Capital Commerce
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Bush's Compassionately Conservative Subprime Fix
Continue reading… 8 CommentsPlenty of homeowners—especially those who saved up for big down payments so they could get a low-rate fixed mortgage—have little sympathy for their fellow Americans who gambled on subprime loans and the teaser rates that often came with them. And they might be rolling their eyes at news that Hank Paulson and his Treasury Department are nudging the mortgage industry—as Arnold Schwarzenegger has done in California—to voluntarily refrain from resetting some $400 billion worth of subprime adjustable-rate mortgages when the teaser rates expire next year.
But they should not be surprised. Consider this: Three of the four states with the highest number of foreclosures in October were potential 2008 swing states: Florida, Ohio, and Michigan. The political pressure to do something big and not wait for some reform of the Federal Housing Administration was becoming overwhelming. The Democratic-controlled U.S. House and Senate have certainly been working on a fix. For instance, presidential candidate and Senate Banking Chairman Chris Dodd has a bill to let judges restructure mortgages while in bankruptcy proceedings—a bill the industry vehemently opposes.
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Economy Continues to Boom Despite Woes
Continue reading… 3 CommentsYes, the economic growth numbers for the third quarter were revised sharply upward today, from 3.9 percent to 4.9 percent. And no, you shouldn't suddenly feel better about the economy—well, at least if you listen to the bears on Wall Street and their media megaphones. The pessimists say that the fourth quarter—the one we are now in—will see a sharp slowdown in growth as the housing downturn and credit crunch really take a bite out of the economy. And indeed, growth is probably in the midst of a downshift. Certainly, job growth isn't what it was a year ago.
But consider this: If you exclude housing, the economy grew at an astounding 6.1 percent rate, up from a 4.6 percent pace in the second quarter. My guys at Action Economics think gross domestic product growth will average 3.3 percent in the second half of 2007, versus a 2.2 percent average in the first half. That is more or less in keeping with what the White House is looking for. Team Bush today lowered its forecast for economic growth for next year to 2.7 percent from 3.1 percent previously. It also expects unemployment to rise to 4.9 percent.
But the 2008 election impact is this: The economy heading into Election Day will most likely be perceived by voters as worse than it is right now—and right now only a quarter of Americans, according to Gallup, rate the economy as "excellent" or "good."
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A Possible, Pricey Solution to the Mortgage Mess
Continue reading… 9 CommentsEd Yardeni of Oak Associates thinks he knows how to stop the credit crunch:
We have to consider the possibility that the Fed can't save the financial system all by itself with the blunt tools it has. So, I have another idea. Why not set up a government guaranteed Sub-prime Resolution Trust Corporation? It would buy all sub-prime mortgages (even those that are delinquent, but haven't defaulted) and related securities at 80 cents on the dollar and issue government-backed bonds. The government (we, the taxpayers) would provide the capital, i.e., take the hits if the mortgages are eventually resolved at less than 80 cents. Most estimates are that the problem will eventually cost $200 billion, roughly the size of the current annual federal deficit. I think it's a price worth paying to put this sorry mess behind us. In the early 1990s, we set up the RTC to clean up the S&L debacle, which cost about half as much to accomplish as the estimated $500 billion. By the way, the problem with freezing resets (the Arnold Schwarzenegger solution) is that so many ARMs have been securitized.
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Economic Policy Missing From Last Night's GOP Debate
Continue reading… 0 CommentsFred Barnes of the Weekly Standard brings the hammer down on last night's YouTube debate among the Republican presidential candidates:
But it was chiefly the questions and who asked them that made the debate so appalling. By my recollection, there were no questions on health care, the economy, trade, the SCHIP children's health care issue, the "surge" in Iraq, the spending showdown between President Bush and Congress, terrorist surveillance, or the performance of the Democratic Congress.
