Posted by Michael A. Kamperman on September 30, 2009
Despite the constant claims that the economy is in recovery by the happy talking Wall Street pundits, the Main Street economy cannot avoid the Great Unraveling of the new debt-induced global deflationary depression. The word out tonight is GM plans to shutdown the Saturn car brand after a deal to sell the brand to the Penske Group unraveled. Saturn will now join Pontiac on the scrap heap of the depression. Many more jobs will be lost. But the real killer for Main Street is the pending demise of CIT. One of the key lenders to small businesses is the shadow bank CIT. This company is more important to the Main Street economy than Lehman Brothers was to the Wall Street economy. The investment banking services provided by Lehman Brothers were for the most part duplicated by multiple other firms on Wall Street. Lehman simply represented the culmination of the run on undercapitalized banking and investment firms. After Lehman the federal government stepped in and back stopped the major banks and investment firms via the TARP. But the Obama economic team in all of its wisdom has decided not to support CIT with additional funds from the TARP. They have deemed that CIT is not too big to fail and does not pose a systemic risk to the financial system. CIT has well over half a million small business customers that rely on it for credit. Access to credit is the lifeblood of any small business that actually creates real jobs. Small businesses create a lot more net new jobs than large corporations. The Obama administration is being penny wise and pound foolish.
The economy cannot recover until the job creating engine of the U.S. economy is revived. Small business is the number one job creator in America. Yet the Fed and the Treasury have expressed little interest in supporting small businesses. While almost all of CIT’s larger and well capitalized customers will find alternative sources of credit, most of CIT’s small and under capitalized customers will be left to wither and die on the vine. The large banks that received TARP funds have been decreasing their loans to consumers and small businesses. They will not pick up the slack for many of these small businesses. Neither will any of the other large shadow bank lenders that are also re-trenching just like the large banks. We are left to watch the dominoes fall into each other one by one.
The Obama economic team is loaded with academicians and life long government employees. They just don’t get it. In business one often has to spend money to make money. By not risking taxpayer dollars to support small businesses the ranks of the unemployed will continue to grow. The federal government will not only lose taxpayers, they will spend a fortune on the unemployed both directly and indirectly in increased aid to the states. The let them eat cake attitude of the Washington elite will drive unemployment rates in America even higher than they are now. What will it take for this administration to put forward a real job creation plan? We already have 1 in 6 Americans that want a full-time job unable to find one. Mr. President, will we have to wait until the number rises to 1 in 5? The way things are going we could well reach that number in just a few months. Right now the number one issue in America is jobs. So is the number two and the number three issue. Without finding a way to extend credit to small businesses and consumers there is no way to lower unemployment in the U.S.
Posted by Michael A. Kamperman on September 28, 2009
Sheila Beard and the governing board of the FDIC will probably require banks to pre-pay their FDIC deposit insurance premiums for the next 3 years in advance. The reason is the FDIC has run out of money and there are still many troubled banks that need to be closed. Closing a bank costs money and the FDIC is required to have the cash available to fund the closing costs. The FDIC is not technically broke. Deposit insurance is backed by the federal government and the FDIC has a $500 billion line of credit from the U.S. Treasury that they can tap at anytime. But the mood in Washington is to do as little as possible for the economy and to kick the can down the road in the hope and prayer that an economic rebound will materialize to solve the economic problems. The last thing Washington is interested in doing is spending political capital to fix the economy. Hence, the FDIC is borrowing a page from the Treasury’s stress tests of the banks and prefers using smoke and mirrors to pretend everything is not really so dire as opposed to formulating real concrete solutions to fix the real problems. The FDIC has at least ruled out the sham scenario of borrowing money from the large banks that it backs to assure us our deposits are safe in those banks. The reason the FDIC has chosen an advance premium payment over the other options is because the accounting for the advance from the banks will not hurt the earnings of the banks. Basically, a bank will be allowed to expense over 3 years its premiums even though it is required to pay them up front, hence the smoke and mirrors.
