Friday, January 30, 2009

Big bang’ financial clean-up


The Obama administration is gearing up for a “big bang” announcement next week that will combine a bank clean-up with measures to reduce home foreclosures and probably steps to kick-start credit markets.

Details of the financial overhaul are being finalised and have yet to be approved by President Barack Obama, but it may include both the purchase of toxic assets by a “bad bank” and insurance-style guarantees for problem assets remaining on bank balance sheets.

Anti-foreclosure efforts are likely to focus on subsidising programmes that reduce unsustainable monthly mortgage payments, though there may also be support for schemes that subsidise the partial writedown of loans that exceed the value of the home. Treasury may also unveil new efforts to revitalise dysfunctional securitisation markets.

Thursday, January 29, 2009

Bank Bailout Could Cost Up to $4 Trillion

From CNBC:

The cost of restoring confidence in U.S. financial firms may reach $4 trillion if President Barack Obama moves ahead with a "bad bank" that buys up souring assets.

The figure far exceeds even the most pessimistic estimates of how great the loan losses might be because there is so much uncertainty about default rates, which means the government may need to take on a bigger chunk of bank debt to ease concerns.

Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.

New York Sen. Charles Schumer has said that a number of experts thought that up to $4 trillion may be needed to buy the bad assets, an estimate that a Senate aide said was based on informal conversations with people in the industry.

The Wall Street Journal said government officials had discussed spending $1 trillion to $2 trillion to help restore banks to health, citing people familiar with the matter.

At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand.



Washington's attempt to spend us out of our economic doldrums gets more ambitious by the day
and could total more than $1 trillion once interest is figured in. The long-range implications of this are alarming.

the Democrat-led Congress has larded up the 647-page American Recovery and Reinvestment Act of 2009 with an assortment of spending items that have little or nothing to do with economic stimulus.

There's money to refurbish the National Mall, sponsor a carbon-capturing contest, buy alternative-energy vehicles for the Defense Department and a new computer system for the Social Security Administration, pay for testing for sexually transmitted diseases, fund the arts,

and endow child-care development programs.

You might like some or all of these things. But they're not stimulus. Ans such non-stimuli add up. The full package is going to cost, according to House Ways and Means Ranking Member Rep. Dave Camp, a Republican from Michigan, $1.1 trillion, including $347 billion in interests payments.

That will push the deficit to $1.5 trillion, a little more than 10% of the entire domestic economy. Deficits aren't usually a problem as long as they don't exceed roughly 4% of GDP. But when they go beyond that, trouble begins.

Senators need to keep that in mind as they take up the stimulus bill next week. A stimulus bill should stimulate, not grow government.

Wednesday, January 28, 2009

Zero comprehension of $1 trillion


"I don't know if I can conceive of what a trillion of anything might look like," said economist Dana Johnson of Comerica Inc. in Dallas, who gets paid to parse the big numbers. "These numbers are almost incomprehensible to the average person."

"The problem is that once we get into the 12-zero range, we just can't imagine what we're giving up," he said. "The usual graphics – piles of dollar bills bigger than the Rockies, etc. – may help a bit, but I think the real way to talk about it is to somehow describe what $1 trillion could actually buy."

We'll jump off that bridge when we get to it


In our view, it is highly likely that the Federal Reserve will eventually decide to purchase longer-term Treasuries. First, even a 0% nominal federal funds rate is likely to look much too high by 2010 if our forecasts for inflation and the unemployment rate are roughly on the mark ... Fed officials will therefore have to pedal harder and harder to “mimic” the effects of cuts in short-term interest rates via unconventional monetary policy options, and buying longer-term government securities is one of the most conventional of these unconventional options.

After all, the massive stimuli under way should be highly inflationary; but if the Fed helps to engineer that markets cannot price inflation into bond prices, there has to be a valve. This valve, in our view, will be the U.S. dollar; we cannot see the dollar hold up in face of the types of intervention that are under way and that we see play out. Incidentally, a substantially weaker dollar may be exactly what Fed Chairman Bernanke wants. He has repeatedly praised Roosevelt for going off the gold standard during the Great Depression to allow the price level to adjust to the pre-1929 level; this is Fed talk for praising the pursuit of inflationary policies. His only criticism has been that he didn't act fast enough. ... In the U.S., these days, most of the deficit is financed abroad; the U.S. is lucky that at least the debt is U.S. dollar denominated so that it can, at any time, repay its debt by simply printing more money. However, the value that foreigners may place on the U.S. dollar may be substantially less the more inflationary the policies are the U.S. is pursuing.

Tuesday, January 27, 2009

American Recovery and Reinvestment Act of 2009


CBO has released a cost estimate for H.R. 1, the American Recovery and Reinvestment Act of 2009, which was introduced today in the House of Representatives. A link to the full cost estimate can be found here.

As summarized in the cost estimate, H.R. 1 would specify appropriations for a wide range of federal programs and would increase or extend certain benefits payable under the Medicaid, unemployment compensation, and nutrition assistance programs. The legislation also would reduce individual and corporate income tax collections and make a variety of other changes to tax laws.

Assuming enactment in mid-February, CBO estimates that the bill would increase outlays by $92 billion during the remaining several months of fiscal year 2009, by $225 billion in fiscal year 2010 (which begins on October 1), by $159 billion in 2011, and by a total of $604 billion over the 2009-2019 period. That spending includes outlays from discretionary appropriations in Division A of the bill and direct spending resulting from Division B.

Boston Tea Party calls for bailout tea party


Karl Denninger wrote, “It is time for We The People to send a strong message to Washington DC - no more. No more loading our children and grandchildren with debt. No more bailing out speculators and bankers who made bets they knew were unsafe at the time. No more bailing out people who came to Congress to demand the removal of leverage limits, got what they asked for, then blew themselves up with the very leverage they demanded to be able to use.”

