What did TARP accomplish?

"If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big. It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure."
Mervyn King, the governor of the Bank of England

Matt Welch at Reason.com looks at TARP (the big government Troubled Asset Relief Program to save our nations banks and US car makers) and asks, what did it accomplish? There are some who claim it was a big success - but measured against what criteria? That things could be worse? That the economy did not completely and utterly collapse?

Here is what President Bush said would happen if the US Congress failed to take "immediate action" to spend $356 billion to save the banks...

More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.

Keep in mind this was said towards the end of 2008. What has happened since? Money was given to Banks, two US car companies purchased, a huge Stimulus bill approved, and still every single item in this list has occurred.

Bottom Line

The Government (Republican and Democrat) simply has no clue how to fix an ailing economy. The government can feed people via welfare & unemployment insurance, it can provide some limited number of temporary jobs outside of civil service, but it can not, by itself, prevent a recession or turn it around. In fact government intervention just makes recessions worse by creating uncertainty and propping up failed businesses to complete with successful businesses. Money is spent to "save jobs" because this makes voters happy but in the long run they are upsetting maket forces that reward the talented companies and punish the inefficient under the flag "Too Big to Fail". Many of these businesses are failing for a reason - throwing money at them just postpones the inevitable.

Unintended Consequences

“The supply of government exceeds demand.”- Lewis H. Lapham

My latest commuting lecture series on CD has been on the Fundamentals of Economics. With all the problems in the economy and odd government behavior, I decided to brush up on my Micro & Macro Economics that I learned so long ago in college. As the instructor points out, it would be a good thing for ALL government leaders to brush up on the basics.

For example: Supply & Demand. You don’t have to like it but it’s a “force of nature” that cannot be denied. It explains behavior in all kinds of economies – capitalism and socialism - around the world. It results in all manner of unintended consequences in “well-meaning” legislation.

Case in point – the economics professor says one should NOT use prices to bring about social change. The setting of price caps or wage floors upsets the balance of Supply & Demand and nature will not be denied. It will find ways to compensate.

Consider rent control laws. Landlords have no desire to support apartments that return less than market rates. They will let the place run down, or charge high fees (like key deposits) to make up the balance. New landlords stay out of an unprofitable market resulting in fewer “low-cost” places to live. There are also consequences for the renter. When supply of rent-controlled apartments diminishes, those that have them hold on to what they have, no matter what. They become reluctant to move or “trade up” because they have a great below-market deal. The apartments become family assets that are passed on to children or (illegally) subleased, sometimes at higher rates. Because the rent is fixed for everyone, there is little to stop the rich from getting great deals. A congressman from NY has 4 rent-controlled apartments in the same building that he combined into a nice living space.

What are the alternatives to rent-control? If the government wants to help low-income families to find affordable living, then target these families directly (not indirectly with prices that affect everyone). Give them an apartment check that is similar to food stamps – payable only towards rent. Or a tax rebate if rent exceeds x% of your budget for households earning less than $Y.

Or consider tax-cuts & other programs to simulate the economy. Sounds good at first glance – more money in peoples pockets. But what are the unintended consequences?

- More money chasing the limited goods can result in inflation that erodes away the new dollars available. So no one is better off afterwards.
- The extra money may be spent on foreign imports, improving the economies of other nations at the expense of US taxpayers. The “Cash for Clunkers” helped Japanese car makers more than US companies.
- Less tax means the government debt will increase (at least short term until the economy recovers). Government borrowing drains money from investors making it more costly for companies to borrow money or issue bonds/stocks for improvements. Instead of stimulating, the resulting debt can slow down the economy. This happened under FDR, Regan and looks to be happening again under Obama.

The alternative: government spending should focus on long-term improvements that lift up the nation, not handouts to “shovel-ready” jobs for frivolous projects. We could instead build a new Internet super-highway to bring network speeds up to levels enjoyed by nations like Japan. Or build wireless access across the nation. Or fix old roads and bridges and public waterworks. Strengthen our nation’s electricity grid against failure.

Bottom Line

The science of economics is not perfect; it’s not called the “dismal” science for nothing. Just look at the debate of Keynesian vs. Supply-Side vs. other theories on how to “fix” a recession. But an awareness of economic principles and history can teach us that there ain’t no such no such thing as a free lunch. Someone always pays though it may be quite hidden or indirect.

So the next time a politician promises to fix some ill via a law or spending, ask yourself – who will indirectly benefit from this? What will be the long-term consequences and who will suffer? Can this new law/spending be exploited by the rich and powerful [Example: a law was passed requiring government to spend X% of contract dollars on companies with female or minority ownership. What happened – big white-male companies set up dummy companies led by a woman or minority that would subcontract everything back to the big white-male company. There are always loopholes.]

Recession and Unemployment

“A man willing to work, and unable to find work, is perhaps the saddest sight that fortune's inequality exhibits under this sun.”~Thomas Carlyle

Officially the US Recession is over. A recession is defined as negative Gross Domestic Product (GDP) and since the US economy managed to show a positive return for the third quarter of 2009, voila, the recession is over. But as Paul Harvey used to say, now you'll hear "the Rest of the Story”.

1. The 3rd quarter may be an artificial blip resulting from the stimulus money and Clunkers for Cash.

2. It is entirely possible for the recession to resume. The Great Depression followed a recession and “recovery”.

3. We could be in for a “jobless” recovery. Companies return to profitability with fewer workers and no plans to rehire.

4. Even if companies do rehire, there is a lag period. You don’t hire during a sales slump. Only when the economy really picks up and people start spending again, will there be a new for companies to grow their work force.