What is truly troubling about the choice the FDIC is about to make is it confirms that no substantial additional help is coming from the Whitehouse to restore credit and create jobs. The board of the FDIC should stand up and be counted. It should tap its line of credit at the Treasury and declare that it will ensure that banks that are too weak to lend will be closed and their deposits will be transferred to institutions that will extend credit to consumers and small businesses. Of course, that would require fixing most of the large banks that the Treasury has turned into Zombies that keep cutting back on their lending to preserve capital. It would require creating a true “bad bank” that will absorb the toxic assets and free up the flow of credit once again. But that would require a lot more money and would use up political capital that is being saved for healthcare reform and then energy reform.
Accounting gimmickry gave us Enron. Accounting gimmickry gave us large banks with off-balance sheet SIV’s stuffed with AAA rated no money down, no job, bad credit mortgage-backed securities. Enough with giving us gimmicks. President Obama, please get yourself a new economic team that will tell you that you need to make hard choices. The same type of hard choices your generals are telling you need to make in Afghanistan. At least the military is laying it out on the line and giving you a clear picture of the truth and the ramifications of your decision. You need someone on your economic team that will tell you the truth about the suffering of the American people. You need someone, anyone, that will tell you more time and the stimulus plan will not heal the potentially mortal economic wounds our nation has been struck with. The last person who wants to see you go down as the re-incarnation of Herbert Hoover is me. The economic team you have now is giving you the same quality of advice that Hebert Hoover’s economic team gave him. For starters the FDIC is going to need a lot more money than just 3 years of upfront premiums.
Posted by Michael A. Kamperman on September 24, 2009
Last week President Obama sent China a stern message on fair trade when he slapped a 35% tariff on low end tire imports from China. China is basically expanding industrial capacity far beyond their own internal demand and is looking to dump excess supply onto the U.S. and other markets. In the last two years China’s share of the U.S. tire market has risen from 4% to 16%. China retaliated with a couple of trade restrictions against the U.S. But nothing is set to rattle world markets and global trade more than Britain’s attempt to grow exports ala China by driving down the value of the pound against other currencies. The Bank of England’s Head Governor Mervyn King told a regional newspaper a lower currency was desired by the British government to grow their share of the export market. The corollary of course is that a weak currency encourages local production and discourages expensive imports. The Obama administration also believes a strategy of growing exports and shrinking the U.S. trade gap is the right strategy to restore the economic health of America. Basically, Britain and the U.S. want their economies to look more like China’s. Correspondingly, this beggar they neighbor strategy is dependent upon the large net export nations in Asia such as China and Japan, plus Germany, to change their economic models and begin to produce less and import more. Fat chance! While this may look good in some wonkish white paper it is not going to happen in the real world. The export driven nations have taken a huge hit to their economies and global trade has dropped more in the last year than at any time since the early 1930’s. It is politically unrealistic to expect them to ask their citizens to endure higher rates of unemployment so that America and Britain can experience lower levels of unemployment. The imbalances in the global economy brought about by excessive debt levels are continuing to unravel. The Great Unraveling is as inevitable now as it was in the 1930’s. The leaders in the 1930’s weren’t dumb, they were desperate.
One of the widely blamed causes of America’s deep suffering during the Great Depression was the Smoot-Hawley Act which raised tariffs on thousands of imports sparking a global trade war. Back then the U.S. was a creditor nation with a positive trade gap. Today we are a debtor nation with the world’s largest trade deficits. A trade war will hurt us less and hurt China, Japan, and Germany more. While our risks from a trade war are not as great as they were in the 1930’s, that doesn’t mean we won’t feel some real pain and should avoid one at all costs.
