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This is a reprint from Cafe Hayek that gets right to the point of Recovery Act spending and that lies being told by the Obama Administration about its apparent success. You know, like they saved “600,000″ jobs, or “800,000″ jobs, or “2,100,000″ jobs, or, just the other day, “1,400,000 to 3,300,000″ jobs created or saved, or whatever number they have touted. They are lying.
Now, Joe Biden is going around saying that they’ve weatherized 200,000 homes across America, thus creating jobs and saving energy. You can be assured that this is also a lie and that all the benefits claimed are false. I urge anyone interested to visit Recovery.gov to see how the money is being spent.
Here is GMU professor Russ Robert’s take on the subject:
How it sounds vs. how it really works
Here is how it sounds, from Whitehouse.gov:
At an event with homeowners and workers who benefited from the program, today in Manchester, New Hampshire, Vice President Joe Biden announced a major Recovery Act milestone – the weatherizing of 200,000 homes under the Recovery Act. As a result of the Administration’s unprecedented commitment to energy efficiency, more than 200,000 low-income families have been able to save money on their energy bills while saving energy, and thousands of people have been put to work.
“Thanks to the Recovery Act, thousands of construction workers across the country are now on the job making energy-saving home improvements that will save working families hundreds of dollars a year on their utility bills,” said Vice President Biden. “From replacing windows and doors to adding insulation, these are small changes that are making a big difference for American workers, manufacturer and consumers. We’ve hit the accelerator on the weatherization program, making over 200,000 homes more energy-efficient already, and are now full speed ahead to meet our original target of weatherizing 600,000 homes nationwide. ”
“The weatherization program under the Recovery Act – one of our signature programs – is successfully delivering energy and cost savings for hundreds of thousands of American families while creating thousands of clean energy jobs in local communities,” said U.S. Energy Secretary Steven Chu.
How does it sound? Great. Energy efficiency meets job creation. Green jobs helping the environment and saving people money.
Here is how it really works, from an Associated Press story (Drudge): … Continue reading Obama Administration vs. The Facts
UPDATED
Part 2 of 2
There are three factors that will hurt bank earnings: weak loan demand, spreads on interest income will narrow because of competition among banks, and it appears that many banks are concealing the true state of their balance sheets because of “extend and pretend” policies.
“Extend and pretend” and “mark-to-make-believe” have been a major factor in dragging out this recession and is a major threat to the economy. This article describes the problem well:
A big push by banks in recent months to modify such loans—by stretching out maturities or allowing below-market interest rates—has slowed a spike in defaults. It also has helped preserve banks’ capital, by keeping some dicey loans classified as “performing” and thus minimizing the amount of cash banks must set aside in reserves for future losses.
Restructurings of nonresidential loans stood at $23.9 billion at the end of the first quarter, more than three times the level a year earlier and seven times the level two years earlier. While not all were for commercial real estate, the total makes clear that large numbers of commercial-property borrowers got some leeway.
But the practice is creating uncertainties about the health of both the commercial-property market and some banks. The concern is that rampant modification of souring loans masks the true scope of the commercial property market weakness, as well as the damage ultimately in store for bank balance sheets. …
More broadly, the failure to get the loans off banks’ books tends to deter new lending to others. It’s a pattern somewhat reminiscent, although on a lesser scale, of the way Japanese banks’ failure to write off souring loans in the 1990s contributed to years of stagnation.
Banks hold some $176 billion of souring commercial-real-estate loans, according to an estimate by research firm Foresight Analytics. About two-thirds of bank commercial real-estate loans maturing between now and 2014 are underwater, meaning the property is worth less than the loan on it, Foresight data show. U.S. commercial-real-estate values remain 42% below their October 2007 peak and only slightly above the low they hit in October 2009, according to Moody’s Investors Service. …
In a large proportion of cases, modifying the terms of loans ultimately isn’t enough to save them. At the end of the first quarter, 44.5% of debt restructurings were 30 days or more delinquent or weren’t accruing interest, up from 28% the first quarter of 2008. …
But here is one positive note. … Continue reading Why Small Banks Are The Key To Recovery-Part 2
The critical factor in our economy right now is a declining money supply which has been the result of the “credit crunch” or what Keynesians call a “liquidity trap.” We have discussed this frequently on this blog. I believe deleveraging is the key to an economic recovery and measures of business. The result of deleveraging is deflation, but instead of seeing deflation as a negative, it is a necessary step for growth.
