Posted by Michael A. Kamperman on January 29, 2010
The global sovereign bond markets have been shaken in the last few days. The same speculative short interests that ran like a pack of wolves and took down one bank after another until the federal government stepped forward with a national guarantee of Too-Big-to-Fail are looking to see if Greece and other fiscally weak nations in the euro get a bail-out of their own. While thereis hot rhetoric that Greece must stand on its own, in the end we all know if they fall the wolf-pack will come for another and another and then they will come for us. As a member of the euro Greece doesn’t control its money supply. For all practical purposes there is little difference between being in the euro or being on the gold standard. A sovereign nation is either situation doesn’t control its money supply. It cannot print or devalue its way out of its problems. One of FDR’s biggest tools in stopping the steep 1933 slide into the economic abyss was ending the use of gold as money and then devaluing the U.S. dollar by 40% against the price of gold. Greece will either accept severe austerity and budget pain, or they will get a bail-out, of they will be forced out of the euro. In Greece severe austerity will lead to unsustainable riots in the streets and so the options are either a bail-out or a force out. Since multiple other nations like Spain have similar to problems to Greece the time has come for the European nations to ban together or end the euro. Hence, the odds favor Greece getting an economic lifeline to heal its budgetary pain. The global depression has lowered tax revenues for all and raised social costs for all.
Yet after the State of the Union speech it is doubtful states like California or New York (not Nebraska) will receive the same economic lifeline probably coming to Greece. The President embraced a spending freeze, wink wink after the elections in 2011, and a pay-as-you-go philosophy for handling the federal fiscal budget deficits. Therefore he left the states on their own to deal with substantial budget shortfalls despite bragging about saving the jobs of fireman, teachers, and police. New York City Mayor Bloomberg just unveiled a new city budget that cuts all 32 school nurses from elementary schools with less than 300 kids. And, the Mayor stated that if Governor Patterson’s state budget that calls for a $1.3 billion cut to NYC is enacted, then another 18,000 fireman, teachers, and police will join the nurses on the unemployment lines. The states cannot print money and unlike Greece they don’t have the option of pulling out and going it alone.
The President has sent a clear message, he is not serious about solving our economic problems. He embraced populist rhetoric when he should have use a chalkboard to explain why the federal government needs to bail out the states and put America back to work again. He should have said the value of everyone’s home and everyone’ 401(k) is on the line. Instead he threw an angry electorate the soundbites they wanted to hear. But few Americans with a vote understand the root causes of the economic crisis and fewer still understand the solutions needed to right the ship. All they know is things are not going the way they should and like the people of the middle ages they are willing to find witches and burn them. So anyone who stands up and says witch-witch will get an audience. Sadly it appears the Whitehouse is not only willing to give in to mass hysteria to win votes, it also appears the Whitehouse doesn’t have a clue as to how to solve the economic crisis. The big idea to get the economy going was to double exports in five years. Well I wouldn’t look to Greece to double its purchases of U.S. goods and I didn’t hear the President demand China open up its markets to us. While the President sounded good the subtle message to NYC is get those pink slips ready.
Posted by Michael A. Kamperman on January 27, 2010
President Obama has decided he needs to distance himself from the Too-Big-to-Fail taxpayer bailed-out Zombie banks. Politically speaking, who can blame him? But there is a difference between campaign rhetoric and policy. The President’s is embracing former Fed Chair Paul Volcker’s quest to separate out taxpayer backed deposits from riskier strategies such as proprietary trading, private equity investments, and hedge funds. It would be nice to go back to the Glass-Steagall era, but that ship has sailed. The age of financial innocence is over and it is not coming back in our lifetime. After the disorderly Lehman Brothers bankruptcy no Treasury Secretary or Federal Reserve Chairman will allow a large financial institution to go under in a non-planned, chaotic, your on your own buddy way. Too-Big-to-Fail means that if an institution goes under it is large enough to drag multiple other institutions under with it setting off a domino effect. What the President should propose are regulations that allow the Treasury and the Federal Reserve to close financial institutions in the same way they can close FDIC insured commercial banks. The federal government needs to be able to seize all assets of an insolvent financial institution, wipe out the shareholders, and sell the assets to another institution who will guarantee the firms accounts and counter-parties.
