Michigan's Budget Woes?

For all of Michigan's budget woes spending less appears to not be an option:

2003 Total Budget: $38,546,223,200
2004 Total Budget: $39,236,530,900
2005 Total Budget: $40,224,217,400
2006 Total Budget: $41,672,547,100
2007 Total Budget: $42,791,804,000
2008 Total Budget: $43,827,383,200
2009 Total Budget: $44,500,000,000 (tentative)

The governor has claimed to have cut more services than any other governor of Michigan - that may be true but it is more akin to shuffling deck chairs on the Titanic

Voter Fraud (by the legislature)

You can't make this stuff up.

Home Buyer Tax Credit

Now that the new home buyer tax credit dissipation is winding down it is time to review the results. The claims are 355,000 homes were purchased that would not have been otherwise purchased. That puts the cost to you and I as the taxpayers at about $43,000 for each supposed house sold above expectations. That is a lot.

We probably sold lots of those 355,000 homes to twenty year old people with three jobs and no college plans to buy $155,000 that is immediately underwater at $183,000 after additional government loans for improvements. See more here.

The monthly payments on her debt amount to $1328. Her income is $2470, leaving her with just $285 a week to live on. She's paying 54% of her income to make the mortgage payments. She earns that income by holding down one full time and two part time jobs. Obviously, this woman has a strong work ethic. But it also means her income is precarious. With unemployment still rising, she obviously should be worried about losing one of her three jobs. A loss of one of them would likely leave her unable to make the debt payments.

Emphasis mine.

This loan is almost certain to fail - would you loan a hard working friend that kind of money with those risks? Guess who is holding the bag? The mirror is in the bathroom if you need to clear that up.

As bad as this is we now find the IRS is investigating about 100,000 loans for fraudulent filings for the first time buyers tax credit. It should be interesting to see how this will be clawed back since the FHA let buyers use the credit as the down payment on these homes. Does this mean the government is "nudging" lenders to perform foreclosure avoidance and the IRS to perform foreclosures? Time will tell but it looks bad for the tax payer either way.

Boycott TARP Banks

After all the outrageous behavior of the TARP banks Denninger is calling for a boycott of Bank of America, Citi, Wells Fargo/Wachovia, and JP Morgan/Chase. I am joining him in this call, actually already implicitly doing this. You can see Karl Denninger's rant at the Market Ticker.

I might add GMAC/Ally bank and Capitol One Finance. So look at the back of your credit cards and see who is the sponsoring bank. Move bank accounts to a local credit union. You'll probably be happier anyway.

Global Consensus

I have been thinking a lot about many of the alarmist endeavours that have consumed society and the press over the last several decades. Global warming feels like one of those situations. We hear much about scientific consensus and that concerns me. Oddly, I found the a comment on this article attached to an article on global warming by a commenter simply named "Mike" and have repeated a portion of it here:

Supporting or believing in [global warming] based on "consesus" is unscientific. Consesus told us that Newtonion physics was the final answer and for awile even Einstein was laughed at when he said it wasn't. Consesus told us that eugenics was sound science and the political advantages that it could provide didn't hurt in obtaining that consesus. Consesus told us that frontal lobotomies and recovered memory syndrome were sound science. Consensus and scientifically accepted methods told us that thalymide(and many other unsafe drugs) were safe. In short consensus isn't science. Peer review does not contest the result of a study based on it's findings. It reviews a study to determine if proper methods of measurement,data aquisition and analysis were used. When consensus is cited as a basis for acceptance it's particularly problematic when such consensus doesn't even exist.

Well put Mike.

Killing The Goose

John Mauldin writes another great letter this week. This weeks letter is a little depressing considering Mr. Mauldin is an optimist. Either way a great read. Sign up and read more here. Don't worry its free.