“It is time that America returns to its founding values of protecting liberty and expecting personal responsibility,” says Douglass Gaking, Chair of the national committee. “The American taxpayer can not afford to take on this debt. He did not ask for it, and it should not be his responsibility.”

Deficit approaching intolerable levels?

This is a view from the left:

Economic conservatives, market absolutists, and the like argue that the annual budget deficit and national debt are approaching intolerable levels. In truth, what they're arguing against is a needed government intervention and New Deal-type spending required to jump-start the U.S. economy -- even if it means the economy will plunge into a deeper recession without the stimulus. It seems some economic conservatives would rather see the nation's economy suffer, than to violate one their flawed economic theories.

That's why some in the economic conservative camp are harping about the budget deficit, but their argument is philosophically thin. In truth, although a nation should not run a deficit during an expansion, as New York Times columnist Paul Krugman has noted, deficits are necessary during a recession, in order to create demand when few other forces in the economy will.

Further, the national debt remains serviceable, provided the U.S. economy returns to a sustainable growth track, as a result of the likely increasing government revenue that will accompany that recovery. After the recovery is in place, Krugman adds, the federal government can then act to balance its budget -- and pay-down the national debt -- by cutting spending and/or raising taxes.

Why would economic conservatives continue to publicize blatantly false claims like 'an unserviceable budget deficit' and 'the ineffectiveness of government spending'? It's required by their political base -- primarily wealthy and upper-income Americans -- whose lives remain relatively unharmed by the recession: whether the recession is mild or deep, their lives are relatively unscathed. They certainly won't sustain the massive life disruption of people losing their jobs and homes. And if one isn't harmed, what's the need for fiscal stimulus?

Hence, it's for the above interest group reasons, not sound economics, that economic conservatives today continue to attempt to distort -- via a half-truth -- the historical record, in an attempt to invalidate fiscal stimulus as an engine of growth: they argue that World War II, not the policies of FDR, ended the Great Depression. But World War II involved massive government spending and wholesale federal government organization of the U.S. economy. In other worlds, federal government spending for World War II was an amped-up version of the New Deal, proving that, if anything, the mid-1930s portion of the New Deal (when FDR mistakenly tried to balance the budget) was too small.

Actually I don't think the response is defense of free markets as much as a true concern about the building deficit. We do not know that the stimulus purposed will work. Its now looking like all the past stimulus did nothing at all. The one thing we do know is that we will need to pay for it. They say after the crisis passes we can pay for it by increasing taxes...again higher taxes will just slow the economy. Spending and the associated debt is going to be a major strain on our future.

The other issue you are seeing from the Conservatives is that the proposed bail out contains a huge amount of pork that will not stimulate the economy or create jobs. Its just an excuse to push major spending mostly on liberal programs.

Monday, January 26, 2009

Stimulus or Socialism?


Barack Obama is putting together a “frightening” social program rather than a package that will stimulate the economy, says Tom DeLay, the former House majority leader.

“The proposal is full of welfare — welfare for local governments, welfare for people, subsidies for health insurance, expanding the federal government’s involvement in our educational system,” DeLay tells Newsmax.

What the estimated $820 billion plan amounts to is “just complete, out-and-out writing of checks to people that don’t pay taxes,” DeLay observes. “These are welfare checks that are called tax cuts.”

In general, “I’m very frightened of what I see. What I see is a president that is probably the best that I’ve ever seen, coming from the left, at saying one thing and doing another,” DeLay says.

DeLay cites Obama’s inaugural address.

“He was talking about the era of responsibilities and made you think that we were talking about tough love and people taking responsibility for their actions, and going through the consequences of those actions,” DeLay says. “When in fact his era of responsibility means the government is going to be responsible for all your decisions, and it’s going to be involved in every aspect of your life. The redistribution of wealth is going to be overwhelming.”

On thing is certain...we will have to figure out a way to pay "stimulus" one day.

The Social Security song and dance

From Washington Times:

The Senate Budget Committee says it is prepared to tackle the third rail of American politics, Social Security, encouraged both by President Obama's remarks that "what we have done is kicked this can down the road; we are now at the end of the road and are not in a position to kick it any further," and by his commitment to not allow it to go past his presidency. Commendable. Also commendable was the Senate holding its first hearing on the nation's long-term fiscal outlook the day after Mr. Obama's inauguration, focused on fixing Social Security and Medicare.

While Mr. Obama's zeal is truly admirable, the first thing he should learn from his predecessors is that absolute-demagogic statements - like his condemnation of the Bush plan - will only lead to political disappointment and disaster.

Sunday, January 25, 2009

Helpful in the short term, but it will add to the deficit


Unfortunately, passage of the bill would require that the federal borrowing limit be increased $825 billion to $12.1 trillion. That expansion of debt would bring the increase to $1.5 trillion or more than 10 percent since last October. That should still be a concern to both parties.

The Chinese, Japanese and Saudis, who hold much of the U.S. debt, may not be willing to endlessly fund our consumption and deficits while getting a paltry 2 to 3 percent return, argues Peter Schiff, president of Euro Pacific Capital, in an opinion piece in the Wall Street Journal.

When they need their investments to fund their own domestic problems, there may be a decline in demand for U.S. debt that would push interest rates up exhorbitantly and choke off any prolonged stimulus we might plan.

So while Republicans and Democrats appear to be working together to solve the economic problems, they should remember: They may not be the only ones at the table when the debt comes due.

Provision that would give low income people, who don’t pay income taxes, a discount on Social Security taxes

From The Caucus:

The economic stimulus is President Obama’s first leadership test. But it’s also a test of his brand of politics, which emphasizes transcending partisan divides. So Mr. Obama invited the Republicans to come talk it out with him on Friday, and here’s what he said to Representative Eric Cantor when the Virginia Republican brought up his disagreement over a provision that would give low income people, who don’t pay income taxes, a discount on Social Security taxes:

“We just have a difference here, and I’m president,” Mr. Obama said to Mr. Cantor, according to Rahm Emanuel, the White House chief of staff, who was at the meeting.

