Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts

Monday, March 19, 2012

Timing

An attention-grabbing article is in the March 26th The New Yorker: "Replay; As he faced an ailing economy, what could Obama have done differently?" by John Cassidy. Actually it is an book review of "The Escape Artists: How Obama’s Team Fumbled the Recovery" by Noam Scheiber, a review that somewhat undermines the subtitle of the book, as Cassidy's opening sentence sets the stage for the entire article: "In Presidential politics, timing is everything" -- reminding me of an entry I wrote a couple of months ago.

I've cobbled together a couple of quotes from that entry, and strung them together, making a similar point about timing: "The Republicans say that by now Obama 'owns' the economy, as if a switch was thrown when he was inaugurated and a dial was set for about three years, the onset of the next Presidential election cycle.....[But] when it comes to the economy I can neither give Obama credit nor condemnation.....Capitalism is a story of inherent cycles."

One thing is for sure: we averted economic catastrophe during the Obama administration, but could have things have been handled more perfectly, perhaps so. He certainly could have managed expectations better and favored housing issues over health care at the onset of his Presidency. But he had no direct control over some of the issues that are the consequence of economic cycles, just as he has no direct control over the price of gas where geopolitical issues dominate. But we've heard Republican cries of "vote for me for $2.50 gas" Why not $1.99 or for that matter $0.99?....

Wednesday, January 11, 2012

Blather into Matter

Or, as a friend of mine from my academic publishing days called it, feces into thesis.

The political circus is almost on full parade now but when it comes to the economy I can neither give Obama credit nor condemnation. The news media, the Republican candidates, and the administration are obsessed by citing statistics to justify their positions, and if you think you've heard it all, it is just the beginning of stream of consciousness blather. But the fact of the matter is the economy was in a swoon, a serious one, before Obama took office and continued on that route for a while before stabilizing and, even, growing.

Capitalism is a story of inherent cycles. The Federal Reserve was devised in part to mitigate the extremes of the cycles. Unfortunately, the Federal Reserve failed in that mission with the beginning of the 21st century, thanks to the hubris of Greenspan. At the bottom of the crisis in 2008 he confessed to Congress: “I made a mistake in presuming that the self-interests of organizations, specifically banks, were such as that they were best capable of protecting their own shareholders and their equity in the firms. Free markets did break down, and I think that, as I said, that shocked me. I still don't fully understand how it happened or why it happened.”

It is amusing to hear all the political rhetoric now that, for the time being, we seem to have been able to drag ourselves off the cliff of a depression. Harking back to those dark days of 2008/9 the CNBC cheerleaders looked stunned most of the time as the Dow was flushing like a broken toilet. Now the market is up about ninety percent from its low and jobs are slowly coming back (agreed, way too slowly, but this is a different kind of recession and a different kind of recovery) and everything is cheery at CNBC except for their opinion of Obama.

The Federal Reserve policy is just one component of the crisis and one can add to the mix the expense of overseas wars, the housing crisis, deregulation (yes, see what Greenspan admitted to above), private profit at public risk, governmental gridlock, all of this exacerbated by normal economic cycles. Oh, also add the multi-generational lack of an energy policy to this colossal conundrum.

The Republicans say that by now Obama "owns" the economy, as if a switch was thrown when he was inaugurated and a dial was set for about three years, the onset of the next Presidential election cycle. Unfortunately for him, he too misunderstood the magnitude of this unprecedented economic cycle, saying the following in an interview only days after he took office: "A year from now, I think people are going to see that we're starting to make some progress, but there's still going to be some pain out there.... If I don't have this done in three years, then there's going to be a one-term proposition." Romney et al have eagerly seized on this gaffe. Expect to hear it over and over again in the next ten months. Likewise, expect to hear Romney's (the presumptive Republican nominee) recent comment that he "likes being able to fire people" over and over again. Sound bite vs. sound bite reverberating on the airwaves thanks to the endless resources of Super PACs.

When it comes to job creation (or erosion) there are limits as to what a mere president can do in a relatively short period of time given economic cycles and the severity of the present crisis. That Romney created or uncreated jobs in the private equity arena is of no particular advantage unless he has the cooperation of Congress with smart policies. Likewise, Obama has little control over jobs without cooperation and policy agreement. It is preposterous to assume that Romney is any more qualified that Obama simply because he worked in private equity. I ran a publishing company for thirty years; that ought to make me more qualified to deal with the economy!

And those policies have to consider the vice grip closing in on this unique moment in US economic history: baby boomers are reaching retirement age at the rate of about seven each minute of each day for the next two decades, expecting the promises of Social Security and Medicare. We all know both sides of the equation have to change, how entitlements are doled out, and how revenue must be raised. This is not something that can be achieved by a Presidential Executive Order (although at times I think our dysfunctional Congress needs to be replaced by a benign dictatorship).

The Republicans do not talk about areas where Obama successfully functioned without having to negotiate with Congress, such as his role in planning Osama bin Laden's death. Remember when John McCain promised voters (in 2008) that he "knows how to capture and bring to justice Osama bin Laden"(although at the time that was a secret he was not going to share with anyone unless elected)? They didn't have the economy to blame on Obama then, so it was his foreign policy "inexperience." Bin Laden sharing the bottom of the North Arabian Sea with the fishes came with no help from Congress, thank you. In spite of his inexperience Obama had the wisdom to send in Navy Seals rather than taking out bin Laden with a drone strike to have proof it was indeed him.

So let the games begin. Blather into matter. Feces into thesis.

Friday, December 2, 2011

Unemployment Good News

It's finally happened, a significant downtick in unemployment. Does this make a trend? That remains to be seen. But the headline news -- The unemployment rate fell to a 2-1/2 year low of 8.6 percent in November and companies stepped up hiring, further evidence the economic recovery was gaining momentum. -- is sure to provoke animated "debate" as the presidential election year gathers steam.

But there is some really good news here: "While part of the decline in the unemployment rate from 9.0 percent in October was due to people leaving the labor force, the household survey from which the jobless rate is derived also showed solid gains in employment." And those gains have been underway for four months. Maybe, indeed, the beginning of a welcome trend. And who will take the credit, or, better, who will give it? Perhaps it is merely embedded in the economic cycle, but everyone is quick to blame someone on the other side of the cycle.

