Krugman vs. Ferguson

Check out this exchange between Paul Krugman and Niall Ferguson (among others).

Briefly, Krugman and Ferguson agree that the future of the U.S. economy depends upon how large the U.S. national debt becomes and how the world views the value of this debt.  If, instead, the U.S. has to print money to meet its obligations, then inflation will ensue...and things get a little dicey.  Paul Krugman (the optimist here) does not believe this is likely to happen...but Niall Ferguson is not as sure and suggests a long-term conservative approach...one that, in my opinion, would lead to cutting important social programs (education, healthcare, etc.)..which will lead to other economic problems.  Maybe, Bush shouldn't have pushed for cutting taxes in the early 2000s at a time when were entering into a war in Iraq and started running deficits again.  What do you think?

Is California Too Big to Fail?

Joe Matthews of the NY Times asks the question:  "Is California Too Big to Fail?".

"IS California too big to fail?

That’s the question President Obama and Congress will soon face. While many states have severe fiscal problems, the depth and unusual persistence of California’s budget problems — the state has run deficits for most of the decade — has emptied Sacramento’s till. On its current path, California will run short of the cash it needs to pay its bills in late July.

It’s highly unlikely that the state’s political leaders will be able to fix the problem themselves. Typically, states build up a cushion of tax revenues in the spring to pay expenses through the fall, when little cash comes in. But enormous drops in tax revenue have left California without the savings to meet even one month’s worth of expenses.

The other methods of cash management — transfers to the general budget from other state accounts and short-term borrowing in the credit markets — are no longer enough to address the problem. California’s leaders have drawn so deeply in recent years on the state’s hundreds of special funds that there is little cash left to repurpose.

And selling short-term notes in the credit markets is difficult because of California’s credit rating, the lowest of any state. Even if the state could pay high interest costs, California may require more cash — more than $20 billion by some estimates — than it can plausibly acquire in the markets."

Let's hope not!

The Stock Market is Still Way Over-Valued!

Check out this analysis by Mish and John Mauldin

On April 10, 2009, the total earnings estimate for all of the S&P 500 companies was a combined $28.51.   

"The S&P closed Thursday at 888. That's a richly priced PE [price/earnings ratio] of 31 [888/28.51= ~31]. Let's assume that earnings recover to $48. That's still a richly priced PE of 18.5. A bear market bottom might sport a PE of 10-12 but let's be generous and use 15.

15*$28.51 would put the S&P 500 at 382!
Let's be more generous and use an earnings estimate of $48.
15*$48 would put the S&P 500 at 720!

-----------------------------------------------------------------------------

No matter how you slice and dice things, fundamentally the stock market is very pricey."

Changes to text in bold.

GDP: U.S. vs. China

Sometimes, we lose perspective on what an economic powerhouse the U.S. really is!

A comparison courtesy of a Wolfram Alpha search:

While China's GDP growth averages more than 3Xs that of the U.S.,

pay attention to the current absolute values:  $13.8 Trillion (U.S.) vs. $3.4 Trillion (China)

And...the per capita GDP of the U.S. is approx. 28 times that of China.  Staggering!

| United States | China GDP at exchange rate | $13.78 trillion per year | $3.4 trillion per year  GDP in local currency | $ 13.78 trillion  (US dollars) | yuan 25.87 trillion  (Chinese yuan)

GDP per capita | $41 770 per year | $1533 per year GDP real growth | +3.222%per year | +9.9%per year inflation rate | +2.653%per year | +4.991%per year unemployment rate | 7.2% | 4%

It's a Long Way to the Top....

It's a long way to the top....  unemployment numbers still have a ways to go....

See chart here.

(Hat tip to CalculatedRisk)

From the U.S. Department of Labor:

U.S. Department of Labor Office of Public Affairs Washington, D.C.

