Capital Commerce
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The Unemployment Bubble
Continue reading… 7 CommentsThe market has rallied. There's also been a string of better-than-expected economic reports. But the variable to keep an eye on, especially politically, is the unemployment rate. And that doesn't look so hot. Listen to Janet Yellen, president of the San Francisco Fed:
It’s true that the Blue Chip consensus shows moderate positive growth rates in output in the second half of this year. But even so, the level of the unemployment rate would still rise throughout 2009 and into 2010. So, in this sense, the worst of the recession is not expected to occur until next year. And, even by the end of 2011, I would expect the unemployment rate to be above its full-employment level. So I wouldn’t call this a particularly rosy scenario.
Or how about Kenneth Rogoff and Carmen Reinhart:
A careful look at the international evidence on severe banking crises suggests a far more cautious assessment. The recessions that follow in the wake of big financial crises tend to last far longer than normal downturns, and to cause considerably more damage. If the United States follows the norm of recent crises, as it has until now, output may take four years to return to its pre-crisis level. Unemployment will continue to rise for three more years, reaching 11–12 percent in 2011.
Or how about the UCLA Anderson Forecast:
Nationwide, the unemployment rate will worsen -- peaking late next year at 10.5%. And in California, which has been battered by tumbling housing, retail and manufacturing sectors, the jobless rate will soar to 11.9% by mid-2010, the latest UCLA Anderson Forecast says.
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Fantasy Obama Vs. Reality Obama
Continue reading… 7 CommentsSo where are we in the Age of Obama? Here is where we are: Cap-and trade is on hold, the middle-class tax cut has an expiration date, a government healthcare insurance option is 50-50, and trillions are being spent on Wall Street. Where would liberals like to be? Probably somewhere in the vicinity of this agenda by Robert Kuttner: 1) Have government directly refinance mortgages; 2) nationalize troubled banks; 3) nationalize the Fed; 4) put a tax on all financial transactions;5) end international tax and regulatory havens; 6) enact a carbon tax; 7) comprehensive pre-K; 8) union card check; 9) health insurance for all; 10) a huge public works program.
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Geithner: 'Quite Open' to Idea of Global Currency
Continue reading… 15 CommentsTreasury Secretary Tim Geithner says he is "quite open" to a massive reduction in the economic power and influence of the United States.
O.K, what Geithner actually said earlier today is that he is "quite open" to China's idea of a global currency system linked to the International Monetary Fund's Strategic Drawing Rights. But it might be pretty much the same thing since the whole point of the embryonic idea is to lessen the influence of the dollar. More from Geithner: "As I understand it, it's a proposal designed to increase the use of the IMF's Special Drawing Rights. I am actually quite open to that suggestion ...[though it should bee seen as an] evolutionary building on the current architecture rather than moving us to a global monetary union."
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U.K. MEP Daniel Hannan: Transcript of His Attack on Gordon Brown
Continue reading… 78 CommentsI don't normally delve into the politics of the European Parliament, but this video of Conservative MEP Daniel Hannan stripping the bark off British Prime Minister Gordon Brown is worth noting. ("The devalued prime minister of a devalued government.") Many American politicians might be hearing the same criticisms next year if the U.S. economy is still depressed even as the national debt soars. Here is a transcript:
Prime Minister, I see you’ve already mastered the essential craft of the European politician, namely the ability to say one thing in this chamber and a very different thing to your home electorate. You’ve spoken here about free trade, and amen to that. Who would have guessed, listening to you just now, that you were the author of the phrase ‘British jobs for British workers’ and that you have subsidised, where you have not nationalised outright, swathes of our economy, including the car industry and many of the banks? Perhaps you would have more moral authority in this house if your actions matched your words? Perhaps you would have more legitimacy in the councils of the world if the United Kingdom were not going into this recession in the worst condition of any G20 country?