This is the lowest unemployment level since 2009, when I was writing "A true recovery requires jobs, jobs, jobs – and how are they going to be created – by banks trading energy futures? What happened to the commitment to the infrastructure? Our roads, utilities, and public transportation are falling apart. Alternative energy seems DOA. Aren’t these the areas our financial recourses should be focused on, ones that will create jobs, in construction, technology, and finance, and can lead a true economic recovery we can pass on with pride to future generations?"

A real recovery still seems to be a long way down the road as it took years and years to get to where we are and mountains of debt need to be addressed.

Meanwhile, the reasons for this drop in the unemployment rate will be parsed by the political pundits during the weekend talk shows. Brace yourself.

Monday, November 28, 2011

Altar of Consumerism

It's become a religion, thou shall pay homage to the God of Black Friday. With unemployment and economic uncertainty persisting one would think that consumers would be hunkering down in their bunkers, but, no, they are out spending in droves, standing in the dark with their faces aglow staring into iPhones, awaiting midnight store openings after Thanksgiving, stampeding into the stores as the clock strikes twelve. Perhaps it is counter-intuitive, $52 billion in sales on Black Friday weekend during hard economic times, but consumers have been conditioned to "feel good" spending, the same kind of feeling that arises from cathartic prayer.

Our Father™ in consumer heaven,
hallowed be your trademarked name.
Your Black Friday come,
your buying will be done,
at the mall and online.
Give us this day almighty bargains,
and forgive us our debts,
and give bailouts to our debtors.
Leading us away from credit card temptation,
and delivering us from debit card fees.

AMEN (there is even an App named for the traditional closing of a prayer -- just pay up!).
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Monday, November 21, 2011

Taking One for the Team

Ever since I heard that Hillary Clinton was planning to "retire" I've been thinking, what a waste of skill and experience. My thought was that Obama needs a new running mate, one that can handle the stalemated war of Republican and Democrat ideologues, and what better person than a former, and very effective, Secretary of State. Of course it means true sharing of power at the top, but Obama does not seem to be threatened by that, and as evidence he himself appointed his former rival to the position of Secretary of State.

Today the Wall Street Journal Op-Ed piece by Patrick H. Caddell and Douglas E. Schoen, both former Democratic pollsters, ups the ante with their article The Hillary Moment, which suggests Obama should actually step aside for the good of the Democratic party so Hillary Clinton can run for President, their argument being that Obama will not be able to run a positive campaign based on his [economic] record and even if he wins we will still be left with a highly charged partisan political landscape, something he will not be able to change. In effect, President Obama should take one for the team.

While I might agree with his difficulty in achieving bipartisan consensus (and that is why I thought Hillary would be the ideal running mate in 2012), I have a problem with ascribing every economic ill to Obama. It is impossible to prove an alternative reality, but if Hillary had run in 2008 and won, we would not be in a much different economic place. And if McCain won, we would have been as equally bad off, or worse ("you betcha" if you know what I mean). After all, the economic problems leading to today were long in the making: regulatory failures, ill conceived Federal Reserve actions, the housing bubble with the attendant rapacity of investment banking firms, Bush tax cuts, 9/11, and ill-chosen wars in Iraq and Afghanistan. When you live beyond your means for such a long time, it takes years to repair the balance sheet, especially when dealing with one the size of the United States'. It can't be done overnight and it can't even be done in one four-year Presidential term.

Making such repairs without doing further damage to the economy means compromise, spending cuts and tax increases, ones that do not further exacerbate the steadily growing division between the haves and the have nots, the one percenters and the ninety-nine percenters.

Expecting Obama to step aside is to concede an imaginary failure, undeserved and such a concession would only feed opposition blathering. And that is where you come in Hillary, perhaps you will consider taking one for the team by agreeing to become Obama's running mate in 2012.

I continue to have high hopes for the Obama presidency in a second term. Hillary, I still hear America singing.
PS: Barry Ritholtz's Presidential Blame & Credit, is well worth reading in conjunction with the above.
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Tuesday, August 9, 2011

Fed Speaks

The Federal Reserve’s press release covering its recent meeting begins “Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected. Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up.” Later, it continues, “the Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased.”

Its main action point is that the nation’s economy is “likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.” Talk about telegraphing what it probably already knows: the economy seems to be slipping into recession once again and the Fed is helpless, meaning continued high unemployment, no remedies for the real estate market and homeowners with mortgages under water, and continued low returns on any savings. And these conditions are not temporary: they are expected to last two years (and unless Congress ever learns to function again, they will last much longer). Imagine, three year Treasury notes (no longer AAA which is another farce from S&P, the folks who brought us triple A-rated collateralized debt obligations) now yield less than a half a percent!

Where this is all likely to end is anyone’s guess, including the learned economists at the Fed. The volatile markets are reflecting that uncertainty. Buying dividend paying stocks may the best option for income, but any severe recession could leave those stocks vulnerable, jeopardizing the return of capital. That seems where the Fed is leading the individual investor.



Sunday, July 24, 2011

“A Glide Path to Zero Debt Post 2011”

This “glide path” was forecast in George W. Bush’s Feb. 28th, 2001 budget, A Blueprint for New Beginnings; A Responsible Budget for America’s Priorities.

The centerpiece of the legislation was a $1.35 trillion tax cut over 10 years which was signed into law on June 7, 2001. This cut was supposed to spur growth and thus increase federal revenues in spite of the tax cut (sound familiar?)

The exact wording from Blueprint for New Beginnings:

Over the next 10 years, the Federal Government is projected to collect $28 trillion in revenues from American taxpayers. The President’s Budget devotes roughly $22.4 trillion to extend the Government we have today, including the President’s new initiatives. This leaves a $5.6 trillion surplus. The President’s Budget takes a cautious approach to allocating this staggering sum, starting by saving the entire Social Security surplus—nearly 50 percent of the total surplus—for Social Security and debt retirement. None of the Social Security surplus will be used to fund other spending initiatives or tax relief.

By devoting these revenues to debt retirement, the Nation will be able to pay off all the debt that can be redeemed—an historic $2 trillion reduction in debt over the next 10 years. The only remaining debt will be those securities with maturity dates beyond 2011. In all likelihood, American taxpayers would have to spend an additional $50 to $150 billion in bonus payments to bondholders to accelerate the repayment of those notes, a wasteful and senseless transaction. It makes more sense to allow the securities to mature naturally, leaving the Nation on a glide path to zero debt post 2011.