President Obama is looking to re-orient the U.S. economy to borrow less, save more, and spend less. He wants us to become a creditor nation again and lead the world in exports. He only wants responsible people to have access to credit. He wants to see the federal budget deficits reduced. He wants to drive down the costs of healthcare in the U.S. and bring them in line with the per capita costs experienced by other industrialized nations. While these virtuous ideals sound good, in reality they are the opposite of what is needed to get the country out of our debt induced deflationary depression. We need to look to solve our own problems and not expect the rest of the world to solve them for us. With the whole world in a depression it is not possible for the world’s largest economy to export its way to prosperity. We need to re-kindle internal consumer demand. We need massive quantitative easing from the Fed. Unfortunately, the Fed is bowing to the pressures from the inflation hawks and has failed to increase its program of quantitative easing. The Fed will up this program in time. It is just a question of how much more pain the Whitehouse and the Fed are willing for us to take before they act. My guess is we will not see a concerted effort from Washington to provide further assistance to the economy until unemployment reaches 11% in a few months. Hopefully by then it will not be too late to head off at the pass a new depression worse than The Great Depression.
Posted by Michael A. Kamperman on September 22, 2009
I’m not holding my breath. The Fed seems more concerned about pundits and speculators hyping potential hyper-inflation than about poor working stiffs in America with no job. But at this meeting the Fed needs to take a stand and up its program of quantitative easing rather than signal a plan to unwind it. At the last meeting the Fed extended the deadline to complete its purchases of $300 billion in Treasury bonds from the end of September to the end of October to soften the impact when it withdraws support for the Treasury market. Many expect the Fed will similarly extend the purchase of federally guaranteed mortgage-backed securities into next year to taper out of that program. For the Fed to withdraw support for the markets it needs to affirmatively answer two key questions; is the real economy experiencing a sustainable recovery and is there sufficient capital from other sources to replace the extra cash the Fed has been pumping into the market? The answer is a clear no to the question of whether the economy is experiencing a sustainable recovery. The answer is probably no to the question of whether or not alternative capital resources are available to replace the Fed’s printed cash.
Over the weekend Edmunds reported that September auto sales are running at an annual rate of 8.8 million units, the lowest annual sales rate of the year. This is the worst year for per capita auto sales in the post World War II era, and this month is looking to be the worst month during the worst year for auto sales. That is not a sign of an economic recovery, it is a sign the economy is starting to resume its slide. And it is real time data. I look for a slide in homes sales to follow the slide in auto sales as soon as the first time home buyers tax credit expires on November 30.
The more interesting question is does the cash exist outside of the Fed to support the needs of the mortgage markets and the bond markets? While we won’t know for sure until the Fed pulls its support, it certainly doesn’t look like the funds exist. The FHA has reported its reserves are close to falling below the regulatory minimum. Rather than asking Congress for more money the FHA has decided to tighten its lending standards. That won’t be very supportive for lower priced home sales. Additionally, the NYT reported a shocking story that the FDIC was considering borrowing money from the banks it regulates because it is running out of reserves. The FDIC has a line of credit from the Treasury but is apparently reluctant to tap it. The Whitehouse wants to save any additional deficit spending for healthcare reform. It is afraid that the votes in Congress won’t materialize to spend more money if the Congress believes the economy needs a lot more deficit spending. At the same time there is going to be a push at the G-20 meeting to raise the capital reserve requirements on banks to reduce their overall risk. On the surface this seems like good policy. But in a debt-induced deflationary depression the last thing governments should be doing is adopting policies that will further shrink the money supply by further deleveraging the banks. This policy will only exacerbate the powerful deflationary forces already unleashed in the economy. The only way out of a deflationary depression is to spend one’s way out. Yet people cannot spend money they don’t have and investors cannot purchase mortgage-backed securities with cash they don’t have. The ball is in the Fed’s court and I am concerned they are about to fumble it.