I look at these issues quite differently from Keynesian and Neo-classical economists. As we have seen the Fed has been unable to stimulate money growth through zero interest rate policy (ZIRP) or through quantitative easing (QE). This is something that their theories not been able to adequately explain, and the outcomes of their policies have led to continued high unemployment, declining growth, declining money supply, and deflation. The policy makers at the Fed and Treasury have run into the same problems that mired Japan’s economy for almost 20 years: sluggish growth amidst deflation.
The reason we are seeing money supply decline is twofold. Banks have (1) tightened lending standards which makes credit less easy to obtain, and (2) banks are finding it difficult to find credit worthy borrowers. While the Money Base has increased dramatically, these funds sit in the Fed as “excess reserves” where banks earn interest on it from the Fed. I will explore this issue in a moment.
But first … … Continue reading Why Small Banks Are The Key To Recovery-Part 1
Christina Romer resigned as Chairman of the President’s Council of Economic Advisers. According to the Bloomberg story:
Romer, 51, pushed last year for Obama’s $787 billion stimulus package as unemployment rose from 7.7 percent. She quit as a U.S. economic recovery propelled by government spending and financial bailouts show signs of slowing, and unemployment exceeding [...]
Remember when every economist was saying that emerging markets will lead us out of this recession and that prosperity was just around the corner? I do recall because it has been my opinion that, as export based economies, they rely on the U.S. and Europe to lead them out of recession. Now these “emerging” economies, especially Asia, are slowing down. China engaged in massive fiscal stimulus but now finds itself trying to cool down an overheated real estate market. Not necessarily coincidental, the U.S. ISM new manufacturing orders index came out today showing further declines in new orders (see below).
China
Two major Chinese manufacturing indices fell.
The official report:
China’s manufacturing activity expanded at the slowest pace in 17 months in July, an official gauge showed Sunday, reflecting that tightening measures introduced earlier this year and growing uncertainty over global demand continued to weigh on the country’s economic expansion. … China’s official purchasing managers’ index, issued by the China Federation of Logistics and Purchasing and the National Bureau of Statistics, fell to 51.2 in July from 52.1 in June, the third straight month it has declined. The reading also was closer to the expansionary threshold of 50 than it had been in 17 months. A reading above 50 signals expansion.
The PMI data showed that China’s new export orders grew last month from June but the growth slowed, while imports declined in July from June, signaling that exports and imports will continue to post lower annual growth in the coming months.
The new export-orders subindex in the PMI slipped to 51.2 in July from 51.7 in June and the imports subindex dropped to 49.3 from 50.4. …
“The Chinese economy is slowing down due mainly to the ongoing property-tightening measures, but the slowdown is clearly not as dire as some expected. We don’t think the current situation warrants an all-out fight to rescue growth,” said Mr. Lu, [BofA economist].
Then, HSBC reported:
On Monday, another gauge of manufacturing activity, the HSBC China Manufacturing Purchasing Managers’ Index, showed activity fell to 49.4 in July from 50.4 in June, indicating manufacturing activity actually contracted for the first time since China’s economic recovery began.
Here are some excerpts from the HSBC report:
… Continue reading Worldwide Economic Slowdown?
Banks Don’t Want Your Money
After the fallout from the crash of 2008, banks, especially regional and local banks, are finding they need to adapt to a profit squeeze. Add on top of this new regulations from the financial overhaul bill, and these banks are going to look more like banking utilities than profit centers.
According to a report released by Accenture:
“The subprime segments that drove very high margins prior to the crisis have effectively disappeared,” said the study, which was issued last week. “They are too expensive for many banks to serve now that their risk profile has been fully recognized and priced in.”
Of the 46 banking executives contacted, just under half told Accenture that the profitability of their average customer had dropped 5% to 11% since the crisis began. A further 11% cited a drop in profitability of greater than 15%. And nearly two-thirds of the executives reported an increase in “shopping around” for services, meaning customer-bank relationships are becoming more volatile.
It turns out that customers want more control over their banking activities.
A look at earnings reports show that bank earnings are improving, but:
These small banks continued to get hit with nonperforming loans and chargeoffs, but they did not take as bad of a beating as they did the previous quarter and a year earlier. Median net income rose by 4%-9.6% from the previous quarter depending on the region, according to a report from Sandler O’Neill & Partners LP and SNL Financial LC. At the same time, regional declines in nonperforming loans ranged from 2.3% to 9.5%.
… Continue reading Are Banks Becoming Utilities?
