The Case Against Bailing Out Granny

People on Social Security should not receive $250 checks from the government. They are not getting a cost of living adjustment (COLA) this year and for good reason: the cost of living has decreased. Deflation has set in. That means that their groceries, gas, and other things cost less this year. It is basically a handout to give them a raise. There are many people who are employed that did not get raises this year, why should we be giving what amounts to a bonus to someone on government pension?

I'm all for Social Security, but don't see the need to throw a $250 check at people who are not in a worse position than they were last year. This money would be better directed at people who are unemployed.

Clunker redux

An interesting take on cash for clunkers. I agree with the basic premise that it is not possible to generate value by destroying a working asset.

However in this case, a car may have been worth more as scrap that on the road, so that may not be true. Still, I fear that this was a case of the neither the auto manufacturers, dealers, or even the public getting bailed out.

Clove Cigarettes will be illegal very soon

http://www.msnbc.msn.com/id/31233307/

While this article does not specifically call this out, kreteks, or clove cigarettes will soon be illegal. As will any flavored cigarette. Not sure how this would do any good for public health, but is interesting. Perhaps the main reason is that clove cigarettes come from Indonesia, so this would be a form of protectionism.

Here is more information on the upcoming trade dispute.

Also in the ban are any flavors other than "standard." So no more cherry-vanilla cigars.

Stimulus signed, Recovery site up

The American Recovery and Reinvestment Act of 2008, "the stimulus" has been signed into law by President Obama. This act was not nearly big enough. We needed at least $1.5 trillion, we got about $800 billion. It is still better than nothing.

A new website, offering the purporting to offer the public and unprecedented amount of transparency to track where the money flows, has been launched. www.recovery.gov

$15,000 housing tax credit dead

The $15,000 house buyer tax credit is going to be wiped out of the reconciled bill between the house and the senate.  It will be replaced with a $7,500 credit, which is still better than the $7,500 15 year interest free loan that is currently available.

My biggest beef?  This is not a true stimulus, because it will likely be retroactive, applying to those who purchased houses as far back as January 1.  If the goal is just to stimulate housing sales, it would be better to make it for the future only.  However, this credit may be used to spend on a house, at stores like Home Depot, which would then make it more of a stimulus.  But who knows what the buyers will do with it?

Krugman Confused on Housing Credit

In today's op-ed, Paul Krugman delves into the compromises of the stimulus package. While there are many examples of bloat, pork, and garbage in the stimulus bill, he takes aim at one thing he shouldn't: the $15,000 housing tax credit. From reading his piece, I am almost certain that he understands the credit less than your average blogger.

He makes a good point that funds cut from state governments is a problem. State governments are badly in need of cash and they are generally more effective than the fed at getting money into peoples hands. Those are all valid criticisms.

This is not:

On the other hand, the centrists were apparently just fine with one of the worst provisions in the Senate bill, a tax credit for home buyers. Dean Baker of the Center for Economic Policy Research calls this the “flip your house to your brother” provision: it will cost a lot of money while doing nothing to help the economy.

A little background on my perspective. I am not a homeowner; I have rented a 1 bedroom apartment for the last 5 years since I graduated from college. I live in Metro DC and have not been in a position to buy a house until now, mostly because of the bubble prices that were quite atrocious here. So yes, I have something to gain from this bill, but that doesn't affect my opinion of it.

Those who bought houses from 2003-2006 are likely very deeply underwater now. We are currently at the 2002 level of prices. Now, a lot of this blame rests with the "ownership" society created by Bush & Co, who believed that giving people loans they wouldn't be able to pay in 5 years would at least allow them to temporarily become members of that society.

But we need to focus on the present situation: There are tens of millions of families who are upside down on their houses. The only way for them to have the chance at downgrading to another house or maybe even relocating to another, more affordable market, is for them to sell their current properties. Some people just vacate their houses, destroying their credit rating and any chance of future ownership. Some were not as foolish and actually bought houses they could afford; but they still cannot sell at today's prices.

An example would be someone who bought a house in 2003 for $275,000. At the peak, it may well have hit $500,000. Now it is closer to $200,000. They have it listed for $250,000, which is what they owe. But the buyers (especially those who don't own a house yet) aren't willing to pay $250,000, because all they see are the prices going down down down. Why immediately have negative equity in a house? The $15,000 at least provides a bridge, it gives these first time buyers a little bit more so that they can get the house they want at a price the other side can swallow.

