April 29, 2010

More on GM

After you read the letter below sent to Secretary of Treasury Timothy Geithner by Congressmen Paul Ryan, Jeb Hensarling, and Scott Garrett, you will cringe the next time you see the GM ad claiming that GM has paid back every dime plus interest of what the government loaned the company:

Dear Mr. Secretary:

On April 21, 2010, The Department of Treasury announced that General Motors (GM) repaid the final portion of its debt obligation under the Troubled Assets Relief Program (TARP), totaling $6.7 billion. But the remaining ownership interest of the U.S. government in GM is significant: $2.1 billion in preferred stock and 60.8 percent in common equity. Given this, it appears to be misleading that GM's Chairman and CEO, Ed Whitacre, wrote a piece in The Wall Street Journal called, "The GM Bailout: Paid Back in Full." It is also unclear whether, as you stated in a press release, this is "a positive sign for our auto investment."

In a recent letter, Senator Grassley stated, "It is unclear how GM and the Administration could have accurately announced yesterday that GM repaid its TARP loans in any meaningful way." The repayment of debt was not directly tied to teh automaker's profitability, but rather resulted from swapping capital GM received from TARP to pay down debt owed to Treasury.

The fact remains that the U.S. government still owns GM (60.8% of GM's common equity). Both before and during the bankruptcy of "Old GM," the government bailed out the automaker by "investing" about $48 billion in the company through the TARP Automotive Industry Financing Program. After bankruptcy, this "investment" was converted to $6.7 billion in debt, which GM has repaid with government funds, $2 billion in preferred shares, and an amount representing 60.8% of common shares. This means that roughly $39 billion from the TARP investment has been exchanged for what resulted in a common equity stake in post-bankruptcy GM.

Unfortunately, there is little publically-available information on the current financial health of GM, so it is hard to determine the exposure to the taxpayer. While current law and the changes the Administration is pursuing in financial services legislation calls for thorough, frequent, and transparent reporting by private companies on their financial condition, there appears to be a lack of transparency in the exposure to the taxpayer from the over $40 billion still outstanding in funds provided to GM. As a first step to disclosing necessary information, please answer the following:
  • What are the market value of the government's preferred shares and the 60.8% share (in other words, what could taxpayers expect to receive in return if Treasury divested all of its common equity in GM today)?
  • Do you have an updated estimate of the cost of the GM bailout to the taxpayer and if you do what is that cost after repayment of the $6.7 billion loan?
To put it in context, The Congressional Budget Office (CBO) reported in March 2010 that it expects the Federal Government to lose about $34 billion of the $82 billion disbursed to all TARP automotive programs, including investments in GM, Chrysler and GMAC. An April 23, 2010 letter you sent to Congressional leaders reports a total cost for auto industry support of $28 billion. Of the roughly $80 billion committed to auto financing program, GM is by far the most significant allocation, representing about half of the total commitments. Since the above estimates were made, the Administration and GM have gone out of their way to highlight the loan repayment and suggest that is has erased the government's exposure to GM. In light of these comments and press stories, it is important that the public get a revised estimate of the Federal Government's potential exposure and the current estimate of the cost to taxpayers.

It is critical the Administration be forthright and transparent that over $40 billion in taxpayer funds are at risk. We ask that Treasury provide an estimate of the market value of the preferred shares and the government's 60.8% stake in GM in comparison to what was spent to bail out GM, as well as any additional disclosures that would be expected of a public company to investors.

Thank you and we look forward to your response.

April 28, 2010

Spending is the Culprit

Opening Remarks delivered by Congressman Paul Ryan at the National Commission on Fiscal Responsibility and Reform:

Just about everything has been said but not everyone has said it. Let me try and say something a little different.

First to the two chairmen – Senator Simpson, Mr. Bowles – each of you has a great reputation of integrity, and I look forward to working with you in this effort.

Most of us were in Congress during the last economic crisis. That was a crisis where the Chairman of the Federal Reserve and the Treasury Secretary came rushing to the Hill in panic mode. We all got together and we governed in a panicked situation.

We have before us the most predictable economic crisis that we have ever had in this country. We all know that. We also are getting a good grasp of the size and the magnitude of this crisis. Sovereign debt crises are popping up all over the world, and we are kidding ourselves if we don’t think it could come to us next.

Here is one of the problems that we’re going to have to end up discussing: as we know, health care is the biggest part of this looming crisis. It doesn’t matter how you voted on this last bill, it’s law now.

We just took $529 billion of savings out of Medicare, not to go toward extending Medicare solvency, but to go towards a new entitlement. We just increased the size of Medicaid by a third. We now have a new health care entitlement. In entitlement speak we used to call it the “Big Three” – Medicare, Medicaid, Social Security. Now it’s the “Big Four”. That’s an issue we are going to have to talk about – what do we do about this new entitlement?