President Obama is off pitching his stimulus plan today in Michigan:
The trip, part of a campaign dubbed “Recovery Summer” by the White House, is intended to reassure Americans the U.S. economy is returning to a sound footing in advance of the fall elections. …
On Wednesday, the White House released new data saying a surge in Recovery Act funding had raised economic growth in the second quarter of 2010 by as much as 3.2% and boosted employment by as many as 3.6 million jobs, compared to estimated levels in the absence of the stimulus. http://dailycapitalist.com/2010/07/14/how-to-start-an-economic-recovery/
I wonder if President Obama reads the same data as I do? Aside from the fact that the numbers the White House presented are false, the data are revealing the beginning of an economic slowdown which are clearly contra to the Administration’s claims that the economy is growing. The Fed is clearly worried as shown below in the minutes of its June meeting. In fact they expect years of slow growth. I wonder if Mrs. Romer talked to Chairman Bernanke before she boasted about her fake numbers?
Here is an overview of data that came in just this week that reveals a slowing economy:
… Continue reading Obama Says It’s The “Recovery Summer” But The Fed Says It Will Take 5 or 6 Years
UPDATED
Regular readers of The Daily Capitalist know I think we are headed for a decline in economic growth in 2010 and that the data is starting to show this.
Why isn’t our economy recovering? I ask that question often and have written about it many times. Perhaps a better question is: what needs to happen in order to make our economy grow? I offer some solutions.
There are many problems seen as hindering recovery. Here are the common ones I wish to examine:
- Too much debt encumbering consumers;
- The lack of consumer demand to fuel growth;
- Too much debt encumbering banks; and
- The government’s interference in the economy.
There are a host of other issues that are also important but let me focus on these points and show what can be done to fuel a recovery.
Numbers 1 and 2 (debt/demand) are related.
Our economy is consumer driven and we are reminded over and over again that consumer consumption is 70% of our economy. To put this in perspective, for Germany it is about 57% of GDP.
Our economy is built on consumption which is fine as long as it is supported by real savings, productivity growth, and wage growth. The data reveal that most of the consumption binge of the boom phase of this current cycle was financed directly or indirectly by debt related to rising home values. Personal savings declined to almost zero. Now savings are back up to 4%.
Here is why this is seen as a problem for recovery: PCE will decline as consumers pay down debt and increase savings. Spending drives the economy and the economy will decline.
Is this really a problem?
Saving is a process necessary for a recovery. Consumers are acting rationally to uncertainty and they will give us the signal when they are ready to spend again. About $10 trillion in household net worth was wiped out during the bust. Until consumers see unemployment decrease, wages go up, and their debt go down, they aren’t going to spend anyway.
But savings is never bad for an economy. Economists often fail to look at the other side of savings which is an increase in capital necessary to fuel future growth. In a normal cycle, increased savings reduces interest rates, which sends a signal to producers of capital goods that consumers don’t want to buy consumer goods right now, and that there is opportunity for them to increase production of durable goods such as machines, homes, and basic equipment. They use the loan funds to pay workers who will spend which, as this capital works its way through the economy, will create new and real economic activity.
While manufacturers have been increasing production in response to normal business cycle activity (inventory recovery; weak dollar advantages), they are just utilizing current capacity. If they wanted to expand, unless they are a large company with access to money center capital, they now report they are having trouble getting a bank loan.
What does this mean? It means they can’t expand and hire new workers whose spending will take up the slack from consumers who save. The government and the Fed have confused our ability to make economic decisions because they are artificially lowering interest rates.
What can we do to fix this? Savings is the fix. There is nothing that should be done to prevent this from occurring. In the longer term it will prepare the economy for new growth. See No. 4 for why flogging a dead horse is harmful to recovery.
The question is: why can’t we get loans?
… Continue reading How To Start An Economic Recovery
Retail sales were mixed, if not a bit disappointing in June. Personal savings increased to 4.0% in May.
Here is a summary of the results from various sources:
Retailers from department stores to teen retailers responded to limited demand with increased markdowns. Big sales during June are common as retailers try to clear shelves [...]
Consumer borrowing fell for the fourth month in a row in May. This is one of the most significant indicators of a healthy economy: when consumers feel comfortable about their economic situation, they are confident enough to borrow money. This is one of the major drivers of consumer consumption.
At The Daily Capitalist, I [...]
Amity Shlaes is one of my favorite writers based on her book, The Forgotten Man, a wonderful history about the Great Depression and the New Dealers. This piece deals with what she sees as false parallels of today and the Great Depression.
Depression Fear Mongers Obscure the True Concerns
By Amity Shlaes
 Amity Shlaes This year is supposed to be like 1932. That’s what you would believe after reading commentators who compare current patterns in the Dow Jones Industrial Average to those at the end of Herbert Hoover’s presidency.