By 2011, Federal debt will have fallen to only seven percent of GDP—its lowest level in more than 80 years. Net interest payments on this debt will be less than 0.5 percent of GDP, less than one quarter of today’s share and only three percent of the budget. This represents a great national achievement
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Meanwhile, the threat of recession intervened, and the Federal Reserve ratcheted down interest rates. America went on a borrowing and speculation binge, focused on real estate and the building industry. Government, Wall Street and Main Street were all complicit, greedy investors buying up “investment property,” Wall Street packaging them as “risk-free” CMO’s, and homeowners indulging in the practice of using their homes as a piggy bank, with exotic no money down, no initial interest payment loans, the repayment of which was dependent on future appreciated real estate values. At the same time we continued to outsource our manufacturing capabilities to China and other emerging economies. Why work when Utopia could be achieved by merely borrowing?

So returning to the halcyon Blueprint for New Beginnings, another lesson to be learned from China: "Forecasting is difficult, especially about the future.” This is why the brinksmanship of raising the debt limit is such political grandstanding. Where was the outcry about the buildup of the national debt during the Bush years or holding Congress accountable for the failure of Blueprint for New Beginnings? While the stock market was climbing to new highs by 2007 and real estate prices were soaring, making homeowners and investors feel (not be) wealthy, not one peep about the national debt. We were borrowing against the future.

Depending on how one defines accountability to an administration (which takes control in late January every four years, but really does not have much impact until at least the end of the following Sept. 30 fiscal year), one could argue that Bush administrations were responsible for about a $6 trillion increase in National Debt (9/30/2001 - 9/30/2009) and the Obama administration for about $2.5 trillion thus far. (See this link for historical figures.)

Of course, debt growth has been more dramatic over the last few years (including the final year of the Bush administration) as Keynesian spending of “saving the world” from a depression soared. In spite of that spending, economic growth has been slow, unemployment persistently high, and real estate and associated industries remain in the doldrums.

These are the serious issues, as well as the national debt, which must be addressed. While I am the first to argue for fiscal responsibility, a balanced budget cannot be achieved overnight and cannot be achieved without some revenue increases via taxes. The best argument against pinning hopes that spending cuts, alone, will achieve a balanced budget is simply to reread Blueprint for New Beginnings. Allowing the US to default on its debt is a hopelessly reckless option.

PS: An interesting follow up to the above published by Bloomberg news two days later.

Monday, June 13, 2011

Substance and Talking Points

I try to set aside Sunday mornings for catching up on some newspaper reading and to watch political shows such as Meet the Press, keeping my eyes on the page/computer and my ears on the TV, drifting back and forth depending on what I'm reading or hearing. This week's Barrons', which I've read forever it seems (now online, having forsaken the print version), had a remarkably to the point article by Doug Kass, founder and President of Seabreeze Partners, and well-known "short-seller" which echoes some of what I've written about the subject of the growing abyss between the haves and the have not's and its impact on the misery of the middle class. Kass' term for this misery is "Screwflation" (combing inflation with the screwing of the middle class). Here are some of his bullet points although its best to read the entire article:

* While...corporate profits will soon attain a new peak, median real wages have made little recent progress....Moreover...an unprecedented four years of declining home prices have further weakened the confidence and purchasing power of the middle-class screwees.

* Unemployment has exacerbated screwflation's impact on all but the wealthiest Americans.

* Because there are few areas of the domestic economy that can replace the prerecession strength in real estate, a recovery in jobs will be more difficult than in previous cycles. Work related to real estate accounted for nearly 40% of U.S. job growth in 2001-06–almost all of it middle-class.

* Back in 1980, the richest 1% of Americans captured 9% of national income. Today, the richest 1% receive about a quarter of national income.

* [The] rise [ of commodity prices] falls more heavily on low- and middle-income families, who spend most of their money on the necessities of life. Add rising health care, education and other costs to commodity prices, and the result is a poor foundation for growth.

* Difficult fiscal decision...must be made this summer in Washington. The needs to accelerate job growth and to control the federal deficit seem irreconcilable.

* A shallow and fragile domestic economic recovery may be exposed to and be vulnerable to the need to cut spending–but drastic spending cuts will jeopardize the shallow recovery in jobs. Not moving on deficit reduction holds its own risks, of U.S. dollar weakness, soaring interest rates and higher unemployment....Partisanship already makes a real solution less likely.


Kass concludes with some excellent suggestions, but with Washington in gridlock, even on such major issues of raising the debt ceiling, and in the throes of pre-Presidential election rhetoric (see Meet the Press discussion below), one can't be terribly optimistic about implementing them:

* Policies that could help quickly include: extending the payroll-tax cut initiated by the Obama administration; reducing income taxes for the middle class; providing federal funds for infrastructure spending; creating incentives for businesses to make new capital investments; allowing tax-free repatriation of U.S. corporate earnings made abroad, if they are earmarked for the creation of American jobs; the launch of an energy plan that taps domestic resources; and the use of federal-housing financing to slow foreclosures and distressed sales.

While reading that article of substance, I was watching Meet the Press, particularly David Gregory's interview with Debbie Wasserman Schultz, the Democratic National Committee Chair and Reince Priebus, the Republican National Committee Chair. Talk about talking points galore. Here is the entire transcript.

Gregory immediately baits the debate with so called "facts:"

MR. GREGORY: All right. Well, let's talk more, let's talk more about the economy in some more detail. This is the president's standing in terms of handling the economy in the public's eye, and it's pretty negative right now. Sixty percent almost, 59 percent, disapprove of the president's handling of the economy . And there are facts that back that up that are difficult for this administration and for the Democrats: unemployment's up 25 percent since Inauguration Day for President Obama ; the debt's up 35 percent, over $14 trillion; a gallon of gas up over 100 percent, with gas $3.75, higher than that in certain parts of the country . Why should Americans trust Democratic governance right now on the economy , and particularly the president's?

The numbers might be correct but one has to wonder about the "cause" of the "effect." Naturally, both Schultz and Priebus jump on their talking points:

REP. SCHULTZ: ...when President Obama took office, the month before he was inaugurated, the economy was bleeding 750,000 jobs a month, David , and we were not headed in the right direction. Now, I know we -- and President Obama has said we have a long way to go . We'd like the pace of recovery to, to, to be picked up. But we have definitely begun to turn the economy around. You, you fast-forward two and a half years later now, and the economy has created 2.1 million private sector jobs, a million of those jobs just in the last six months. We've had 15 straight months of job growth .