Also, just in this session of Congress, we have passed $1.8 trillion in new spending, coupled with $670 billion in new taxes. I would argue that our fiscal trajectory was bad and now it’s getting worse and that’s just from my own personal perspective.

I have put a number of ideas out there myself. I kind of think of myself as a canary in the mineshaft on entitlement reform. But if there is anything I’ve learned from my own experience, it’s that the American people are ready to be talked to like adults. They are ready to know the fiscal facts. If there is one thing we can accomplish with this effort, it is better public education about the nature of this problem and educating our colleagues in Congress on the nature of this problem.

I too, like [Congressman] Jeb [Hensarling of Texas] said, look at this with an open mind, not an empty mind. If you look at the math of all of this, spending is the culprit. Mathematically speaking, you literally cannot tax your way out of this problem. I don’t think we should go down that path of trying to tax our way out of this problem.

If you look at the Congressional Budget Office models of the future of our country, the economy shuts down mid-century. Their computers cannot think of any way out of this fiscal problem we have.

We know for a fact, it is irrefutable - we are giving the next generation an inferior standard of living. We have never done that before in this country. The legacy of this country has always been – you take on the challenges before you to make sure that your kids and grandkids have a better life. All of us agree on this legacy, but it’s going to take some heavy lifting to uphold it.

When you look at the spending problem, the sooner you act, the much better off you are going to be. Millions of our fellow citizens have already organized their lives around these programs. Acting very soon, you can assure that their lives will not be uprooted. They will not have the rug pulled out from underneath them. We can make prospective changes going forward so people have time to organize their lives around these reforms – running room so to speak. But if we keep kicking this can down the road and not confronting these massive spending challenges that kind of assurance to those who already organized their lives around these benefits, cannot be maintained.

We are in a situation where time is of the essence to deal with this. We have to spend our time on the spending side of the ledger because that is what is driving this. At the end of the day, the levels of personal and economic freedoms, standards of living, jobs, and international competitiveness have got to be the overarching concerns that drive the decisions we end up making.

April 27, 2010

Rhetoric and Reality


From a recent WSJ article:

103: The number of months it would take to sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years, at the current rate of sales.

.......As of March, banks had an inventory of about 1.1 million foreclosed homes, up 20% from a year earlier, according to estimates fromLPS Applied Analytics. Another 4.8 million mortgage holders were at least 60 days behind on their payments or in the foreclosure process, meaning their homes were well on their way to the inventory pile. That “shadow inventory” was up 30% from a year earlier.

Say It Aint So

Last week, the independent actuaries at the Department of Health and Human Services’ Centers for Medicare and Medicaid Services (CMS) released an analysis of the newly enacted Democrat health care overhaul.

Below is a summary of the report's key findings.
  • Health Care Costs Increase: “national health expenditures under the health reform act would increase by a total of $311 billion (0.9 percent) during calendar years 2010-2019.” [Page 4] The actuaries found the law bends the cost curve up by a greater degree than either the House or Senate-passed legislation, despite the Administration's claim that slowing national health spending was the "single most important" reason to overhaul the health system.

  • Over One-Half Trillion in Medicare Cuts: The Medicare actuaries found that the new health law cuts “$575 billion” [Page 4] from Medicare.
  • Seniors’ Access to Care Jeopardized: As a result of the cuts to Medicare, the actuaries found, “absent legislative intervention, [providers] might end their participation in the program (possibly jeopardizing access to care for beneficiaries).” [Page 10]
  • Workers & Seniors Can’t Keep the Health Plan They Have and Like: “We estimate that such actions would collectively reduce the number of people with employer-sponsored health coverage by about 14 million.” [Page 7] Furthermore, 2 million Americans who currently have employer-provided health coverage will be dumped into Medicaid. [Page 3] Additionally, the actuaries predict millions of seniors will lose their Medicare plan because massive cuts to the program will result in, “about 50 percent” of seniors no longer being in a plan. [Page 11].
  • Long Wait Lines Resulting From A Shortage of Doctors and Hospitals: “For now, we believe that consideration should be given to the potential consequences of a significant increase in demand for health care meeting a relatively fixed supply of health care providers and services.” In other words, Americans should be prepared for doctor and hospital shortages under the new law. [Page 20]
  • False Promise to Those With Pre-Existing Conditions: “By 2011 and 2012 the initial $5 billion in Federal funding for [high risk pools] would be exhausted, resulting in substantial premium increases to sustain the program.” [Page 16]
  • Massive & Unworkable Entitlement Expansion: “First, an estimated 18 million would gain primary Medicaid coverage as a result of the expansion.” [Page 3] In addition to burdening both Federal and state budgets, the actuaries caution this expansion will fail to provide meaningful access to health care. “Therefore, it is reasonable to expect that a significant portion of the increased demand for Medicaid would be difficult to meet, particularly over the first few years.” [Page 20]
  • Millions Will See Their Health Benefits Taxed for the First Time: “It should be noted, however, that an estimated 12 percent of insured workers in 2019 would be in employer plans with benefit values in excess of the thresholds (before changes to reduce benefits) and that this percentage would increase rapidly thereafter.” [Page 13]
  • Budget Gimmicks Revealed: President Obama’s actuaries found that the new government-run long-term care program that Democrats had touted as saving $72 billion dollars over the next ten years, will “face a significant risk of failure.” [Page 15]
  • New “Medicare Tax” Doesn’t Go To Medicare: “The Reconciliation Act amendments introduced a new 3.8-percent “unearned income Medicare contribution” on income from interest, dividends, annuities, and other non-earnings sources for individual taxpayers with incomes above $200,000 and couples filing joint returns with incomes above $250,000. Despite the title of this tax, this provision is unrelated to Medicare; in particular, the revenues generated by the tax on unearned income are not allocated to the Medicare trust funds.” [Page 9]