Posted by Michael A. Kamperman on September 20, 2009
One of the controversial components of the way the unemployment report is calculated is the birth death model. The model was fully adopted in 2003 and is now part of the unemployment report. The model is designed to estimate the number of new small businesses started each month versus the number of small businesses that close down each month. This model has consistently added jobs to every monthly unemployment report and has yet to subtract jobs. Hence the controversy since everyone is seeing more local businesses close down than open up in their neighborhoods. But I think arguing only about quantity misses the point. We should also be debating the quality of new jobs being formed in America. The CEO of Office Depot Steve Odland said this morning on Fox News Sunday that his company is not seeing a recovery in the economy. He said most of the new jobs in America are created by small businesses. Most people starting a small business use either home equity loans or credit cards to start their businesses. This form of credit is extremely tight right now and new sources of credit have not emerged for entrepreneurs. He also claimed very little of the stimulus money is targeted to reach small businesses. Basically, if you lose your job it is currently very difficult to turn around and start a real company that provides a living wage for its owner and workers. Yet the birth death model has not been adjusted for the new credit environment and is still assuming we are partying like its 2006.
The New York Times profiled some of the new jobs created by the recently unemployed now known as accidental entrepreneurs. It noted that the Kauffman Foundation’s Index of Entrepreneurial Activity showed a slight uptick in 2008 over 2007 in entrepreneurship. However, Kauffman said “the patterns provide some early evidence that ‘necessity’ entrepreneurship is increasing and ‘opportunity’ entrepreneurship is decreasing.” Examples of these new companies were a brother and sister who sold 70 bicycle bags to hold keys and wallets for an average of $30 per bag, a former Lehman Brothers employee who started a college recruiting consultation company but has yet to sign up her first client, and a mother and daughter who started a cookie company with sales reaching $300 per month. These new “jobs” cannot provide a living wage and are really sidelines and hobbies. Yet if these people report to the Department of Labor they have started a small businesses they are counted as self-employed and not unemployed. It is no wonder then that Bank of America’s credit card charge-off rate has reached 14.5% and is now deviating substantially from its normal historical correlation with the official unemployment rate which is currently 9.7%.
The credit crisis can be fairly blamed on the credit rating agencies for placing the AAA rating on pools of loans to homebuyers with no money down, no job, and bad credit. However, it is economists and their failed econometric forecasting models that are preventing additional and meaningful federal government support for job creation. These alchemists defend an unemployment report that relies on the unadjusted birth death model, a GDP report that relies on net exports, and a CPI report that relies on owner equivalent rent as accurate estimates of true economic activity. It is clear these emperors of economic thought have no clothes. We need someone who is respected in the profession to call for a complete overhaul of how we measure the economy. If economists keep inputting garbage data into their models they will continue to get garbage out. Rather than trusting estimates of economic growth for the second half of 2009 and for all of 2010 they should listen to the warning of Office Depot’s CEO that without access to credit the small business job creation engine in the U.S. remains gassed out. We can keep kissing the real economy goodbye until we find a way to get the fuel of credit to small businesses whether they were created because of opportunity or necessity.
Posted by Michael A. Kamperman on September 18, 2009
The fight over healthcare is keeping on hold any additional attempts to support the economy. The reason is due to misguided concerns over the size of the federal budget deficit and the size of projected future deficits. We do not know what the deficit will be over the next 10 years because we do not know what the economy will do over the next 10 years. Our decision makers have an over-reliance on econometric forecasting models that are based on post World War inflationary trend data that is now irrelevant in the current debt-induced deflationary global depression. None of the blue-chip economic forecasts predicted the economic downturn and none of them predicted deflation. We need to make common sense decisions on what will benefit our society the most and not on what healthcare plan is deficit neutral or costs only $900 billion over the next 10 years because that number sounds better politically than $1 trillion. We need a simple reform plan that benefits the economy. President Obama should not be pushing a huge back door tax increase on young adult workers disguised as mandatory health insurance premiums. On the whole 63 year olds need health insurance desperately and 23 year olds do not. Congress has not thoroughly thought through the negative impact on consumer spending when healthy young workers in their 20’s are forced all at once to pay a couple of hundred dollars a month for health insurance with no increase in income. And has Congress figured out how the one in 6 workers in America without a real job are going to come up with the extra cash to pay for health insurance premiums? The healthcare crisis is a financing crisis and not a medical crisis. Everyone in America with a broken leg gets a cast and everyone with appendicitis gets an appendectomy, even if they are illegal aliens. The big issue is who is going to pay for it, and how. Congress should pass 5 simple reforms that people can understand and that will benefit the uninsured yet not harm the economy.