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Consumers Cry All the Way to the Mall
Continue reading… 0 CommentsYes, yes, those consumer confidence numbers yesterday were lousy. But let's see, Wal-Mart says Black Friday sales exceeded their expectations by 40 to 60 percent. And my guys Brian Wesbury and Bob Stein over at First Trust Advisers tell me:
Early holiday shopping reports show little reason to fear the Grinch. One widely reported data set was very strong, while a poll of consumers was somewhat weak. We think there are solid reasons to put our chips on the report showing consumer strength. According to ShopperTrak RTC Corp., sales at 50,000+ shopping centers and malls across the country were up 8.3% on "Black Friday" (the day after Thanksgiving) versus the same day last year. Black Friday sales totaled $10.3 billion this year versus $9.5 billion last year. When Saturday is included, sales were up 7.2%. And according to ComScore Inc., a Reston, Virginia-based firm, Thanksgiving Day purchases via the internet were up 29% versus last year, while Black Friday Internet sales were up 22%.
To paraphrase JP Morgan, no one ever got rich betting against America.
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A Recession Might Help the GOP in 2008
Continue reading… 10 CommentsHere's the conventional wisdom about the economy and its role in the 2008 presidential election: Simply put, if there's a recession, a Democrat wins and a Republican loses.
History says as much. In his book The 13 Keys to the Presidency, historian Allan Lichtman notes that all seven times since the Civil War when the economy was in recession in the fall of a presidential election year—1876, 1884, 1896, 1920, 1932, 1960, and 1980—the candidate from the opposition party was elected president.
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Rudy and Romney's Big-Government Energy Plans
Continue reading… 4 CommentsThink we need billions of dollars of government spending on energy independence or climate change? First, think about stem cells. The apparent breakthrough in stem cell technology—it appears skin cells can be reprogrammed into stem cells—is not-so-good news for some half-dozen states that have invested in embryonic stem cell research, including California, which has committed to spending $3 billion over 10 years. Essentially, what those states decided to do was engage in a bit of industrial policy. They decided to let government rather than private enterprise and the market decide what the most promising stem cell technologies were. And now they appear to have bet on the wrong technological horse.
Indeed, the history of such efforts has been quite poor. Take Japan, a country many central-planning advocates used to point to as an example of how government can aid certain industries—at least they did before the country's two-decade economic funk. But as William Lewis of the McKinsey Global Institute notes in his marvelous book The Power of Productivity, the success of Japan and its Ministry of International Trade and Industry is mostly myth.
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One and Done for Bernanke?
Continue reading… 0 CommentsThe whispers are getting louder: Ben Bernanke might be a one-term Fed chairman. (Alan Greenspan served, by the way, from 1987 to 2006.) This from economist David Hale in the Financial Times:
Ben Bernanke, the Fed chairman, does not want to preside over an election-year recession when the core inflation rate is barely 2 percent. That could jeopardise his chances of winning a second term in 2010.
Expect to hear more of that sort of talk.
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Thompson Pushes a Big Tax Cut Plan
Continue reading… 0 CommentsFred Thompson has come out with the most detailed tax reform package of any of the major Republican presidential candidates. In short, Thompson would extend the Bush tax cuts on income and investment set to expire at the end of 2010, cut the corporate tax rate to no more than 27 percent, eliminate the alternative minimum tax and the estate tax, and allow Americans to opt into a simpler, flat tax system. But it all sounds kind of pricey to the folks over at Bloomberg News: "Republican presidential candidate Fred Thompson proposed sweeping tax reductions, including extending President George W. Bush's cuts, that would cost $400 billion a year by 2012 and more than $3 trillion over 10 years."
My take: That sort of "static" analysis assumes taxes have no impact on economic growth. If the tax cut boosts growth, then the so-called lost revenue won't be anywhere near $400 billion a year. Plus, as the Thompson campaign notes, the candidate has also proposed a fix to Social Security, a far larger fiscal issue than the annual budget deficit.
Yet voters are in a foul mood and will most likely be skeptical of any and all talk of tax cuts from candidates who don't also seem as equally gung-ho to cut spending. Of course, talk of cutting programs can be used to bash a candidate, so it was pretty savvy of Mitt Romney to propose capping government, nondefense discretionary spending at the rate of inflation minus 1 percent and leaving the fine details to later. But if 2006 should have taught Republicans anything, it's that GOP voters, at least, are worried about spending just as much as they crave lower taxes.