The truth, Prime Minister, is that you have run out of our money. The country as a whole is now in negative equity. Every British child is born owing around £20,000. Servicing the interest on that debt is going to cost more than educating the child. Now, once again today you try to spread the blame around; you spoke about an international recession, international crisis. Well, it is true that we are all sailing together into the squalls. But not every vessel in the convoy is in the same dilapidated condition. Other ships used the good years to caulk their hulls and clear their rigging; in other words – to pay off debt. But you used the good years to raise borrowing yet further. As a consequence, under your captaincy, our hull is pressed deep into the water line under the accumulated weight of your debt We are now running a deficit that touches 10% of GDP, an almost unbelievable figure. More than Pakistan, more than Hungary; countries where the IMF have already been called in. Now, it’s not that you’re not apologising; like everyone else I have long accepted that you’re pathologically incapable of accepting responsibility for these things. It’s that you’re carrying on, wilfully worsening our situation, wantonly spending what little we have left. Last year - in the last twelve months – a hundred thousand private sector jobs have been lost and yet you created thirty thousand public sector jobs.
Prime Minister, you cannot carry on for ever squeezing the productive bit of the economy in order to fund an unprecedented engorgement of the unproductive bit. You cannot spend your way out of recession or borrow your way out of debt. And when you repeat, in that wooden and perfunctory way, that our situation is better than others, that we’re ‘well-placed to weather the storm’, I have to tell you that you sound like a Brezhnev-era apparatchik giving the party line. You know, and we know, and you know that we know that it’s nonsense! Everyone knows that Britain is worse off than any other country as we go into these hard times. The IMF has said so; the European Commission has said so; the markets have said so – which is why our currency has devalued by thirty percent. And soon the voters too will get their chance to say so. They can see what the markets have already seen: that you are the devalued Prime Minister of a devalued government.
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Do We Even Need the Geithner Bank Rescue Plan?
Continue reading… 3 CommentsHey, I know the stock market loved hearing the details of the The Public-Private Investment Program. Huge rally. But consider this: 1) Obama-Geithner want to get these so-called toxic securities off bank balance sheets so banks supposedly will lend more; 2) the PPIP plan is predictated on banks agreeing to sell at some price to be determined by price discovery via subsidized private investment funds; 3) Many banks are not going to want to sell this so-called toxic assets which have cash flows and upside appreciation potential; 4) Regulators may push them to sell and take huge writeoffs; 5) This will require further capital injections, maybe $1 trillion; 5) Congress and public opinion show little interest in another ginormous bailout. Indeed, Congress has zeroed out Obama's $250 billion placeholder in the upcoming budget.
Is there an alternative? How about this one from Larry Kudlow:
As net interest and profit margins rise while the yield-curve is upward-sloping, higher bank profits can be used to replenish capital. Meanwhile, government authorities can cease and desist — not only their punishment of private-equity shareholders, but also their clumsy attempts to control various bank operations (compensation, golf outings, means of transportation, etc.). Then, if bankers are so dumb they still can’t make money with zero borrowing costs, the FDIC should shutter them and sell them off piece by piece.
And some withering criticism of the Geithner Plan along the same line from economic analyst Ed Yardeni:
Do we even need the PPIP? Several of the big banks are reporting much better earnings during January and February. Won’t that be enough to make them want to lend again? Could it be that the problem has been solved in the traditional way, with the Fed lowering the federal funds rate well below lending rates? ... If FASB relaxes mark-to-market rules on April 2, won’t that make PPIP irrelevant? Banks have already taken large markdowns, and may now be able to mark up the values of their assets. In other words, their toxic assets won’t be so toxic. Their distressed assets won’t be so distressed. They won’t be under the gun to raise capital, or beg for more of it from the government. So they won’t be interested in selling these assets at the discounted prices that buyers are likely to bid even though their debts are non-recourse government-backed loans. It would be a real pity if the government forces the banks to sell their assets at distressed prices just because they fail Geithner’s gimmicky “stress test.” ... If you’ve downloaded the government’s various “white papers,” “term sheets,” and “FAQs” on their assorted financial rescue programs, you might have noticed that they appear unprofessional. (See link below.) They aren’t on official stationary of any sort. They look like rough drafts of talking points banged out late at night as Word documents after long and heated debates among government officials at the Treasury, Fed, White House, and FDIC. Could it be that no one is really in control of the process?