Pent Up Inventory Unleashed in 2010

I almost always enjoy reading Dr. Housing Bubble and his blog focusing on housing and particularly southern California Real Estate. Here is a quote from a recent article titled

"Shadow Inventory Case Study: Inventory in the Shadows Twice as Big as Normal Resale Inventory in Los Angeles and not on the MLS or for Public Viewing. Foreclosures and Distress Properties Clogging the System."

The pent up inventory is getting ready to unleash in 2010. The gigantic bet made by the bankers and Wall Street was that somehow by allowing banks to fudge numbers since the crisis started that housing would find its footing and the market would stabilize. Sweep the collapse under the bailout rug. This perceived grounding was then going to allow banks to unload these properties and avoid realizing institutional ending losses. Yet 21 months into this painful recession and trillions handed out to the banking sector, housing prices are not spiking. The tiny uptick in home prices is a mirage brought on by three major factors. First, the $8,000 tax credit lured additional home buyers into the market. Next banks have held back on the shadow inventory thus artificially lowering the supply of homes on the market. Finally, the U.S. Treasury and Federal Reserve have artificially kept mortgage rates low by buying up some $1.25 trillion in mortgage backed securities. All this and housing prices have barely stabilized in some regions while foreclosures are at record breaking heights.

Read the rest for some interesting investigative coverage.

OPEC was Trade Retaliation

China's reaction [Bloomberg] to 35% tariffs by the U.S. on its tires has it investigating dumping and subsidies provided to U.S. automakers and chicken producers. We fired the first shot by applying a clause on China's entry into the WTO in 2001 that had not been previously invoked. The clause was regarding protecting existing industries.

How can you begin trading with a trading partner and not expect an existing industry to be impacted?

Let us not forget where these types of protectionist policies may lead to. Today is the 40th birthday of OPEC [Wikipedia]. OPEC's founding was triggered by protectionist quotas by Eisenhower on Venezuelan and Persian Gulf crude.

Simultaneous Tax and Subsidy

So Obama and the Democrats will consider taxes on soda and sugary drinks. This is ironic because we already have the government doing so much wrong on sugar.

Currently we subsidize sugar growers to the tune of $1,200,000,000 ($1.2B) a year. I wonder if the beneficiaries of this subsidy even number in the thousands? We also have import quotas and tariffs on sugar which limit foreign supplies of sugar to U.S. consumers - reducing supply and raising prices.

It gets worse. We subsidize the growing of corn which, in turn, makes corn syrup a more attractive option to food producers. Wouldn't it be nice if we simplified all of this. Forget the tax, stop the corn and sugar subsidies and remove import quotas. Now isn't life simpler.

The Immortalized Peter Stark

Congressman Peter Stark:

The more debt we owe, the wealthier we are...

This helps explain some of the reason the federal deficit is growing so rapidly.

Watch the entire episode here:

Best Title of the Week

Reggie Middleton's BoomBustBlog.com had this article titled:

California is borrowing money to repay the money it is borrowing which was used to repay some IOUs

Entertaining Roddick Interview

Here is an interview with tennis star Roddick - refreshingly honest and open .

This Week on Mauldin

This week Mr Mauldin has a great piece of work describing some uncomfortable choices that need to be made by both consumers and policy makers. He rightly points out that we cannot borrow our way out of the current problems.

We ran up unfunded pension deficits at many local and state funds, to the tune of several trillion dollars and rising. We have a massive, tens of trillions of dollars, bill coming due for Social Security and Medicare, starting in the next 5-7 years, that makes the current crisis pale in comparison. We now seemingly want to add to this by passing even more spending programs that will only make the hole deeper.

This dovetails nicely with Washington's Blog article about our inability to inflate away debt without destroying the economy - here is one quote from the article:

Instead of taking steps to do this, the government is doing just the opposite. It is proposing to take bad debts onto the public-sector balance sheet, printing new Treasury bonds to give the banks – bonds whose interest charges will have to be paid by taxing labor and industry...

Now consider Keynes fascinating quote on my earlier post.

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat.

...

I really don't like where this is heading.