EMPLOYMENT AND TRAINING ADMINISTRATION

USDL 09-539-NAT

Program Contact:	TRANSMISSION OF MATERIAL IN THIS
Scott Gibbons (202) 693-3008	RELEASE IS EMBARGOED UNTIL
Tony Sznoluch (202) 693-3176	8:30 A.M. (EDT), THURSDAY
Media Contact :	May 21, 2009
(202) 693-4676

UNEMPLOYMENT INSURANCE WEEKLY CLAIMS REPORT

          SEASONALLY ADJUSTED DATA

In the week ending May 16, the advance figure for seasonally adjusted initial claims was 631,000, a decrease of 12,000 from the previous week's revised figure of 643,000. The 4-week moving average was 628,500, a decrease of 3,500 from the previous week's revised average of 632,000.

The advance seasonally adjusted insured unemployment rate was 5.0 percent for the week ending May 9, an increase of 0.1 percentage point from the prior week's unrevised rate of 4.9 percent.

The advance number for seasonally adjusted insured unemployment during the week ending May 9 was 6,662,000, an increase of 75,000 from the preceding week's revised level of 6,587,000. The 4-week moving average was 6,480,500, an increase of 131,000 from the preceding week's revised average of 6,349,500.  

The fiscal year-to-date average for seasonally adjusted insured unemployment for all programs is 5.071 million.

UNADJUSTED DATA

The advance number of actual initial claims under state programs, unadjusted, totaled 536,588 in the week ending May 16, a decrease of 33,824 from the previous week. There were 319,694 initial claims in the comparable week in 2008.

The advance unadjusted insured unemployment rate was 4.6 percent during the week ending May 9, unchanged from the prior week. The advance unadjusted number for persons claiming UI benefits in state programs totaled 6,189,434, a decrease of 2,110 from the preceding week. A year earlier, the rate was 2.1 percent and the volume was 2,847,329.

 

Extended benefits were available in Alaska, Arizona, Arkansas, California, Connecticut, the District of Columbia, Idaho, Illinois, Indiana, Kentucky, Maine, Massachusetts, Michigan, Minnesota, Montana, Nevada, New Jersey, North Carolina, Ohio, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Vermont, Washington, and Wisconsin during the week ending May 2.

Initial claims for UI benefits by former Federal civilian employees totaled 1,174 in the week ending May 9, a decrease of 44 from the prior week. There were 1,751 initial claims by newly discharged veterans, an increase of 67 from the preceding week.

There were 15,868 former Federal civilian employees claiming UI benefits for the week ending May 2, a decrease of 553 from the previous week. Newly discharged veterans claiming benefits totaled 28,542, an increase of 21 from the prior week.

States reported 2,268,367 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending May 2, an increase of 111,851 from the prior week. EUC weekly claims include both first and second tier activity.

The highest insured unemployment rates in the week ending May 2 were in Oregon (7.4 percent), Michigan (6.9), Puerto Rico (6.6), Nevada (6.4), Pennsylvania (6.3), Wisconsin (6.2), Idaho (6.0), California (5.6), Alaska (5.5), New Jersey (5.4), and North Carolina (5.4).

The largest increases in initial claims for the week ending May 9 were in Michigan (+16,817), North Carolina (+3,783), Virginia (+2,871), Kentucky (+2,768), and Pennsylvania (+2,444), while the largest decreases were in California (-10,052), Wisconsin (-1,691), Kansas (-1,415), Oklahoma (-1,084), and Washington (-843).

 

"Ten Reasons Why the Stress Tests Are “Schmess” Tests "

Nouriel Roubini has an interesting article in the Wall Street Journal (WSJ) concerning how the recently concluded Bank Stress Tests vastly underestimate the losses that the banks will take over the next 6-9 months.  This means that in order for these banks to remain solvent, they will have to raise even more capital than originally thought.

Wolfram Alpha is Coming!

A new specialized internet search engine will be operational beginning this upcoming Monday!  It is named Wolfram Alpha.