Priebus has his talking points:

MR. PRIEBUS: David , the chairwoman's living in fantasyland. We know that the facts are the facts, and we can't get away from that. And Barack Obama is defenseless to the truth on what's going on in the American economy . We have lost as -- two and a half million jobs since Barack Obama 's been president. And of that two and half million jobs, almost 45 percent of those people have been out of work for six months. That number, that number rivals the Great Depression .

Back and forth, your talking points vs. mine. It is a sign of the silly season of an impending election, with the danger that the increasing polarity will result in a stalemate that leaves our economy on the edge of a cliff once again.

But, can they both be "right?" The Bureau of Labor Statistics' Employment, Hours, and Earnings from the Current Employment Statistics survey (National) 2001 -- 2011 confirm that, indeed, we've lost about 2.5 million jobs since Obama was inaugurated, and we've gained almost 1 million jobs in the last six months. But the BLS also shows about 4.4 million non-farm jobs lost in the 12 months before Obama took office. How's that for a talking point?

One can play with all these statistics any which way to "prove" a point of view. The fact of the matter is we had tremendous job growth in the three plus years before the collapse of the economy (and almost the collapse of our entire economic system) in 2008, but those jobs "created" were heavily real estate and construction related during a housing run-up which we now know was merely a chimera. These are jobs that would not have come into existence without the frothy, nothing-down, exotic mortgage real estate market and the complicity of the investment banks and Washington to get those deals done. We simply "borrowed" from the future. Now, those jobs our out of the system with no prospects of returning soon. It is going to be very difficult to have robust job creation if, as Doug Kass suggests, real estate represents 40% job growth without solving our foreclosure and distressed sales issues which is now on such an enormous scale.

And how fair is it to "mark" a President's starting point for job creation as the date of his inauguration? The economy is a leviathan which cannot be turned on a dime. And, by the time Obama was making some headway, he lost control of Congress. Now we have such a polarized government, it is a wonder that any jobs are being created.

And, really, what control does the President have on world oil prices? We could have an army of rigs in the Gulf of Mexico and it wouldn't make much difference in prices as it is a world market for oil. The US cannot effect prices much by creating marginally more supply. Now, controlling the speculative aspect of prices may be a different matter, but financial regulation is habitually resisted by Obama's adversaries.

Agreed, we should have a national energy policy, but for it to have any teeth it will mean some hardship. In Europe, gas is twice the price as it is here. People learn to drive smaller cars, take mass transit, etc. No one would agree to that here so a national energy policy is simply kicked down the road, by both parties.

Finally, the deficit. Does anyone really think that if McCain was elected it would be much different today? President George Bush's 2001 and 2003 tax cuts have been big contributors as well as funding for the wars in Afghanistan and Iraq. Granted, President Obama's 2009 stimulus bill is also in the mix. But that was enacted when the Federal Reserve no longer could cut interest rates (they were already effectively at zero) and there was general agreement that the economy was still in crisis and without a stimulus, it would slip off the cliff again. And one one argues the bill failed to create jobs as intended. No Republicans voted for the act and now that they control Congress, one has to wonder what they will vote for or block. We know the talking points, and Kass makes substantive suggestions, but can Congress even function any longer?


Tuesday, June 7, 2011

The Financial Crisis Reaches Out to the Arts

The tentacles of the Great Recession and financial malfeasance run deep, as evidenced by the demise of one of the great theaters in the area, Florida Stage. While their move to the Kravis Center this year was a positive development, everything else seemed to be a negative for this local, but well-established theater company, its revenues shrinking because of declining contributions (partly due to the aftershock of the Madoff scandal which hit this geographic area particularly hard), reduced interest income, and changing demographics as well. When we first began subscribing to Florida Stage, more than ten years ago, I remember remarking about the average age of the audience, wondering whether succeeding generations will appear to take their (now our) place. It seems like great theater has taken a back seat to Twitter and Facebook in that regard, Florida Stage's subscription base declining from a peak of 7,000 to now only 2,000 (including our prepaid subscription for next season which now will not be).

Florida State was daring enough to put on many original plays and musicals, not content to take the "easy way" as many theaters do in Florida, serving up the pabulum of Broadway revivals or touring companies as a staple. Of course, it is one thing to be daring during good economic times and strong subscriptions, and another to steer that course when the tide is running against you. I thought this season's offerings could have been stronger, maybe they should have served up a classic play or two to appeal to its audience. Ghost-Writer, I thought, was their best play of the season, with their opening play, Cane , the weakest.

All in all, there have been stronger seasons at Florida Stage, but it is doubtful whether that would have saved the company in face of all its other macro adversities. A really tragic moment for the arts and for the West Palm Beach area.

And this eliminates, still, another venue for new plays, one that I've learned firsthand from experience is fraught with difficulties to produce. More than a year ago I began an adaption of four Raymond Carver short stories into a theatrical work, When We Talk About Carver. Florida Stage was very much on my mind as a possible venue but it took me most of the year to negotiate and secure a formal permission for non-commercial, non-exclusive stage rights (just to show the work) with the Carver estate.

I had thought the success of "Gatz" which is a six hour acted reading of Fitzgerald's The Great Gatsby was an encouraging sign that unabridged adaptations of great literature could make great theatre. As Fitzgerald is to the American novel in the 20th century, Carver is to the American short story, and it is time HIS story and magical power of writing should be dramatically told. Also, interestingly, the new film, Everything Must Go with Will Ferrell was based on Carver's short story “Why Don’t You Dance.” The timing might be right for something more significant by and about Carver.

But without a local theatre that would consider a new work, even one which was essentially written by an established writer of Carver's stature, I now begin a search for a company that is willing to take chances as was Florida Stage.

One can only hope that other such companies can survive these hard economic times, one of the many unintended consequences of putting Wall Street ahead of Main Street (jobs) and failing to address a decade of deficit spending. The closing of Florida Stage is not only a loss for our area, it is a tragedy on a larger scale for the Arts in general.

Sunday, April 24, 2011

Natty Bumppo Economics

The recently completed $38 billion battle of brinksmanship over next year's federal budget is going to look like child's play in comparison to the upcoming showdown over the need to increase the debt ceiling. So, so much more is at stake, including the dollar's status as a reserve currency. And yet, our congressional "leaders" have declared a recess until sometime in early May, only a couple of weeks before the Treasury hits the debt ceiling. No doubt the recent move in gold and dollar weakness reflect an increasing anxiety that the United States Government could actually default. S&P has put the US on credit watch. Without Congressional action we will simply greatly increase the cost of inevitably having to borrow anyhow when Armageddon comes knocking at our fiscal door, and who will want to lend to a deadbeat government? Why would our politicians even play such a game? Is it a form of political conspiracy to bring the government to its knees?