Whatever you are......

The story below from James Lileks reminds me of Abraham Lincoln's quote, "Whatever you are, be a good one."

At the grocery store on Saturday the clerk was bagging the groceries, and doing a damned fine job. I admit I make it easy: I load the belt by category and destination. Everyone does, don’t they? It’s part of planning ahead. If I arrange the items so it’s meat / vegetables, then bladders of liquids, then dry food, then domestic goods, everything’s in bags that can be ferried to their property destination without rooting through a bag that has bacon, razors, socks, and cereal. She stocked the bags well, and respected the genre classifications I’d set up.

“Nice framing,” I said. That’s the term for bracing a bag so it has walls, and everything fits together.

“Thank you,” she said. “They don’t teach us.”

“They don’t?

“No, they show us a video on how it’s supposed to be done, but they don’t train anyone. Everything I learned I learned from Byerly’s.”

That’s the high-end grocery store. They have one person to run the belt and another to bag. Half the baggers are retirees, half 20-somethings. I don’t mean a hellish vivisectioned conjoining of the two. They’re all good, and I don’t just mean they don’t put coffee cans on top of grapes. They frame well. That’s the skill of grocery-store bagging: the ability to look at the items on the belt and see the frame.

Quote of the Day

"Wisdom might plan, but virtue alone could execute." Samuel Johnson

April 26, 2010

Talking About a Revolution?

You really do wonder if people are going to sooner rather than later say enough's enough.

April 25, 2010

GM - Paid in Full?

Rick Moran in the American Thinker makes a very interesting point regarding GM's claim that they have "paid back" the government bailout it received.

Uncle Sam gave GM $49.5 billion last summer in aid to finance its bankruptcy. (If it hadn't, the company, which couldn't raise this kind of money from private lenders, would have been forced into liquidation, its assets sold for scrap.) So when Mr. Whitacre publishes a column with the headline, "The GM Bailout: Paid Back in Full," most ordinary mortals unfamiliar with bailout minutia would assume that he is alluding to the entire $49.5 billion. That, however, is far from the case.

Because a loan of such a huge amount would have been politically controversial, the Obama administration handed GM only $6.7 billion as a pure loan. (It asked for only a 7% interest rate--a very sweet deal considering that GM bonds at that time were trading below junk level.) The vast bulk of the bailout money was transferred to GM through the purchase of 60.8% equity stake in the company--arguably an even worse deal for taxpayers than the loan, given that the equity position requires them to bear the risk of the investment without any guaranteed return. (The Canadian government likewise gave GM $1.4 billion as a pure loan, and another $8.1 billion for an 11.7% equity stake. The U.S. and Canadian government together own 72.5% of the company.

But when Mr. Whitacre says GM has paid back the bailout money in full, he means not the entire $49.5 billion--the loan and the equity. In fact, he avoids all mention of that figure in his column. He means only the $6.7 billion loan amount.

April 23, 2010

The Fear of God

Financial guru James Grant has some great thoughts on what real financial reform should look like:

The trouble with Wall Street isn't that too many bankers get rich in the booms. The trouble, rather, is that too few get poor -- really, suitably poor -- in the busts. To the titans of finance go the upside. To we, the people, nowadays, goes the downside. How much better it would be if the bankers took the losses just as they do the profits.

Happily, there's a ready-made and time-tested solution. Let the senior financiers keep their salaries and bonuses, and let them do with their banks what they will. If, however, their bank fails, let the bankers themselves fail. Let the value of their houses, cars, yachts, paintings, etc. be assigned to the firm's creditors.