Mr. Emanuel said that Mr. Obama was being lighthearted and that lawmakers of both parties had laughed.

Mr. Cantor, in an interview later, had a similar recollection. He said the president had told him, “You’re correct, there’s a philosophical difference, but I won, so we’re going to prevail on that.”

“He was very straightforward,” Mr. Cantor added. “There was no disrespect, but it was very matter-of-fact.”

Friday, January 23, 2009

Highlights of Senate economic stimulus plan

From Associated Press:

Highlights of the economic recovery plan drafted by Senate Democrats and President-elect Barack Obama's economic team. Most provisions expire in two years. Other spending items are to be released later on Friday.


Seniors, disabled and veterans — $300 payments to Social Security beneficiaries, and $300 payment under the Supplemental Security income program for elderly and disabled people living in poverty. Veterans receiving disability or pension payments would also receive $300. The cash payments are one time only.


Individuals — $500-per-worker, $1,000-per-couple tax cut for two years, costing about $142 billion; greater access to the $1,000 per-child tax credit for the working poor; expanding the earned-income tax credit to include families with three children; a $2,500 college tuition tax credit; $7,500 tax credit for middle-income, first-time home buyers who purchase homes in the first half of 2009; temporarily suspends taxation of unemployment benefits.

Businesses — An infusion of cash into money-losing companies by allowing them to claim tax credits on past profits dating back five years instead of two; bonus depreciation for businesses investing in new plants and equipment; a doubling of the amount small businesses can write off for capital investments and new equipment purchases.

Energy — $31 billion in tax credits to boost renewable energy production and promote energy efficiency, including making it easier for money-losing companies to benefit from energy tax credits. Makes tax credits for energy-efficient homes more generous.


Aid to the poor and unemployed — $40 billion to provide extended unemployment benefits through Dec. 31, increase them by $25 a week and provide them to part-time and other workers.

Health care — $27 billion to subsidize health care insurance for the unemployed and provide coverage through Medicaid; $87 billion to help states with Medicaid.

No Problem!


Thursday, January 22, 2009

Social security is here to stay


“The government will most likely choose between the options of reducing benefits or raising Social Security taxes to ensure there will be money for future generations,” Campbell said.

He believes the retirement age may go up as a result of these Social Security problems.

“The current age for people to retire now is 66,” he said. “For people who were born after 1960 or later will find themselves retiring at ages 67 or 68.”

Sooner or later Social Security must go broke


Since Social Security discloses that the benefit it pays retired workers comes directly from the money paid by current workers, it is not, entirely, fraudulent. However, like a Ponzi scheme or a pyramid scheme, Social Security is, by its own definition, impossible to sustain. Like all pyramid schemes, sooner or later Social Security must go broke.

Though the Social Security trustees themselves cannot be called frauds, fine print, often passed over quickly in political sound bites, is filled with ominous double meanings. Even though the government websites about the Social Security trust fund plainly discloses the difference between the "special issue" federally backed securities held in the trust fund and the marketable securities that are widely sought as sound investments, the definitions of Social Security solvency based on any discussion of the trust fund can easily become misleading. Once, the difference between these securities and marketable securities becomes clear, the answer provided by the government that Social Security is solvent until 2041, when the "trust fund reserves are exhausted," plagued with ambiguity. The special issue treasury bonds will begin to need "redemption" by about 2017. That’s when "Ponzi shceme" nature of Social Security kicks in and it will be, by common bookkeeping practices, technically insolvent. After about 2017 only higher taxes or more government borrowing will allow Social Security benefits to be fully paid. This social security crisis has happened repeatedly because of the unsound pyramid scheme nature of the program itself. As one might predict by any common sense analysis of a pyramid scheme, each crisis in the Social Security program has become more profoundly enslaving to each new generation involved in the program. Rates that began as low as 1% for participants have increased to 6.2% today. Likewise the value of benefits for participants has eroded. This must continue, no matter "fixes" desperate politicians employ. The program itself must be completely overhauled, completely revised.

Borrowing hundreds of billions of dollars from you, your children and your grandchildren for a doomed fiscal stimulus.


"The time has come," President Barack Obama told us in his inaugural address, "to set aside childish things." He borrowed the line from Corinthians.

With the Beltway bread-and-circus show over, President Obama will now get to work on borrowing hundreds of billions of dollars from you, your children and your grandchildren for a doomed fiscal stimulus.

As President Obama basked in the inaugural glow, a dark cloud of reality moved in over the Democrats' $825 billion plan to rescue the economy. The Congressional Budget Office crunched the numbers and concluded that a huge bulk of the federal spending orgy wouldn't actually kick in until the recession is waning — if not already over.

A few conservative Democrats have started murmuring about this looming fiscal nightmare. North Carolina Rep. Heath Shuler expressed concern about the porkification of the bill: "This can't be a Christmas tree."

Sen. Kent Conrad (D-N.D.) told Bloomberg News that "his committee projects the plan will reduce the unemployment rate by 'maybe' 1%, or about half of the 3 million jobs Obama has said the plan would generate."

Wake up, taxpayers: This nearly $1 trillion plan is nothing but future-mortgaging ornaments and tinsel boxed in self-delusion. It is time, as President Obama lectured us, to put away childish things — starting with this epic fail.

Hospitals may lose more Medicaid funds to help erase budget deficit

DOVER — Many of the state's largest hospitals may lose millions of dollars in Medicaid reimbursement funds as part of state lawmakers' efforts to erase a projected $100 million budget deficit by the end of June.