Agreed, carrying unsustainable debt is a sure death knell as well. But debt on the balance sheet comes not only from making poor judgments and being profligate, it also comes from failing to raise revenue. Both sides of the income statement --- expenses AND revenue ---need to be examined by our absentee representatives.

It is wishful thinking, particularly as the economy has been on life support through the Federal Reserve since the 2008 financial crisis, that we can grow enough to offset the tax cuts that have been implemented since the Clinton years. US taxpayers with the highest adjusted gross income have watched their federal tax rates fall from about 30 percent in 1995 to 17 percent by 2007. No argument that we need to simplify the tax code, but tax revenues need to be higher, simple as that. We need to revisit those Clinton rates again, a graduated tax rate without the loopholes. Close as many doors as possible to the underground economy. Eviscerate tax avoidance strategies.

We also need to shore up Social Security by increasing the wage limits for SS taxes -- or how about a similar "donut hole" we give to seniors for their drug needs, taxing wages for social security to a certain limit, then no tax until another higher limit is reached, and then resume taxing for social security revenue. On the expense side of the income statement, means testing will have to be instituted and the retirement age slowly moved back.

The ideas put forth for privatizing Medicare will slowly kill the program, so desperately needed by the middle class. Cost containment measures have to take first priority. A voucher program is smoke and mirrors. Can you imagine the average senior having to make such decisions with insurance companies pulling the strings?

And Medicare being entirely turned over to the States, many of which can hardly make their own budgets balance? Disaster for the poor.

These are huge issues and I don't mean to simplify any of them, but defaulting on our debt is NOT the first step in resolving any of these problems. It will be our last.

The amazing thing about this "movement"-- if it is fair to call it that -- is some of the people who would be hurt the most just say "bring it on, let the government fail." Perhaps this notion harkens back to the idealized Natty Bumppo from James Fenimore Cooper's Leatherstocking Tales. But this is not a mythical tale of American rugged individualism and "one shot, one kill." It is about cooperation and compromise. We need our representatives to do the hard, serious work they were hired to do without all the political posturing and partisanship, and without the brinksmanship of the twelfth hour.

Tuesday, March 1, 2011

Inflation Takes a Haircut

Jon Hilsenrath, normally a straight forward journalist who is the chief economics correspondent for The Wall Street Journal covering the Federal Reserve, made an argument on CNBC today essentially basing the real inflation rate on the price of his haircut. He was interviewed by Joe Kernen, who is enamored by his hair as well, in regard to today's testimony before Congress by Ben Bernanke.

According to Hilsenrath, the Commodity Research Bureau's (CRB) indexes "do not hit American households...we do a lot of other things with our money, like haircuts, which is one of the benchmarks I use, and [they] are not rising....The people who look at food and energy ignore those other things."

While the CRB puts commodity inflation well into the double digits, the CPI reports nearly no inflation (1%) excluding food and energy. Surely, between the two is the REAL inflation rate that is taking its toll on most Americans, particularly retirees.


Jon (and Joe), instead of preening your haircuts as anecdotal evidence of there being little inflation, you should walk in the shoes of a balding retiree. I just happened to have reconciled our 2010 expenses, and have accurate data going back eight years. Comparing that data our income was up only marginally as, even though social security kicked in during the period, investment income declined substantially due mostly to bonds and CDs maturing and having to be replaced by lower yielding investments (the Fed's attempt to force investors into riskier investments, the very issue that almost started a depression). Indeed, fuel and groceries were among the most significant inflationary items over the eight year period, up almost an identical 68% in our case. But what I found interesting there were also large increases in items that are not only essentially non-discretionary, but they are nearly monopolies as well, the consumer having only marginal choices, such as health care, insurance (car, home and health), water and sewage, communications (cable, telephones, Internet), and, most lately, real estate taxes. These take their toll on retirees.

But as I now generally buzz cut my remaining locks, haircut expenses were de minimis so there must be little inflation. Thanks for the fine journalism, Jon and Joe.
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Wednesday, January 12, 2011

American Dream Diminished

Owning a home was once a cornerstone of the American Dream. Go to school, work hard, get married, buy a home with a mortgage, have children, try to give them better opportunities than you had, work hard some more to pay off the mortgage, retire and do the things you couldn't do while you were working. It all sounds prosaic now, even old fashioned, but I suppose if I had to describe my life in a few words, that description would be a rough outline. Lucky for me, I loved my work so I never thought a moment about following just about the same blueprint as did my parents.

They were children of the Great Depression and after the war, the urge to own a home was overwhelming, a symbol of financial security and success. Levittown became the poster child for postwar suburbs throughout the country, and upon my father's return from WWII, they immediately bought their first house, around the corner from my grandparents' home, and blocks from my other grandparents, in Richmond Hill (borough of Queens in NYC). I think they paid less than $5,000 (this is 1946 mind you) and we lived there until I was 13 when we moved to a larger home, in a "better section" of the same community. Both homes still stand today, remarkably unchanged as these photos from Google Street Views attest. Those were the only homes they owned during their entire lifetimes.

By comparison, our home-owning has been more prolific (and equally remarkable, our past homes have been renovated to such a degree they are now nearly unrecognizable). After renting apartments in Brooklyn and the upper West Side of Manhattan, we finally ultimately moved to Connecticut where I was then working, first renting a small house in Westport, and then finally buying our first home which was almost across the street from where we were renting. It was 1971, the beginning of a steady increase in real estate prices and by 1974 we sold that first home and moved into a larger one in neighboring Weston where we lived for the next 22 years and raised our family.

The 1990s saw a moderation of real estate prices -- even a decline in some areas. It was the time of the savings and loan crisis, but with our children out on their own or off to college, our two acre home in Weston seemed unnecessary and we wanted a home in a "neighborhood" and by the water, so we sold and bought a 100 year old cape on the Norwalk River in East Norwalk. We thought that might be our home for the rest of our lives but, unexpectedly, my working life was at its end four years later and that is when we decided to move to Florida, the fourth home we've owned and, who knows, perhaps our last.