......."The fear of God," replied George Gilbert Williams, president of the Chemical Bank of New York around the turn of the 20th century, when asked the secret of his success. "Old Bullion," they called Chemical for its ability to pay out gold to its depositors even at the height of a financial panic. Safety was Chemical's stock in trade. Nowadays, safety is nobody's franchise except Washington's. Gradually and by degree, starting in the 1930s -- and then, in a great rush, in 2008 -- the government has nationalized it.

.......The substitution of collective responsibility for individual responsibility is the fatal story line of modern American finance. Bank shareholders used to bear the cost of failure, even as they enjoyed the fruits of success. If the bank in which shareholders invested went broke, a court-appointed receiver dunned them for money with which to compensate the depositors, among other creditors. This system was in place for 75 years, until the Federal Deposit Insurance Corp. pushed it aside in the early 1930s. One can imagine just how welcome was a receiver's demand for a check from a shareholder who by then ardently wished that he or she had never heard of the bank in which it was his or her misfortune to invest.

........Like one of those notorious exploding collateralized debt obligations, the American financial system is built as if to break down. The combination of socialized risk and privatized profit all but guarantees it. And when the inevitable happens? Congress and the regulators dream up yet more ways to try to outsmart the people who have made it their business in life not to be outsmarted. And so it is again in today's debate over financial reform. From the administration and from both sides of the congressional aisle come proposals to micromanage the business of lending, borrowing and market-making: new accounting rules (foolproof this time, they say), higher capital standards, more onerous taxes. If piling on new federal rules was the answer, we'd long ago have been in the promised land.

Quote of the Day

Life is tough, but it's tougher when you're stupid." John Wayne

The Problem with Capitalism and Socialism is.......

Every now and again, I read something that I really, really wish I had written.

This piece from Jonah Goldberg is one I really, really wish I had written:

Five years ago this week, my former boss William F. Buckley started a column thusly:

"Every ten years I quote the same adage from the late Austrian analyst Willi Schlamm, and I hope that ten years from now someone will remember to quote it in my memory. It goes, 'The trouble with socialism is socialism. The trouble with capitalism is capitalists.'"

......If by "capitalist" you mean someone who cares more about his own profit than yours; if you mean someone who cares more about providing for his family than providing for yours; if you mean someone who trusts that he is a better caretaker of his own interests and desires than a bureaucrat he's never met, often in a city he's never been to: then we are all capitalists. Because, by that standard, capitalism isn't some far-off theory about the allocation of capital; it is a commonsense description of what motivates pretty much all human beings everywhere.

And that was one of the reasons why the hard socialism of the Soviet Union failed, and it is why the soft socialism of Western Europe is so anemic. At the end of the day, it is entirely natural for humans to work the system--any system--for their own betterment, whatever kind of system that may be. That's why the black-market economy of the Soviet Union might have in fact been bigger than the official socialist economy. That is why devoted socialists worked the bureaucracy to get the best homes, get their kids into the best schools, and provide their families with the best food, clothes, and amenities they could. Just like people in capitalist countries.

The problem with socialism is socialism, because there are no socialists. Socialism is a system based upon an assumption about human nature that simply isn't true. I can design a perfect canine community in which dogs never chase squirrels or groom their nether regions in an indelicate manner. But the moment I take that idea from the drawing board to the real world, I will discover that I cannot get dogs to behave against their nature--at least not without inflicting a terrible amount of punishment. Likewise, it's easy to design a society that rewards each according to his need instead of his ability. The hard part is getting the crooked timber of humanity to yield to your vision.

And it's also why the problem with capitalism is capitalists. Some people will always abuse the system and take things too far. Some will do it out of the hubris of intellect. Some will do it out of the venality of greed.

I bring all of this up because many in Washington seem convinced that the solution to the problem with capitalists is always less capitalism. To be sure, a free-market society is in some sense a government program. The government must prosecute criminality, enforce contracts, and demand that the rules be observed. Few lovers of free markets are so laissez-faire as to want to strip the government of its role as referee.

But few should want the ref to suit up and play the game.

Washington's solution to Wall Street's problems is to get Washington deeply, deeply involved in Wall Street. So involved that the savvier capitalists will recognize--once again--that the safest bets are not to be found in the vicissitudes of a fickle marketplace, but in gaming the system run from Washington. The "reform" coming down the pike will put bureaucrats in charge of investors. If bureaucrats were better than investors, they wouldn't be bureaucrats. The government will decide which firms are worthy--"systemically important"--and which are not. Those that are will use their official "importance" to game the system. Instead of eradicating "too big to fail," we will systematize it.

April 22, 2010


Don’t ever forget that “minutia” is often not minutia at all.