Here is a description from the website:

Wolfram|Alpha's long-term goal is to make all systematic knowledge immediately computable and accessible to everyone. We aim to collect and curate all objective data; implement every known model, method, and algorithm; and make it possible to compute whatever can be computed about anything. Our goal is to build on the achievements of science and other systematizations of knowledge to provide a single source that can be relied on by everyone for definitive answers to factual queries.

Wolfram|Alpha aims to bring expert-level knowledge and capabilities to the broadest possible range of people—spanning all professions and education levels. Our goal is to accept completely free-form input, and to serve as a knowledge engine that generates powerful results and presents them with maximum clarity.

Wolfram|Alpha is an ambitious, long-term intellectual endeavor that we intend will deliver increasing capabilities over the years and decades to come. With a world-class team and participation from top outside experts in countless fields, our goal is to create something that will stand as a major milestone of 21st century intellectual achievement.

This search engine will be great for engineers, economists, scientists, and anyone else who wants to analyze publicly available information and try to make sense of it.

For example, if you wanted to know how the median income in America has changed as a function of time...and if you wanted to know how this has changed relative to the top 1% of earners in America...you could do that....and Wolfram Alpha would make it easy.

Nursing Shortage (continued)

If there is an increase in the demand for nurses, then the wages for nurses should increase in the short-term.  Higher wages attract more professionals to enter the profession.  As supply catches up with the demand, then wages stabilize.  That's Economics 101.  

So why, at least domestically, isn't the supply of nurses sufficiently increasing?  The consensus is that there are not enough nursing instructors, and promising students (over 50,000 people according to some reports) are turned away and not able to reach their full potential.  Why an inadequate number of nursing instructors?  The job does not pay well, so they pursue other jobs.  How can this be? Shouldn't the nursing shortage drive up wages for instructors?  At the very least, wouldn't "we the people"  have a vested interest in adequately subsidizing, at least in part, the training of nurses?  And what about the healthcare industry...they couldn't win sufficient subsidies from Congress?

So...does it make sense for hospitals in America to spend a significant amount of time and money (attorney) to navigate the sometimes complicated H1B visa system (and other temporary foreign workers programs) to import labor from other countries?  No...which is the reason for push by the healthcare industry for The Nursing Relief Act of 2009, to make it easier to import well-qualified trained nurses.  According to some estimates, temporary foreign workers currently represent 3% of nurses in the Northeast and up to 15% of nurses in the Southwest and on the West Coast.  This is not exactly a flood of temporary foreign workers. 

...But proposed Nursing Relief Act of 2009 would only be a short-term fix, and if the federal and state governments do not adequately address future projected nursing shortages in this country by supporting domestic nursing programs now, then by 2020, not even the most liberal foreign workers policy will be able to fill the employment gap.

(I wonder how Italy is handling the situation....they have a huge aging population.) 

Watch this video on the nursing shortage problem:

More on Nursing Labor Market

The Health Resources and Services Administration (part of the U.S. Dept. of Health and Human Services) has this to say in regards to nursing supply/demand:

Excerpt:

"An adequate supply of nurses is essential to achieving the Nation’s goals of ensuring access to affordable, high-quality healthcare. The adequacy of nurse supply varies geographically throughout the Nation, with a general consensus that at the national level currently a moderate shortage of registered nurses (RN) exists. The findings of our analysis suggest that the current RN shortage will continue to grow in severity during the next 20 years if current trends prevail and that some States face a more severe shortage than do others. The growth and aging of the population, along with the Nation’s continued demand for the highest quality of care, will create a surging demand for the services of RNs over the coming 2 decades. At the same time, because many RNs are approaching retirement age and the nursing profession faces difficulties attracting new entrants and retaining the existing workforce, the RN supply remains flat."

The current consensus is that the East Coast has a nursing surplus, while the Southwest and West Coast  regions of the U.S. have a nursing deficit.  Why such a huge variation from Coast to Coast?

Nursing Shortages

Some information on the proposed (but not yet adopted) Nursing Relief Act of 2009 is here.

But is there currently a significant nursing shortage?  It is not clear the shortage is ubiquitous, and it likely depends on what state you live in.