But, someplace along the way, the American Dream of home owning has become an American Nightmare. Foreclosures and the federal takeover of Fannie Mae and Freddie Mac are just ongoing symptoms of the developing crisis that has stemmed from the housing bubble of 2000-2007, mortgages being eagerly issued by banks with zero down to less than credit-worthy buyers, or to those in the "business" of flipping homes for profit, these loans condoned or even mandated by government. This activity and Wall Street's eagerness to cash in by taking inappropriate subprime loans and rolling them into exotic collateralized mortgage obligations, "rated" AAA by another accomplice in this crime against the American Dream, the rating agencies, conning investors into thinking they were getting a "guaranteed" return on a "riskless" investment, fueled the fire.

Also complicit is the Federal Reserve. By addressing the crisis with "Quantitative Easing" the Federal Reserve has postponed the day of reckoning. By Federal Reserve Chairman Ben Bernanke's own admission in a November 2010 Washington Post opinion piece, it is the "wealth effect" of past QE's that has contributed to the stock market's recovery, saying "higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending." This Fed induced bubble simply accelerates the "boom bust cycle," one that may end ugly when 'the can' can no longer be kicked down the road.

We all see the macro effects of QE, the rise in speculative investments, animal spirits being drawn out by low interest rates, a surge in commodity prices (of which there are relatively fixed amounts in relation to monetary creation out of thin air) but the gorilla in the room is our state and local governments. There has been a sudden flood of articles about their failing finances; a Google search will unleash an avalanche of them and I've written about this before as well.

In a nutshell, our state and local governments have promised too much in their pension obligations and now that the revenue tide is running against them with lower property tax revenues from falling real estate prices and foreclosures, not to mention their poor fiscal habit of financing certain projects with the assumption there will always be the opportunity to roll over debt with more debt in the future, the homeowner finds himself in the crosshairs. The cavalry of the Federal Reserve which rode to the rescue of banks and AIG has decided to leave municipalities and homeowners to their own devices, Bernanke saying "we have no expectation or intention to get involved in state and local finance. [States] should not expect loans from the Fed."

Consequently, it is now a vicious cycle, lower property values begetting a smaller pie for municipalities, which results in millage increases being levied by local taxing authorities, which in turn results in still lower property values. Being a homeowner today leaves one obligated to share in the past profligacy and poor planning of one's local government. Many would have difficulty selling their homes at any price to escape this obligation, turning the American dream of home owning into a nightmare.

Tuesday, December 7, 2010

Rebels Without a Cause?

It was a "chicken-run" by the Republicans and the Democrats, drag-racing to the edge of the Bush Tax Cliff as the sun was setting, but who really bailed out of the car and who remained will be revealed in two years. In the movie, the adversaries, Jim (played by James Dean) and Buzz, check out the abyss of the cliff before climbing into their cars:

Buzz: This is the edge. That's the end.
Jim: Yeah. It certainly is.
Buzz: You know something? I like you. You know that?
Jim: Why do we do this?
Buzz: You got to do something, now don't you?

And that seems to be the nature of the "deal" between the two parties: "You got to do something, now don't you?" On the surface, President Obama caved in. Someone had to and it was pretty clear the Republicans were prepared to fly off the cliff to preserve the precious Bush tax cuts for "everyone," especially for the wealthiest, the old Razzle Dazzle 'em of trickle-down economics.

We now continue the drag race to the same cliff in two years but this one also includes the Presidential election. If the "compromise" just further expands the deficit without creating meaningful jobs, the Democrats will blame the Republicans who will be left in the car. Of course the American people will be in the passenger's seat. "This is the edge. That's the end."

Monday, October 18, 2010

Tale of Two Economists

In an ironic twist, an economist turned entrepreneur writes a rigidly academic critique, The Recklessness of Quantitative Easing, and an academic pens an anecdotal piece of writing on a different but related subject, I Can Afford Higher Taxes. But They’ll Make Me Work Less.

Recklessness by John Hussman, whom I’ve quoted before in this blog as I consider him to be one of the clearer thinkers about the uncharted territory we call today’s economy, argues that the Federal Reserve’s announced intention to pursue a second round of QE is to drive “interest rates to negative levels in hopes of stimulating loan demand and discouraging saving” and to “increase the supply of lendable reserves in the banking system.” But will this increase output and employment?

Hussman thinks not as “interest rates are already low enough that variations in their level are not the primary drivers of loan demand.” There is simply a lack of confidence – both for the consumer and businesses -- that they will have the income in the future to pay off loans. So low or even negative interest rates is not a barrier and “removing a barrier allows you to move forward only if that particular barrier is the one that is holding you back (the economic term being "constrained optimization" as he explains.)

“Instead, businesses and consumers now see their debt burdens as too high in relation to their prospective income. The result is a continuing effort to deleverage, in order to improve their long-term financial stability. This is rational behavior. Does the Fed actually believe that the act of reducing interest rates from already low levels, or driving real interest rates to negative levels, will provoke consumers and businesses from acting in their best interests to improve their balance sheets?”

The effect of all the talk about QE2 has been to propel gold to new highs and to further erode the value of the US dollar as the Fed dramatically expands its balance sheet. “But once the Fed has quadrupled or quintupled the U.S. monetary base from its level of three years ago, how will it reverse its position?” Hussman’s answer is that many years down the road it will be forced to sell off the instruments it is buying, driving interest rates much higher as foreign buyers might be absent from such auctions, and undermining whatever recovery might have begun of its own accord, just further accentuating the boom bust cycle.

He has constructive suggestions, fiscal responses that might include “extending unemployment benefits, ensuring multi-year predictability of tax policy, expanding productive forms of spending such as public infrastructure, supporting public research activity through mechanisms such as the National Institute of Health, increasing administrative efforts to restructure debt through writedowns and debt-equity swaps, abandoning policies that protect reckless lenders from taking losses, and expanding incentives and tax credits for private capital investment, research and development.” Of course many of these require the cooperation of Congress and watching the mud slinging of the mid term elections, one has to wonder.

But Hussman’s article is must reading it its entirety, especially if you are an individual investor and wondering how to position a portfolio in this strange new economic world. The net effect of the Fed’s actions, besides the obvious nearly zero return on any CD you might buy, is to “force” the investor to move into riskier assets commodities in particular and equities as well. One could also “play” the decline of the dollar by investing overseas or in US multinational companies, which derive a majority of their income abroad. But to what extent QE2 is already baked into the prices of these riskier assets is anyone’s guess. There is also the possibility of a more protracted deflationary period than anyone can imagine right now, with the ongoing real estate crisis and high unemployment having a continuing impact. There seems to be a heavy reliance on the Fed’s future actions leading to an idyllic outcome. I think Hussman would disagree.