The story below is from legendary basketball coach John Wooden, who coached UCLA to 10 national championships in a 12-year span:

“Over the years I have become convinced that every detail is important and that success usually accompanies attention to little details. It is this, in my judgment, that makes the difference between champion and near champion.

One of the little things I watched closely was a player’s socks. No basketball player is better than his feet. If they hurt, if his shoes don’t fit, or if he has blisters, he can’t plan the game. It is amazing how few players know how to put on a pair of socks properly. I didn’t want blisters, so each year I gave in minute detail a step-by-step demonstration as to precisely how I wanted them to put on their socks----every time. Believe it or not, there’s an art to doing it right, and it makes a big difference in the way a player’s feet stand the pounding of practice and the game. Wrinkles which cause blisters can be eliminated by just a little attention.

In the majority of cases, the only difference between the truly start performer and just a good player is merely the perfection of a few minor details or fundamentals. This doesn’t occurs by chance or by accident, but by determination, study, and industriousness.”

Financial Reform

Bankstock's Thomas Brown has some very interesting thoughts on the Financial Reform legislation being debated in Congress:

The bill the two sides are about to agree on is a vast, complex, pointless mess. And underline pointless: had it been in place in place in 2008, the bill wouldn’t have done a thing to prevent the financial system from melting down exactly as it did, nor will it do much contain the next (inevitable) financial crisis. Meanwhile, it will give the federal government vast new powers to seize private property, and will almost certainly raise the cost of credit for businesses and individuals. Oh, and it doesn’t get anywhere near correcting the problems that were at the core of the Panic of 2008. Did I mention I think the whole thing’s useless?

........Well, let’s start, first, with what should be the most basic test of any legislation: does it achieve the immediate goal it was designed to achieve? In this case, if you define “immediate goal” as “prevent a rerun of what happened after Lehman failed the next time a large institution blows up,” the answer is “no.” I’m not being hypothetical here. You can go back and walk through the process, and see what would have been happened.

Shall we? Lehman’s failure led to a general financial meltdown, you may recall, because a money market fund called the Reserve Fund owned a tiny piece of Lehman debt. When Lehman defaulted on that debt, Reserve broke the buck, which in turn caused panicked investors to pull out of money market funds en masse. As cash fled the funds, the commercial paper market (wherein MMFs are the main buyers) froze up. Voila! Suddenly a vast swath of corporate America, from General Electric on down, was on the verge of insolvency. It wasn’t until the FDIC stepped in and guaranteed money funds that catastrophe was averted.

OK, now to today. If we pretend the new bill were in place and a similar Lehman-style collapse happened, what would be different? Nothing. In their (entirely understandable) desire that the federal government not be seen as the final savior of every institution in the system, legislators are insisting that no institution is seen as “too big to fail.” So in the event of a troubled institution’s collapse, the feds will step in with “resolution authority” but will insist that equity and debt investors take their hits like grownups. Even, presumably, if the debt holder is a money market fund that will break the buck upon default, which in turn will cause panic among other money fund investors and then . . .

........In the meantime, this resolution authority that the Congress wants to confer on the federal government (which is supposed to take care of the TBTF problem, remember) is a disaster waiting to happen. Do you know how it’s supposed to work? In the event a financial institution runs into trouble, the federal government will have the power to unilaterally step in, take it over, and “wind it down”—that is, liquidate it. The firm’s shareholders will be wiped out; its debt will go into default. And the authority won’t apply just to chartered banks. The government will have the power to seize any institution it deems “systemically important.” Which is to say, it will be able to seize any company, anywhere.

You can see why this might be alarming. First off, and as noted, in the midst of a financial panic it’s not clear what good resolution authority will actually do. But it’s not hard to imagine the mischief—and not just during panics. Every financial company in existence will operate under the threat of immediate seizure. If you think the politicians can be relied wield the resolution authority only in high-minded ways, you don’t know much about politics. President Obama spent much of the last year jawboning the banks to make loans for which there was either no demand or no creditworthy borrowers. So the banks wisely resisted; a year later, most are well on the way towards repairing their balance sheets. But how would the banks have reacted, do you suppose, if the President could have backed up his jawboning with the threat of unilateral resolution? That would not have been a good thing. Beyond that, financial crisis or not, what would keep the government from using the implied threat of resolution authority to subtly get banks to steer credit to politically favored borrowers or industries? You think I’m being paranoid. Maybe. But I can’t think of any power the government has that’s as similarly sweeping as the resolution authority being considered in this reform bill. And I’m hard-pressed to doubt that the government will be tempted to abuse it.

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Cartoon of the Day

April 20, 2010

Unsustainability of Debt

This is a must read column from Barron's Thomas Donlan:

"To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above. These choices are difficult, and it always seems easier to put them off -- until the day they cannot be put off any more."