Megan Woolhouse of the Boston Globe writes that, counterintuitively,  hospitals in Boston, MA have been laying off nurses. 

What are the reasons for the layoffs?  Woolhouse proposes a couple of explanations centered around the effects of the current economic downturn :

Excerpt from Woolhouses's April 18, 2009 article:

"Beth Israel Deaconess Medical Center recently said it will lay off more than 100 employees, including nurses, and officials at two Boston nursing schools said opportunities for new nurses are nearly nonexistent at Children's Hospital.

There are two major reasons for the lack of new jobs. First, most hospitals are treating fewer patients as people put off costly elective surgery. At the same time, many experienced part-time nurses are looking for more hours, while others are coming out of retirement because a spouse was laid off.

"This steep recession has placed an unusual economic burden on a lot of households and it's driving many nurses back to the labor market," said Peter Buerhaus, a professor at Vanderbilt University who has written extensively about the nation's nursing shortage."

So, at least in Boston, an increase in the supply in labor coupled with a decrease in the demand for that labor is to blame for the nursing layoffs?  I am skeptical.  Could hospitals be unsustainably cutting corners and/or asking retained nurses to do more for less?

What About Commerical Real Estate (CRE)?

Briefly, CRE loan defaults are adversely affecting smaller regional banks that up until now had  successfully weathered the recent economic storms.

From Calculated Risk (more here):

'This is a story we've discussed for a few years, but it is probably worth repeating: Small and regional banks couldn't compete in the residential mortgage market during the housing bubble (with some exceptions), so they focused on Construction & Development (C&D) and other Commercial Real Estate (CRE) loans. The C&D loans are defaulting in large numbers now and this is impacting a number of regional banks (like BankUnited and Corus).'

How Wall Street is FED!

More from Eliot Spitzer in Slate here.  The NY FED definitely has some conflict-of-interest problems.

Excerpt:

The kerfuffle about current New York Federal Reserve Bank Chairman Stephen Friedman's purchase of some Goldman stock while the Fed was involved in reviewing major decisions about Goldman's future—well-covered by the Wall Street Journal here and here—raises a fundamental question about Wall Street's corruption. Just as the millions in AIG bonuses obscured the much more significant issue of the $70 billion-plus in conduit payments authorized by the N.Y. Fed to AIG's counterparties, the small issue of Friedman's stock purchase raises very serious issues about the competence and composition of the Federal Reserve of New York, which is the most powerful financial institution most Americans know nothing about.

Eliot Spitzer on Investment Bank Regulation

Eliot Spitzer effectively articulates populist opposition to the Wall Street bank bailouts.  (If you can overlook his past hypocrisy, difficult though it may be, he makes a convincing argument.)

Economic Water-boarding?

With so many homeowners "underwater"....I think you know the punchline.

More Irrational Exuberance?

Ruth Simon and James Hagerty with an interesting article in the Wall Street Journal. Full article here.

Briefly, an additional 4 million homeowners were "underwater" after the first quarter of 2009 than at the end of 2008.  In the meantime, what has happened to the value of toxic mortgage-backed securities over the past 4 months?  Toxic collateralized debt obligations?

How have things gotten better then?  Why is the stock market rallying?  

"The downturn in home prices has left about 20% of U.S. homeowners owing more on a mortgage than their homes are worth, according to one new study, signaling additional challenges to the Obama administration's efforts to stabilize the housing market.

The increase in the number of such "underwater" borrowers comes amid signs that falling prices are making homes more affordable for first-time buyers and others who have been shut out of the housing market. But falling prices also make it more difficult for homeowners who get into financial trouble to refinance or sell their homes, and for others to take advantage of lower interest rates...."

"Real-estate Web site Zillow.com said that overall, the number of borrowers who are underwater climbed to 20.4 million at the end of the first quarter from 16.3 million at the end of the fourth quarter. The latest figure represents 21.9% of all homeowners, according to Zillow, up from 17.6% in the fourth quarter and 14.3% in the third quarter."