Steve Ahnen, president of the New Hampshire Hospital Association in Concord, said the result could be devastating if a provision in House Bill 30 that calls for the elimination of billing Medicaid for facilities fees at hospital-owned physician practices is approved.

"Unemployment and Medicaid enrollment are increasing as more New Hampshire residents need help paying for health care, but reimbursement continues to fail to cover the costs of that care," said Ahnen in a prepared statement. "Hospitals' financial health and ability to continue to serve their communities during an economic crisis depends in part upon adequate funding from Medicaid."

Ahnen said Medicaid reimbursement rates are already much lower than private insurance rates. When hospitals bill Medicaid for the care patients receive and a facilities fee, Ahnen said they are trying to recoup their costs.

He said hospitals were already dealt a major blow when state lawmakers approved Gov. John Lynch's request in November to cut $30 million from Medicaid reimbursement fees.

What About The Deficit? What senators should be asking Timothy Geithner.

From Forbes:

But Geithner's biggest challenge as Treasury secretary went largely unexamined. How will he ever get the U.S. back on track to a balanced and sustainable budget?

The senators seemed less concerned with the long-term fiscal deficit that Geithner faces, poised to balloon as the $700 billion Troubled Assets Relief Program is joined with a $825 billion stimulus plan now dubbed the American Recovery and Reinvestment Program (ARRP). The Congressional Budget Office (CBO) estimates the deficit will be $1.2 trillion for the 2009 fiscal year alone. The overall U.S. debt is currently $10.6 trillion.

Wednesday, January 21, 2009

Obama Does Not Mention Social Security or Medicare in Inaugural


It was somewhat surprising that President Obama did not mention Social Security or Medicare in his inaugural address yesterday. Hopefully, this is no indication that he is retreating from comments just days ago indicating he would begin almost immediately to work on improving their financial viability.
In a recent speech, the new president said, “…I’m calling on all Americans – Democrats and Republicans – to put good ideas ahead of the old ideological battles; a sense of common purpose above the same narrow partisanship; and insist that the first question each of us asks isn’t ‘What’s good for me?’ but ‘What’s good for the country my children will inherit?’”

His staff began immediately yesterday to facilitate this contribution of “good ideas.” A new blog asks for feedback and the new Public Liaison & Intergovernmental Affairs (OPL-IGA) invites all Americans to participate. Senior citizens, with critical issues on the public agenda, need to jump on this opportunity to let their voices be heard.

The OPL-IGA appears to be the place to go to provide suggestions to President Obama and his staff.

“OPL-IGA takes the Administration out of Washington and into communities across America, stimulating honest dialogue and ensuring that America's citizens and their elected officials have a government that works effectively for them and with them,” states the White House Website.

“OPL-IGA will bring new voices to the table, build relationships with constituents and seeks to embody the essence of the President's movement for change through the meaningful engagement of citizens and their elected officials by the federal government.”

Follow this link – OPL-IGA – to the home page, which also has a contact form to use for contributing your ideas.

Tuesday, January 20, 2009

Social Security makes us party to a Ponzi scheme


Yes, Social Security has a so-called trust fund, said to contain more than $2 trillion. But the treasuries in the “trust fund” are IOUs, and differ from “regular” treasuries in that they are not marketable. In reality, there is no Social Security trust fund.

Also, the “pay as you go” aspect of Social Security will end — in 2017, it is estimated — when payroll taxes are no longer adequate to meet benefit obligations.

At that point, the treasuries in the “trust fund” will be “redeemed” to continue paying benefits at the same pace. And where will the money for those redemptions come? Why, from the general fund of the U.S. Treasury. That means Social Security benefits paid for out of the trust fund are paid for twice, first by payroll taxes and second by other taxes that go into the general fund.

If the federal government wants Social Security to escape the stigma of being a Ponzi, then it must either limit payroll taxes to being no more than benefits, or it must invest the surplus in real income-producing investments, not U.S. treasuries or securities. It should also do away with the accounting fiction known as the “unified budget.”

So, Ponzis and Social Security are operationally identical. The difference between the two is in how their surpluses are used.

In a Ponzi, we’re talking simple grand larceny. But in Social Security, the surplus goes into the U.S. Treasury’s general fund.

But America is entering uncharted waters. The population is aging. The deficit is skyrocketing. We’re at war. And Congress is on a spending spree like no other and wants to “give” health care and Lord knows what else to every last one of us.

We can’t kick this can any further down the street


Senior citizens will be impacted by his leadership in the same way as all Americans on many issues, but will also have a unique set of concerns – primarily involving Social Security, Medicare and Medicaid.

Year after year seniors are warned that these key programs, known as entitlements, are going broke. Just in the last few days the Centers for Medicare & Medicaid services warned that the trust fund that is the primary source of funding for Medicare will run out of money in 2016 – just seven years from now.

Social Security is expected to take in less money in 2011 than in pays out in benefits and will have to dip into reserves.

The strain on the government and taxpayers is tremendous and will get a whole lot worse. Social Security recently announced a new online enrollment system and said they expect to enroll 10,000 seniors a day for the next 20 years in Social Security and Medicare.

Medicaid, often over-looked, remains the real safety net for millions of older people who run out of money in their old age, often due to health care costs or the necessity of long-term care, which is extremely expensive and not covered by Medicare.

Economic crapshoot ahead


It is generally expected that Obama is low-balling it, and that after Congress is finished the level will be closer to $1.2 trillion.Without such efforts, it is asserted, we would face something on the dimensions of the Great Depression (during which time America endured up to 24 percent unemployment; and up to 13 percent contraction of GDP in a single year.) With the stimulus and other legislative and executive actions, people close to Mr. Obama hope that unemployment would top out at under 10 percent and GDP contraction at about 5 percent.