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Barack Obama, Stock Market Strategist
Continue reading… 1 CommentEd Yardeni does the math so I don't have to:
The S&P 500 Financials probably bottomed on March 6. If so, then so did the S&P 500 at the devilish level of 666 on an intraday basis. Since their latest bottoms, the S&P 500 Financials and Banks stock price indexes are up 58.1% and 76.9%, respectively. ... The S&P 500 is 18.2% above the March 3 level, when President and Chief Investment Strategist Barack Obama said that stocks were “a potentially good deal.” The next stop might be a test of the year’s high on January 6 at 934.70, which would make for a 40% rally since 666. ... The March 6 bottom was made on worries that the government would have to nationalize the banks.
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Dude, Where's My Depression?
Continue reading… 2 CommentsEconomist Michael Darda of MKM Partners points to some rays of sunshine:
1) The yield curve spread, a classical leading indicator, has turned up.
2) And unlike the Great Depression or the Japan experience in the 1990s, broad money growth has picked up dramatically.
3) The credit markets, while not back to normal, have improved significantly from last fall/winter.
4) At the same time, industrial commodity prices appear to have bottomed. This flies in the face of the idea that the global economy is falling at an increase Indeed, the message from the financial indicators listed above along with sensitive commodity prices may be that global demand is now stabilizing.
5) Although the Index of Leading Economic Indicators (LEI) is still negative on a six- and 12-month basis, the declines have started to moderate, which is a prelude to a turn. We continue to expect growth to return by the fourth quarter of 2009.
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Why Liberals Hate the Geithner Bank Plan
Continue reading… 15 CommentsThe Geithner bank rescue plan, says liberal economics columnist Paul Krugman of the New York Times, "fills me with a sense of despair." And the liberal blogosphere isn't much happier with it. One denizen of the Daily Kos site describes the gist of it this way:
1. bribe (through subsidies) several hedge funds to bid up the prices of junk bank assets - this will establish "market" price.
2. Treasury will proceed to buy up bulk of the assets from banks - cash for trash.
So what is their real beef with the $1 trillion, public-private partnership sketched out by the treasury secretary? I think there are several components:
1) Liberals think it won't work. Krugman and others complain that the price discovery process is still nebulous, the exact thing that helped sink the original Paulson Plan. So the government, along with its subsidized private sector partners, could end up overpaying for the so-called toxic assets. This could cost taxpayers big money and not really solve the problem of unstable bank or reduced bank lending.
2) Liberals think it won't prevent a repeat problem. Krugman & Co. want troubled banks nationalized (with balance sheets cleansed) and broken up, as well as the implementation of regulations preventing the creation of any future too-big-too-fail banks. But if the Geithner plan fails, they worry, the White House won't have the political capital to push nationalization. (Other analysts, though, think that if the Geithner plan fails, nationalization is the next step because there is no other option.)
3) Liberals are mad that private investment funds are involved. Many liberals speak scornfully of the so-called "hedge fund Democrats" such as Chuck Schumer who are pro-Wall Street and pro-globalization. The whole Geithner plan, in that it uses private investment money, smells like a creation of the hedge fund Democrats to make fat profits for their campaign contributors with little risk. Profits are privitized and risk is socialized. And why should Wall Street, which caused the problem, they argue, profit from fixing it? The big stock market rally only emphasized the point.
4) Liberals are mad Uncle Sam won't get all the profits. I think this is the big one. Liberals aren't worried that the Geithner Plan won't work. They're worried it will. See, when the Paulson Plan came out last September, the Bush White House insisted the scheme would eventually make money for the government since it was buying all these artificially undervalued, distressed assets that would one day rise in price. Former hedge fund manager Andy Kessler agreed, and publicly estimated that the $700 billion toxic asset buy could generate more than $2 trillion for the government. A few days later, New York Times columnist Tom Friedman was already spending that dough in an effort to "green the bailout", insisting the profits from the Paulson Plan be invested in a "smart transmission grid or mass transit." But the Geithner Plan splits the profits 50-50, and the government's share may further be eroded by $750 billion in new capital injections. Not much money left over for a Green New Deal.