What is disconcerting is that by embracing the Volcker position the President is indicating he doesn’t understand the root cause of the financial crisis, and therefore he doesn’t understand what needs to be done to fix it. Proprietary trading is risky, private equity is risky, and hedge fund trading strategies are risky. But none of these activities caused the credit crisis, and none of these activities create systemic risk. Systemic risk comes from a system that is too highly leveraged so that when an unforeseen crisis arises the financial institutions don’t have enough capital to ride out the storm. The cause of the current credit crisis has already been fixed. The markets fixed it. The cause of the crisis resulted from lenders being able to make loans and then sell the loans for a large profit with no ongoing risk if a loan wasn’t repaid. But the AAA rated asset-backed securities market imploded and now if you make a loan you bear the risk of that loan. Hence, the pendulum has swung from loans being too easy to get to being too hard to get.
The President needs to focus on restoring normal credit conditions to small businesses and consumers. The President should leave the structure of banks alone and simply insist they carry more capital compared to their assets and he should insist they start to lend again. Creating uncertainty is no way to encourage banks to take on the risks of new loans. Lending is more likely to happen if an institution is well diversified and can rely on profits from non-lending activities to cushion potential losses from lending activities. I can’t believe that President Obama has backed me into a corner where I have to defend the Zombie banks. What we need is lending, lending, lending rather than extending and pretending. We will not create jobs until small businesses and consumers can access capital. The President should come out in favor of creating a “bad bank” to absorb the toxic assets on the books of the banks. This is the only way to return the Zombies to the land of the living.
Posted by Michael A. Kamperman on January 23, 2010
Finally, in the wake of the Massachusetts political earthquake, President Obama went to Ohio and promised “so long as I have some breath in me, so long as I have the privilege of serving as your president, I will not stop fighting for you,” Mr. Obama said. “I will take my lumps. But I won’t stop fighting to bring back jobs here.” Jobs have been the number one issue in the country all year. The President and his political advisers failure to see this cost them a key senate seat. So it is refreshing to see President Obama talking the talk. What remains to be seen is if he is willing to walk the walk. As Bob Herbert so distinctly pointed out in his NYT column “Deficit reduction is now the mantra in Washington, which means that new large-scale investments in infrastructure and other measures to ease the employment crisis and jump-start the most promising industries of the 21st century are highly unlikely….What we’ll get instead is rhetoric. It’s cheap, so we can expect a lot of it.” In Ohio the President failed to unveil an aggressive new jobs agenda. Hopefully he is saving it for his upcoming State of the Union address. What the President and his advisers need to understand is it wasn’t rhetorical failure that caused an electoral revolt, it was double digit unemployment rates where everyone knows someone out of work.
Bob Herbert has hit on half of the impediment to solving our economic crisis, the Washington mantra of deficit reduction. The other half is the Washington and Wall Street mantra of denial, as in we have avoided entering another Great Depression. Usually this is then followed by the laughable statements that the recession is already over and we are on the cusp of rapid economic recovery. We’re told we all just need to be patient. The weekly jobless claims are rising again. In fact, the economy averaged 1.2 million fewer jobs in the fourth quarter of this year than in the third quarter. Who in their right mind thinks an economy that lost 1.2 million jobs is growing? Certainly not the voters of Massachusetts. President Obama needs to quit defending his Administrations actions and speak honestly with the American people. He needs to say he inherited the worst downturn since the Great Depression, yet despite the efforts and measures taken so far by his Administration the unemployment rate keeps rising. Therefore, he needs to say he will do whatever it takes to put America back to work no matter the cost.
What President Obama and the rest of Washington seem to fail to understand is there are only two ways to significantly reduce the trillion dollar deficits we now have. The first way is to raise taxes, slash spending, and let the unemployment rate rise and rise and rise while unemployment benefits, cobra benefits, and assistance to the states are allowed to expire. That is a recipe for economic disaster. No big bank will be left standing and no big state will be left solvent. The second way to reduce the deficit is to fix the broken economy by fixing the broken credit markets. A true economic recovery would contain job gains, millions of them. The deficit will come down when the unemployed go back to work and go back to paying state and federal taxes. To fix the broken economy the federal government is going to have to spend money to make money. But the money must be spent wisely. For instance, small businesses don’t need a job creation tax credit, they need to be able to access credit to run their businesses and they need for their consuming customers to be able to access affordable credit to buy from their businesses. President Obama, if I hear you talk about bringing down the deficit and living within our means next week, then I’ll know your long awaited pivot to jobs is just rhetorical.