One of his suggestions as noted is “ensuring multi-year predictability of tax policy” which leads me to the other economist, Professor Mankiw who is professor of economics at Harvard and was an adviser to President George W. Bush, whose administration has to share some if not a majority of the responsibility of our present economic morass.

Professor Mankiw op-ed piece in the October 9th New York Times, through a convoluted and highly subjective mathematical exercise, argues the proposed tax increase on the 2% wealthiest Americans – some attempt at least to close the budget abyss -- will lead to such people not working much, including, alas, movie and rock stars and even novelists! Outraged, and disappointed that I might not see another Harrison Ford movie, or see my first Lady Gaga “concert” or that Jonathan Franzen will put down his pen, denying us his next novel in protest, I immediately shot off a letter to the editor of the NY Times business section, in which Mankiw’s article appeared. Some very good letters were published in response, but not mine. The nice thing about a blog is I can publish my own rejections! So here is what I wrote:

While it is hard to argue with Professor Mankiw’s math (“I Can Afford Higher Taxes. But They’ll Make Me Work Less”) of what his incremental income might become thirty years in the future in a halcyon tax-free world, his conclusion that movie stars, novelists, rock stars, and surgeons might work less if taxes are increased is based more on his own anecdotal view of working. By his own admission: “I don’t aspire for much more than a typical upper-middle-class lifestyle,” and that’s fine, but don’t blame the tax code for declining his next free lance opportunity. If he should climb down from his Ivy tower and look at the real world with real unemployment around 15%, people trying to work to simply support their families and hold onto their homes rather than handing down wealth to succeeding generations, he might have a little more empathy for a progressive tax code that did not seem to destroy incentives during the Clinton years, the last years in which our country actually had a surplus. And even Warren Buffett and Bill Gates see the fairness in having some sort of an inheritance tax.

Maybe the Times found it too preachy or politically oriented. Perhaps I should have concentrated on the nature of work itself. Remember Hussman’s comment about constrained optimization, that removing a particular barrier only has a beneficial impact if indeed it was that particular barrier holding you back? If Mankiw is entitled to personalize his argument, so can I. I worked as hard when in a higher incremental tax bracket as I did when they were lowered. Why? I loved work, simple as that. And, that is what is missing not only from Mankiw’s formula but how our society looks at work and values workers.

I remember my first visit on business to Japan in the 1970’s, the taxi cab drivers waiting at the hotel for a fare, their cabs gleaming as between fares they would polish and clean their cars. The refuse collector doing his job well was as highly valued by society as a company executive. Japan today, of course, suffers some of the same maladies as ours, with a twenty-year head start on the phenomenon of deflation, so perhaps that has taken its toll on their workers. Somehow, as a society, we need to value all workers and restore work as something to be embraced.

Of course we don’t always have an idyllic choice of the work we do in our lifetimes, but we do have a choice of doing it well or not and by choosing the former, we open a path to finding it meaningful. I’m sorry Prof. Mankiw chooses whether he will write an article or accept an invitation for a speech merely based on what his incremental income bracket might be, although I think most people would envy that he actually has a choice.

I like what the great short story writer, Raymond Carver, wrote thinking about a friend who admitted he wrote something just to make a deadline and make a buck, knowing he could have written something better if he took the time. “If writing can’t be made as good as it is within us to make it, then why do it? In the end, the satisfaction of having done our best, and the proof of that labor, is the one thing we can take into the grave. I wanted to say to my friend, for heaven’s sake go do something else. There have to be easier and maybe more honest ways to try and earn a living. Or else just do it to the best of your abilities, your talents, and then don’t justify or make excuses. Don’t complain, don’t explain."

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Friday, September 17, 2010

The More Things Change....

Welcome to the twilight zone. When I read stories such as Microsoft possibly borrowing to increase its dividend and stock buybacks, I see it as just another sign of the American economic system gone wild. There was once a day when companies borrowed money to finance expansion for the production of goods. Now we borrow to pay shareholders or make titanic bonuses to executives. Or we finance our deficit by borrowing from China to keep the American consumer, AKA Hamster on a Wheel, buying at the local official distributor of goods made in China (and other emerging countries), Wal-Mart. But even with interest rates at all time lows, we cannot create borrowing demand in housing, or small business so unemployment remains intolerably high.

In the past I’ve written about many of the pieces of the economic conundrum we’ve created for ourselves, the problem of job creation, the local government crisis, the underfunded pension guarantees, entitlements, banking bailouts, the inflation/deflation tug of war, and in general our consumption oriented society. In fact, while everyone feels a little better as we have thrown so much $$ at the economy to keep it afloat, repair some damage to everyone’s 401Ks, the really major challenges lie ahead, and in one of the more divisive political environments as the midterm elections loom. The more things change, the more they stay the same…. Alphonse Karr
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Monday, January 25, 2010

Volcker, Stiglitz, Hussman….

Here’s some positive news from or about people who can help point us in the right direction. First there was the big news that Paul Volcker will finally take a key role in addressing economic reform, particularly with the reinstatement of some of the key features from the Glass-Steagall Act. Joseph Stiglitz touches upon that need as well as other issues in an extract from his new book, Freefall; Free Markets and the Sinking of the Global Economy in a piece entitled “Why we have to change capitalism”

We now know the true source of recent bank bonuses: “free money” profits: According to Stiglitz, “the alacrity with which all the major investment banks decided to become ‘commercial banks’ in the fall of 2008 was alarming – they saw the gifts coming from the federal government, and evidently, they believed that their risk-taking behaviour would not be much circumscribed. They now had access to the Fed window, so they could borrow at almost a zero interest rate; they knew that they were protected by a new safety net; but they could continue their high-stakes trading unabated. This should be viewed as totally unacceptable.” Also, Stiglitz puts the bailouts in the context of the bigger picture: “the failures in our financial system are emblematic of broader failures in our economic system, and the failures of our economic system reflect deeper problems in our society. We began the bailouts without a clear sense of what kind of financial system we wanted at the end, and the result has been shaped by the same political forces that got us into the mess. And yet, there was hope that change was possible. Not only possible, but necessary.” As a consequence he argues for “a new financial system that will do what human beings need a financial system to do.”