Read both
An Uncomfortable Choice by John Mauldin

Why we can't inflate away our debt at Washington's Blog

Keynes is Austrian

From Munger's blog a fascinating Keynes piece:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.
Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become 'profiteers,' who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

In the latter stages of the war all the belligerent governments practised, from necessity or incompetence, what a Bolshevist might have done from design. Even now, when the war is over, most of them continue out of weakness the same malpractices. But further, the governments of Europe, being many of them at this moment reckless in their methods as well as weak, seek to direct on to a class known as 'profiteers' the popular indignation against the more obvious consequences of their vicious methods. These 'profiteers' are, broadly speaking, the entrepreneur class of capitalists, that is to say, the active and constructive element in the whole capitalist society, who in a period of rapidly rising prices cannot but get rich quick whether they wish it or desire it or not. If prices are continually rising, every trader who has purchased for stock or owns property and plant inevitably makes profits. By directing hatred against this class, therefore, the European governments are carrying a step further the fatal process which the subtle mind of Lenin had consciously conceived. The profiteers are a consequence and not a cause of rising prices. By combining a popular hatred of the class of entrepreneurs with the blow already given to social security by the violent and arbitrary disturbance of contract and of the established equilibrium of wealth which is the inevitable result of inflation, these governments are fast rendering impossible a continuance of the social and economic order of the nineteenth century. But they have no plan for replacing it.

It is originally Keynes writing in 1919 in The Economic Consequences of the Peace.

We Are Turning Japanese

Fascinating chart from Paul Kedrosky (Infectious Greed) showing the Nikkei and the S&P from there peaks. Originally sources from Bloomberg.

Four Stocks 37% Daily Volume

Karl Denninger at The Market Ticker has some interesting data points regarding trading volume.

2.126 billion shares traded in four stocks, two of which that accounted for some 900 million of those shares are in companies that by any measure of accounting have absolutely zero common equity value whatsoever (and never will under any rational view of the future), yet NYSE Euronext continues to list them.

These four stocks represented thirty seven percent of all shares traded today.

Read more.

These Guys Get it (C4C)

There are many videos of cars being destroyed in the Cash 4 Clunkers program. The gentleman having to destroy a working automobile understand that C4C is fundamental wrong. Warning: foul language.

Destroy A Nice Mazda Truck [youtube]

Explaining the Green Shoots

I believe Calculated Risk found out what happened to the green shoots that were sprouting this spring - my emphasis.

The restaurant business is still contracting, and although not contracting as fast as late last year, the pace of contraction has picked up over the last two months.

Someone must have eaten the green shoots.

Oxhorn Subsidies

Money is fungible and income from one activity can be spent elsewhere while looking like it is unrelated. Stimulus money most certainly is being used for corporate subsidies regardless of how uninformed Ms. Oxhorn of the White House is about accounting, economics and unintended consequences. [Bloomberg]

Elizabeth Oxhorn, a White House spokeswoman, said she isn’t aware of any case in which states are directly using stimulus dollars to lure businesses. Any applications that would use funds in such a way would be rejected, she said. Competition among states “ensures that the taxpayers see the very best use of their money,” she added.
Technically she is correct, no stimulus money is being "directly" used but this is disingenuous Newspeak.

My complaint here is the stimulus packages (there were three so far) are sold as money going to mostly idealistic job-saving or economy-saving causes. What is needed is a deeper evaluation of the unintended consequences - by the public and policy makers. These are always present in any policy and the effects are usually minimized or outright ignored. The most recent stimulus was exaggerated as being imperative to avoid dire consequences. Well, we got the dire consequences and then some compared to stress test adverse scenario. Additionally, the economy is starting to turn the corner and yet the stimulus has not even spent $100B of $787B in the legislation. As many predicted, the stimulus would be delivered slowly, with poor feedback and ultimately arrive after recovery has started.