Rarely has so much hung on contested economic theories and ambiguous historical references. The first question is whether fiscal stimulus can ameliorate an economic contraction. Interestingly, Mr. Obama's chief economist, Christina Romer, according to the New York Times, "concluded in research she helped write in 1994 that interest-rate policy is the most powerful force in economic recoveries and that fiscal stimulus generally acts too slowly to be of much help in pulling the economy out of recessions."

Although she now supports Mr. Obama's stimulus, many economists fear that by the time a stimulus comes online the economy is already recovering and all the stimulus does is induce inflation. With trillion dollar deficits and huge expansions of the money supply by the Federal Reserve, the prospect of double-digit or worse inflation in a year or two is a real danger to consider.

Any experienced political observer must conclude that if we go ahead and spend the trillions of deficit dollars, inevitably a significant percentage of those dollars will get us very few jobs or economic activity per buck. If the spending will bring a prompt recovery, it may be worth the corrupt waste of much money. But will it work, even then?

We are about to roll the dice on the biggest crapshoot in the economic history of humanity. Will seven come eleven? Or will it be snake eyes for our economic future?

Deficits Restrict Obama as His Promises Come Due

From WSJ:

Barack Obama won the presidency making hundreds of promises large and small, from ending the war in Iraq and global warming to boosting low-income heating assistance and expanding the Peace Corps. Now comes the hard part: translating those pledges into policies, and whittling down the list while keeping his broad coalition of supporters happy.

As a candidate, Mr. Obama was able to promise all things to all people, and position papers still posted on his campaign Web site detail hundreds of pledges made. The Web site, a project of the St. Petersburg Times, counts 510 promises and is tracking action on each.

Many require new spending -- a total of hundreds of billions of dollars, according to internal tracking -- which will be challenging if not impossible given the record federal deficit. He proposes a billion dollars for autism research, a pricey global education fund and billions more for special education, to name a few.

Monday, January 19, 2009

Social agencies worse than Madoff


As bad as Bernie's corruption has proved to be, there is another offender that attracts little or no attention and is completely legal. This offender manipulates 100 times more money and affects almost everyone.

If you haven't figured it out yet, the major predator of which I speak is Social Security and Medicare. When the FDR administration created Social Security in 1935, they built in a fundamental flaw. It was assumed that the ratio of workers to beneficiaries would always be the 42 to 1 as it was in 1945, but now it's 3 to 1. I'm sure some of you are saying that there is still a big lockbox of money out there that has built up over the years. In fact, the lockbox now contains approximately $2 trillion. All good, except for the fact that Lyndon Johnson put the trust fund monies on the federal budget in 1965.

The trust fund now consists completely of official U.S. government IOUs. I would rather they refund the entirety of contributions made on my behalf and let me out of this scheme.

Compared to Social Security, Bernie Madoff is a small-time, insignificant crook.

Obama Will Swell Deficit More Than Bush


Attacks on the Bush economic record generally focus on his deficit spending, converting Bill Clinton’s surplus to an ocean of red ink. In truth, the average Bush deficit during eight years as President amounted to 2.7 percent of the Gross Domestic Product—slightly better than the 45-year-average deficit of 2.9 percent, going back to President Kennedy.

As Bush pointed out in his last press conference, he came in with a recession already underway and left office with a new recession just getting started, but in between the nation saw 52 consecutive months of job growth. If Congress backs a huge new stimulus program, Obama’s first year will double, triple or even or even quadruple as a percentage of GDP, but it’s unlikely the Obama-infatuated media will blame him for this scary imbalance in the federal budget.

America’s Deficit Disorder

From: Front Page Magazine:

The U.S. Treasury deficit---what the government spends over and above its income---will nearly triple in 2009 alone, to $1.19 trillion. Worse, the cumulative U.S. budget deficit will reach almost $2 trillion in the next five years.

All this only spells big trouble for overburdened U.S. taxpayers and businesses now keeping the government afloat. It will be like trying to stretch a 10-inch diameter buckskin over the head of a 30-inch diameter drum. And taxpayers and businesses will be asked to do most of the stretching.

Assuming that U.S. economic policies remain unchanged---and the Federal Reserve Board has already expended most available economic rocket fuel by cutting to nearly zero the “federal funds rate” charged on overnight interbank loans---Obama can't do much more than that besides printing money.

And print money, Obama surely will.

In fact, the Bush administration gave the greenback presses a galloping start. Since August, the Fed issued “tons of newly created dollars into the economy,” doubling the monetary base---the nation's total bank reserves plus U.S. currency--- a “phenomenal increase” that had some (erroneously) worrying about the potential for steep inflation, reports the Wall Street Journal.

The federal government has already allocated at least $7 trillion to the nation's “economic rescue,” including the $700 billion Troubled Asset Relief Program (TARP), last year's $168 billion Economic Stimulus Act, the $300 billion loan-loss backstop for Citigroup and $152 billion AIG rescue. Of those allocations, the U.S. has already torn through upwards of $2.7 trillion---not counting $167 billion in emergency tax rebates granted to consumers.

Meanwhile, U.S. taxpayers still face the extraordinary deficit burden already heaped upon them---and only likely to grow under the Obama administration. As Melloan noted, in the 1990s, “Japan tried to spend its way out of its post bubble malaise,” but merely accumulated “a mountain of debt” and lost a decade to “little or no economic growth.”

Even if the national deficit increases no further, national debt would grow more onerous in the case of a Great Depression-like deflation tornado, such as shredded the U.S. economy and in 1933 raised unemployment to 24%. The debt will remain the same or even grow until it is paid off, while incomes and the tax base shrink. Keep in mind, as in 1933, interest rates and stocks have already declined steeply.

Moreover, to cover the U.S. deficit, taxes will certainly rise. In an inflationary environment, those new taxes could broadly pass to willing (or resigned) consumers. Now, however, in a contracting economy, they must be spread more narrowly to shrinking companies and a shrinking pool of workers. Companies are likely to respond by further slashing jobs, thus adding to the very grave potential for a deflationary spiral.