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The Axis of Angst: Explaining Hillary, Huckabee, and Dobbs
Continue reading… 3 CommentsYou know there is something weird happening on Wall Street when you start receiving economic reports in your E-mail inbox titled "Angst isst seele auf (Fear eats the soul)," as I did recently from Bruce Kasman of JPMorgan Chase. If that's the attitude among the pros, no wonder the market has been selling off lately.
But it's Main Street, too, that has the willies. The great economic conundrum of the past few years has been the strange inability of so many Americans to notice and fully comprehend the indisputable fact that over the past five years, the economy has been expanding (up 15 percent), stock market rising (up 53 percent), real incomes rising (up 16 percent), and unemployment falling (to 4.7 percent from 5.7 percent, with 8 million new jobs). (Thanks to Ed Yardeni of Oak Associates for crunching the data.) As CNBC's Larry Kudlow loves to say, this economy is the "greatest story never told."
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Bernanke Puts a Low Speed Limit on Growth
Continue reading… 0 CommentsThe Federal Reserve released its first quarterly economic forecast today, projecting economic growth, unemployment, and inflation for the next three years.
Here are the Fed's numbers—economic growth: 1.8 to 2.5 percent for 2008, 2.3 to 2.7 percent for 2009, and 2.5 to 2.6 percent for 2010; unemployment: 4.8 to 4.9 percent for 2008, 4.8 to 4.9 percent for 2009, and 4.7 to 4.9 percent for 2010; core inflation: 1.7 to 1.9 percent for 2008, 1.7 to 1.9 percent for 2009, and 1.6 to 1.9 percent for 2010.
My take: While that may be a great forecast for bond investors—unspectacular growth with low inflation—most Americans should be less than thrilled by it. Here is the key sentence from the report: "Economic activity was projected to expand at a pace broadly in line with participants' estimates of the rate of expansion of the economy's productive potential in 2009 and to continue at much the same pace in 2010."
In other words, growth at 3 percent or more is inflationary. Yuck. Compare those numbers with the 1983-1990 Reagan boom when annual growth in gross domestic product averaged 4.1 percent. The Clinton boom, too, was right around 4 percent. If Bernanke and company are right, that's all the more reason for America to adopt policies to make us more innovative and productive so the economy can grow faster than the low-ball Bernanke speed limit.
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Is the Market Forecasting a Recession?
Continue reading… 0 CommentsAnother lousy day on Wall Street as I write this, but Mr. Market isn't making his recession call quite yet, according to Jason Trennert of Strategas Research:
We've constructed the Strategas Bellwether Index out of those stocks most highly correlated with GDP—the fit between the index and GDP growth is 74%. Worth noting, the index has shown a slowdown in growth, but still does not appear as weak as during the 2001 recession.
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Bond Market to Bernanke: You're Blowing It!
Continue reading… 0 CommentsEconomist James Glassman of JPMorgan notes that while the Federal Reserve will be unveiling its new quarterly economic forecasts tomorrow, the bond market is already doing some forecasting of its own—and the message is a total downer:
Market forecasts, those embedded in asset prices, however, have proven to earn their keep. Three numbers in particular are highly informative: 4.5% (the Fed's interest rate target); 3.31% (2-year Treasury note yield); 4.14% (10-year Treasury yield). Market prices imply that policy rates are still 100 basis points above equilibrium levels. The Federal Open Market Committee says the risks are balanced. Few outside the Beltway think so. ... The market view that the Fed will continue to cut rates, including a high probability that this will happen again on December 11, isn't about the upcoming data. It is about a realization that Federal Reserve policy needs to become accommodative, and soon, if there is any hope of cushioning the economy from the damage of drying credit pipelines. Forecasts are helpful, but forecasts can't incorporate what we can't see. And markets don't like what they see.