Health and Percent of GDP

The actual consumption of food at home has gone from 20.3% of income in 1929 to a mere 5.6% today. Factoring in eating out it has gone from 23.4% in 1929 to a staggering 9.6% today. Just reviewing the numbers, and ignoring what we know, it appears Americans are eating much less than they did in 1920's. This is certainly not the case. You could even conclude from the numbers that maybe people don't value food as much and therefore are spending less. Reality is we both eat better and spend less which is great.

Now take medical care, just because we are spending more of GDP then in the past doesn't mean all is bad. We need to look at the value as well. Despite the fact we, as Americans, have some lifestyle improvements to make, get a very strong benefit from what we spend. The reason we know this is because if it didn't work we would not demand more and better health care. Lower demand means lower prices - basic economics.

This evaluation of how much of our GDP goes toward health care is misguided. This is not the metric that should be evaluated. The other thing is everyone loves to do straight line (simplistic) analysis of health care cost growth and how in year X it will consume 50% of GDP. Unlikely.

The focus should be on improving the incentive system in the medical care market. To provide insurance and medical savings plans (currently everyone wants a medical savings plan it seems but with the cost of insurance). To reward providers that have higher output per dollar of input - to establish feedback loops through a cost system. Government mandates will fail, in the sense of even less effectiveness as compared to market feedback and distributed knowledge. Providers should publish prices and keep prices consistent regardless of the payer. We don't need to mot towards nationalization of health care to improve it.

Is Massachusetts the Way To Go?

Massachusetts mandated (under a Republican governor) health insurance basically for everyone. This was done just a few years ago and is considered a model for the current reform plans in Congress. It would be a wise idea to wait and see what happens in the next couple of years to the state plan - if nothing else we can improve the proposals.

As I expected, the Massachusetts plan is not so great is being revamped. It was not working so well and did little to control costs. The current plan appears to actually do little to control costs and will greatly exceed (50% or more) over the first 10 years even the pessimistic projections of the Congressional Budget Office that Schumer and others are scoffing at.

A good post to read a bit more at EconLog

DRM's Ugly Head

As a Kindle owner I am very, very disappointed to find that Amazon can and will change purchased content on your Kindle. They have gone and removed (with an account credit) already purchased books from the purchaser's Kindle. Ironically, it was Orwell's 1984 and Animal Farm.

Read the details. http://www.tgdaily.com/content/view/43296/98/

-fishsticks

Glenn Beck Gets it Right

I am not a Glenn Beck fan but he does a nice job of explaining one aspect of "crony capitalism" that we have going on in Washington and on Wall Street. For anyone thinking this is capitalism - this is not capitalism. This is a symptom of government largess. Companies cozy up to the lawmakers to ensure they stand to benefit from this largess.

We Are All Auto Experts

I know my prescription for the ailing American auto industry is correct. So thought Daimler, followed by Cerberus Capital Management and currently Fiat. Fortunately, I don't run, nor will I run an auto maker. Daimler and Cerberus used there own money - I am good with that.

Unfortunately Congress gets to play with other people's money - your money. It seems they think they know which dealers are economically viable better than management or the accountants. Not it looks like they are going to try a new endeavour - running an auto maker.

More than 3,100 General Motors and Chrysler dealers could be in line for a new lease on life as a House bill to overturn dealer closing passed a House committee vote last night. The bill, part of larger spending bill, will move to the House floor next Wednesday.

Read more here.

Anyone who believed that a government run auto maker was going to be free to pursue economic rather than political choices was starkly wrong. These are the unintended consequences of bailouts. I expect that before the end of the next recession GM or Chrysler(Fiat) will be back to losing money on a massive scale. Again the taxpayer will be expected to be riding to the rescue (again). Can we get off this merry-go-round?

Health Care Chaos

Nationalizing more of our health care is a very, very bad idea. The simpler solution to the (involuntarily) uninsured is to provide vouchers or cover them under Medicaid. We didn't need to nationalize grocery stores to provide food aid to the poor We did it in the form of food stamps. Creating a Byzantine, inefficient bureaucracy is overkill.

