-dimensional thinking is that national healthcare expenditures that are rising faster than the overall rate of inflation is “bad thing” for America and its economy. It would be if we imported most of our healthcare. But in fact the vast majority of health-care spending in America is geared toward our domestic economy. In fact, health-care is the only sector of the economy that is still growing jobs. As long as the quality of care keeps improving it doesn’t matter if it costs more. If I am willing to pay up for a big screen HDTV, why shouldn’t I pay up for high-tech health-care? Will America be better off if we cut health-care spending and send even more people to the unemployment lines?
The next form of one-dimensional thinking is that most of the Americans that are without health insurance are suffering. Nothing could be further from the truth. Everyone who needs medical attention can walk into an emergency room and receive treatment, whether they can pay for it or not. A friend of mine is a surgeon. He told me he has 5 different rates for removing an appendix. The first price is his stated full price. This is the price that someone without health insurance, but with money, pays him. He says almost no one ever pays this rate. The next price is the price large insurance companies negotiate with his practice. The next price is the price Medicare dictates it will reimburse him for an appendectomy. Then, an even lower price is the price Medicaid will reimburse him. And finally, there is the charity price, which is $zero. He gets up in the middle of the night if the hospital calls and removes an appendix regardless of what portion of his fee he will be collecting. So health-care insurance reform is only geared to the non-payers and the full price payers. Since I have health insurance, the higher fee Blue-Cross/Blue Shield pays him covers the lesser fee paid by others. I am already “taxed” by my health insurance premiums by paying a higher rate for an appendectomy. The working poor, whether they are legal citizens or illegal immigrants, have no money and they don’t pay because they have few if any assets at risk to a lawsuit. Healthy young men and women often go without health insurance because they don’t perceive the cost/benefit of having a policy as being worthwhile. So the only people health-care reform will really benefit is the middle-class with assets to lose and no policy due to choice, pre-existing conditions, or because they were dropped by their existing policy holder due to risks and costs. And, the ones who are unfairly gaming the system are employers of the working poor who pay nothing for their workers health-care even though they all receive because of the health insurance “premium tax” paid by others.
Why don’t we have hospitals build clinics for the working poor funded by savings from treating sore throats in the emergency room and by a tax on employers that don’t provide health insurance? Why don’t we tell the insurance companies it is illegal to drop coverage for health reasons for anyone they gave a policy to? Why don’t we offer a subsidy to health insurance companies to help cover the costs of a mandatory window whereby anyone with a pre-existing condition has to be offered coverage? Why don’t we tell insurance companies everyone must be offered the same rate for health insurance whether they are an individual or a large employer? What I don’t want to see happen is some grand cost cutting experiment with health-care that drives the country into an even deeper depression as nurses hit the unemployment lines. What I also don’t want to see is an America that goes to Vegas to gamble, goes to the Super Bowl, goes to get tummy tucks and manicures and pedicures, but then turns around and tells Grandma she needs to walk off into the woods to die because we can’t afford end-of-life care.
Posted by Michael A. Kamperman on July 27, 2009
An analysis by the Wall Street Journal showed that the total loan portfolios of the nation’s 15 largest banks shrank by an aggregate of 2.8% in the second quarter. Most of the lending that did occur in the quarter went to mortgage refinancing and credit renewals for existing business customers. Less than half of the loans that were made represented new commitments by the banks representing new transactions for the economy. The banks claim that demand remains weak from potential borrowers, and potential borrowers claim the banks have overly restrictive lending standards. The truth is both viewpoints are true. Many of the highest quality borrowers are looking to contract, not expand. Meanwhile, the banks have significantly raised the bar on what it takes to qualify for a new loan, whether it is a consumer loan or a business loan. According to the WSJ, loan portfolios at the nation’s 15 largest banks have decline by 10% from year ago levels after acquisitions are netted out. The fact that lending is still contracting at the same pace as it did in the last couple of quarters means there is a real possibility the economy contracted at a similar pace as well. Economists are looking for a much more benign contraction in U.S. second quarter GDP. I would not be surprised if the number is much worse than expected, just like it was in Britain.
Fed Chairman Ben Bernanke, in a much hyped Town Hall style meeting to be broadcast this week on the PBS News Hour program, claimed that back in 1929 and 1930 the world was experiencing a normal recession. Then, major Central Europe lenders (Austrian Creditanstalt) faltered and further panic set in causing the Great Depression. His thesis is that since the large “banks” have been rescued the crisis has been averted. But we have no way of knowing if the rumors of trouble with certain banks indeed kicked off the Great Depression. It could be that the event was just the next inevitable phase of the crisis and the back then hoped for “green shoots” of 1931 vanished. We have built up significant hope in 2009 that the worst is behind us and blue skies are just around the corner. However, the shrinking credit extended by our largest banks is painting a very different story.