Posted by Michael A. Kamperman on January 20, 2010
Main Street Massachusetts just sent Washington a loud and clear message; they’re worried about their jobs, they’re worried about their homes, and they’re worried about their 401(K)’s. This election came down to kitchen table issues. Every poll shows the number one issue Americans are concerned about is jobs, not healthcare. The Whitehouse has been tone-deaf and has had tunnel vision in trying to pass a healthcare bill, any healthcare bill almost no matter what is in it. Scott Brown did not surge in the polls because the people of Massachusetts don’t want the country to have some form of universal healthcare. The state already has its own version of state funded universal healthcare and it is popular in Massachusetts. Scott Brown surged in the polls because the people of Massachusetts, along with the rest of the country, believe the Whitehouse is more interested in the jobs of bankers on Wall Street rather than their jobs on Main Street. Unemployment is still rising. Foreclosures are still rising. The Dow Jones Industrial Average is where it was a decade ago. Yet instead of hearing the President say he will put America back to work, they hear him say we know unemployment will rise further before it starts to come down. Amazingly, President Obama inherited the worst economy since the Great Depression and he has squandered his opportunity to be the next FDR by failing to focus on the people’s concerns. The question is does he get the message?
The Democrats were already playing the blame game before the polls closed. It’s true Martha Coakley was neither a dynamic candidate nor a good campaigner. But there was no scandal or significant local issue in the race and there is no doubt Scott Brown’s 25 point surge in 25 days was about Washington, not Coakley. Hopefully President Obama will hear the real message and not believe his own supporters spin. Last night I was watching Rachel Maddow on MSNBC say “the unemployment rate in Massachusetts is only 8.8% and while that sucks it is a lot better than the rest of the country and it shouldn’t be a big factor in the outcome of the election.” In the past an unemployment rate of 8.8% was certainly high enough to get an incumbent booted from office and Martha Coakley represented the ruling Democrats. Plus, the 8.8% unemployment rate in Massachusetts is based on throwing thousands of people out of the workforce. The real rate is probably in 10’s. Rachel Maddow doesn’t get it, the President’s advisers don’t get it, but hopefully the President will see the wheels have come off the tracks and he will alter the trajectory of his Presidency.
If I were advising the President I would tell him to pivot to jobs now, right now, today. He should come forward and say the number one job, the number two job, and the number three job of his Administration is to get America back to work. I would advise him to ignore concerns about the deficit and to come forward with a one trillion dollar major jobs bill that includes an emphasis on investments in infrastructure, education, and research and development. He should say America has the number one economy in the world and these investments are designed to keep America number one for the rest of the 21st Century. I would advise him to state unequivocally that we will not only bring aid to Haiti, we will rebuild Haiti creating American and Haitian jobs. If we can rebuild Iraq and Afghanistan, then we can rebuild Haiti. In short, the President should come forward and talk about our possibilities, not about our limitations. Massachusetts is sending a message the people have lost confidence with the direction of the country. The President needs to signal he gets the message loud and clear.
Posted by Michael A. Kamperman on January 16, 2010
The Wall Street Journal is reporting the Federal Reserve plans to let most of their emergency measures expire as scheduled during the next two months. The Federal Reserve will remove guarantees for money market funds on February 1. They will also no longer make emergency loans to businesses that are having trouble accessing the commercial paper market. Most significantly, they will stop purchasing federal agency paper and mortgages at the end of March as scheduled. They will leave interest rates near zero until the economy demonstrates it has improved, and that the improvement is sustainable. Basically, the Fed plans to hide and watch for the remainder of 2010. Surprisingly, the Fed acknowledges that unemployment will probably remain stubbornly high for the foreseeable future. Yet there is a belief by the majority of Fed Governors that they have done enough and there is not much more they can do for the economy.
Balderdash! The Federal Reserve is charged with both price stability and full employment. By tacitly acknowledging we have an employment problem, but not using more of the tools at their disposal, the Fed is throwing in the Keynesian towel and adopting the creative destruction concepts of the Austrian School of Economics. If Ben Bernanke cannot move the Federal Reserve Board to fulfill its mandate, then he should not be confirmed to a second term. In a war, if you’re not winning, you fire the generals and bring in leaders who are willing to be more aggressive. Just because the Fed has done more than they ever have before doesn’t mean they have done enough, nor all that they can. Haiti is an example of an overwhelming crisis that requires a much bigger effort than what has been put forward so far. It doesn’t matter that what we are sending is more than we have ever sent to an island nation. It only matters that we do the job required of us to save those people, especially since we have the resources to do it sitting on U.S. bases. Like Haiti, the scale of our economic collapse is beyond the experience and the ability of our current economic rescue team to handle.