First and foremost almost everyone agrees an insurance company should not be able to drop someone’s coverage when they get sick based on some technicality and that annual and life-time caps should be eliminated. Second, we should create a one-time window between now and the end of 2010 for anyone with any pre-existing condition whereby they can sign up with any health insurance company and receive coverage. After 2010 the pressure needs to revert back on the uninsured to get coverage before they need it or everyone will wait until they get sick to sign up. Third, rather than a public option we should simply mandate interstate commerce for health insurance to spur competition across state lines creating more affordable health insurance premiums. Fourth, Congress should allow individuals and small businesses to pool together to get health insurance at the same group premiums as employers and employees of large institutions and Congress should also allow them to receive the same tax break on health insurance premiums. While these 4 simple reforms will not solve all of the problems, they will move us further down the road towards where we want to go.
Finally, Congress should be courageous and lower the eligibility age for Medicare to 60. This will provide a significant economic stimulus boost for employers that provide health insurance for workers between the ages of 60 to 65, for states that provide partial Medicaid funding for the 2 million poor people between the ages of 60 to 65, and for individuals between the ages of 60 to 65 that pay for their own health insurance premiums and for their own healthcare. Importantly, it will encourage some workers between the ages of 60 to 65 to retire opening up jobs for younger unemployed workers. We should also lower the eligibility age for Social Security to 60 to further encourage retirement. This is the age group that needs health insurance the most and now they will have universal coverage. For the most part they require more medical care than younger workers and they have more savings to protect from potential bankrupting illnesses. It would cost the federal government approximately $100 billion next year to lower the eligibility age for Medicare to 60. Higher inflation rates for healthcare is a long-term issue for the economy and the federal budget whether or not the age for Medicare stays at 65 or is lowered to 60. There will be economic benefits that could reduce the overall cost to federal government. State budgets will have less pressure and they will need less direct assistance from Washington. Profitable corporations will see reduced healthcare expenses and higher profits boosting both federal and state income tax receipts. Jobs will open up for some younger unemployed workers generating further tax revenues and reducing unemployment insurance payments. It is a common sense plan that benefits our society.
For those interested in further detail on the math for generating the estimated $100 billion cost for lowering the eligibility age for Medicare to 60 it is found in chapter 9 of my book How America Can Escape the New Great Depression. A portion is excerpted below:
“Lowering the retirement age for Medicare eligibility to 60 would
add 15 million new Medicare recipients to the Medicare rolls. There
are currently 44 million Americans eligible for Medicare. Certain
people who are disabled or who have end-stage renal failure, meaning
they require kidney dialysis, are currently eligible for Medicare
even though they are younger than 65 years of age. Approximately
2 million of the 15 million Americans between the ages of 60 to 64
are already disabled and on Medicare. The total cost for Medicare in
2008 was over $450 billion. The average Medicare recipient costs the
federal budget over $10,000 per year. Simple arithmetic would say
that adding 13 million people to the Medicare rolls would cost $130
billion. However, unlike the case of the costs of Social Security, we
all know that medical costs are not simple. The sickest people spend
the most money for medical care. Some healthy people have virtually
134
How America Can Escape the New Great Depression
no medical costs each year and would cost Medicare nothing. Most
of the sickest people between the ages of 60 to 64 are disabled and
are already receiving Medicare benefits. Additionally, the majority
of Americans will spend most of their health care dollars in the last
couple of years of their life. The vast majority of Americans between
the ages of 60 to 64 will not be in the last couple of years of their
life. The pool of Americans who join Medicare will be the healthiest
in the pool and on average the least costly to the program. However,
these new healthier enrollees will be paying the Medicare Part B
premiums to the federal government even though most of them will
not generate significant medical costs. The direct cost to Medicare
for adding participants between the ages of 60 to 64 will be less than
$100 billion per year. To keep the argument simple, we will assume
that adding younger retirees to Medicare will cost the Federal government
an additional $100 billion per year.”