5) Liberals are mad that conservatives aren't. The Wall Street Journal editorial page just sort of shrugged at the Geithner plan, saying it was encouraged that the White House had decided on a path forward. Any plan (as long as it was not nationalization) was better than no plan. And the conservative blogosphere still seems more enthusiastic about attacking the AIG tax increases than the complex Geithner plan. What's more, with liberals attacking it, maybe it's not such a bad idea.
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Geithner and Toxic Assets: What It All Means
Continue reading… 13 CommentsWhen the stock market surges 7 percent in a single session, I'm going to pay attention. I'm going to think. A few observations on the Geithner Plan to deal with the "toxic assets" problem:
1) Let's keep in mind that there is every chance that the "legacy loan" program isn't going to be up and running until September. Perhaps Treasury can time it with the one-year anniversary of the roll out of the original Paulson Plan. Some nice symmetry there.
2) Will there be a lot of participants? Who knows. There are still lots of details left to be answered, particularly with the "legacy securities" program. As Mike Feroli of JPMorgan notes: "It is unclear how TALF will interact with the Legacy Securities Program. Moreover, the lending rates, haircuts and duration of any TALF loan have yet to be determined. Without this information, the spine of the Legacy Securities Program is no more complete today than it was on February 10th when Geithner first discussed his plan." And while Team Obama has talked down any chance of AIG-like punitive action against participants in the Treasury program, that fear is still hanging out there.
3) What if banks don't want to sell those toxic assets? (Indeed, it now seems as if those stress tests will be used to "twist their arms" to sell.) Let's recall what Warren Buffett had to say about those terrible toxic assets:
Yeah, the interesting thing is that the toxic assets, if they're priced at market, are probably the best assets the banks has, because those toxic assets presently are being priced based on unleveraged buyers buying a fairly speculative asset. So the returns from this market value are probably better than almost anything else, assuming they've got a market-to-market value, you know, they have the best prospects for return going forward of anything the banks own. The problems of the banks are overwhelmingly not toxic assets, you know. They may have been one or two at the top banks, but they are not going to do in--if you take those 20 banks that are subject to the stresses, they're not going to do those banks in. Those banks have the earning power which has never been better on new business going out of this to build capital positions even if they pay low dividends which they're starting to do now.
In fact, Buffett makes the case that all that really needs to happen is a bit of capital, perhaps, and some mark-to-market reform so that the banks don't have to keep taking those big writedowns. Add in the upward sloping yield curve (good for bank profitability) and there's your solution.
4) But to the extent that there is some investor participation in the Geithner Plan, it does perhaps further lower the risk of a depression event. And I think that's what really explains the market's rally of late: some M2M Reform + some better-than-expected economic reports + the Fed's inflation strategy + some clarity on the toxic assets issue + rising commodity prices = no depression. This, of course, does not rule a Lost Decade or a That '70s Show scenario.
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Recession Killing Obama Climate Plan
Continue reading… 10 CommentsCongress is trying to fast track healthcare reform. But Obama's cap-and-trade plan? Not so much. And these Gallup poll numbers give you some perspective as to why: "For the first time in Gallup's 25-year history of asking Americans about the trade-off between environmental protection and economic growth, a majority of Americans say economic growth should be given the priority, even if the environment suffers to some extent."
Economy 51 percent, environment 42 percent. Here is the party ID breakdown: Republicans 64-31, Independents 50-42, Democrats 44-50. (A new Gallup poll also shows support for nuclear energy soaring.)
Now folks with science PhDs tend to prefer a cap-and-trade system to raise the price on CO2 because it places a defined emission limit on the climate-altering gas. Those with economics PhDs tend to favor a direct carbon tax for its transparency and economic efficiency.Cap-and-trade proponents, however, have generally had the better luck with politicians, such as President Obama and congressional Democrats. Their persuasive closing argument: Voters don't want to pay higher energy prices. And while both plans would raise costs for consumers, a carbon tax makes that painful reality far more obvious to tax-averse Americans than a system where companies bid for carbon permits and then pass costs along. In short, a straight carbon tax is as much a political loser today as it was back in 1993 when President Clinton was forced to abandon plans for a heat-content, or Btu, tax.