What I think Chairman Bernanke is missing is the world of lending has changed since 1931. Back then most of the credit extended in the economy came from commercial banks. If the commercial banks were lost the economy would be lost with them. However, in the 2000’s the vast majority of lending has come from the shadow banking system fueled by the asset-backed securities market. This market is dead and as CIT can attest the shadow banking model is broken. Yet our largest banks have not only failed to pick up the slack, they too are shrinking the credit they extend to the economy. Perhaps the real cause of the Great Depression was the inevitable “Great Un-Ravel” (yes I just coined that term) that was destined to occur one way or another as a global economy with too much debt ran into contracting economies and deflation. Just like early 1931, we have a global economy with massive imbalances that are still unraveling. We just don’t know what will be the next shoe to drop.
Posted by Michael A. Kamperman on July 24, 2009
For those thinking that the U.S. can ride the coat-tails of the global economy to recovery, think again. GDP in the U.K. fell by a worse than expected .8% in the second quarter. This dismal performance included the benefits of stimulus spending, .5% central bank interest rates, bank rescues, and quantitative easing. In Spain, unemployment for the second quarter reached 17.9%. Many Spanish construction workers are on a temporary status and are thus easier to lay-off than other workers in other parts of Europe. Admittedly, those championing growth prospects in the rest of the world often refer to the emerging economic BRIC countries, especially China. Well, in the first half of this year consumer price inflation fell 1.1% from the previous year. This in spite of significant stimulus spending on public projects by the Chinese government and the government and the government’s insistence that state own banks ramp up lending. The state owned banks supposedly doubled the lending rate from the year before. While these actions created a second quarter growth rate in China of 7.9%, it is strange that China is experiencing deflation. The rampant growth rates in China over the last several years have been accompanied by high single digit rates of inflation. In fact, inflation had been a key concern for the Chinese government up until now. To me, Chinese deflation is signaling a weakening Chinese consumer and a weakening Chinese private sector economy.
The Obama economic dream team needs to figure out how to generate internal demand, rather than chase after some pipe-dream of export led growth. And the Federal Reserve needs to up its program of quantitative easing and print more money before deflationary forces take hold in the global psyche. Once the desire to save replaces the desire to spend it could take a generation or two to reverse the psychic fabric of society. The economic paradox we face is that while spending too much got us into our economic mess, it only by spending even more that we can get out of it. Otherwise, the debts that are weighing down the economy will become even more difficult to deal with as global GDP shrinks and deflation decreases the value of assets and earnings.
Posted by Michael A. Kamperman on July 22, 2009
I personally like President Obama, a lot. He loves and plays basketball, and so do I. He is smart, articulate, inspiring, and personable. If he fails, America fails. If America fails, we all fail. So yes, absolutely I do not want to defeat him, I want him to succeed. But I’m afraid the economy was pushed into the back seat tonight at the President’s health care conference. We all know health care financing is screwed up in America and needs reform. We do not need to treat sore throats for people without both health insurance and money in the emergency rooms of hospitals all over the country. We do not need to see lower middle class people lose their life savings if they have an unexpected health care emergency. But a robust American economy is what pays for the best health care in the world. The President is wasting political capital on an important issue, but not the most important issue. The current estimates are that 1.5 million Americans will run out of unemployment benefits before the end of the year without receiving a job offer. Tonight, the President claimed that the stimulus bill not only saved jobs, it has created jobs. Mr. President, the only measure of job creation for a President is for the unemployment rate to go down, not up. Any other measure is arguing how many angels can sit on the head of a pin.
Unfortunately, the President is signaling that the economy will have to take a back seat to his more pressing issue of health care financing reform. Mr. President, there is no more pressing issue in America than good paying jobs. I will tell you what your advisers, so called, don’t have the guts to tell you. If unemployment keeps going up rather than down, then you will be a one term wonder. So please do not tell the American people your administration has “created” jobs. Instead, please create them.