For those that think "public choice" health care is a good idea they should sign up. However, where profit is falsely believed to be "excess" this is their chance to enjoy the benefits of government. If nationalizing becomes a reality it should be funded just like private insurance - from the proceeds of the program and fees collected through payroll deduction (only from the covered). NO GENERAL FUND money should supplement the program. This is where it will be quickly discovered profit is neither guaranteed nor excess in a competitive market place. I concede that our current system is already very convoluted. A system where the employer decides who pays for coverage, the patient choose the provider, the insurance company decides how much to pay on the claim. The normal market incentive system is broken.

Regulation, wisely done, is a necessity for both a private or public option and should be unaffected by such legislation.

The Fearsome Barrel Monster

This is definitely the most creative use of construction barrels I have seen. Hopefully the charges against the North Carolina State University student get dropped.

Arm Twisting for Chrysler

The government wants to change the outcome of well established bankruptcy procedures. This is not about giving away Chrysler to another entity, foreign or otherwise. This is about property rights and may well impact everyone in the country.

Bondholders that are senior (vs. senior subordinated, unsecured, etc.) are entitled to being made whole before any junior creditor. This is screwing investors who accepted lower interest because they would be the first reimbursed even in bankruptcy. This was not necessarily a poor investment based on existing rules. By changing the rules the government is telling all bondholder that senior is the same as unsecured. Imagine the implications for future bond sales by other companies and the effect this will have on borrowing costs. Investors may tend to stay away from any corporate bonds or bond funds, particularly those holding industrial, unionized companies - at least until this is resolved.

The retort to the suit by the government is “this is better for the economy” must not stand otherwise any effective property right you may believe you have is moot. Tthe same argument about your how much you make, where you work, how much free time you have, where you live, etc.

This is not about protecting the common man, this is about protecting every man. It does not matter that the small investors are fighting back, that is their right. Be happy someone is fighting back. J.P. Morgan and other TARP (bailout) recipients hold a lot of automotive bonds, but don’t look for them to join the fight as a bond holder.

More Regulation?

My concern is we have not enforced our existing regulations and we allowed lobbyists for banks to convince Congress to pass favorable laws.  A Federal regulator have even allowed blatantly illegal activities regarding backdating capital on the balance sheet, from a bank regulator that did the same thing in the S&L crisis.  See the Wall Street Journal for details.

Congress and the President want even more regulation.  That means more regulators.  That means more duds like the video below ensuring(???) we don't get burned as taxpayers.  The Federal Reserve has committed over $9.7 TRILLION dollars that the taxpayers ultimately backstop.  That is over $30,000 liability on every single person in this country.  More regulators is very unlikely to help.  How about better regulators?  Lots of Wall Street people are without jobs and they know how business is done.

Watch the video and you decide if more regulators will help.  By the way - stuff like this is quite common for our regulators for those who don't regularly see "how the sausage is made."

 

Sources:

Mises.org, The Fox Watching the Henhouse,  http://blog.mises.org/archives/010086.asp

Wall Street Journal, Regulators Let IndyMac Backdate Infusion, http://online.wsj.com/article/SB122998621544328009.html

Nanny Knows Best

I found an interesting blog called "Nanny Knows Best" and it highlights Britain's path towards a pervasive nanny state. Below is an excerpt from a recent post expounding on recent "expenses" by Members of Parliment:

Listening to our "walking dead" Prime Minister the other day, prattling on about how "the system" (wrt MPs' expenses) was at fault for the claims for floating duck islands, fake mortgages, moats etc I was struck by how what the PM said exemplifies the very heart of the problem of the Nanny state.

The PM ignored the fundamental issue, it is not the system that is at fault but the people. It was not compulsory for our MPs to claim for duck islands and moats, they did so voluntarily and with gusto!