I think this article dose a great job of describing the imediate issues that Obama faces and the potential that bad policy will make things worse, not better.

Sunday, January 18, 2009

Speaker Pelosi differs from Obama

From Associated Press:

House Speaker Nancy Pelosi appears to differ from Barack Obama on at least two issues — tax increases and investigating the Bush administration.

But the two democrats agree on the need to address the soaring cost of entitlements such as Social Security and Medicare.

Pelosi and Obama appear to be on the same page when it comes to entitlements such as Social Security and Medicare. Obama announced last week that he would convene a "fiscal responsibility summit" in February to focus on long-term problems with the economy and the skyrocketing costs of benefit programs such as Social Security and Medicare.

"I support what he wants to do, to have a summit of that kind," Pelosi said Sunday. "We will have our own initiatives in the Congress to work with him on that."

Pelosi said everything should be on the table, including benefit cuts.

"The only thing we didn't want to put on the table is eliminating Social Security, Medicare and Medicaid," she said.

What Bush leaves behind

From LA Times:

By Bush's own standards, his presidency has largely been a failure when it comes to domestic affairs. He sought to build a lasting Republican majority around a new brand of big-tent conservatism, but he leaves his party wounded and weakened amid the worst financial collapse since the Depression. He wanted to reform tax and immigration laws, Social Security and Medicare; none of that got done.
Bush attempt at changing Social Security was met with harsh resistance. IMO its unlikely that anyone has the political capital to get reforms passes. Denial and pushing it off for another day is politically much easier.

Saturday, January 17, 2009

Obama Targets a 'Grand Bargain' to Fix Budget Mess

From The Wall Street Journal:

Odd as it sounds amid a wheezing economy, mounting bankruptcies and rising unemployment, President-elect Barack Obama and his aides realize they'll actually be dealing with the easy part of their economic challenge when he takes office next week. After all, getting Congress to agree to spend billions of dollars and cut billions more in taxes to stimulate the economy right now is, politically speaking, relatively easy.

The harder part will be trying to follow that up by creating what is coming to be known in Obama circles as a Grand Bargain: getting everyone to agree to clean up the nation's budget mess in a really big way, one that doesn't just fix the problems being created now, but also addresses the frightening long-term problems America was going to face anyway to pay for Social Security and Medicare in coming decades.

For this Grand Bargain to work, all sides would agree to sacrifice some part of their agenda. The price they would agree to pay would be unhappiness -- temporary, perhaps, but real -- among their constituents and favorite special interests. Their reward would be a cure for problems everybody knows they'd have to deal with a few years down the road.

Here's where the Grand Bargain could come in. Like Humpty Dumpty, the budget is going to be broken anyway. In putting it back together, would retirees be willing to accept that idea of having more prosperous seniors pay a monthly premium to receive their Medicare health coverage? Would liberals accept cuts in their favorite social programs? Would conservatives accept the idea of a carbon tax, to both raise big money for entitlements and prod the nation to move more quickly away from fossil fuels?

Obama Pledges Entitlement Reform

From Reuters uk:

U.S. President-elect Barack Obama will hold a "fiscal responsibility summit" next month with members of Congress and other groups to discuss entitlement programs and the economy, The Washington Post reported on Thursday.

Obama's biggest priority in the initial days of his administration will be stabilizing the ailing U.S. economy, but the paper said he told advisers he wanted to tackle problems with entitlement programs such as Social Security and the Medicare health insurance program during his watch as well.

"What we have done is kicked this can down the road. We are now at the end of the road and are not in a position to kick it any further," Obama told the newspaper. "We have to signal seriousness in this by making sure some of the hard decisions are made under my watch, not someone else's."

Friday, January 16, 2009

Reducing the haven appeal of U.S. debt.

From Bloomberg:

Ten-year Treasuries fell the most in almost two months as stocks gained on government efforts to bail out banks, reducing the haven appeal of U.S. debt.

U.S. securities dropped as European government bonds fell amid advances by global equities after the U.S. agreed to a $138 billion bailout of Bank of America Corp. The cost of living fell in December as the recession deepened.

“The sell-off in general is happening because risky assets are higher on optimism that some of this is going to work, whether it’s the stimulus or that there are banks that are too big to fail, and therefore there will be credit flowing through the system,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group, one of 17 primary dealers that trade with the Federal Reserve.

The 10-year yield climbed 20 basis points, or 0.20 percentage point, the most since Nov. 21, to 2.40 percent at 9:31 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 fell 1 27/32, or $18.44 per $1,000 face amount, to 111 25/32. Two-year note yields increased eight basis points to 0.78 percent.

Even with all out announced bailouts over the last two has flocked to US Treasuries. As bad as it is here in America...we are doing much better than just about everywhere else. If and when things go from deflationary to inflationary it is likely that there will be a massive sell off in US Treasuries.

Schwarzenegger: Deficit is 'rock upon our chest'

From Associate Press:

Gov. Arnold Schwarzenegger has called California's massive deficit a "rock upon our chest" and says the state can address no other policy issues until the crisis is resolved.

In a relatively brief State of the State address to lawmakers on Thursday, Schwarzenegger said the financial situation has put California in a state of emergency.

California's budget deficit is expected to soar past $40 billion during the next year and a half.

Schwarzenegger said, "The $42 billion deficit is a rock upon our chest and we cannot breathe until we get it off."

Schwarzenegger says lawmakers must act quickly to avoid even worse developments in the weeks ahead, when the state is expected to run out cash.

Thursday, January 15, 2009

In Bailout Era, No Room Left For Old Virtues

From IBD Editorials:

Printing trillions more dollars and growing government to cover new debts isn't so bad if we call it "stimulus." That is far smarter than saying something honest like, "I propose a new $1 trillion debt program."