The Federal Reserve is now looking to the Whitehouse and the Congress to solve the economic Rubik’s Cube of finding a way out of the economic mess we find ourselves in. Unfortunately, massive quantitative easing is a big part of the way out and the Fed controls that. Doubly unfortunate is the fact that the Whitehouse and the Congress appear to be like deer in the economic headlights. Whatever came of the President’s job summit? Should Brown win in Massachusetts on Tuesday, then we could have gridlock right up until the mid-term elections in November. Even if the Democrat Coakley pulls it out, a near miss will call for recalibration. The situation in Haiti has clarified for me the problem with finding a solution. CNN reported that U.N. doctors left 25 patients in a field hospital unattended at night because of security fears. Yet CNN’s correspondent Dr. Sanjay Gupta, a hero, was able and willing to stay with the patients through the night to give them the best chance at survival. Because of his heroics all of the patients lived through the night. The command and control structure for the Haitian rescue mission is disjointed and broken. No one is really in charge and chaos reigns. The same problem has happened with the federal government’s response to the economic crisis. No one is in charge and no one is willing to be a hero. Everyone wants to stay with protocol and not stray to far from the orthodoxy. Therefore, they can always claim they did all they could and it wasn’t their fault. We need to throw caution to the wind and place a U.S. General in charge of the entire Haitian rescue operation, protocol be damned, and give that person full authority with unlimited resources to get the job done. Likewise, we need the President to use his existing authority to take ownership for providing a solution to the economic crisis. Instead, all we have now is bickering and debate and minimal efforts that are too meager to be effective.
Posted by Michael A. Kamperman on January 11, 2010
The consumer is getting the shaft in the Fed’s zero percent interest environment. Consumer credit fell by over $17 billion in November, which is part of the all-important Christmas shopping season. But what’s even more disturbing is the federal government is allowing the tax payer bailed out too-big-to-fail banks to get away with highway robbery. Big banks have raised the interest rates on credit card customers who are current on their bills up to 30% in some cases. We already have a huge problem in that many consumers cannot access credit. But many who can access credit are getting gouged. There is simply no acceptable reason for banks to be allowed to charge usurious interest rates when the Fed is letting them have money almost for free. The Fed’s policy of low interest rates is working to give the banks a chance to earn some income to cover their swept under the rug losses. However, the Fed’s low interest rate policy is failing to jump start the economy because the consumer is not seeing the low interest rates passed on to them, except for home mortgages. But most people cannot buy a new house because they can’t sell the house they live in and they cannot refinance because their current mortgage is underwater. Hence, this is having a limited impact on reviving the economy. The consumer’s inability to access affordable credit is paramount to a contraction in the money supply. Since the money supply is already contracting without factoring in the interest rate differential, the risk of persistent deflation rises daily.
The Federal Reserve needs to quit talking nonsense about an exit strategy and needs to get serious about printing a lot more money. There is no way the housing market will survive if mortgage interest rates rise further. That is all but certain to happen if the Fed ends its purchases of mortgages under its current quantitative easing program at the end of March. Nero fiddled while Rome burned. Right now the Obama Administration is fiddling while the consumer is being burned alive. It is up to Ben Bernanke to stand up and be counted. History calls.
It is also up to Congress to stand up and be counted. The recent “consumer protection” bill left a multi-month window for banks to abuse the little guy. And boys have they. Do they not realize that 70% of the U.S. economy is based on consumer spending? Do they not realize the consumer votes? Senator Dodd pushed this legislation through and now he has been pushed out. President Obama needs to call for change. He needs to call for change we can believe in. This economy is going no where if the consumer is not given a life-line, pronto.
Posted by Michael A. Kamperman on January 10, 2010
Sometimes it is better to sit back and think rather than to react. My initial reaction was to pound the table on how the latest unemployment report is showing the job situation to be much weaker than the economists and the Obama Administration have led us to believe. The talk of an improving trend in job losses has become so acceptable that the Administration is out taking credit for losing only 85,000 jobs in December and stating that it is a 90% improvement over peak monthly job losses. My reflex is to point out that in order to keep a 10% unemployment rate we had to drop another 600,000 plus people out of the labor force. Despite the stimulus bill aimed at supporting state budgets we lost another 21,000 government jobs. I also wanted to point out that when we hire 1.2 million census workers between now and May, only to let them go by November, we will be temporarily understating the true state of the unemployment situation. The reality is this unemployment report showed no signs that job creation is on the horizon, unless of course you are looking for temporary work without benefits. Will the new census workers receive health insurance, or a pension, or a sense of permanency? But giving a blow by blow description of what is happening in the economic game can cause one to fail to see the forest for the trees. It is the methods we are using to keep the economic game stats that are deluding us into thinking we are better off than we really are. We need an economist of stature to step forward and say we need to rewrite the way we measure the outcome of the game.