So just how flummoxed is the cap-and-trade crowd right about now? Congressional Democrats from Big Carbon states, as well as conservative Republicans, have immediately identified and attacked the new White House cap-and-trade plan as a de facto carbon tax. In a recent hearing, Sen. Debbie Stabenow, a Michigan Democrat, called Obama's proposal "unlikely to happen," while Sen. Lindsey Graham, a South Carolina Republican, blasted it as a "radical" approach that would "destroy the ability of Congress to come together." (It also doesn't help the White House that its budget predicts a cap-and-trade system would generate just $80 billion in annual revenue when implemented in 2012. Private estimates put that number at roughly $300 billion. Washington conspiracy theorists speculate that the missing $200 billion might be diverted to help fund healthcare reform.)
If it want to still push a green plan, better the White House eventually pivot and instead push a carbon tax that, for instance, returns 100 percent of revenue back to consumers as a dividend. That's the plan favored by climate activist and NASA scientist James Hansen. Or it could adopt the "tax what you burn, not what you earn" approach of Al Gore, who advocates replacing America's Social Security payroll tax with a revenue-neutral carbon tax.Either way, bipartisan support is there for the taking. Influential conservative economists such as Gary Becker, Kevin Hassett and Gregory Mankiw favor a carbon tax, as does columnist Charles Krauthammer. (So too, by the way, Obama economic adviser Paul Volcker, Energy Secretary Stephen Chu, and the Democrat-controlled Congressional Budget Office.) A carbon tax would be a post-partisan solution for a president who campaigned as a post-partisan problem solver.
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Obama, Bernanke and the 1970s Redux
Continue reading… 0 CommentsHave we just traded the 1930s for the 1970s? The decision by Ben Bernanke and the Federal Reserve to pump an additional $1 trillion-plus in the economy, while not as sexy a story as AIG bonus-gate, has far greater long-run importance. Already we are seeing the dollar fall and gold rise as the prospect of higher inflation begins to seep into asset prices. (So long energy price tax cut.)
And make no mistake, part of this is driven by the prospect of superhigh long-term budget deficits. Who's going to buy all those bonds? Not just Rising Asia, apparently. The Fed's plan to buy up to $300 billion in Treasuries may be just the first installment. And the end result may be a double-dip recession (or a period of anemic growth) as the Fed eventually tries to reanchor inflation expectations by pulling all this monetary stimulus back out of the financial system. (Or we could let inflation rise and inflate away our big deficits. Bad idea.)
Team Obama, though, is forecasting the economy will grow at an average rate of 4 percent from 2010-2012, a pretty good clip. That, however, seems like a less and less credible scenario. In a way, the 1970s was our Lost Decade just as the 1990s was Japan's. Look, if I had to choose, I would rather have a repeat of the stagflationary 1970s than the Great Depression of the 1930s, certainly. And apparently, so would the White House and Bernanke. But I would rather see a prosperity plan than a mere survival guide coming from Washington.
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Did the Fed and Bernanke Just Slam the Banks?
Continue reading… 2 CommentsEconomist Robert Brusca raises a point that has been nagging at me since yesterday afternoon. The current upward sloping yield curve, where short-term rates are way below long rates, should boost bank profitability since they borrow short and lend long. (Easing M2M rules is also a big boost.) But now the Fed is trying to lower rates at the lond end. Brusca puts it this way: "Lowering long term yields works at cross purposes with helping the banks. Banks borrow short and lend long. So reducing rates at the long end is not good for bank profitability."
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Did Mark-to-Market Create a Phony Banking Crisis?
Continue reading… 9 CommentsJeffrey Snider at Atlantic Capital Management emails me this great analysis of the problems with mark-to-market accounting:
1) For the majority of the public banks are full of "toxic" assets. The reason they believe that is because of mark-to-market (or more accurately mark-to-model). The paper losses being forced on the banking system proves to the public the banks' toxicity.
2) Despite the fact that it may be difficult to explain that credit spread-based pricing models are producing insane results, the fact that 100% implied correlations or 80% default rates with 40% recovery rates are not realistic makes the effort worthwhile.