Posted by Michael A. Kamperman on September 15, 2009
There is now no way out. Today Bernanke and Obama sealed certain economic doom. Fed Chairman Ben Bernanke irresponsibly stated that “technically” the recession is over. Yes, the U.S. will probably report positive GDP this quarter thanks to cash for clunkers and first time home buyers scrambling to ink deals before the deadline. But none of this is sustainable without more help from Washington. The words spoken by Bernanke and President Obama today renders the political possibility of giving the economy the help it really needs all but nil. It will now be the spring of 2010 before a reassessment is made of whether significant additional measures should be taken to aid the economy. The only way it will be before the spring is if unemployment reaches 11% sooner rather than later, a real possibility. How can Bernanke, a so called expert on the Great Depression, declare our recession is over when credit to consumers and businesses is still falling. The vast majority of the money supply in the U.S. comes from credit, not cash. As long as credit is shrinking deflation will continue to take hold. As for President Obama he can certainly talk the talk. He said he was focused on jobs as part of his talk to the AFL-CIO on the need for healthcare reform. But talk is cheap. What we need is a leader who can walk the walk. While President Obama said he was focused on jobs he offered nothing in the way of new initiatives to stem rising unemployment. This amounts to the same liquidationist strategy adopted by Herbert Hoover in the early 1930’s.
The nation’s largest lender, Bank of America, reported today that credit card defaults have risen to 14.54%. Normally charge-offs are in line with the unemployment rate. This lends credence to the concept that the true unemployment rate is closer to the U-6 measurement of 16.8% rather than the official U-3 measurement of 9.7%. The federal government’s statisticians can throw 2 million people out of the official labor force. But that doesn’t mean those 2 million people can still pay their bills. The Bank of America report corresponds closely with the report that 13.2 % of all mortgages in America are 30 days or more past due. It also corresponds closely with the report that consumer credit in July dropped by $21.6 billion. Metrics to measure credit such as the TED Spread and Libor no longer have the same meaning that they did in the past. This is because national governments have stepped in and guaranteed transactions between their largest banks and other institutions. Fear of a systemic collapse is off the table. But banks remain in a Zombie state, the walking dead that are insolvent and unable to lend.
In addition to bank data on credit cards we also received word today from Kroger, one of the nation’s largest grocery chains, that deflation has entered the food business. I doubt President Obama and Fed Chairman Bernanke are heeding the message that deflation is rampant in the U.S. Instead they are relying on the econometric forecasting models of blue chip economists who expect economic growth in the second half of 2009 and in 2010. These are the same econometric forecasters who failed to forecast the current economic downturn. The failure is due to a reliance on post World War II trend data and a severe lack of common sense. We need a third stimulus plan pronto and we need massive quantitative easing. How can the economy receive the kind of support that takes political courage when our leaders are taking a premature victory lap?