Mr. President, how can you actually create jobs? First, fix the broken credit markets. Second, understand that America is the world’s leading economy, not an economy that “is unprepared to compete in the 21st Century.” We are the world’s leading economy in high tech and biotech. We have chosen to outsource our manufacturing to China and others and we can rescind that decision at anytime. The way forward to escape the new great depression is not to become the next export driven economy. My question to you is export to whom? My advice is shake up your Whitehouse team and get some economic advisers that will give you straight talk. You are not the next FDR. When FDR became President the country had an unemployment rate well over 20% and everyone knew we were up the creek without a paddle. But this is not the spring of 1933, it is the spring of 1931. In 1931 the vast majority of Americans did not realize they had already entered the Great Depression. Currently, the vast majority of Americans do not realize we have entered a new great depression. When they figure this out they will blame you, not President Bush. I’m not saying you shouldn’t reform health care. I am saying that if you don’t rescue the economy, then you can kiss your second term goodbye.
Posted by Michael A. Kamperman on July 21, 2009
Today, Ben Bernanke felt compelled to answer his inflation hawk critics rather than ignore them. He sought to assure everyone that the Fed has an exit strategy from its support for the economy and will pull the trigger when the time is right. Astonishingly, he did all of this while telling Congress that the economy remains weak, the risks remain to the downside, and unemployment should continue to rise. What Bernanke has done is box the Fed into a neutral policy of no more action one way or the other for the time being. He is content to wait and watch to see if the policies enacted so far are enough to stabilize and revive the economy. The Obama Administration has adopted the same watch and wait strategy. The question going forward is what are they waiting for? Since both the Fed and the Whitehouse have conceded that unemployment will reach 10%, will we see no more actions to aid the economy until unemployment reaches 11%? 12%? 13%?
Ben Bernanke, renowned scholar of the 1930’s great depression, missed a golden opportunity to confront his critics and declare that more needs to be done to revive the economy and that he is willing to adopt whatever policy is necessary to restore sustainable economic growth in America. He should have built public support for more action, not less. Instead, by tipping his hat to the need for an exit strategy he has made it much more difficult for the Fed or the Whitehouse to come forward with the next plan to revive the economy. Those that wonder if such a plan will be necessary should consider the plight of the states. The Financial Times is reporting the combined 2010 fiscal budget gap for the states that must be closed by spending cuts or tax increases amounts to $143 billion. This includes the extra money the states have received from Washington in the stimulus bill to pay for some of the state’s unemployment and Medicaid costs. The saying that as California goes so goes the country is economically ringing true right now.
The steps necessary to revive the economy will require significant public support to before they can be implemented. Mr. Bernanke is killing support for further action. He started talking about, and coined the term, “green shoots” this spring. Now this summer he blinks in the face of bond vigilante and China criticism and talks about potential exit strategies. While Chairman Bernanke has led the Fed to take unprecedented action in the post World War II era, the actions they have taken have been too little and too late. Now, he is compounding the problem by not pounding the table and cramming quantitative easing down the bond vigilante’s throats. Washington needs to tell the public the truth, that much more needs to be done or the economy will continue to slide. The Ostrich strategy Washington has adopted is no strategy at all.
Posted by Michael A. Kamperman on July 20, 2009
On Tuesday, July 21, 2009, I will be interviewed on the Mind Your BIZness on-line radio program. The program is broadcast continuously for 24 hours only on July 21. The link for those of you that are interested and would like to listen is: http://www.mindyourbizness.com/ If you do happen to listen feel free to post your thoughts on the comment section for this post. After my 15 minute interview I thought gee I wish I had said this, or I wish I would have emphasized that point. I simply had way too much to say and way too little time to say it. This led me to think what would I say to President Obama about the economy if I only had 2 minutes of his valuable time? I certainly wouldn’t have time to go into the background of analyzing how the economy wound up in the position it did. I wouldn’t have time to waste saying who was to blame for the mess we are in. I would only have time to emphasize the seriousness of the situation and what must be done about it.
The first thing I would say is this, “Mr. President, the number one problem facing America is the never ending stream of foreclosures . We currently have a national supply of single family homes to accommodate 70% of all Americans. However, well under 50% of Americans currently qualify to purchase a new home because mortgage standards are way too tight. There is a huge discrepancy between supply and demand. As long as there are more homes to buy than there are buyers, the foreclosures will not stop. The first step in fixing the economy is providing access to affordable mortgage credit to far more Americans. Mr. President, the same problem exists for autos. Fold Fannie Mae and Freddie Mac back into the federal government and start guaranteeing home and auto loan securities.” Well, after those few short sentences my first minute of the President’s time is up. I now have only one minute left to make another point. I need to make sure it is the most important point I have to make.