The PM and these greedy MPs are using the "procedures" argument as a defence, in exactly the same manner that a doctor, social worker, police officer, teacher, FSA CEO or council officer uses "rules and procedures" to justify what they do and to justify their mistakes.

How many times have we heard the phrase "we followed the procedures"?

This should be an interesting blog to follow on occasion, mostly since I don't in Britain. Unfortunately things happening across the pond also wind up here in the USA. Let us hope not.

Stress Canary

Stolen from JCG3

I have a new definition… I was surprised when wikipedia and even the urban dictionary didn’t have a definition for the term “stress canary”.

Stress Canary - noun

1. the person on a team or project that feels the effects of stress well before anyone else
2. a modern version of a canary in a coal mine, someone who reacts to stress as an early warning signal

Things That Shouldn't Happen

Perusing the news I came across this gem. This article, about a girl poking fun at school staff on MySpace, is certainly scary:

Less than a minute into the hearing the gavel came down. "Adjudicated delinquent!" the judge proclaimed, and sentenced her to three months in a juvenile detention centre. Hillary, who hadn't even presented her side of the story, was handcuffed and led away.

The state has the legal authority to enforce its rules forcefully through violence and incarceration. This is a power that no private corporation or individual can legally do and must be monitored vigorously.

Judge Ciavarella plead guilty to the charges of bribery but this went on for seven years.

Last month the judge involved, Mark Ciavarella, and the presiding judge of the juvenile court, Michael Conahan, pleaded guilty to having accepted $2.6m (£1.8m) from the co-owner and builder of a private detention centre where children aged from 10 to 17 were locked up.The cases of up to 2,000 children put into custody by Ciavarella over the past seven years...

This dovetails in the risks the proposed government spending bring. The stakes are high for people to get there piece of the action. We have to count on our government officials to dole out unimaginable sums of money fairly and without favoritism or worse, outright bribery.

Who is going to regulate the regulators?

Today in Bloomberg I saw what was a ridiculous statement from the Obama Administration regarding the plight of the auto industry.

White House Chief of Staff Rahm Emanuel said GM’s plight of is “a wakeup call to America” that signals the need to increase energy independence and overhaul the nation’s health care system.

Yes, that is it - he recognized that a recessionary economy simply needs energy independence and and health care. The economic team can go home we have "The Brilliance of Rahm"®

More disappointing comments to go with some seriously disappointing actions by the new administration.

Paradox of Spending

The King Report has a great analogy of Keynes' Paradox of Thrift:

“The Paradox of Thrift (or saving) is a reductio ad absurdum by John Maynard Keynes that avers that if everyone saves, aggregate demand will decline, and this will imperil the economy. We’d like to contribute the ‘Paradox of Spending’ to Econ 101. This maxim holds that if everyone spends, there are no savings; debt surges and the implosion of that debt collapses an economy.”

Stimulus for the Employed

Considering the richest counties 5 of the countries 10 wealthiest counties are around Washington, D.C., stimulus for this area should not be needed. And after the stimulus passes the wealth in these counties is sure to improve, regardless of "efficiency" and intent of the stimulus.

1	Loudoun County, Virginia	$107,207
2	Fairfax County, Virginia	$105,241
3	Howard County, Maryland	$101,672
4	Somerset County, New Jersey	$97,658
5	Morris County, New Jersey	$94,684
6	Douglas County, Colorado	$92,824
7	Montgomery County, Maryland	$91,835
8	Nassau County, New York	$89,782
9	Prince William County, Virginia	$87,243
10	Santa Clara County, California	$84,360

For a refresher on the horrible rate of unemployment for government and health and education workers in the Wall Street Journal by Allen Reynolds

Most of the spending is unlikely to be timely or temporary. Strangely, most of it is targeted toward sectors of the economy where unemployment is the lowest.

The December unemployment rate was only 2.3% for government workers and 3.8% in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively. Yet 39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education...