3) The banking crisis may not be the fault of the accounting rules, but it has been overstated by them. Consider that Citigroup has written down $30 billion in ABS CDO's, the super senior tranches, but none of those will ever see a single dollar loss. S&P estimates that AAA-rated tranches will only see 1% losses over their life (since super seniors have AAA-rated subordinated senior tranches offering credit protection there is no chance the losses will wipe them out and get to the super senior) echoing a report by the Bank of England from April 2008.
4) If you stopped someone on the street and told them Citigroup's "toxic" assets are really worth full value they would think you crazy because they heard about the mark-to-market losses. That is the true problem, the misunderstanding about what a paper loss and a real loss actually is.
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Fed Annoucement Means Bernanke to the Rescue
Continue reading… 2 CommentsIf you were a White House economic adviser ( like Larry Summers) and perhaps knew that in a few days the Federal Reserve was going to announce an expansion in its balance sheet by over $1.16 trillion with $300 billion in Treasury purchases alongside increases in other purchases of $750 billion in MBS debt and $100 billion in agency debt, you just might tell Americans that the stock market was the "sale of the century."
Wow, the Fed went all in, my friends. And a bit of surprise since it was less than two weeks ago that the president of the NY Fed said buying treasuries wasn't a good use of the Fed's balance sheet. And of course, the mortgage piece of this is the really big news since it should have the effect of lowering mortgage rates. Ethan Harris of Barclays Capital give his two cents:
These are very large numbers. The total buying program has expended from $600bn to $1.75trn. The Fed is essentially underwriting half of the gross issuance in the MBS market and 30% of the gross issuance in the Treasury market. With the rest of Washington moving in slow motion (and in some cases hindering the revival in capital markets), the Fed continues to move ahead aggressively. We see this as equivalent to a 75bp cut in the funds rate. This underscores our belief that a combination of monetary, credit and fiscal easing will slow the recession in 2Q and spark a modest recovery by year-end.
The key words are "modest recovery." That will not stop unemployment for rising, unfortunately, though this does take Great Depression 2.0 off the table. But how about Stagflation 2.0?
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Geithner Resignation Watch: Will AIG Bonus Scandal Cost Him Treasury Job?
Continue reading… 12 CommentsThe AIG bonus-gate is a sideshow, but it's a politically charged sideshow. Betting markets show a surge in contracts (the odds are now up to 30 percent) that wager Treasury Secretary Timothy Geithner may take the fall.
But the real danger here is that voter rage at the bonuses will put at risk the government's response to the financial crisis. Jaret Seiberg, of the Washington research group at Concept Capital, notes that TALF participants are not covered by the executive compensation restrictions that apply to TARP participants. As he puts it (bold is mine):
The issue becomes whether Congress will change this. That could sink the TALF as the program depends upon hedge funds and others to seek non-recourse loans to buy the AAA-rated ABS. Just the worry about Congress extending its reach to these firms may be enough to scare investors away. ... We have the same worry with the bad bank program, which is now being called the public-private partnership fund. Regardless of how the government gets the toxic assets out of the banks, it will eventually need to sell them to the private sector. The current idea is to help finance these private sector purchases. We doubt investors will participate if Congress limits their compensation. ... Increasingly we hear that private equity firm and hedge funds are looking at chartering new banks to acquire failed bank assets. Fears about greater congressional interference in how much these funds could make on their investments may delay or derail these plans. That could further restrict the supply of credit and cause the FDIC to incur even larger losses on failed banks.
Me: That $165 million is getting pricier all the time.
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The AIG Bonus Fiasco and Taxpayers
Continue reading… 3 CommentsThe great Andy Busch of BMO Capital Markets sums things up nicely as usual:
This is what happens when friends don't let friends go into bankruptcy. The US government bailed out AIG and prevented it from going into bankruptcy. As the world's largest insurer, it was deemed too important to allow to fail and cause major disruptions through the market place. However, this "saving" means that no contracts were abrogated or renegotiated by a judge under a bankruptcy filling. This means the major constituents involved in a company such as the common shareholders, the debt holders, the management, and the employees were not forced to all "lose" and take reductions.