To focus on these stock patterns is to be like weather forecasters who talk about the heat index or wind chill. They are gilding the statistical lily. The ungilded reality: today the Dow is down about 30 percent from its 2007 high, nowhere near its decline of 89 percent between September 1929 and July 1932. Today, joblessness in the U.S. is a bit less than 10 percent; in 1932 it was 25 percent.
While these differences set today’s slump apart from the Great Depression, there are other issues that may be holding back a recovery.
Instability in the international currency arrangement is the first one. Today doubt that the euro will survive is affecting the dollar and the stock market. The issue is whether Europe will make the fiscal repairs necessary to preclude an otherwise inevitable collapse of the European currency. It isn’t clear whether or when the euro can be restructured. This, as we’ve seen recently, can hurt U.S. stocks.
In the early 1930s an unsustainable monetary construct likewise jeopardized recovery. In that instance, the teetering house wasn’t the euro but the international gold standard. Depositors concerned that the whole arrangement would break apart were pulling gold out of U.K. banks at a rate the country couldn’t afford. When the U.K. did go off gold in September 1931, the investor panic migrated to the U.S., where depositors also started withdrawing gold. Another wave of bank failures ensued. … Continue reading Is Today Similar To The Great Depression?
While the data will reflect a normal uneven trend in the coming months, there is a clear indication that the economy is slowing.
The reasons are cyclical as much as a result of a winding down of various government efforts at fiscal stimulation. Manufacturing gains have been a result of some stimulus, but much of it is cyclical, coming from the initial inventory reduction by retailers and wholesalers after the crash as consumer spending tanked, followed by a modest restocking effort driven by normal demand from the 80% of us who are employed. Some it was from stimulus programs such as Cash for Clunkers and the home buyer’s credit. Flattening consumer expenditures will dampen additional manufacturing growth. Without consumer demand picking up, the economy will be flat at best. And add to this sinking demand from Europe and China other developing countries, our exports will flatten at well.
This is something that I have been forecasting since February based on several premises:
- Fiscal stimulus would not create any lasting economic impact.
- A lack of credit.
- A declining money supply.
- Government policies that prevent or delay deleveraging or bankruptcies of malinvested capital.
- Several long-term megatrends that are impacting our economy.
Aside from looking at data releases from government and private sources, I carefully monitor the news and the frequency of positive or negative articles that come from the Wall Street Journal, Bloomberg, the NY Times, and the Financial Times. I tend to ignore what polls of economists say, because if they see data rising they will predict a recovery; if data is declining, they will predict caution and consternation.
… Continue reading Are We Heading Toward A Double Dip?
The recent G20 meeting in Toronto came out with a joint statement endorsing “balanced and sustainable” growth for its members. It was one of those statements that are created by committees to placate all participants and don’t really amount to anything. In this case, no meaningful agreements came out of the G20 meetings. Each government will just go back to doing what they have been doing and mouth high-sounding speeches of solidarity and fraternal love for their world co-leaders.
What really happened in Toronto didn’t come out in the official statements (they never do). But the obvious and deep division between the U.S. and Europe was the main story of the event and that was fascinating to watch.
When Obama chides Merkel for Europe’s (Germany’s) proposed attempts at fiscal responsibility and when Merkel hits Obama for the U.S.’s fiscal profligacy, then you’ve got a good story.
The big split has to do with whether the world should continue fiscal stimulus. The Obama Administration believes that it’s too soon to stop. Recent numbers have them scared about the future of the U.S. economy and it wouldn’t hurt to have some global support when they try to beggar Congress for more spending to promote economic recovery. (“See,” Geithner will say, “even the Germans are begging us to spend so we can rescue the world economy.”)
… Continue reading An Outbreak of Fiscal Sanity in Europe? Insanity in the U.S.?
This link will allow you to download a PDF version of the complete article, “Will We Have Inflation, Deflation, or Hyperinflation?” This may be more convenient for readers who which to take in the article as a whole. If you have problems with the download, please let me know. You are free to distribute [...]
This is is the final part of my four part article that deals with what I feel is the primary question investors must now answer: is our future to be inflation or deflation? The answer has vast implications to our investment planning and decisions for the near term, and possibly for our long term. It is a very complex question with a lot of moving parts involving economics and politics.
Like it or not, it is economic theory that is driving macroeconomic policies and political decisions that determine whether we will have inflation or deflation. Since not all of my readers are sophisticated traders I have tried to present the issues in a direct and hopefully understandable way. To those sophisticated readers, please bear with me.
Part 4 of 4
What is Money Supply Doing Now?