Next, look at the supposed multiplier effect of government spending. The consensus seems to be around 1.57 - which, taken simplistically, results in $1.57 spent for every $1 of stimulus. Based on this we should borrow say $2T or $3T until this supposed multiplier gets just above 1. I say this in jest because the multiplier is not 1.57 and we will not grow our economy because of the stimulus. The government can always create jobs, but what it can't create is real wealth or improved living standard in the aggregate. North Korea is an example of government created wealth.

Finally, what are we going to do for an encore in two years when the money has been spent. Stimulate ourselves another $900,000,000,000? This is simply a massive shift of wealth from the prudent to the less prudent and a substantial growth in the power and reach of government. We should be reducing the cost of government not increasing it. We cannot stimulate our way out of credit contraction - the system needs to cleanse itself.

The Future Drag

As noted in today's Wall Street Journal:

The federal government's budget deficit will widen to $1.186 trillion for the current fiscal year, an unprecedented number that will likely only get bigger after Obama's economic package.

Since debt is a "pull forward" of future consumption and investment it means a drag on future economic growth. This is important because the substantial "economic stimulus" is going to have hazardous long term implications for our economy. The effect of debt is particularly gruesome since interest paid is an exponential function.

This adds about $8500 per taxpayer in new obligations. This number is arrived at by the fact there are about 138 million people are in the labor force. It gets a lot uglier when you consider the top 50% of taxpayers pay approximately 97% of all income taxes collected. The fact half the labor force pays less than 3% of the income tax simply doubles the obligation on the "real" taxpayers. The disappointing thing is that the incoming Obama administration is warning of trillion dollar deficits for years to come. Extraordinary borrowing to fix our current problem, which was excessive borrowing, is not a path to affluence for the U.S. economy.

No good will come from this.

Taxpayer Losses are GMAC's Gain

The GMAC bailout really is bothering me. Under TARP the government loaned GMAC $5,000,000,000 which, ironically, also allowed it to qualify as a bank. In lending, the Treasury received 8% dividend paying preferred shares. GMAC immediately began loaning out the money to consumers. On the surface this sounds good but this was a horrible deal - for the taxpayer. This isn't even a normal government policy that is not well thought out. It is downright wealth transfer. A sneaky end-run to subsidize the "American" auto industry.

I want to explain in simple terms what the government did. Say you borrow $100 from your mom and then loan a $1 to each of your 95 friends for 5 years, keeping $5 for yourself since it will take time to track who you loaned the money to. Great deal until you have to pay your 8% interest to mom since those were the terms on her preferred shares. And that 8% comes due every year. Your friends on the other hand got 5 year, 0% loans. And don't forget to factor in the friends who will never pay you back - say 3% - very modest considering you lowered your standards substantially almost ensuring your loan loss will be much higher than 3%.

Based on the above business model you would need to make at least 16% (5% yourself, 3% loss, 8% interest due) on those loans to break even. Not only is that not likely, that is not mathematically possible. So this means the government loaned an organization money that is guaranteed to produce a loss on the loans given. A loss exceeding $800,000,000 the first year if your origination costs are 5%. Even if GMAC paid itself nothing it still loses $550,000,000 in the first year alone.

It Gets Worse
Well, once GMAC loans out there initial $5,000,000,000 they are out of money. Unless, since they are now a bank, they can package those loans up and sell them. Guess who is buying consumer debt at low rates? It is not private investors, so that leaves the Federal Researve and the U.S. Treasury. GMAC will use the bundled loans to give as collateral to the Fed/Treasury who will value them at face value and allow another round of auto loan securitization. Once in the hands of the Treasury (taxpayers) any losses fall to them not GMAC, the loan originator. That would be you and I. This is just an ugly misuse of taxpayer money to ultimately subsidize GM.

Please consider joining the "DO NOT BUY AMERICAN" (GM at least) crowd. I can't imagine buying a car with 36 month warranty from a company with a 3 month lifeline anyhow. I might recommend Ford or one of the many other auto manufacturers. Many of which are build in America.