Since the beginning of 2008 we have dropped 1 million people out of the labor force. We started 2008 by saying 154 million Americans wanted a full-time job and we ended 2009 by saying only 153 million people wanted a full-time job. We need to add 125,000 workers per month to account for a 1% growth in population. This means we have 3 million more people looking for a full-time job at the end of 2009 than at the beginning of 2008. Effectively we have cut 4 million people out of the labor force because they have become too discouraged to get turned down for the hundredth time. If we add these workers back in then the number of people unemployed would be nearing 20 million and the unemployment rate would be 12.3%. While it may have made sense to assume that if someone wasn’t aggressively looking for work in a vibrant economy that person didn’t want a job bad enough to be counted as officially unemployed, it makes no sense to use the same criteria in a depressed economy when jobs simply are not available and the number of long-term unemployed breaks a new record month after month after month. When they counted the unemployed during the Great Depression they didn’t ask whether or not you had mailed out three resumes in the last three weeks.
Undercounting our unemployed leads us to policy errors. The Obama Administration would be not be so complacent to claim the GDP measured recession is over and we are showing a positive trend in job losses if the nightly news reported the official unemployment rate is now up to 12.3%, a level not seen since the Great Depression. We are hiding our soup lines with food stamps. Over 6 million people say the only income they have is food stamps. They couldn’t eat without them. When the news media and the economic pundits keep pushing the lie that we have avoided another Great Depression they are only prolonging the solutions and open the door to who knows what when it all hits the fan. Sweeping the truth under the rug is only going to lead to more pain and even larger outrage. Are we sure we can control the fury?
Posted by Michael A. Kamperman on January 6, 2010
The economic crisis is best thought of as a bursting construction bubble in both residential and commercial properties. For perspective on when we get out of this consider that after the bursting of the NASDAQ bubble that index still trades ten years later for less than half of its all-time highs. It will take a generation or longer for residential and commercial properties to approach the high prices they reached after the height of the no credit, no job, no money down, no worries mate you got a McMansion mania. In November construction spending fell again and is now down 13% from November of 2008. Homes sales slowed markedly in November once the first time home buyers tax credit expired for the first time. Millions of more foreclosures are on the way. On the commercial side there is a glut of empty retail space, office space, hotel space, and warehouse space. And unlike the tech companies that took it on the chin ten years ago it is highly unlikely new innovations will render any of these properties obsolete any time soon and in need of replacement to revive the construction industry. Spain, Ireland, and a host of others headlined by Dubai are also massively overbuilt. Many of the barely more than interest only mortgages backing these overpriced properties have not been written down by the Zombie banks. After all why not extend and pretend instead of fix and lend as long as the bonuses keep coming.
Unlike the NASDAQ bubble there are a lot more jobs on the line this time. Many of these jobs will be gone for a generation or more because the buildings are not going anywhere. When we think about bringing the 10% unemployment rate down we need to realize the jobs lost in construction are not returning. The construction industry includes a lot more than carpenters and electricians. It includes mortgage bankers and lawyers, realtors, architects, interior designers, and manufacturers of building materials. It also includes peripheral jobs making pick-up trucks and running a lunch wagon. Most of these jobs are very good paying jobs and even if we find another job for the laid off worker the new job will probably pay half of what they were making in the construction industry. This of course impacts consumer spending and will cost jobs in a host of other industries including retail and food service.
The Obama Administration is failing to provide the big bang stimulus programs needed to shock and awe the economy back to stability. This is unforgivable and Geithner and Summers need to go. Construction spending is down 13% from a year ago and falling and these knuckleheads are trying to spin us that the economy is growing again. But what is much more important is the economic GDP worshipping technocrats President Obama has surrounded himself with do not grasp the depths of our economic despair and are devoid of the vision thing. We need somebody in Washington who can see the dilemma our nation has fallen into. Exactly how are we going to redeploy the army of well paid construction workers? Do where tear down older obsolete buildings to keep the construction industry thriving? Do we innovate a new industry to absorb the millions of unemployed construction workers and at what pay-scale? Or do we alter our social contract and make retirement at earlier ages more palatable to open up jobs for younger workers? Personally I believe we should employ all three strategies simultaneously. Is the Obama Administration even discussing the need to discuss a strategy?