Posted by Michael A. Kamperman on September 11, 2009
Treasury Secretary Timothy Geithner was on T.V. twice yesterday. First he testified before the TARP Commission headed by Elizabeth Warren. Then last night he held a Town Hall meeting hosted by CNBC. He is a very good politician and should consider running for public office. But he is not the person we need to lead us out of the economic crisis. When asked by Dr. Warren if we could re-run the stress tests on the banks since unemployment is now higher than the worst case assumptions used in the test, he said banks losses were better than the worst case estimates used in the tests. When asked if we could run the stress tests on the 9,000 banks that weren’t tested, he said it was unnecessary since they only represented one third of total bank assets. When asked if we had Zombie banks that don’t go insolvent but are too weak to lend, he said he didn’t believe any of the largest banks are Zombies. I guess he has been too busy appearing on T.V. to notice that consumer credit dropped by a record $21.6 billion in July. I guess his view is the banks have plenty of money to lend; they just don’t have enough credit worthy borrowers to lend it too. In front of the commission he bobbed and weaved and got out of there relatively unscathed.
It was at the Town Hall meeting that we got to see some real insights into Timothy Geithner’s view point. He believes the U.S. economy and the global economies have returned to growth. He believes the banking system needs to take less risk so that another global financial crisis doesn’t emerge. He doesn’t want to end some of the support programs put in place for financial companies too soon. He believes Americans need to save more. He believes once the economic crisis is over the deficit needs to be reduced substantially with higher taxes on relatively wealthier Americans. When asked if Meredith Whitney’s call for housing prices to drop another 25% was a real possibility, he dismissed it by stating the mortgage modification program has already refinanced 350,000 mortgages over the last year. Perhaps he missed that in the month of August alone 355,000 notices of foreclosure were sent to homeowners mirroring the record pace set in July. He basically believes the federal government has done enough to solve the crisis, but will do more if necessary. He thinks we just need more time and patience to slowly crawl our economy back up the hill.
My take is Treasury Secretary Geithner is a deficit hawk at heart and doesn’t want to spend any more resources or political capital than is necessary to solve the economic crisis. But he doesn’t get it. He doesn’t understand that we are in a prolonged debt-induced deflationary depression. He doesn’t understand that we need shock and awe policies to revive the economy. He is part of the economic team advising the President that a slow recovery has started, and while the next few months will be rocky eventually the economy will heal itself. This means he is advising the President to wait and watch rather than to act. The economy has reached the point where the straw has broken the camel’s back. The weight of the debt is too much for the economy to carry. The U-6 unemployment rate is 16.8% and 1 in 8 mortgages are over 30 days past due. By this time next year the U-6 unemployment rate my pass 20% and most of those mortgages that are delinquent will wind up in foreclosure. He is a nice sharp technocrat. But he has no vision on how to lead the economy to the Promised Land. We need a person of economic vision guiding our President. Where is our modern day John Maynard Keynes?
Posted by Michael A. Kamperman on September 9, 2009
Gone is any glimmer of hope that President Obama is beginning to understand that creating jobs is the key to claiming victory over the economic crisis. Tonight President Obama opened his healthcare speech by mentioning the struggling economy. While acknowledging that it would be several more months before the economy fully regains its footing, the President claimed that the risk of entering a new great depression has been avoided. He then moved on to talk about healthcare. The message I received was that he believes his economic team has done all that is necessary and no additional significant help for the economy will be coming from Washington anytime soon. The President needs a new economic team. Just yesterday we learned that consumer credit sank by a record $21 billion in July. Last Friday we learned that the official unemployment rate rose 3 tenths in one month to 9.7%. The broadest measure of unemployment rose to 16.8%. Where will the economy be in the fourth quarter when cash for clunkers and the first time home buyers $8,000 tax credit are no longer driving sales of new homes and new cars? While the tax credit expires on November 30, new homebuyers must close on the transaction by that date to receive the credit. Since it now takes up to 60 days to close on most mortgages there will therefore be few homes sales benefiting from the tax credit in the fourth quarter.