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Why China Won't Dump the Dollar
Continue reading… 1 CommentKurt Brouwer over at the new-and-improved Fundmastery blog tells us why China won't dump the dollar:
We have known for a long time that those countries that export heavily to the U.S. do not want to see lots of appreciation in their own currencies because that would make their products less competitive here. Among these exporters, China is the largest. ... If China dumps dollars, then the dollar might fall and its own currency would probably appreciate versus the dollar, thus exacerbating a problem it already faces. In addition, China does not want to do anything that would help push the U.S. into a recession because when the U.S. economy slows, the rest of the world does too. In conclusion, it seems unlikely that China would dump dollars. In addition, China will probably have to keep increasing its dollar reserves for some time to come.
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What I Am Reading Today
Continue reading… 0 Comments1) Kimberly Strassel of the Wall Street Journal deftly analyzes Rudy Giuliani's campaign strategy.
2) Tim Kane of the Heritage Foundation dismisses the link between the dollar and the trade deficit.
3) Russ Roberts of George Mason University tells "Why We Trade."
4) CNBC's Larry Kudlow is impressed by a peppier Fred Thompson.
4) Barry Ritholtz of the Big Picture sees inflation everywhere.
5) Donald Luskin of the Conspiracy to Keep You Poor and Stupid puts the beatdown on 2012/2016 presidential candidate Eliot Spitzer.
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What the Democratic Debate in Las Vegas Taught Me
Continue reading… 0 CommentsOK, I admit it. I did not watch the Democratic debate from Vegas live. Sorry, Hillary, Barack, and John, but Michael, Pam, and Dwight come first on Thursday. (Surprise, surprise, The Office did a little dramedy last night. Nice.) But I did TiVo the debate, and when I got around to watching it (also, I admit, after watching Survivor: China), I was surprised at what I learned:
1) Massive tax hikes on the middle class are suddenly a big vote-getter. Who knew? Here's a chunk from Barack Obama about his idea to make Social Security solvent by raising the income cap on payroll taxes:
I've heard [Hillary Clinton] say this is a trillion-dollar tax cut on the middle class by adjusting the cap. Understand that only 6 percent of Americans make more than $97,000, so 6 percent is not the middle class—it's the upper class. ... But understand, this is the top 6 percent, and that is not the middle class.
OK, so this is Obama's deal: He wants to reduce the take-home pay of more than 10 million "upper class" Americans today—and if he wants to call, say, a mid-level marketing manager in suburb of New York or Chicago or L.A. "upper class," more power to him—and subject those folks to a $1.3 trillion tax increase.
To what end? So future retirees from, in all likelihood, a far wealthier America can receive a richer set of benefits because those benefits are linked to our rising standard of living rather than inflation. I love that sort of bold, contrarian thinking. I am sure his odds in the popular RealClearPolitics betting markets are surging even as I write this. Wait. I just checked. Obama's odds have actually dipped another percentage point to 16 percent vs. 71 percent for Hillary. Just wait.
2) One of Bill Clinton's big accomplishments was really a bust. I recently read a story about how many lifelong Republican CEOs are planning on abandoning the GOP in 2008 and voting for Hillary Clinton. And it was clear from their comments that they're betting on Hillary really being Bill 2.0 when it comes to economic policy. Yet when Hillary was asked whether the North American Free Trade Agreement was a failure, here was her answer: "NAFTA was a mistake to the extent that it did not deliver on what we had hoped it would, and that's why I call for a trade timeout when I am president." Translation: NAFTA was a mistake. By the way, the unemployment rate when NAFTA took effect in 1994 was a lofty 6.6. percent vs. 4.7 percent today, as roughly 30 million net new jobs have been added.
3) Competing in the global economy doesn't matter. Would you think that in a two-hour debate the subject of making America more productive and innovative so we can better compete with rising Asia might have earned a mention or two? Nope. Just a lot of talk about unfair trade and dangerous products from China. Just remember: Rising worker productivity will determine our future standard of living.
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Does America Really Need a Recession?