A New Economy with Nearly-Universal Healthcare?

Whenever the U.S. economy fully recovers (including on the job front), our nation will likely witness some significant changes in how health care is managed in this country.  Both Democrats and Republicans realize that healthcare in this country needs to be reformed...but in terms of what reforms will need to be made, the two parties will have to duke it out.  Democrats are clearly going after a nearly-universal healthcare system by proposing a government-run healthcare program to compete with hundreds of privately-run programs.  The Republican party is warming up to the idea of universal health care, but only if it is completely administered through the private sector.  But to do so, Republicans will have to work to get a seat at the negotation table.  How?  By re-framing the debate.

The Republican Framing of the Healthcare Debate  via Ben Smith:

THE QUESTION YOU MUST ASK EVERY HEALTH CARE TOWN HALL FORUM

Would you rather… 
“Pay the costs you pay today for the quality of care you currently receive,”

-- OR-- 

“Pay less for your care, but potentially have to wait weeks for tests and months for treatments you need.”

Their Answer:
OVERWHELMINGLY KEEP THE CURRENT ARRANGEMENT

The Democrats already have an answer for this: They're bending over backward to make sure the majority who are comfortable with their care won't be affected. So the burden is on the GOP to prove otherwise.

Green Shoots

The buzz the past couple of weeks is that the economy is bottoming and that we are beginning to witness "green shoots."  The stock market is experiencing a sustained bear market rally, which historically has been a nine month (give or take a month) leading indicator of broad economic recovery.  But what is the basis for the equities market's "leading economic indicator" status?  

Since the Great Depression, most economic recessions have lasted equal to or less than 12 months. Here we are now, though, in our 17th month of this Great Recession.   Given the inability of the market to value toxic assets, the lack of transparency of the investment banks, and the still frozen credit markets...does "leading economic indicator status" during these strange times even apply here?  Without knowing the economic mechanism behind the historical correlation, it is pretty much useless in giving us any real reason for confidence.   

But don't worry about the great 1-2 year lagging economic indicator: job recovery.  We can count on that!

What Does the Market Think of BofA and Citi?

First, some data on BofA and Citibank:

Bank of America

Net Equity (as of end of March 2009) = $ 240 Billion

Market Capitalization (as of Apr 30, 2009) = $57.16 Billion

Citibank

Net Equity (as of end of March 2009) = $ 144 Billion

Market Capitalization (as of Apr 30, 2009) = $16.81 Billion

One explanation for these numbers, besides a cash flow problem,  is that the market believes that some of their underlying assets are incorrectly valued. 

Stressing over Stress Tests

What is the current state of the finance industry in this country?   The results of the bank "stress tests" for the top 19 banks (by asset value) are seen by many independent analysts to be unconvincing.  Last week, the Federal Reserve stated that the vast majority were sufficiently capitalized to withstand an even greater economic downturn than the one we are currently experiencing.  Yet, this week, Bank of America and Citibank (with almost $4 Trillion in assets, combined) were told to each raise over $70 Billion in capital.  High unemployment rates are not going away anytime soon and an economic recovery is not likely to be seen until the beginning of next year even under the rosiest of circumstances.  What will happen to BofA and Citi in the meantime?

John Browne, Sr. Strategist at EuroPacific Capital had this to say:

"First, the level of stress in the tests was set unrealistically low. Their absolute worst case assumption was for a GDP contraction of only 3.3 percent in 2009. This comes as first quarter 2009 GDP shrank at 6.1 percent. And the economy is still slowing. To post a contraction of just 3.3 percent for the year would likely involve an immediate reversal in the rate of contraction and outright expansion by the fourth quarter.

The stress test also assumes a worst case scenario unemployment rate of 8.9 percent in 2009. This is also wildly optimistic when unemployment is already at 8.7 percent and rising at some 20,000 each day. Worse still, if calculated on a pre-Clinton basis, to include all those unable to find anything but part-time employment, the current unemployment rate is a staggering 19.2 percent, or just 0.8 percent from official depression levels! It appears that the U.S. is fast slipping from recession into depression, rendering the stress tests almost meaningless other than as a public morale boosting exercise." 