Truer words were never spoken, nor less acted upon by the speaker. Bernanke is the man who has done more to put off the day of reckoning than anyone else in the world, and he is providing liquidity by the supertanker load.

........Instead, Bernanke thinks the U.S. should charm the world into extending more credit, by offering what he called "a credible plan for meeting our long-run fiscal challenges."

A plan -- not action. As Robert M. Bleiberg, who thundered from this page from 1955 to 1991, said many times, "One needn't be a flim-flam man to be a central banker, but it helps."

........A free translation: If we can con the world into thinking we are serious about curbing our deficits and reducing our debts in the future, the world's investors and savers will lend us even more money at lower prices right now. Then we will have more economic growth and we will curb our deficits without pain.

It's humbug. Economic growth comes from savings and investment, not credit-card consumption.

A New Record?

We have a lot of credit-card consumption from a federal deficit that is officially forecast to hit $1.6 trillion this year.

The Council of Economic Advisers last week issued its quarterly report on a small piece of the spending binge, last year's economic-stimulus act, which the council proudly described as "the boldest countercyclical fiscal expansion in American history."

The council reported that $202 billion has been spent and $160 billion delivered as tax cuts, stimulating the economy by $362 billion since last April, and that between 2.2 million and 2.8 million jobs have been "saved or created" as a result. These must be the good-paying jobs so much beloved by politicians and union activists, since the spending works out to more than $72,000 per job per full year. Weekly earnings in the private sector averaged $763 in January 2010 -- an annual rate of $39,676.

........Where has the rest of the money gone? That is a question that a macroeconomic model cannot answer. We may hypothesize that it went for saving, for debt repayment or for spending that did not create or save jobs. For examples in the last category, extended unemployment compensation, subsidies for unemployed persons' health insurance, and first-time home-buyer tax credits probably did not create jobs, except very indirectly.

Or, thinking dangerously, perhaps the psychological effects of the spending program were negative, so that economic activity and job-creation were lower than they would have been in the absence of a stimulus.

These are interpretations that would be hazardous to the Obama administration's health, so we emphasize that they did not come from the Council of Economic Advisers. But we conclude that macroeconomics, at least when it is in the service of politicians, is no less a flim-flam game than central banking.

Andrew Jackson - Farewell Address

I am working with my wife on a project and came across the words below from Andrew Jackson's Farewell Address:

It is well known that there have always been those amongst us who wish to enlarge the powers of the. General Government, and experience would seem to indicate that there is a tendency on the part of this Government to overstep the boundaries marked out for it by the Constitution. Its legitimate authority is abundantly sufficient for all the purposes for which it was created, and its powers being expressly enumerated, there can be no justification for claiming anything beyond them. Every attempt to exercise power beyond these limits should be promptly and firmly opposed, for one evil example will lead to other measures still more mischievous; and if the principle of constructive powers or supposed advantages or temporary circumstances shall ever be permitted to justify the assumption of a power not given by the Constitution, the General Government will before long absorb all the powers of legislation, and you will have in effect but one consolidated government. From the extent of our country, its diversified interests, different pursuits, and different habits, it is too obvious for argument that a single consolidated government would be wholly inadequate to watch over and protect its interests; and every friend of our free institutions should be always prepared to maintain unimpaired and in full vigor the rights and sovereignty of the States and to confine the action of the General Government strictly to the sphere of its appropriate duties.

April 18, 2010

Dr. Johnson on the Great Herman Boerhaave

From Samuel Johnson's short biography on the great Dutch physician Herman Boerhaave:

But his knowledge, however uncommon, holds, in his character, but the second place; his virtue was yet much more uncommon than his learning. He was an admirable example of temperance, fortitude, humility, and devotion. His piety, and a religious sense of his dependance on God, was the basis of all his virtues, and the principle of his whole conduct. He was too sensible of his weakness to ascribe any thing to himself, or to conceive that he could subdue passion, or withstand temptation, by his own natural power; he attributed every good thought, and every laudable action, to the father of goodness. Being once asked by a friend, who had often admired his patience under great provocations, whether he knew what it was to be angry, and by what means he had so entirely suppressed that impetuous and ungovernable passion, he answered, with the utmost frankness and sincerity, that he was naturally quick of resentment, but that he had, by daily prayer and meditation, at length attained to this mastery over himself.

As soon as he arose in the morning, it was, throughout his whole life, his daily practice to retire for an hour to private prayer and meditation; this, he often told his friends, gave him spirit and vigour in the business of the day, and this he, therefore, commended, as the best rule of life; for nothing, he knew, could support the soul, in all distresses, but a confidence in the supreme being; nor can a steady and rational magnanimity flow from any other source than a consciousness of the divine favour.

