What is wrong with the US economy? Part 2

[Astronuc]

Maybe there will be some bargain hunting tomorrow, or in the news is bad, another down day. The markets are fickle at the moment.

If the House passes the bill over the weekend, then perhaps a rally Monday. But I expect more volatility in the month ahead.

Goldman Sachs is down about 50% from its high during the past year. It might be a good buy now - since its main competition have been beaten down.

In the long term GE should be a good buy.

But the economy seems to be struggling.

 

[jal]

You, (Astronuc), have been doing a good job of giving us good links to figure out what is happening.

Has anyone read the "new" bailout bill? I just found the following comments about the attached pork barrelling etc.
http://www.colonyinc.com/pdfs/1008chairmanscorner.pdf
Random Thoughts the Night before the Vote
Thomas J. Barrack, Jr.
--------
I hope that winter will not be too long.
jal

 

[fuzzyfelt]

Technically we're now in recession.

 

[Astronuc]

According to this article - Total Bailout Bill = $900 Billion
http://www.huffingtonpost.com/hale-stewart/total-bailout-bill-900-bi_b_127125.html

This guy really lays into the bill.

Between the $29 billion the Fed pledged to swing the Bear Stearns sale to JPMorgan in March, $100 billion apiece to rescue mortgage finance firms Fannie Mae and Freddie Mac, up to $300 billion for the Federal Housing Authority, Tuesday's $85 billion loan to insurer AIG and various other rescue deals and loans, taxpayers are potentially on the hook for more than $900 billion.

Think about that for a minute. $900 billion dollars, racked-up before your very eyes. This at a time when the federal government is already bleeding money. Note the following numbers from the Bureau of Public Debt:

09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

Currently the total outstanding debt = $9,634,090,464,815.55 (and rising)

And now, thanks the the geniuses in charge of the US government, we've got the following bills to add: . . . .

This bill apparently started at 3 pages, but it has now grown to 110 pages!
http://en.wikipedia.org/wiki/Emergency_Economic_Stabilization_Act_of_2008
http://www.house.gov/apps/list/press/financialsvcs_dem/ayo08c04_xml.pdf

http://en.wikipedia.org/wiki/HR1424

I think it includes raising the federal debt ceiling from $9.9 trillion to $11.3 trillion. It is expected the deficit will be about $400 billion FY2009. However, based on falling revenue (due to the recession), the deficit could go higher.

I think the bill needs to stripped of the tax breaks/credits.

How many people here are concerned about the federal insurance limit of $100,000 on a single bank deposit?

Goldman Sachs, Citigroup and JP Morgan Chase aren't going anywhere.

 

[OmCheeto]

How many people here are concerned about the federal insurance limit of $100,000 on a single bank deposit?

That's a really good question.

Another question I have is; why with the credit crunch, do I still get daily pre-approved credit card applications in the mail? I even got one from WAMU a week ago! Did someone forget to turn off the snail mail spam-bots?

Ok. I guess that's two questions.

 

[Astronuc]

On Wall Street, Reassurance Before the Fall
http://dealbook.blogs.nytimes.com/2008/09/30/on-wall-street-reassurances-cometh-before-the-fall/

Many chief executives of troubled companies put on a happy face for the public — right before their companies go off a cliff, Andrew Ross Sorkin notes in his latest DealBook column.

These efforts to bolster confidence, he writes, have become especially conspicuous amid the current financial crisis — with the C.E.O.s of firms like Bear Stearns, Lehman Brothers and most recently Wachovia, offering comforting words before the fall.

Are these assurances purely disingenuous or just a smart assessment of how quickly rumor can turn into a self-fulfilling prophesy?

Either way, says Mr. Sorkin, happy-talk executives put themselves in legal jeopardy. And
when we start seeing pictures of C.E.O. perp walks, the crime, he says, won’t be theft or some other kind of financial chicanery, it will be some kind of fraud — probably lying to the investing public.

I think a lot of people are wondering what the heck happened with these companies, and how many more distressed companies and bad CEOs there are. Perhaps some real action will be taken with respect to CEO compensation, such that it really does relate to job performance.

I don't see how financial services companies justifies the compensations of the CEO or directors when there is a whole team of other people who use other peoples money to take a risk. It seems more like a racket to me with intermediaries taking their percentage without exposing themselves to any risk at all.

 

[Jimmy Snyder]

Technically we're now in recession.

Technically, we're in a recession when the nber says we're in a recession. The nber has not said that we're in a recession. So technically, we're not now in a recession. Don't give up hope though.