The old-fashioned spendthrift policies we used to ridicule as congressional pork and "earmarks" are now justified under that ubiquitous nice word, "stimulus."

No matter — the proposed "don't waste a crisis" cure seems to use that model of government-guaranteed corporations to absorb as much of the economy as possible.

Still, no one knows whether the present borrowing and printing of money to give short-term credits, cash grants and jobs to Americans will get the economy moving again or simply reinforce the bad habits that got us here in the first place.

The existing pre-stimulus annual budget was already set to run about a half-trillion-dollar deficit. The present government debt, much of it to Asia and Europe, was nearing $13 trillion even before the latest borrowing plans.

We are going to have to pay these debts back by cutting federal spending and entitlements or raising taxes — or both. Or we can convince panicky debt holders abroad to loan us even more money for years at near-zero interest rates. Or we can try simply printing trillions of new dollars to inflate the economy, while hoping that creditors don't mind being paid with funny money.

What got us in this debacle was the lack of self-control on the part of consumers who borrowed to spend more than they could pay back, rapid growth in government debt, and Wall Street speculators who wanted obscene returns they had not earned.

Tanner named social security chairman

From The Leaf Chronicle:

The panel is a subcommittee of the House Ways and Means Committee, on which Tanner has served since 1997, according to a news release from Tanner's office.

"This subcommittee is crucial as we work to ensure Social Security is protected for future generations," Tanner said in the release. "Given the economic and fiscal challenges facing our country, it is as important as ever that Congress and the administration work to address the long-term fiscal issues facing this vital program."

U.S. Rep. Sam Johnson, R-Texas, was recently named Ranking Member of the Social Security Subcommittee.

"I've watched John make a name for himself as an active member of the Blue Dogs," Rep. Johnson said in the release. "He's a very well respected leader in this town. I like him personally and look forward to working closely with him on the Social Security Subcommittee."

Social Security, Medicare revamp part of Obama plan to cut deficit

From Pension and Investment:

Mr. Obama said at a Jan. 7 news conference that restructuring Social Security and Medicare would be “a central part” of his efforts to reduce the federal deficit. The president-elect offered no details but said he would reveal more when his administration’s budget is released next month.
This just seem like "pie in the sky" dreaming. The main thing I am hearing from Obama is about all the new spending and social programs. He also talks a lot about taxing the high earners more...this could push talent out of country. He needs to remember we are in a world economy and we are becoming one of the more expensive countries to conduct buisness. Even if its just talk...companies will leave. Look at the oil service by one they are leaving for other countries that will not threaten "windfall pofits taxes".

“Raising the retirement age is the easiest way to do things because people are healthier, they’re living longer and jobs are less strenuous,” said AEI's Mr. Biggs, a former deputy commissioner of the Social Security Administration.
I guess "easiest" is a relative term. Pushing this on the retiring baby boomers (the largest voting population in the US) would likely be political suicide.

Social Security revamp

From Pensions and Investments:

Within the next few years, Barack Obama is likely to fulfill his pledge to try to revamp Social Security despite the political pitfalls involved, financial experts said. That most likely means a package of tax increases and benefit reductions that would fall most heavily on upper-income wage earners.

“Obama should learn from Bush’s experience that all ideas should be on the table and basic principles should be followed,” said David Madland, director of the American Worker Project at the liberal-leaning think tank Center for American Progress, Washington.

Social Security benefits will exceed payroll tax revenue starting in 2017, although the system’s trust fund can cover scheduled benefits until about 2041. The U.S. would have to set aside $4.3 trillion today to cover the deficit expected to accumulate in the next 75 years.

Getting any type of reform that limits benefits will be very difficult if not impossible. The boomers are the largest voice in terms of would be suicide to go up against them.

Social Security is a mess and will definitely go insolvent if we do not make drastic changes. But its a tiny problems compared to Medicaid.

The High Cost of Being Healthy

From The Washington Post:

For years, people have been complaining about the high cost of health care and said they are fearful about being only a job away from medical bankruptcy.

"For years a booming economy camouflaged the burden of medical debt," Boodman wrties. "Patients borrowed against their homes or whipped out credit cards, including some specially designed to pay medical or dental bills. But falling house prices and tightening credit have eliminated those options for many."

Brown reports that Americans spend a little less than 10 percent of their income on food, which is down from 25 percent in 1930. We spend twice as much -- 21 percent -- on shelter. Last year, 16 percent of the nation's gross domestic product went for health care. If health care costs grow at its present rate through the first three-quarters of this century, it will consume 38 percent of the GDP by 2075.

This really gets to the heart of the issue. The burden of health care for both govt and individuals is increasing dramatically. It will not be long before the burden becomes overbearing.

Neb. plan would end tax on Social Security money

From KPTM FOX 42:

The taxation of Social Security benefits would be phased out over the next four years, under a plan presented by a Nebraska lawmaker.

State Sen. Jeremy Nordquist of Omaha introduced a bill (LB303) to the Legislature on Thursday that would allow seniors to exempt $15,000 of their Social Security income when filing tax returns for this year. The amount of the exemption would be double for couples filing jointly.

The exemption would increase to $75,000 in 2013, effectively ending state taxes on the benefits.

Iowa and Missouri are among 26 states that don't tax Social Security benefits.

Senant Passes aditional 350 billon for bailout bill

Market Watch:

Senators voted 52-42 largely along party lines to oppose a measure known as a resolution of disapproval introduced by Sen. David Vitter, R-La., that would have blocked release of $350 billion in bank bailout money. President-elect Barack Obama made a request for the funds on Monday.

Before the bill was rejected, Democrats and Republicans clashed over whether the funds should be allocated.

"The American people had serious questions and concerns the first time around," said Vitter. "The second time, they will go through the roof and say, 'Fool me once shame on you; fool me twice, shame on me.' "
Add another 350 Billion to the tab. Its almost surreal. Billions dose not make the headline anymore....It seems like you need to be talking about trillions for folks to pay attention anymore.