Money supply will tell you if we are headed for inflation or deflation. If we look at the rates of change of M1 or Austrian True Money Supply (TMS), they are declining. In fact, M1 and TMS appears to have peaked in 2009 and have been declining on a year-over-year basis ever since. On an absolute basis, as shown previously, M1 growth is flattening. These two charts below show the year-over-year percentage change in money supply.
 Courtesy Michael Pollaro Michael Pollaro at TrueSlant.com
What Will the Fed’s Options be in a Double-Dip Economic Decline?
This is the main point. If, as I have been saying, the economy declines in the second half of 2010, what will the Fed do?
Let me paint a scenario. In any scenario with declining economic growth, unemployment will rise. If unemployment at the narrowest measure is now 9.7% and at the broadest measures (U-6) is 16.9%, rising unemployment will become politically unacceptable to the Obama Administration.
I believe the politicians will first take Paul Krugman’s advice and extend existing stimulus programs and create new ones to spur spending. All the talk about fiscal sanity and deficit warnings will be forgotten as politicians on both sides of the aisle panic. Look for further extensions of the home buyer tax credit program, and other programs that politicians believe will help businesses in their districts. Cash for [Your Industry Here] will be the byword. It will add to an already huge federal debt and will result in more wasteful spending and non-viable short-term results.
On top of all this, the politicians will hammer Bernanke to create jobs, which is one of the Fed’s mandates. But how can he do that? He will try to inflate.
The Fed has limited options in such a case. They can’t reduce the Fed Funds rate any further and they can’t force banks to lend. It is likely that banks will further restrict credit as the economy declines.
I think their only viable option is to use Open Market Operations (OMO) to inject new money into the economy. The next question is: what will they buy? … Continue reading Will We Have Inflation, Deflation, or Hyperinflation? Part 4 (Final)
Fitch reported today that commercial real estate (CRE) values continue to decline giving rise to greater loan losses on CRE. On the average throughout 2009, lenders recovered 43 cents on the dollar on distressed loans. They see the loss rate only going up.
The average loss severity rate or the ratio of realized loss to liquidation balance for U.S. commercial mortgaged-backed securities (CMBS) loans resolved with losses in 2009 was 57% compared to the 43% rate in 2008, according to new data from Fitch Ratings. Those losses outpace the cumulative historical average of 37.2%.
“Loss severities are expected to remain above the current cumulative average through 2011,” said Fitch managing director Mary MacNeill. “Assets liquidated in the current economic environment will be those not likely to see cash flow improvement from an extension or modification.”
“Assets will take longer to resolve as special servicers continue to see high volumes of underperforming loans,” added Fitch senior director Richard Carlson. “Continued high inventory and the declining frequency of modifications means there is no relief is in sight.” …
“Property value is the barometer of potential losses for CRE debt,” [Xiaojing Li, senior debt analyst for CoStar Group] said. “In the first quarter of 2010, there were already $270 million in losses via liquidation. Among the $17.7 billion in loans newly added to special servicers this year, 7% have already had appraisal reductions, threatening a new wave of losses.”
Losses by property type were:
* Hotel: 81.9%.
* Multifamily: 58%
* Office: 56.9%
* Industrial: 48.8% and
* Retail: 48.2%.
I am reprinting this refi timeline chart to give you a better idea of the problem: … Continue reading The Latest Data On Commercial Real Estate Loan Losses
Yesterday we reported a projected record of foreclosure notices going out this year. Today according to RealtyTrac, bank repossessions, the final stage of the foreclosure process, climbed 44% from May 2009 to 93,777, the second consecutive record monthly climb.
“We’re nowhere near out of the woods,” Rick Sharga, RealtyTrac’s senior vice president for marketing, said in a telephone [...]
Certain economic indicators are signs of the times. “Restaurants Show Life After Slump” is one of them. This article reveals that New York City restaurants are coming back.
At David Burke Townhouse, the average bottle of red wine has crept back up over $100. At Delmonico’s, diners ordered nearly twice as [...]
RealtyTrac says that 3.8 million households will receive a foreclosure filing in 2010. That is a 35.7% increase over 2009.
The total amount of individual filings could reach as high as 4.5m in 2010, up from 3.9m filings in 2009, [Rick Sharga, a RealtyTrac senior v.p.] said.
Filings increased from the previous year for 52 [...]
Cato’s Tad DeHaven has been discussing what is referred to as “regime uncertainty,” or the uncertainty relating to the effects of economic policies that businesses see as detrimental to their future. This term was coined by Austrian theory economist Robert Higgs in his analysis of FDR’s New Deal. The idea is that such uncertainty [...]
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