It also gives people who buy foreclosed properties the capital to improve them. I've toured many of these properties and some are a complete wreck. $15,000 would at least make them livable. This would take some of these "toxic assets" off the books of the bank, both improving our nation's financial picture and also giving people the opportunity to own.

Krugman fails to understand that. He is obsessed with a "house flipping" theory, in which you would only buy the house so that you could sell it for a quick profit, using the $15,000 as your start-up capital. This is unlikely for two reasons.
1. The tax credit would only be for a primary residence, so no second "flip" home.
2. Buyers would have to own the property for at least 2 years, or risk repaying the credit.

These two provisions alone should prevent most flip activity.

Lastly, this is an amendment that helps to address the core issue of the meltdown: the housing bust. It is also bipartisan, and passed a voice vote. Other than Krugman, I can find almost no opposition.

And not to belabor the Nobel Laureate anymore but this is the second time I've seen him confused and woefully wrong on his facts. The first was when he discussed Germany's failure to pass a bailout about a week after they already had.

The Biggest Ponzi Scheme

Bernard Madoff admitted yesterday to running a $50B ponzi scheme for a very long time. Basically, what he would do is take money from you or your organization and pay out some money each year, so-called returns on the investment. Anyone who is even remotely intelligent should have noticed something, as his returns were about equal and increased by an equal amount each year. He never had a loss in 10 years.

It seems he made most of his money off his own people, the Jews. He cultivated relationships with Palm Beach and Long Island society and used his contacts at Yeshiva university to get to the money. Several Jewish charities are now going out of business because they had entrusted him with their endowments, which are now gone.

Overall a very strange case, but it brings us back to the maxims:

• If it sounds too good to be true, it probably is.
• Don't put all your eggs in one basket.

The Free Market Responds

Ayn Rand fans are speaking out against the bailouts and the current regulatory climate. They are also blaming Ayn Rand's friend, Alan Greenspan, for the mess. I concur, at least with the Greenspan part. We'll see how the increased spending turns out. For now, I'm siding with Krugman.

Negative Interest Rates

Wow.

Depression Economics

In today's NY Times, Paul Krugman argues that while we are not yet in a depression, we are in a time when "depression economics" should be followed.  

In other words: forget the deficit, do not spend cautiously, bail out everyone and everything.  Increase government spending like FDR did.  

While I think that the government, per Greenspan's policies, are the ones that got us into this mess, I am now thinking that it may take some more government action to hasten the resolution of this mess.  While I am definitely not a fan of out of control spending, we must take everything into context.  George W. Bush, fiscal conservative (ha!) has added trillions of dollars to our national debt.  Right now, we are in a world in which every country's economy is in shambles.  I'm not convinced that the free market alone will work for the US when the EU, China, and others are getting huge government help.  What's another $600B anyway; at this point it's a drop in the bucket.

Should we let GM fail?

General Motors is now teetering on the edge of bankruptcy. It currently has about $16B in available cash but its burn rate is close to $2B per month. When you add to this the fact that the majority of Americans will not buy a car that is made by a struggling company due to potential warranty and service issues, you create a negative feedback loop that will likely bring GM down.

This is nothing new. I wrote about GM's problems over three years ago. All auto companies, including the venerable Toyota, are hurting now. But American companies are even worse off. Why? Because of the union contracts they've had for the past half century, including the socialist JOBS BANK, which pays workers to sit in a room and not work. GM complacency during boom times gave the union these types of benefits that are practically unheard of in any industry.

It is not so simple to just allow GM to fail. If GM goes under, parts suppliers will probably have to close as well, which has the potential to hurt the other automakers. Furthermore, close to 10% of US jobs are in someway connected to the auto industry, when you include dealership personnel, parts manufacturers, and the entire dealership industry.

What they want is a couple dozen billion dollars to continue operating, but I'm not sure that would do any good. I think that a bankruptcy may be their best chance at survival, as that would allow them to renegotiate a lot of their contracts, likely including their UAW contracts.

I don't have any quick term solutions to propose and neither does our current president. Our next president favors a bailout, since you don't want to start your term presiding over a meltdown just as bad as the financial crisis.

Bailout = McCain Finished?

The bailout fiasco is bad, really bad.  I'm not of the opinion that we need it yet, but the market was priced to expect the bailout so now the Dow has dropped 777 points.  I've lost several thousand recently.  Oh well, I have time to save.