More on this here.

DHOTUS (Debt Holders Of The United States)

Who are the top-ten holders of U.S. debt (in the form of U.S. Treasuries)?

1.  Federal Reserve and IntraGovernmental Holdings ($4.8 Trillion)

2.  Mutual Funds/ Money Market (769 Billion)

3.  China (740 Billion)

4.  Japan (635 Billion)

5.  State and Local Governments (523 Billion)

6.  Pension Funds (456 Billion)

7.  Other (individuals, trusts, brokers, etc)  (413 Billion)

8.  Oil Exporting Countries (Iraq, Saudi Arabia, Venezuela, etc.) (186 Billion)

9.  Off-shore Caribbean Banks (177 Billion)

10.  Brazil (134 Billion)

Foreign Governments in italics.

Numbers from CNBC.

The Top Ten hold $8.8 Trillion of an estimated $11.1 Trillion in total U.S. debt.  Notice that China and Japan combined only hold slightly more than 10% of U.S. Treasuries.  So...China has to worry about fluctuations in the U.S. dollar...and tries to exert influence to maintain its investment...but there are plenty of other countries and institutions begging to lend the U.S. money in their flight to an investment safe haven!

Staggering Sums of Money...Still More Needed

Clearly, the U.S. government on behalf of 'we the people' needs to spend money to get us out of this economic crisis.  Still, the amount of money is staggering....

Remember: the value of all the goods and services that we produced in this country (the Gross Domestic Product, GDP) in 2008 was about 14.2 Trillion Dollars.

The following table details how the Fed and the government have committed the money on behalf of American taxpayers over the past 20 months, according to data compiled by Bloomberg.

Click on Chart to increase Chart size.

Timothy Geithner and Wall Street

Up until his appointment and confirmation as U.S. Treasury Secretary, Timothy Geithner served as President of the New York Federal Reserve Bank.  What is the role of the New York Fed, you may ask?

from the NY Times: Becker and Morgenson, April 26, 2009:

"The Federal Reserve was created after a banking crisis nearly a century ago to manage the money supply through interest-rate policy, oversee the safety and soundness of the banking system and act as lender of last resort in times of trouble. The Fed relies on its regional banks, like the New York Fed, to carry out its policies and monitor certain banks in their areas.

The regional reserve banks are unusual entities. They are private and their shares are owned by financial institutions the bank oversees. Their net income is paid to the Treasury.

At the New York Fed, top executives of global financial giants fill many seats on the board. In recent years, board members have included the chief executives of Citigroup and JPMorgan Chase, as well as top officials of Lehman Brothers and industrial companies like General Electric.

In theory, having financiers on the New York Fed’s board should help the president be Washington’s eyes and ears on Wall Street. But critics, including some current and former Federal Reserve officials, say the New York Fed is often more of a Wall Street mouthpiece than a cop."

This begs the question:  Could Geithner's associations with former and current Wall Street CEOs and top-officials cloud his judgement in his official work on behalf of Main Street?  Or even worse?  Perhaps, Obama could have chosen a Treasury Secretary who could have avoided even the appearance of impropriety.  Realistically, this may have been difficult....but usually, if there is a political will, there is a way.

Uptick Rule Short on Logic

The SEC is convinced that some version of the Uptick Rule should be reinstated in the equities markets.  The claim is that short-sellers can intentionally drive a company's stock price down and destroy an otherwise sound company.  This does not make sense.  If the fundamentals of a company are sound, then short-sellers pose no threat to its long-term viability.  On the other hand,  if a company is "cooking the books" and is trying to "fake it to make it," then the short-sellers pose a grave threat and rightly so!