 

[BobG]

On Wall Street, Reassurance Before the Fall
http://dealbook.blogs.nytimes.com/2008/09/30/on-wall-street-reassurances-cometh-before-the-fall/
I think a lot of people are wondering what the heck happened with these companies, and how many more distressed companies and bad CEOs there are. Perhaps some real action will be taken with respect to CEO compensation, such that it really does relate to job performance.

I don't see how financial services companies justifies the compensations of the CEO or directors when there is a whole team of other people who use other peoples money to take a risk. It seems more like a racket to me with intermediaries taking their percentage without exposing themselves to any risk at all.

More like exposing themselves to a very unlikely risk. Here's a really simple (overly simple, in fact) article on the logic behind the risk: Double or nothing.

Of course, people in the financial market are usually pretty smart. The key part of the logic is that home prices always go up. You're flipping a weighted coin, which makes the likelihood of losing extremely small. At least until the new fad of reverse mortgages eventually matures and you have a lot of houses that have to be sold to a population that's declining or at least growing at a much slower pace. (Here's one case where the consumers might be smarter than the financial folks.)

Having a credit crisis now is pretty unexpected. Having one eventually is practically a certainty. Which means we'll go though this again regardless of how this one turns out.

 

[mheslep]

...How many people here are concerned about the federal insurance limit of $100,000 on a single bank deposit?

The bailout bill will increase deposit insurance to $250,000 [http://thomas.loc.gov/cgi-bin/query/F?c110:5:./temp/~c110a9fMTD:e116130:" ], a mistake, without any corresponding action to increase the FDIC insurance fund, another mistake. The deposit cap was increased from $40,000 to $100,000 by Congress in 1980, the subsequent S&L scramble to take in more deposits helped cause the 80/90's S&L fiasco.

 

[LowlyPion]

The bailout bill will increase deposit insurance to $250,000, a mistake, without any corresponding action to increase the FDIC insurance fund, another mistake. The deposit cap was increased from $40,000 to $100,000 by Congress in 1980, the subsequent S&L scramble to take in more deposits helped cause the 80/90's S&L fiasco.

Actually I think it doesn't really matter.

The move looks to be intended to slow down the volatility of those thinking to move money around unnecessarily, contributing to short term volatility. I rather think that the extra cost is nil. It's just psychological. I also think that it is short term, and if it is going to remain in force will result in greater restriction down the road to assure that proper risk premium is assessed.

 

[Astronuc]

It's the $100 billion in tax breaks that trouble me, in addition to the disposition of $700 billion. It's not clear to me that there is a plan to get to the bottom of this, i.e. that there is an remedial action.

It seems to me from the outside, that Congress would have this problem drops off the radar screen as it slips into the past. Then it will be business as usual.

Financial market reform
Commentator Karl Denninger, author of The Market Ticker, has proposed a plan to restore trust in the financial system starting with (1) balance sheet transparency (2) an exchange for OTC derivatives, and (3) limiting leverage to 12:1. Transparency, because it increases the information available to investors, allows more accurate risk assessment and derivative pricing. An exchange increases the liquidity of derivatives. A return to historical leverage limits (e.g. 12:1) helps identify those institutions that are over-leveraged while rewarding those more conservative. He argues that addressing the problem with these reforms in place makes the process of restructuring failing firms more fair and orderly, and far less costly.

What gets me is this stuff:

Tax breaks and credit extensions for the following:

• "Certain wooden arrows designed for use by children" (Sec 503) [11]
• Wool research (Sec. 325)
• Film and television productions (Sec. 502)
• Litigants in the 1989 Exxon-Valdez oil spill (Sec. 504)
• Virgin Island and Puerto Rican rum (Section 308)
• American Samoa (Sec. 309)
• Mine rescue teams (Sec. 310)
• Mine safety equipment (Sec. 311)
• Domestic production activities in Puerto Rico (Sec. 312)
• Indian tribes (Sec. 314, 315)
• Railroads (Sec. 316)
• Auto racing tracks (317)
• District of Columbia (Sec. 322)

A House leader accused the Senate of legislating "by blunt force" without public-consent. Senate has also been accused of "sweetening" the bailout to force its passage by the opposing House.

http://en.wikipedia.org/wiki/Propos...inancial_system#Senate_vote_October_1.2C_2008

 

[Astronuc]

Congress apparently just passed the Bill.
http://news.yahoo.com/s/ap/20081003/ap_on_go_co/financial_meltdown

The final vote, 263-171 in the House, capped two weeks of tumult in Congress and on Wall Street, punctuated by daily warnings that the country confronted the gravest economic crisis since the Great Depression if lawmakers failed to act.