He asserted, on all occasions, the divine authority and sacred efficacy of the holy scriptures; and maintained that they alone taught the way of salvation, and that they only could give peace of mind. The excellency of the christian religion was the frequent subject of his conversation. A strict obedience to the doctrine, and a diligent imitation of the example of our blessed saviour, he often declared to be the foundation of true tranquility. He recommended to his friends a careful observation of the precept of Moses, concerning the love of God and man. He worshipped God as he is in himself, without attempting to inquire into his nature. He desired only to think of God, what God knows of himself. There he stopped, lest, by indulging his own ideas, he should form a deity from his own imagination, and sin by falling down before him. To the will of God he paid an absolute submission, without endeavouring to discover the reason of his determinations; and this he accounted the first and most inviolable duty of a christian. When he heard of a criminal condemned to die, he used to think : Who can tell whether this man is not better than I? or, if I am better, it is not to be ascribed to myself, but to the goodness of God.

Soak 'Em

In 2006 (the latest data available), the 40% highest earning American Households paid 86% of Total Federal Tax Liabilities. The 60% lowest earning households paid just 14%. The 40% highest earners have never paid such a large share of total federal tax liabilities as far back as we found tax burden data (back to 1979). You can see that there has been a steady erosion in the bottom 60%'s contribution to total federal taxes. We don't show it in the chart below, but in case you're wondering, the picture is even worse for the top 10% of Americans. The top 10% of Americans paid 55.4% of total federal taxes, which was a higher share than at any time in the data period going back to 1979. In 1979 they paid 40.7% of total federal taxes, so the top 10% highest earners have taken on a substantially larger share of total taxes, ie. funding of the federal government, over time.

Deep Truth About Markets and Investing

Eddie Elfenbein has some great thoughts on the Deep Truth about the Markets and Investing:

The Federal Reserve isn’t nearly as powerful as is commonly believed.

There isn’t a person or group of people in charge of the market.

There’s no such thing as a “healthy correction.”

Good stocks can go down for no reason.

Bad stocks can go up for no reason.

A trend can last much longer than you thought possible.

Stocks don’t know you own them.

The market doesn’t care about politics.

The most important variable to the stock market, by far, is the direction of long-term interest rates.

Mega-mergers rarely work.

Investment bubbles aren’t due to the moral failings of the market participants.

Ignore anyone who tells you that the Federal Reserve is a private bank.

Commodities are almost always terrible investments.

The stock market hates inflation. The only thing it hates more is deflation. The best environment for stocks is a low stable inflation rate.

As an investment tool, P/E Ratios work much better for individual stocks than for the market as a whole.

The best three fundamental metrics are (in order) ROE, Debt Ratios and Cash Flow.

Wherever possible, seek out stocks with expanding margins.

Dividends are underrated by investors, especially companies that consistently raise them.

Portfolio diversity is overrated.

As a general rule, IPOs are a bad deal.

Boring but profitable always beats exciting and unprofitable.

CAPM and MPT are nonsense.

No one can consistently time the market. No one.

The Equity Risk Premium (over long-term debt) is probably much smaller than commonly believed.

The data showing a return premium for small-cap stocks is probably wrong.

The media never questions the bond market. Only stock investors are “greedy.”

Perma-bears are never held to account for being wrong so if you want to sound smart, be very bearish and very vague.

The market really does “climb a wall of worry.”

Follow unfollowed stocks.

The market is self-aware. Scary but true.

It’s far easier to rationalize selling than buying.

The market isn’t efficient—it can be beaten.

But it’s very, very, very, very hard.

Most technical analysis is complete garbage.

A high P/E Ratio is much better sign of a stock to sell than a low P/E Ratio is a sign to buy.

It’s pointless to measure the stock market relative to gold or in euros or pork bellies or whatever else people can come up with.

Ignore any chart that has seemingly similar lines trying to show how this market is “just like’ the one in 1831.

Except at very low levels, volatility is neutral.

Many gold bugs are quite simply fanatics.

Whatever the issue, your typical finance professor will blame the investing public and urge more self-denial as the solution. Bank on it.

Never base an investment decision of demographics.

The worst investor in the world is the guy holding on to a small loss waiting for the rally because “they don’t want to take the loss.” Again, the stock doesn’t know you own it.

Very, very few serious companies are traded on the pink sheets.

Never stress out about what a stock does after you sell it.

April 16, 2010

The Shoe Has Dropped?

Very interesting read on the current state of the commercial real estate market from PERE:

The shoe has dropped

It has been repeatedly said that commercial real estate will be the next shoe to drop in the US. But thanks to a lack of transactions and a wall of uninvested equity, speculation is mounting that it has already happened.