Jobless Claims Rise

From Market Watch:

Weekly Jobless Claims Rise
Trend at highest level since 1982
The gain in the most recent claims data restarts an upwards trend that analysts had expected. Initial claims had declined in the prior two weeks, likely due to difficulties in accounting for seasonal adjustments.

The underlying trend in claims is still rising, and could reach a peak of 750,000, according to Ian Shepherdson, chief U.S. economist with High Frequency Economics.
"The experience of previous deep recessions suggests claims are nowhere near their peak, and we doubt that peak will be reached before the fall of this year," Shepherdson said.

However, the four-week average of new claims fell 8,000 to 518,500 -- a level that is 55% higher than the average during the same period in the prior year.
Meanwhile, the number of people collecting benefits in the week ending Jan. 3 fell 115,000 to 4.5 million, a level that is 64% higher than the prior year.

A little bit of good news.

From Market Watch:

Trade gap plunges on falling demand, prices

November deficit narrows to $40.4 billion on record decline in imports

The U.S. trade balance with the rest of the world plunged by 29% in November to $40.4 billion, on a record decline in oil prices and significantly weaker demand for imports, the Commerce Department reported Tuesday.

Imports fell a record 12% to $183.2 billion, the lowest level in two and a half years, as the average price of imported petroleum dropped by $25.30 a barrel to $66.72.
Meanwhile, exports dropped 5.8% to $142.8 billion, led by weakening foreign demand for industrial supplies and capital goods.
People are saving more and spending less. In many ways this is a good thing but in our consumer driven economy, this will cause more declines.

$825 billion stimulus bill

Press Summery

$550 billion in thoughtful and carefully targeted priority investments with unprecedented accountability measures built in.
Another 1/2 Trillion to add to the deficit if this passes. When they learn that our major problem is spending and too much debt...on a national and personal level. You cannot fix these problems with more spending and more debt.

California Faces 42 Billion Dollar Deficit

From the WSJ:

"The Republican governor is facing his biggest challenge since voters chose him to replace Democrat Gray Davis in a 2003 recall election. Over the next 18 months, California faces a $42 billion budget deficit, due in part to declining tax revenues in a state hit especially hard by the economic downturn."
It can be argued that entitlement spending is way too high in CA already. This is a problem that will get much worse.

Legacy Issue

"That's because the 800-lb gorilla at the negotiating table is Nortel's deficit in its defined-benefit pension plan, and one of the key pension regulators in this saga is the Financial Services Commission of Ontario, an arm of that province's government.

According to court documents, Nortel had a shortfall of US$1.8-billion in 2007, well before the fall market meltdown. A recent RBC analyst report pegs the deficit at US$2.8-billion. The court monitor states only that the funding deficit has "significantly increased" since 2007.

In 2008, Nortel ended its defined-benefit pension offerings for Canada and the Unites States and created defined-contribution plans, so the problem is a legacy issue."

Ky medicaid deficit up 25%

"The deficit in the state's Medicaid program this year has grown more than 25 percent, to $231.8 million, two legislative committees were told yesterday."


"Kentucky's Medicaid deficit has ballooned to $231.8 million, up from $183 million state officials previously projected for the government insurance program.

Cabinet for Health and Family Services Secretary Janie Miller told House and Senate budget committees Wednesday that the state's portion of that deficit was approximately $69.5 million."

Another Bailout for BofA

WSJ (link here):

"The U.S. government is close to finalizing a deal that would give billions in additional aid to Bank of America Corp. to help it close its acquisition of Merrill Lynch & Co., according to people familiar with the situation."

Wednesday, January 14, 2009

This chart show how remarkably unsustainable our spending has become.

Deficits to be Brusing for Decades

The Associated Press (Link Here)

Peter Orszag, designated by Obama to run the Office of Management and Budget, told the Senate Budget Committee to expect budget deficits equaling 5 percent of the size of the economy for the next five or ten years. That would mean deficits of $750 billion or so over the next couple of years and steadily exceeding $1 trillion by the end of the next decade.

Current projections see a deficit for the ongoing budget year exceeding $1 trillion — and that's before enactment of Obama's $800 billion or so economy recovery plan. The Congressional Budget Office predicts a $1.2 trillion deficit for 2009, about 8 percent of gross domestic product.
This is the one predictable outcome from all the bailouts...we will have a large debt to pay.

Ramping it up

Deficit hits record in just 3 months

Economists, citing expected spending, say the yearly imbalance could top $1 trillion.

"The federal government has already run up a record deficit of $485.2 billion in just the first three months of this budget year. And economists say the imbalance for the full year could easily top $1 trillion, pushed to that eye-popping level by the spending the government is likely to do to combat the most severe financial crisis in generations.

The Treasury Department reported yesterday that the deficit for December totaled $83.6 billion, a sharp deterioration from a year ago, when the government managed a surplus of $48.3 billion.

All the red ink comes from the spending out of the $700 billion financial rescue package - $247 billion spent so far - and a prolonged recession that has depressed tax revenues.

The overall deficit from October through December is the highest on record for a first quarter. It surpasses the mark for a full budget year of $454.8 billion, set last year."


For decades debts have been accumulating. The have been pushed in to the future. With our aging workforce there is reason to question if the future will be able to handle these growing liabilities.

Our government's reactionary (not precautionary) policies and actions during the 2008 banking crisis is a wake up call to any of us that think the government will fix this problem before it gets too big. At this point I strongly believe these problems will be put on the back burner and will not be dealt with until after it is declared a crisis.

The deficit is growing at an alarming rate. Not a week goes by without a new bail out being discussed. If these bailouts will work or not is up to debate...the one thing that is not is that we will be stuck with the bill.