This means that the US government's bailout of AIG has caused the US taxpayer to be on the hook for contracts that could've been abrogated under a different method of bailout. While voters are incensed over this development, the worst is yet to come. Now, there is no reason/incentive/point for AIG employees who are highly skilled to stay on to help run the company. My guess, they begin to leave to other insurers if they can. This means that the US government's investment in AIG will be under further duress. -
Will Cap-and-Trade Cost You $2 Trillion?
Continue reading… 7 CommentsSo much for budget transparency. It now looks like the White House lowballed revenue estimates (actually costs to business and consumers) from his cap-and-trade carbon plan. Instead of $646 billion over eight years, it may cost $2 trillion. According to the Washington Times:
President Obama's climate plan could cost industry close to $2 trillion, nearly three times the White House's initial estimate of the so-called "cap-and-trade" legislation, according to Senate staffers who were briefed by the White House. ... At the meeting, Jason Furman, a top Obama staffer, estimated that the president's cap-and-trade program could cost up to three times as much as the administration's early estimate of $646 billion over eight years. A study of an earlier cap-and-trade bill co-sponsored by Mr. Obama when he was a senator estimated the cost could top $366 billion a year by 2015.
And where might all those extra revenues go? I dunno, maybe pay for Obama's healthcare reform plan, whichit turns out , may also cost 3x White House projections. That would be $1.5 trillion instead of $600 billion.
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The Mark-to-Market Bull Market
Continue reading… 2 CommentsWhy are the Dow industrials up some 13 percent over the past six trading days? Here is my theory: Depression 2.0 seems off the table. Great Recession? Sure. Lost Decade? Maybe. But not even a minor repeat of the 1930s. And why is that? For starters, a bit of common sense about the mark-to-market accounting rules which have been contributing mightily to financial crisis. Ed Yardeni opines thusly:
There are those who claim that M2M has been a minor contributor to the negative feedback loop that has exacerbated the financial crisis. I don’t agree. Here is the latest example: The Federal Home Loan Banks recorded a combined loss for the fourth quarter of $672 million--mainly the result of write-downs in the value of “private label” mortgage securities. The banks say they plan to hold these securities until maturity and don't expect to realize major losses on them. But accounting rules require them to mark the securities to the estimated market value at a time when very few investors are bidding for such assets.
But now companies may be getting some needed wiggle room to apply a cash flow value to certain hard-to-value assets rather than using the last transaction as the key benchmark. Yardeni says that if the new FASB guidance happens, "companies could use the new guidance when issuing their first-quarter financial statements. If so, then earnings should get a boost from the rule change." And as Larry Kudlow rightly puts it:
I suggested that not one more dime of government money is necessary for the banks. Instead, the marriage of the cash-flow valuation of bank assets and the upward-sloping Treasury yield curve will do the trick. Net interest margins are rising as banks purchase money for near-zero interest and loan it out at profitable rates. And the new mark-to-market reform will allow banks to hold their toxic assets for several more years and work them out — just as they did back in the 1990s.
This also seems to be the Warren Buffett plan, by the way. Why doesn't Team Obama seem to realize this? Maybe because the administration is filled with technocrats and academics -- not that they are not fine Amerians all -- who lack real-world business experience.
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Cap-and-Trade Protectionism
Continue reading… 10 CommentsFirst, Buy American. Now this: Energy Secretary Stephen Chu told a House subcommittee yesterday that if countries such as India and China do not limit carbon emissions as the U.S. is planning to do, then tariff should be considered “in order to protect American industries." The Chinese say such move would be a "disaster" and illegal under World Trade Organization rules.
Me: Hey, cap-and-trade is turning out to be a terrific two-fer. It will raise energy costs here at home and make imports more expensive.
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Is AIG Bonus Witch Hunt Unconstitutional?
Continue reading… 12 CommentsNow Chuck Schumer is on the AIG bonus case, promising to tax money away from the AIG employees. Wouldn't such legislation be a bill of attainder? Mark Finkelstein wonders, too.