Currently, the real problem, and one that is not being fully addressed, is the lack of transparency concerning the valuation of a company's assets.  With respect to the Wall Street investment banks, it is difficult to know which ones are even currently really solvent.  Short-sellers have been charged with driving investment bank share prices well below what they are really worth.  Really?  Some of these banks' stocks are worthless...and when they actually have to write-down the value of their "toxic assets" ...who are we going to blame?  The short-sellers? 

On the contrary, short-sellers play a vital role in the equities market, namely decreasing market volatility, as Sal Khan explains:

Running the Government Like a Business?

Mark Shields asks the question:  Do we really want the government run like a business?

Well, certainly not like the typical Wall-Street investment bank!

Great Time to Start a Bank?

Check out this article in the Wall Street Journal:  "It's a Great Time to Start A Bank."

It would be nice if new banks with clean balance sheets could qualify for TARP money (see April 21, 2009 post:  New American Bank Initiative).

Again, you can read the full plan here:  http://cift.haas.berkeley.edu/nabi-intro.html

Collateralized Debt Obligations (CDOs)

Did you ever want to know about CDOs but were too afraid to ask?

Here is Sal Khan's tutorial (approx 10 min.):

L-shaped Recession

At a seminar he gave at the University of Cincinnati on Friday, Krugman answered the following question about the economic crisis:

What will it take to pull out of this crisis?

I'm in the camp that really worries about the L-shaped recession. We level off but we don't get the recovery. We hope it isn't, but it has all the markings of it. This looks like the kind of slump that has all the markings of where normal recovery forces are very, very weak.

It's hard to see where recovery comes from. Almost always the way a country recovers from a financial crisis is with an export boom. The problem is that we have a global crisis this time. So who are we going to export to, unless we find another planet to take our stuff?

See the rest of his conversation here.

Glut of Foreclosures

This from Mr. Mortgage at Field Check Group:

California:

Foreclosures About to Soar Near-Term — Easily Back to All-Time Highs

Are you ready to see the future? Ten’s of thousands of foreclosures are only 1-5 months away from hitting that will take total foreclosure counts back to all-time highs. This will flood an already beaten-bloody real estate market with even more supply just in time for the Spring/Summer home selling season - great timing!

Check out the facts and figures at: 

http://www.fieldcheckgroup.com/2009/04/07/4-7-ca-foreclosures-about-to-soar/

Future Economic Recovery: Not So Fast

The speed at which the economy has been declining has finally leveled off.  Still, the popular consensus is that we are still far from the start of a tangible economic recovery...but what will this recovery even look like?  

From the Economist:

The worst is over only in the narrowest sense that the pace of global decline has peaked. Thanks to massive—and unsustainable—fiscal and monetary transfusions, output will eventually stabilise. But in many ways, darker days lie ahead. Despite the scale of the slump, no conventional recovery is in sight. Growth, when it comes, will be too feeble to stop unemployment rising and idle capacity swelling. And for years most of the world’s economies will depend on their governments.

Consider what that means. Much of the rich world will see jobless rates that reach double-digits, and then stay there. Deflation—a devastating disease in debt-laden economies—could set in as record economic slack pushes down prices and wages, particularly since headline inflation has already plunged thanks to sinking fuel costs. Public debt will soar because of weak growth, prolonged stimulus spending and the growing costs of cleaning up the financial mess. The OECD’s member countries began the crisis with debt stocks, on average, at 75% of GDP; by 2010 they will reach 100%. One analysis suggests persistent weakness could push the biggest economies’ debt ratios to 140% by 2014. Continuing joblessness, years of weak investment and higher public-debt burdens, in turn, will dent economies’ underlying potential. Although there is no sign that the world economy will return to its trend rate of growth any time soon, it is already clear that this speed limit will be lower than before the crisis hit.

It looks like most of us will have to adapt to a new economic era, one reminiscent of Japan's lost decade.  

Foreclosures: A Prime Problem

Foreclosures are not just a sub-prime problem now.   Check out this report by Fannie and Freddie that came out today.