I'm not going to get into economics tonight.  

My simple analysis is this: the failure of this bailout to pass just might sink John McCain for good.

Strike 1: McCain "suspended" his campaign to go to Washington and help build bipartisan support for the bailout bill.  He did not do much helping (by all accounts, he made a couple phone calls).  The bailout failed, mostly due to republicans.  This leads me to believe that McCain's own party does not respect him, particularly the Ron Paul Republicans who voted against it.

Strike 2: McCain said he was only participating in the debate because passage of the bailout bill was imminent.   Passage was not imminent.

Strike 3: Monday morning McCain claimed credit for the bill...  It didn't pass.

Obama didn't come up looking much better since he has backed the bailout bill (with strong reservations about its current form).  However, he did not pull stunts such as "suspending" his campaign or swinging wildly as McCain is doing today.  

Add to that a tie, at best, during the debate that was supposed to be John McCain's strength and you may very well be witnessing a major meltdown.

Falling bridges

At least 25% of bridges in the US need to be upgraded, at a cost of $140 billion.  This is about the same amount of a budget surplus we had under Clinton.  Meanwhile, that surplus has turned into a near $500 billion deficit for next year.  McCain would further increase that deficit through his spending on the Iraq War and the Republicans inability to be fiscal conservatives (that is now the job of the democrats).  If you are worried about your taxes going up, it is George Bush's Third Term (McCain) that you should fear.  

Oil prices down 15%

Oil prices have dropped by over 15% in the past 2 weeks.  While this is good for the stock market (my 401k is up by thousands in the past couple days), we can't ignore the fact that oil is still 4 times the price it was just a few years ago.  

Gas my be under $4 now, but its not time to buy a new pickup truck.  

McCain: Worse than Bush?

Hopefully we will never know the answer to the title of this post, but in order to inform the undecided, we need to visit this issue.  Would a McCain presidency be worse than Bush?  

When George W. Bush was first elected president in 2000, we were at the peak of the internet boom.  The business cycles has since been on a downward spin, most likely because we have not had a positive technological shock since the dot.com boom of the late 90's.  Whether we will have another such shock in the next 8 years is anyone's guess, but it is likely as these cycles run over 15-20 years.  

No matter if Bush or Gore was elected president, we would likely have faced a minor recession sometime over the past 8 years.  What would not have been predicted, however, is the massive cost of the Iraq War, which has been a major factor in the spike in oil prices, the fall of the dollar, and the loss of our rights to privacy, jury, and other freedoms.  

How would John McCain or Barack Obama confront such issues?

When it comes to the Iraq War, currently McCain is more gung-ho about it than even George Bush.  While the White House has recently flirted with the idea of setting a vague timetable for withdrawal, McCain remains steadfast that we should maintain permanent bases in Iraq, against the wishes of the Iraqis and more than 50% of Americans.  McCain's wishes would likely lead to at least a $1,000,000,000 level of spending over his presidency, from this issue alone.  

When it comes to oil prices, McCain favors "offshore drilling" and not much else.  Offshore drilling was already allowed, oil companies did not choose to partake in it.  All Bush just did was open up some more areas.  That point is moot, since we do not have enough refineries to keep up with this, so even if we did strike oil (this would take 5-10 years), we would have to have it made into gasoline by another country and then re-import it.  Even conservative oil-man T Boone Pickens does not see oil as the future.  Instead, he proposes we use a combination of wind power and natural gas.  I also think that geothermal power, nuclear power, and solar power have to be added to the first two to be our new backbone of electricity, which could power a new generation of vehicles.  McCain talks about alternative energies, but seems to be continuing Bush's legacy of paying lip service to alternatives while just drilling for more oil to further fuck up our planet.

McCain worse than Bush?  Maybe, but hopefully we will never know the answer.

Upcoming Primary: WV

Hillary Clinton likes to tout her advantage among "hard-working" Americans.  I'm not quite sure what hard-working means, but she's said many times that the people of West Virginia fall into this group.

I think we could agree that people who work harder than average would be more likely to produce more goods and services.  To wit, we can look at the GDP of West Virginia in comparison to the rest of the United States.  I looked up the GDP per capita (per person) for the state, and found that it was 2nd to last, ahead of only Mississippi.  

That means that the people in WV produce less goods and services than 48/50 states (and less than DC).  Hard-working my ass.