Continue reading… 0 CommentsGiven the credit crunch, mortgage meltdown, and higher oil prices, it's certainly understandable why people would be wondering if the economy might be headed for a recession. But some folks have gone further. Some almost seem to want a recession. Newsweek columnist Robert Samuelson recently wrote of the "often-overlooked benefits" of economic downturns. They dampen inflation and punish financial speculation, for instance. What's more, Samuelson argues, a recession would trigger "a faster—and healthier—drop in home prices. ... By making homes more affordable, a quick and sharp price drop might revive housing more rapidly."
Another apparent recessionista, to borrow lingo from my pal Larry Kudlow, is economist John Makin of the American Enterprise Institute. "A recession," Makin wrote recently, "is the most desirable outcome" to the deflating housing bubble. Avoiding a downturn, he says, through more Fed rate cuts "would involve so much government intervention and so much reinflation by the Fed that risk-taking would be encouraged even further, resulting in an even larger bubble and a larger subsequent recession."
Heck, Democrats might want to get on this gloomy train before it leaves the station. Consider this: Two of America's big economic problems, according to the party's various presidential candidates, are rising income inequality and our big trade deficit. Guess what, a recession— even a depression—might be a great cure for both of them. According to income inequality data collected by academics Thomas Piketty and Emmanuel Saez, the top one tenth of 1 percent of Americans received 3.73 percent of income, including capital gains, in 1928. By the 1939, that number had dropped to 1.77 percent.
Another great decade for income equality was the 1970s. The top 10 percent took in 34 percent of income vs. 48 percent in 2005, the most recent year Piketty and Saez have run numbers for. Of course, the '70s was a decade where stocks went nowhere, inflation raged out of control, and the economy shrank in 1 out of every 3 months. But hey, we were all in that sinking boat together. Certainly a recession today might help make incomes more equal by dragging down the stock market and hurting upper-income people with big portfolios.
Terrible economic times are also great for turning trade deficits into trade surpluses. As George Mason University economist Don Boudreaux has noted in his Café Hayek blog:
Only 18 of the 120 months of that dreary decade [the 1930s] did the United States run a trade deficit. ... For each of the remaining 102 months of the decade of the 1930s, the U.S. ran a trade surplus. On an annual basis, the only year of the decade of the 1930s that the U.S. ran a trade deficit was 1936; in each of the other nine years the U.S. ran a trade surplus. And for the Depression decade taken as a whole, the U.S. ran a substantial trade surplus. Exports over those economically challenging ten years totaled $26.05 billion while imports totaled only $21.13 billion. In other words, the U.S. trade surplus during the entirety of the 1930s was nearly 19 percent the size of the total value of U.S. exports during that decade.
And what of today? Another dose of tough fiscal medicine might work its terrible magic again, argues economist Michael Darda of MKM Partners:
If the U.S. moves toward anti-growth policies after the 2008 elections, the current account deficit likely would fall faster. ... Tax hikes, trade protectionism, and re-regulation would sap American growth relative to the growth in the rest of the world. This would lower U.S. demand for foreign products and thus reduce the current account deficit. In other words, the standard of living would fall (or rise more slowly) and so would the trade deficit (this occurred during the Great Depression).
My take: Of course, we could go a different route and focus on continuing to grow the economy and boosting all incomes that way, just as we did in the late 1990s and here again the past three years. Furthermore, we could relax the Dobbsian antitrade rhetoric and view the trade deficit as a cyclical phenomenon that already seems to be reversing itself to some extent, based on the latest trade data. And longer term, continued global growth will enrich consumers in developing nations like India and China so they can buy more of our goods. I think I'll take a pass on a recession and vote for more economic growth instead.