Empty Creditors

There is an interesting article in Slate.com by Daniel Gross on "The Scary Rise of the 'Empty Creditor'.  "

The take-home lesson here is that because of credit default swaps (insurance policies for lenders in case their customers can not make good on their loans) and other new-age financial instruments, creditors stand to lose a lot less if the distressed financial institutions to which they lent money go into bankruptcy.  Thus, creditors do not want to negotiate and will actually try to push debtors into bankruptcy.

But if you think about it...who is the insurer for a lot of this debt?  AIG.  The same company that received more than 150 Billion dollars in bailout money from the U.S. government.   So...really...the U.S. government has provided insurance for a lot of Wall Street financial institutions (ex. Goldman Sachs) to make risky investments. 

So...our tax money is going to helping AIG to make good on its insurance obligations so that it becomes even more difficult to extract ourselves from this economic mess.  The solution that makes sense to me is for the government to take control of all the distressed banks and unravel all of their convoluted relationships with one another.

Alternative to the Geithner Plan: New American Bank Initiative

Sal Khan offers one potential solution in which the currently insolvent zombie banks are cut out as middlemen in the flow of capital from the government to the private sector :  the New American Bank Initiative.  Briefly, Khan proposes to set up new banks (with clean balance sheets) with the 700 Billion dollars that the TARP program received.  Since the new banks do not have to worry about write-downs associated with bad loans and toxic asset-backed securities, these new banks can start lending immediately.  As an added benefit, each household would receive shares in the new banks...so at least the taxpayers would stand to get some direct benefit from their financing of the plan.

You can read the full plan here:  http://cift.haas.berkeley.edu/nabi-intro.html

Salman Khan's Online Education Model

The explanation as to why Timothy Geithner's plan to get the banks lending again will not work came from Salman Khan.  He has a cool model for educating the world!  The world needs more people like him.  Check out the Khan Academy online!

Salman Khan (Sal) founded the Khan Academy with the hope of using technology to foster new learning models. He is currently an investment professional in Palo Alto, CA and has held positions in venture capital, product management, and engineering.

Sal received his MBA from Harvard Business School. He also holds a Masters in electrical engineering and computer science, a BS in electrical engineering and computer science, and a BS in mathematics from the Massachusetts Institute of Technology.

Why the Geithner Plan (PPIP) Will Not Work.

Salman Khan has a good series on YouTube in which he explains why the Geithner plan will not be any better than Hank Paulson's plan to get banks lending again.  

Part I is below.  Here are the next videos:  Part II.  Part III.  Part IV.

Professor Krugman

Check out Krugman's blog

Learning from Paul Krugman

I have been reading Paul Krugman's column in the New York times for over a year now.  I like his style of backing up his conclusions with evidence!  Lately, too much of the public discourse in regards to fixing the economy has been centered on conservative vs. liberal ideology.  While Krugman is a self-professed liberal, he uses history and economic principles to guide his opinion. Perhaps even better than his columns are his blogs where he shows charts and graphs to better illustrate his points.  I find it refreshing that he doesn't distort the facts to suit his own personal value system.  For example, in one of his blogs,  he responds to the erroneous belief by many people that a strong middle-class is required for the economic growth of a country.  Upon reflection, I think we can all cite examples of economically-successful countries controlled by aristocracies or dictators, where the middle-class is all but nonexistent.  For many of us, we value a large middle-class where people are free to pursue their dreams, but economically speaking, it is not required for economic growth.  

We should all be able to agree that both conservatives (not to be confused with the right-wing, hate-spewing wackos that we have been hearing from on television lately) and we liberals value a strong American middle-class,  but we just disagree on the practical aspects of how to achieve it and to maintain it.  This would be a good starting place for a national conversation on the matter.

Let's Get It Started!

This blog is dedicated to the honest discussion of current issues of national and international importance.  Currently, the U.S.  economy has taken center-stage in my consciousness....so at least in the short-term, I would like to explore the pros and cons of government actions to address the current economic downturn.  Any honest government action must be based on perceptions of reality and on assumptions about the present and future.  In light of this, these issues are appropriately fair game, as well.