By Zoe Hughes

Anyone thinking they could be patient in waiting to take advantage of the distressed opportunity of a lifetime would have had a shock had they attended the Urban Land Institute’s spring conference in Boston this week.

Not only would they have learned those deals were largely not making it to market, as the industry had originally envisioned, but whenever transactions did emerge competition was intense.

Indeed, there is currently such a mismatch between the supply of property and the demand from equity investors targeting the US that one real estate economist predicted cap rates in the US had already reached their peak and were now starting to compress back to levels seen in 2005 and 2006 – and even back to the lows last seen in 2007.

Unlike the RTC crisis in the early 1990s, banks and financial institutions have been refusing to offload troubled estate mortgage and assets at fire sale prices. Instead they have focused on restructuring and reworking a loan, rather than foreclosing on it – leaving many property market shelves bare.

However, at the same time a wall of capital – both domestic and foreign – has emerged at the sidelines of the US property markets in search of opportunities at distressed prices. At ULI this wall of equity was estimated to be roughly $150 billion, including $45 billion sat in private equity real estate opportunity and value-added funds. With modest leverage, that figure rises to between $250 billion and $350 billion of firepower targeted at the US, and predominately its major cities.

As such any deals that do make it to market are inundated with bids, with many professionals now arguing pricing has become too “aggressive”. What has proved surprising – and shocking – for many of the 3,000 delegates gathered in Boston though is the speed of this value recovery. One national broker told a ULI panel Thursday that cap rates had declined by more than 100 basis points in the past six months alone – because of the amount of equity chasing deals. In the last 90 days in particular, the speed of cap rate compression had been “astounding” and “shocking”, two other real estate professionals added.

This week’s acquisition of 600 Lexington Avenue in New York by REIT SL Green from Hines was just one deal being closely watched by the industry amid speculation a price bubble is starting to grip the city. Hines had originally bought the property on behalf of its US Core Office Fund for $91.6 million or $329-a-square-foot in 2004. On Thursday, SL Green revealed it paid $193 million for the property – or roughly $636 per square foot – including the assumption of a $49.9 million interest-only loan.

Fears of a bubble though aren’t just restricted to core assets in New York or Washington DC, the US’ top two markets. ULI heard numerous reports of aggressive bidding for vacant properties in California, for non-performing loans and even land across the US.

The situation prompted some ULI delegates to wonder this week whether the boom was back. As one workout specialist retorted: “If commercial real estate is the next shoe to drop in the US, then it’s already dropped. People just didn’t hear it.”

April 15, 2010

We're from the Federal Government and We're Here to Help

From the April Congressional Oversight Panel report on the TARP Foreclosure Mitigation Program:

Treasury’s response continues to lag well behind the pace of the crisis. As of February 2010, only 168,708 homeowners have received final, five-year loan modifications – a small fraction of the 6 million borrowers who are presently 60+ days delinquent on their loans. For every borrower who avoided foreclosure through HAMP (Home Affordable Modification Program) last year, another 10 families lost their homes.

I don't know about you, but boy am I glad the Federal Government is taking over our health care industry.

April 13, 2010

Thomas Chalmers - Letter to a New Believer

I found this passage from a letter the great Scottish pastor Thomas Chalmers sent to a recently saved brother in Christ to be the most powerful thing I have read all week:

The law is for the direction of those who are able to keep it, but it serves another purpose. It instructs us, by its observed violations, in the melancholy but important truth, that all are guilty before God. It compels us to the remedy laid before us in the gospel, and is the "schoolmaster which brings us to Christ". When you feel the wretched deficiencies of your own heart, take in a full impression of its unworthiness, and do not seek tp protect yourself from the humiliating contemplation. The protection offered us in the gospel is protection against the terrors of the law, and not against the shame and the consciousness of having violated it. "Be not afraid, only believe", says the Saviour and the experience of every day carries home to my heart that the only applicable expedient for man in the actual state of our present being, is simply to take to Christ, to unite with him by faith, to approach God through that Mediator who is able to save to the uttermost, to perfect our union with the Saviour by doing Him the honour of trusting Him, or taking Him at his word, and to look for sanctification, for heavenly mindedness, for conformity to the will and image of Christ, for redemption not merely from the punishment of sin, but also from its power, for "progressive virtue and approving heaven" - to look for these, and for all other spiritual blessings, as the promised effects of that union. If you come to the tranquillity of such final conviction as this, is it possible, I ask, not to view the great agent in the process of reconciliation as your friend? and can the heart of the Christian refuse the energy of His impressive voice "Ye are my friends, if ye do whatsoever I command you"? Virtue is not exploded; it is hung upon a new principle (2 Cor. 14 15).