The President and his economic team have not grasped what it means to be in a deflationary depression. It is not about falling off of a cliff and having every business in America close overnight. It is about an inability to generate enough cash from income and from asset sales to service debt. As time goes by savings accounts are drained and foreclosure is the only option left. In New York City the owners of Stuyvesant Town and Peter Cooper Village, two large apartment complexes, only have enough cash to stay solvent until February. At that time they face certain default. The rental income from the apartments has dropped 25% from when the owners purchased them for $4.4 billion two years ago. This story is being repeated by both businesses and consumers in communities all across the country. Some one is going to lose a portion of the $4.4 billion loan. As a result of the losses more people will lose their jobs. Those people then default meaning other people will lose their jobs.
The President is intent on passing a signature health care plan that requires all Americans to obtain health insurance. But how can the 16.8% of Americans who are unemployed or can only find part-time work going to be able to afford to purchase health insurance? The President pledged to cut spending in other programs if the cost assumptions he put forth tonight proved to be to optimistic. The problem is the President and the Congress have not accounted for the fact that the unemployment rate in this country has doubled in the last 18 months and is still rising. The plans they are working on were put together when the economy was much healthier. Teachers are being laid off all over America despite the stimulus bill. The worst thing the President and the Congress could do is withdraw spending from other areas of the budget. The President is assuring us the healthcare plan will be paid for, but the country cannot afford to pay for it until the economy improves substantially. I agree with accomplishing many of the President’s goals on healthcare such as no life-time caps on coverage, no dropping coverage when someone gets sick, access to insurance for those who currently have pre-existing conditions, and no more free-loaders on the healthcare system. But these plans take money. The money will not exist to pay for a big new healthcare plan unless the President begins to grasp that we are in a global deflationary depression. Mr. President the number one issue in America is jobs.
Posted by Michael A. Kamperman on September 8, 2009
The Zombie Banks are suffocating the consumer. The latest data for July shows that consumer credit fell $21.6 billion in July. This is an all-time record low. Additionally, consumer credit for June was revised down with credit dropping $15.5 billion. Consumer credit includes almost all forms of secured and unsecured consumer credit, except for loans secured by real estate. The consumer is not being cautious with credit as many in the media report over and over. The consumer is being denied credit by the Zombie banks. The standards for consumers to receive a loan from a bank are getting tighter and tighter. There is no meaningful shadow banking system left to step in and provide alternative credit options to consumers. The consumer accounts for 70% of the nations GDP. Anyone thinking the U.S. economy is going to have inflation and a V-shaped recovery without consumer spending kicking in needs to have their head examined. Without access to credit, the consumer will continue to be forced to spend less and less. The reason the unemployment rate keeps rising is the consumer cannot access affordable credit to provide the spending that creates jobs.
This week Washington will continue to debate healthcare when they should be debating fixing the broken credit markets and finding jobs for the unemployed. The July credit numbers come after the Zombie banks either passed the vaunted Stress Test, or raised the amount of capital required by the Treasury. So why are the banks not lending in this zero interest rate environment? It is because the credit markets remain broken. The smoke and mirrors Wizard of Oz Stress Test trick to not look behind the curtain is a failure for the real economy. Unless real steps are taken by Washington to fix the broken credit markets the economy will remain mired in a deflationary depression.
The solution is to create a “bad bank” and clean up bank balance sheets once and for all. Then, the federal government needs to back the securitization market so banks have a place to sell their loans and recycle the cash into another loan. Finally, if Washington wants to see the economy move forward they need to open up credit to people with subprime credit scores. The moral high ground aversion to loaning to people who have been down on their luck in the last two years is killing the economy and causing large scale unemployment. Many people who said that people with subprime credit scores shouldn’t get loans last year have found themselves unemployed this year as business has dried up. We all know someone who is unemployed. Is our puritanical moral superiority worth seeing those people we know lose all of their savings, their homes, and their self-esteem? I think not. I think it is high time Washington got serious about saying the economic crisis is the biggest crisis facing the country. Then, I think both republicans and democrats need to sit down in good faith and negotiate solutions for the good of the country and not for the good of their own personal 2010 election prospects.