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Kudlow: Dollar Talk May Be Followed by Action
Continue reading… 0 CommentsWisdom worth considering from the outstanding blog of CNBC's Larry Kudlow after President Bush tried to talk up the tumbling dollar:
The mere fact that the president talked at some length about the greenback is significant. It could possibly reflect administration thinking that it's time to be more rhetorically aggressive on the greenback. Mr. Bush clearly is inferring that the dollar should be trading more strongly at a higher exchange rate. ... It would not be surprising if [Treasury Secretary Henry] Paulson soon delivers a beefed-up dollar support statement of his own at the G7 finance ministers meeting in Cape Town, South Africa. Nor would it be surprising if other G7 ministers echoed the U.S. view. ... Fundamentally, U.S. economic growth and inflation are virtually identical to that of Europe. Interest-rate differentials have narrowed substantially. A kind of trading bubble seems to have developed around the euro, probably because while the Fed acted wisely to reduce its target rate to settle down U.S. financial markets during the sub-prime credit turmoil, the Treasury failed to offer any official support for a steady greenback. Official support should begin with some stronger-dollar oratory, such as President Bush offered in the television interview. Such support could also develop into some coordinated dollar purchases by the G7 to back up the rhetoric. Additionally, President Bush may offer a sizable corporate tax cut in his next budget which will be buttoned down after Thanksgiving. That too would strengthen the dollar. Lowering corporate tax rates would promote economic growth, enhance U.S. competitiveness relative to already low corporate tax rates in Europe, and fatten worker wages.
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A Techno Fix for Climate Change and Peak Oil
Continue reading… 0 CommentsIf you're worried about climate change and/or peaking world oil production, it seems to me that you have two choices. One: Accept a dramatic reduction in your and everybody else's standard of living as we effectively deindustrialize and return to the farm fields. Option Two: Push to make the economy as innovative as possible and as rewarding to entrepreneurs as possible. This piece of news from Technology Review (Efharisto to the FuturePundit) pertains to the latter point:
A company in Japan has developed a novel way of making solar cells that cuts production costs by as much as 50 percent. The photovoltaic (PV) cells are made up of arrays of thousands of tiny silicon spheres surrounded by hexagonal reflectors. The key advantage of the system is that it reduces the total amount of silicon required, says Mikio Murozono, president of Clean Venture 21 (CV21), based in Kyoto, Japan. "We use one-fifth of the raw silicon material compared with traditional PV cells," he says.
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The Oracle of Omaha Is Blind to the Death Tax's Effects
Continue reading… 0 CommentsSo multibillionaire investor Warren Buffett is worried that the permanent elimination of the "estate" or "death" tax (the tax is to be eliminated in 2010 and then reinstated in 2011 as the Bush tax cuts expire) would turn America into a wealth-concentrated plutocracy. He told Congress as much yesterday. What's more, he wants the revenue from estate taxes to be used to pay for lower taxes for lower-income Americans. (Payroll taxes, I guess, since fewer and fewer pay income taxes anymore.) Now an observation and comment or two on what the Oracle of Omaha had to say:
1) Buffett is known for his frugality. I'm surprised he doesn't worry that high estate taxes merely punish saving and investing and wealth building (particularly in the form of small businesses) and create an incentive for consumption and leisure by folks who know they can't easily pass on their wealth to future generations.
2) Estate taxes contribute only around 1 percent of total federal revenues, or about $25 billion. Is risking the possible negative side effects really worth a relative budgetary pittance? And certainly any tax cuts for lower-income Americans could be paid for through spending cuts.
3) This all reminds one of Buffett's plea earlier this year for higher income taxes on the wealthy. He's publicly lamented paying a lower tax rate than his office assistant. But if Buffett so worried that he doesn't pay enough in taxes, he can cut Uncle Sam a check. If he and Bill Gates are worried about creating a financial aristocracy, then they are free to disperse their fortunes—as both, indeed, seem to be doing. Maybe they can get their superwealthy friends to do the same.
4) As I write this, I am sitting in a greenroom at the Capitol Hill studios of the new Fox Business channel and watching humorist-actor Ben Stein opine on the estate tax. His view is that there should be an estate tax as a revenue raiser but that the threshold should be raised from the current $2 million to somewhere in the $10 million to $20 million range so the IRS doesn't nab middle-class folks who were diligent savers throughout their lives. Yet that would raise less revenue and is thus self-defeating if the one reason you support the estate tax is that it's a revenue raiser.