My second point would be “Mr. President, we have millions of people who are unemployed with many more on the way. Last year one in two college graduates had a job offer upon graduation. This year it is one in five. This has to change now. Lower the eligibility age for Social Security and Medicare to encourage older workers to retire and open up jobs for younger workers. To pay for this have a heart to heart meeting with the Federal Reserve and have them buy back most of the outstanding Treasury bonds in existence. This would save the country $400 billion a year in interest payments, which can then be used to pay the $400 billion cost of lowering the retirement age to 60. Quit letting China and the bond vigilantes dictate U.S. policy. Print them their checks first and tell them thanks for their respected input, but at this time the U.S. is choosing to avoid any chance at re-entering a new great depression.” That’s it. My two minutes are up. For a rambling version that fails to concisely make the above points you can tune in to Mind Your BIZness.
Posted by Michael A. Kamperman on July 17, 2009
We should not have let Goldman Sachs, J.P. Morgan, and the other banks payback the TARP funds until lending returned to near normal levels in the economy as a whole. These companies greatly benefitted at taxpayer risk from the avoidance of a systemic meltdown in the financial system. They are still benefitting from the FDIC guaranteed bonds they issued to secure below market interest rates. And of course, no one benefitted more than Goldman Sachs when they received 100 cents on the dollar for their subprime “hedges” from the AIG bailout. What Goldman Sachs, J.P. Morgan, and the other banks did with the TARP funds was they sat on them. Rather than extending credit to the real economy and taking on some lending risk for the good of the country with the TARP funds, these companies dramatically tightened credit standards for the good of themselves. The banks are now the only lending game in town. They must step up and fill the lending void. You can lead a horse to water, but you can’t make him drink. Now that they are returning the TARP money what should the Treasury Department do with the funds?
No doubt Treasury will continue to prop up the largest zombie banks with some of the funds. But this is not enough to help the economy. The shadow banking system the Treasury has decided to kill off with its decision not to rescue CIT accounted for over 70% of the lending in the U.S. in recent years. Treasury should take the funds and re-acquire Fannie Mae and Freddie Mac and make them a single agency of the federal government once again. Then, Fannie Mae should begin guaranteeing jumbo mortgages of up to $2 million for securitization. Additionally, the new Fannie Mae should enter the auto securitization market and begin to guarantee pools of new and used auto loans. Fannie Mae should require a downpayment and verification of income and assets before guaranteeing a loan. Additionally, in order to reduce foreclosures Fannie Mae should refinance any mortgage in America with no appraisal. Why shouldn’t ordinary Americans who are working hard to make payments on their underwater mortgages not receive the same support the Treasury was so anxious to extend to Goldman Sachs?
Ironically, this proposal would not only benefit the Main Street economy; it would also benefit the Wall Street economy. While I think Treasury has done more than enough at this point for Wall Street, it has not come close to doing nearly enough for Main Street. One other idea to help Main Street would be for the Treasury to partner with private capital and start a brand new well capitalized bank to compete with Goldman Sachs, J.P. Morgan, and the other banks. One of the reasons the banks are not lending is there are not enough lending dollars available for the whole economy. Hence, the banks are able to lend all of the money they need to even with extremely tight credit standards. By starting a new bank with zero legacy issues and FDIC guaranteed bond funding Treasury would place a powerful new competitor in the market that would force the existing banks to loosen their credit standards or lose market share. If Goldman Sachs and J.P Morgan do not want to loan out Treasuries money, then let’s give the money to a new bank that will.
Posted by Michael A. Kamperman on July 15, 2009
Have we learned nothing from letting Lehman Brothers go belly up without a plan to absorb the fallout? I guess not. The Washington Post is reporting tonight that the Obama Administration has decided not to provide anymore financial aid to small and medium business lender CIT. In truth the shadow banking system model is dead. The asset-backed securities market is dead and it no longer makes sense to borrow short and loan long. But why not arrange a government sponsored takeover ala Bear Stearns, Washington Mutual, or Wachovia? If Treasury Secretary Timothy Geithner supports this he should be fired by President Obama. If Treasury Secretary Geithner does not support this, then he should tender his resignation to the President. Tonight, up to a million small businesses will be scrambling to find an alternative lender. Most of these business owners will go to banks that have tightened credit to ridiculous levels and will find no lifeline. Unfreakinbelievable!
This would be alright if the Obama Administration had cleared the decks for the banks to absorb the lending lost to the shadow banking system. But they have not. There is no “bad bank” to absorb toxic assets. The recent scheme to leverage and purchase the toxic assets from the banks for pennies on the dollar is a flop. The shadow banking system, when combined with Wall Street and the asset-backed securities market, accounted for over 70% of all of the credit extended in America in recent years. The banks need to step up and absorb this loss of credit to the nation. But the banks remain zombies and are in no position to do it.