Meanwhile, the Financial Times carried an excellent piece on Paul Volcker now that he is again front-and-center, Man in the News: Paul Volcker. For too long now Volcker inexplicably had been pushed off the center stage. Last March, as the market was in complete free fall, my tongue-in-cheek piece about “the new era of the 177K” asked, “Where is Paul Volcker to lead the way back to the 401K?”. Per the Financial Times: “this week the towering former Fed chief stood by Barack Obama’s side as the president embraced what he dubbed the “Volcker rule” banning proprietary trading – over the reservations of some of his most senior economic advisers.”
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Then, John Hussman, the economist who runs his own mutual funds, and each Monday blogs about his views, published, today, a lengthy, carefully reasoned Blueprint for Financial Reform.
This is an extraordinarily detailed eight point plan/proposal and rather than giving the bullet points here, go to the link. It deserves careful consideration by our elected officials. Needless to say, he sides with Volcker. Hussman for Chairman of the Federal Reserve or bring back Volcker?
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I've argued that in addition to financial reform, the main economic focus must be job creation: “a true recovery requires jobs, jobs, jobs – and how are they going to be created – by banks trading energy futures? What happened to the commitment to the infrastructure? Our roads, utilities, and public transportation are falling apart. Alternative energy seems DOA. Aren’t these the areas our financial recourses should be focused on, ones that will create jobs, in construction, technology, and finance, and can lead a true economic recovery we can pass on with pride to future generations?”

Green shoots first, then…..

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Wednesday, December 30, 2009

Ghost of New Year’s Future?

If you read only forecast for 2010, let it be this one by James Howard Kunstler who writes a blog, Clusterfuck Nation. While I hope things will not evolve as badly as he speculates, he may have the direction right, the ephemerality of the “recovery” from our duct-tapped economy, government’s complicity, and our lack of moral fiber as a nation to do the right thing. “We're a nation of thugs and louts with flames tattooed on our necks, who call each other ‘motherfucker’ and are skilled only in playing video games based on mass murder.”

Amen to that.
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Tuesday, October 27, 2009

Awash in Liquidity

Again (see last post) I defer to another insightful analysis about the economy and why we might be at an investment inflection point, this time turning to the world’s leading bond manager, Bill Gross at PIMCO. His monthly investment outlook, Midnight Candles, details why the investment “bubble” is a long standing one, that as a nation which once relied on the production of real things, we became focused on “paper asset” appreciation by the 1980’s. Governments have artificially influenced those prices since then. Gross distills this in an interesting observation: “How many TV shots have you seen of people on the Times Square Jumbotron applauding the announcement of the latest GDP growth numbers or job creation? None, of course, but we see daily opening and closing market crescendos of jubilant capitalists on the NYSE and NASDAQ cheering the movement of markets – either up or down.”

That sets the macro economic scene, which has been compound with the crisis of the last couple years. More recently investors have flocked to riskier assets as the Fed has flooded the markets with liquidity and driven interest rates to nothing. Unless the real economy grows substantially, this has to end badly when the Fed reverses course. For this reason, Gross believes asset prices might be peaking.

Gross is certainly one of the more literate, philosophical money managers around, and his prefatory remarks set the stage in that venue. As one who is about Gross’ age, I identify with his feelings about being “Everyman.” I suspect he has read Philip Roth’s novel of the same title, but that’s another matter.


On a lighter side from my photo archives….


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Thursday, August 6, 2009

Clunker Consequences

The cash for clunker’s program has been proclaimed a “success” by politicians lining up to take credit, to show their constituents that they know how to sprinkle a little money on the little guy, a mere $3 billion when it is all said and done, while $trillions go to Wall Street in one form or another. But, as with many of these bailout programs, when the government steps in, there are unintended consequences, some of which can’t be seen until the deed is done. Clunkers Plan Deflates Mechanics proclaims the Wall Street Journal. While car dealers are delighting in their windfall, 164,000 auto repair shops, as well as their suppliers, are left with less work. As one spokesperson pointedly said: "How do we get on the special interests, special treatment bandwagon? How much is it going to cost me and to whom shall I send the check? Who picks the winners in this game 'cause obviously the game is fixed."

And that in a microcosm is the downside of this approach to “fixing” the economy. Cash for clunkers might save some jobs, but at the expense of others. Also, the government has succeeded in doing what public corporations have long done – accelerating sales to make one quarter look better than it would otherwise. Wouldn’t these clunkers have to be ultimately replaced anyhow? Merely moving these sales forward does not fix the economy or create permanent jobs and as many automotive repair shops are independents, it certainly hurts small business. But it may make some politicians look good for a little while.
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Friday, July 17, 2009

Goldman Insatiable Sachs

While Citigroup, Bank of America, and Morgan Stanley, Troubled Asset Relief Program recipients are finding ways to circumvent TARP compensation restrictions, Goldman Sachs, having “paid back,” those funds, may brazenly pay out some $773,000 per employee as total compensation in 2009. This comes on its reported net earnings of $1.81 billion and revenues of $9.43 billion for the quarter ending March, 2009, a nifty operating profit of almost 20% in the depths of the “Great Recession.” Don’t get me wrong, I’m all for profit and the capitalist system, but Goldman had taken TARP funds, and was the largest recipient of AIG TARP money due to collateral calls on mortgage related Collateralized Debt Obligations, and presumably AIG (we, the taxpayer) may be on the hook for more. The herd of financial firms has thinned and we have handed them monopoly-like power.

While I recognize that the financial mess was primarily an inherited one by the Obama administration, we are not addressing the toxic assets that are still haunting the books of many financial institutions. Bad mortgages and a weak real estate market persist, and unemployment continues to grow. We may have forestalled the complete seizure of the financial system, but the structural weaknesses remain, and taxpayers are underwriting a postponement of a solution, benefiting financial institutions such as Goldman.

Paul Krugman at the New York Times makes these key points about GS’ earnings and compensation plans in his column, The Joy of Sachs:

First, it tells us that Goldman is very good at what it does. Unfortunately, what it does is bad for America.

Second, it shows that Wall Street’s bad habits — above all, the system of compensation that helped cause the financial crisis — have not gone away.

Third, it shows that by rescuing the financial system without reforming it, Washington has done nothing to protect us from a new crisis, and, in fact, has made another crisis more likely.


His conclusions are must reading. Wall Street seems to be calling the shots in Washington, all of this while reported unemployment flirts with 10% and with real unemployment substantially higher as dispirited workers who have given up looking for a job, or part-timers who want a full-time job, are not even counted. Sounds like a good time for record payouts at Goldman Sachs.

As Mary Elizabeth Lease wrote in the early 1890’s, “It is no longer a government of the people, by the people, and for the people, but a government of Wall Street, by Wall Street, and for Wall Street.” Hat tip: Got Shares? (GotShares.com)