 

[turbo]

Now we see what happens when we throw money at Wall Street. I predict that since there will be little or no benefit to the working class, whose consumer spending drives most of our economy, the economy will continue to tank and the neo-cons will try to come back for another "urgently needed" dip at the trough. Stocks of some companies who stand to get bailed out of bad paper they are holding will rise on those expectations, but I don't expect any up-turn in consumer spending, which bodes ill for the manufacturing sector and for retailers.

 

[Ivan Seeking]

Actually I think it doesn't really matter.

The move looks to be intended to slow down the volatility of those thinking to move money around unnecessarily, contributing to short term volatility. I rather think that the extra cost is nil. It's just psychological. I also think that it is short term, and if it is going to remain in force will result in greater restriction down the road to assure that proper risk premium is assessed.

Yes, a simple move intended to prevent further disaster - a run on the banks.

 

[edward]

I still can't decide whether to call it a bail out or a sell out. A lot of pork was thrown into get the votes to pass the bill. They keep mentioning the people on main street, how about the people on the side streets?

If the government gets stupid and turns the management of the toxic funds over to some, no bid wacko company, housing prices could tumble even faster than with no bail out. If too many homes hit the market all at once it will be another crisis,this time on side street America.

Back during the savings and loan debacle a Phoenix investor named Wolfswinkle owed $380 million on 6,000 acres of land north of town. He filed for bankruptcy and the Resolution trust ended up with the property.

Four years later the Resolution Trust sold the property to a group of investors which included Wolfswinkle. The selling price $180 million.

We can't afford to have that kind of garbage going on this time around. There are going to be a lot of former bankers with money in their pockets just waiting for the fire sale prices.

 

[Ivan Seeking]

How many people here are concerned about the federal insurance limit of $100,000 on a single bank deposit?

The concern is for small businesses.

 

[Astronuc]

The concern is for small businesses.

OK - that I can understand. I was thinking of individuals.

I can see a concern for small businesses being able to make payroll.

 

[Ivan Seeking]

According to this article - Total Bailout Bill = $900 Billion
http://www.huffingtonpost.com/hale-stewart/total-bailout-bill-900-bi_b_127125.htmlThis bill apparently started at 3 pages, but it has now grown to 110 pages!

One news anchor on CNN had a copy on his desk yesterday. According to him and several other reports, as of yesterday, the bill was up to 450 pages.

 

[turbo]

OK - that I can understand. I was thinking of individuals.

I can see a concern for small businesses being able to make payroll.

That provision meant something to me personally, but I could have lived without it. It's a much different story for small farms, timber operations, etc who need someplace to park profits so that they can invest in new or upgraded equipment when necessary. If you are a small wood harvester, and your feller-buncher craps out, can you come up with the cash or ready credit to replace it so that your crew of harvesters, truckers, etc can keep working? If a large $$$$$$ piece of agricultural equipment craps out, can you repair or replace it promptly enough so that you can harvest your potatoes before they rot in the ground? In the absence of ready credit, such businesses need liquidity, and they need to be able to get at that money on short notice, at times. It would be pretty disconcerting to have lots of cash deposits in money-market or savings accounts, and have those banks fail just before harvest time (if you are a farmer) or when pulp mills are experiencing a shortage of wood and increase the prices they pay you (if you are a logger).

 

[edward]

The concern is for small businesses.

The concern was for small businesses but now every savings account will be covered, including those who want to pull money out of risky investments and stash it. This could be a dangerous move without proper funding for the FDIC.

Why didn't they just increase the amount covered by the FDIC to $250,000 for just business accounts?

They had over 450 pages of legislative jingo to do it in.

 

[Ivan Seeking]

The concern was for small businesses but now every savings account will be covered, including those who want to pull money out of risky investments and stash it. This could be a dangerous move without proper funding for the FDIC.

Why? They can vote for additional funds if needed.

 

[turbo]

The concern was for small businesses but now every savings account will be covered, including those who want to pull money out of risky investments and stash it. This could be a dangerous move without proper funding for the FDIC.

Why didn't they just increase the amount covered by the FDIC to $250,000 for just small businesses?

They had over 450 pages of legislative jingo to do it in.

This is one provision that might actually have some positive value, though. Let's say that people dive out of risky investments and cash in, putting their money in savings, money-markets, etc to the extent that they can. That would increase the capitalization of banks big and small, and they would try to find ways to leverage this capital, hopefully by making good loans and not by betting on derivatives. If banks have extra money to play with, they want to loosen credit to their customers and put that money to work, which could be a good thing for individuals and small businesses. In the meantime, as little investors seek cash and relative safety the big boys will snap up blocks of shares that the little guys had abandoned. It's perverse, but it is possible that increasing the FDIC cap could provide more stimulus to the economy than the infusion of money to buy bad debt.