The Great Depression happened because the dominoes kept falling into each other. Tonight, if the Washington Post’s reporting is accurate, more dominoes just crashed into the Main Street economy. We are in a depression now and it is rapidly heading towards a New Great Depression. The only hope is that Washington will find the political will to stand up and be counted. That did not happen tonight. Nero fiddled while Rome burned. I imagine our Congressman, Senators, and President have a symphony to attend tonight. If the FDIC is not going to risk losses and support CIT, then the FDIC needs to tell the banks that were so anxious to repay the TARP like Goldman Sachs and J.P. Morgan that they can no longer issue bonds guaranteed by the FDIC. Please, let’s support Main Street for once.
Posted by Michael A. Kamperman on
The global economic depression is not over, not close. Bank of America/Merrill Lynch replaced their market strategist and the new one has called an end to the recession. After the markets closed yesterday, there was jubilation over a much better than expected report from Intel. One talking head on the show Fast Money gleefully declared that Intel is indicating the recession is over. Funny, I must not have studied hard enough in my economics classes. I didn’t know that a near monopoly company that reports a greater than 15% year over year drop in revenues indicates anything good for the economy. Now I do know that some stocks are overvalued and some stocks are undervalued every day in the stock market. Having declining revenues that are still better than expected can be positive for the price of a stock. But declining revenues from the world’s premier microchip company with few competitors is not indicative that the depression is over. To think so because of the happy talk is to be tricked by an economic optical illusion.
Merrill’s old analyst David Rosenberg is not calling for an end to the economic malaise. To me he is one of the few economists out there that seems to really get it. He said “what I see is a forecasting community that continues to make predictions based upon linear data that have been completely interrupted by the secular change in the credit cycle. And I think because this is all so far beyond our own collective experience, the tendency has been to underestimate the role that asset deflation and debt repayment plays in the economy….The average FICO score today now is down to 690 after the borrowing spree of the past seven years. Yet to obtain a plain-vanilla 30-year fixed rate mortgage, the minimum score is 760. For a 15-year HELOC, it is 740. And, for a three-year auto loan, the minimum FICO is 720.”
Two corporate reports yesterday were much more telling about what is really going on in the economy. Martin Marietta said they saw a significant drop in orders for crushed stone to build and repair roads. The stimulus money is not showing up in shovel ready infrastructure projects and the states are cutting back. Yum brands lowered their outlook because of the weakness they see amongst the consumers in their two biggest markets, the U.S. and China. That’s right, in spite of the Chinese government’s stimulus money actually building shovel ready roads and bridges, the Chinese consumer is slowing down. As the consumer goes, so goes the economy. The consumers will continue to sit on their wallet as long as unemployment keeps rising and the ability to borrow money to buy a home or a car remains excessively tight.
Posted by Michael A. Kamperman on July 13, 2009
It is not only tight credit markets that will restrict economic growth going forward. One of the bigger drags on the economy will be from the losses absorbed by both pension plans and endowments. In the last few years many chief investment officers have moved their portfolios into economically sensitive investments that have not performed well in the last two years. Many of these investments are illiquid such as direct investments in real estate and timber. What’s worse is many pensions and endowments have invested in private equity deals that require the institutions to cough up more cash as some of these overly leveraged businesses struggle. Pensions and endowments have annual requirements to pay cash out to either the beneficiaries or chosen charities. We have already witnessed the early fallout from these phenomena when Harvard University announced layoffs. Many endowments have payouts tied to formulas that use a fixed percentage of assets based on a 4 year rolling average of the endowments value. The losses in these portfolios will lower the cash they provide to their institutions in the coming years. At least the endowments only have to payout based on the assets that they have.
The more significant drag on the economy will come from underfunded pension plans. Many organizations have made small contributions to their pension plans in the last few years as the growth of plan assets exceeded the cash contributions necessary to keep the plans properly funded. Now, not only will many organization have to begin to make the full contributions calculated by their accountants, they will also have to make catch up payments to cover recent losses. This will create a large and unplanned for payroll expense on large corporations, large charitable organizations, and especially municipal governments including cities and states. A recent study done for some Long Island cities in New York showed that inorder to fund the promised pension payouts to fireman and policeman the cities would need to contribute up to 40% of annual payroll to cover the liability. Needless to say, the only two options short of a rapid rise in asset prices are for these cities to cut jobs or raise taxes. Both will be a drag on economic growth.
The most important question for those like Treasury Secretary Geithner that are predicting a near return to sustainable growth is where will the growth come from? Rising unemployment is killing the consumer. Lower sales revenues are hurting businesses and municipal governments. Going forward, the asset losses experienced by pensions and endowments will affect the real economy. And, the credit markets still remain broken.