 

[Ivan Seeking]

Yes, we can't afford to inject additional liquidity problems through fear.

 

[Astronuc]

The Dow30 rallied through the morning, but have since given almost all back - a swing up and down of about 300 points - and down more than 500 points for the week.

Maybe some bargain hunting means a recovery on Monday - unless there is more bad news this weekend.

Loss of 159,000 jobs, but the unemployment rate remains 6.1%, which means the unemployed get kicked off the rolls.

 

[edward]

Why? They can vote for additional funds if needed.

Additional funds from where. Are you saying we can bail out the bail out.

 

[Astronuc]

Additional funds from where. Are you saying we can bail out the bail out.

They borrow it from the same place they borrow the other $trillion+.

 

[edward]

This is one provision that might actually have some positive value, though. Let's say that people dive out of risky investments and cash in, putting their money in savings, money-markets, etc to the extent that they can. That would increase the capitalization of banks big and small, and they would try to find ways to leverage this capital, hopefully by making good loans and not by betting on derivatives. If banks have extra money to play with, they want to loosen credit to their customers and put that money to work, which could be a good thing for individuals and small businesses. In the meantime, as little investors seek cash and relative safety the big boys will snap up blocks of shares that the little guys had abandoned. It's perverse, but it is possible that increasing the FDIC cap could provide more stimulus to the economy than the infusion of money to buy bad debt.

Thats a good point. I admit I had not considered that.

 

[drankin]

It looks like the bailout was approved.

Do we, the US, actually have $700,000,000,000 just sitting somewhere that we can just spend away?

Where does this money come from? $700,000,000,000 divided by the US population 305,324,801 = $2,292.64 from each US man, woman, and child.

Not to mention the other bailouts we've already financed. Where does this end?

 

[turbo]

Thats a good point. I admit I had not considered that.

None of our media talking heads or political spinners had considered it either, edward, judging from the lack of discussion on this point. Economics is too arcane to make good ratings on news programs, and most people would be bored to tears to hear how throwing money at investment banks WILL NOT translate to job creation, so I hoped to inject a positive spin on what I consider to be a raid on our treasury. Ireland's banks have recently adopted a similar policy (higher insurance deposit caps), forcing the EU to consider following suit.

 

[edward]

They borrow it from the same place they borrow the other $trillion+.

Thats the part that worries me

 

[Jimmy Snyder]

I think there was a concern that people with more than $100,000 in a single bank would withdraw the excess and deposit in another bank. This could potentially cause some otherwise sound banks to fail.

Single factor analysts who said that the DOW lost $778 on Monday because the House rejected the bailout, need to explain to me why the DOW lost $157 today.

 

[mheslep]

The FDIC cap increase only covers bank accounts and not anything else like money markets. As illustrated by the S&L crash, people place large sums in banks only when the banks raise the interest paid to compete for those deposits. The only way FDIC insured banks have of paying those large rates is to in turn loan those deposits out as risky high interest loans. Kaboom.

 

[turbo]

The FDIC cap increase only covers bank accounts and not anything else like money markets.

My wife and I have a joint MM account that is insured to $200K because both our names are on the account. My understanding is that the new cap would increase the insurance to $500K.

As illustrated by the S&L crash, people place large sums in banks only when the banks raise the interest paid to compete for those deposits. The only way FDIC insured banks have of paying those large rates is to in turn loan those deposits out as risky high interest loans. Kaboom.

Again, not correct. Investment banks can offer nice investment packages for personal IRAs that rival or exceed the performance of traditional 401K plans. If you watch the fund performance history and look at fees, etc, critically, you can do well, or at least not lose it all in a bad downturn. I had several 401K plans from former employers and consolidated them into one IRA - best move I ever made. It simplified transactions, and I have a direct 800 number to the financial advisor that helps me reallocate (rarely) investments. I try to take the long view, while keeping an eye on some investments that have been poorly-handled and might rebound.

 

[LowlyPion]

I think there was a concern that people with more than $100,000 in a single bank would withdraw the excess and deposit in another bank. This could potentially cause some otherwise sound banks to fail.

Single factor analysts who said that the DOW lost $778 on Monday because the House rejected the bailout, need to explain to me why the DOW lost $157 today.

Jobs report, slowing economy, recession fears.

 

[mheslep]

... Investment banks can offer nice investment packages for personal IRAs that rival or exceed the performance of traditional 401K plans. ...

Of course they do, but investment bank assets are not FDIC insured, the point of my post.