Bottom Line

If you’re one of the 10+% Americans looking for work, http://www.bargaineering.com/ is publishing Bargaineering Career Week 2009 with lots of job-hunting advice.

Here is their list of the top job search sites:

SimplyHired – great for local job listings

Yahoo! HotJobs - one of the most popular employment websites. It will tell you how many people have looked at your resume.

Monster.com – one of the largest sites with 5000 new jobs posted daily

CareerBuilder.com – claims to have over 1 million jobs listed

http://www.craigslist.org/ - great for part time work and consulting

What does a Trillion dollars buy?

"The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'" - Ronald Reagan

For this post, I'll let a picture be the star. What has the one trillion dollar stimulus package achieved?

Lies, damned lies, and statistics

While the news in this graph is very bad for the US and for Obama, I'll switch hats from government cynic to mathematician for a moment.

I've always associated the phrase, "Lies, damned lies, and statistics" as a favorite quote of Mark Twain but Wikipedia claims it was first used by British Prime Minister Benjamin Disraeli. While the chart above is accurate, it uses three techniques to exaggerate the message and editorialize.

1. This chart does not prove a "swindle". That's just the artist's opinion. I do agree however with the byline, "Reality Trumps White House Promises".

2. I doubt very much that the Obama's sad face is related to the stimulus. The artist wants us to assume that Obama has acknowledged his "guilt" in the "swindle". To my knowledge Obama is still claiming with a smile that the stimulus is a success.

3. The vertical scale of the chart is approximately 7 to 10.5%. By not starting the vertical scale at zero, differences are exaggerated. The White House predicted 8% but got 10%. This is an actual error of 1/4 or 25%. But the graph shows the red line climbing to 4 times higher than the White House "promise" for a perceived error of 400%.

Now here is a more honest graph of the same numbers.

Bottom Line

I'm now putting my government cynic hat back on...

Recall how this stimulus package was passed in Congress. It was urgent to prevent an economic disaster. There was no time to read the details. We were asked to trust our leaders that they knew best how to solve the crisis by throwing lots of money at it. I hope Americans never make that mistake again.

Barter

“All government, indeed every human benefit and enjoyment, every virtue, and every prudent act, is founded on compromise and barter.”- Edmund Burke (British Statesman and Philosopher, 1729-1797)

Today I recommend the article, Barter for the Services You Need, on the Wall Street Journal online. It’s a tricky article to summarize; most every paragraph contains useful information.

In these cash strapped times, barter can help you obtain desirable items and services without spending money. An example given is exchanging painting or carpentry work for a week’s stay in your vacation home. I have a friend who exchanges computer repair with a Dentist for free dentistry for his family.

The article lists some online resources to find/post barter opportunities. But also warns you to get references before trusting the barter partner. My wife used to rent out rooms before we married. A well-mannered young man in her church offered to mow the law, paint the house and do other house repair in exchange for a free room over the summer while he interned. She agreed but he failed to live up to his half of the bargain and did very little real work.

References are always a good idea. We hired a painting company, the low bidder, without checking them out. They used college students to do the work with very little training. We fired them after the first day when our bricks and windows were paint splattered and the walls they had painted were peeling.

The article concludes by pointing out that the IRS taxes barter. You need to report the value of goods or services received on form 1099-B.

Bottom Line

Barter can be fun if you have a sense of adventure and are willing to stand up for yourself and not be taken advantage of. Don’t forget to pay the taxes!

And this just caught my eye - some services may not be bartered legally...
Yep, Trying To Trade Sex For World Series Tickets Is Illegal

Ghost Ships

“Ships that pass in the night, and speak each other in passing, Only a signal shown, and a distant voice in the darkness; So on the ocean of life, we pass and speak one another, Only a look and a voice, then darkness again and a silence”- Henry Wadsworth Longfellow

Although some economists and pundits are declaring the recession over, color me more pessimistic. One website that I keep on eye on is Kiplinger’s Recover Index. They list six leading economic indicators and only two of them are “fully positive”. One of the positives, an increase in existing home sales, says more about the collapse of mortgages and house prices than about the strength of buying power. And harking back to an earlier post, what does “success” mean here? Kiplinger says that just three positive indexes would indicate that the recession is over. I’d set the bar higher and suggest at least 4 out of 6 before declaring victory.

Economics is a complex science with many time-delayed built in interactions. It’s possible for unemployment to decline, yet the newly employed people are still shell-shocked and reluctant to spend for a while. So store sales and profits remain low which slows down future hiring.

A well-written article on the stalled state of the global economy appeared in the UK Daily Mail Online, Revealed: The Ghost Fleet of the Recession. Hundreds of the world’s cargo ships have been parked off the southern shores of Malaysia, near Singapore. A local fisherman says, “We don't understand why they are here. There are so many ships but no one seems to be on board. When we sail past them in our fishing boats we never see anyone. They are like real ghost ships and some people are scared of them.”

The answer is that 12% of the global cargo fleet has nothing to ship (this could climb to 25% before things improve). Business and profits have plummeted, “This time last year, an Aframax tanker capable of carrying 80,000 tons of cargo would cost £31,000 a day ($50,000). Now it is about £3,400 ($5,500).” The ghost ships sit idle waiting for better times ahead.

Bottom Line

Curiously despite the glut in cargo ships, new ones are still being built. It takes three years to build a ship so orders placed when the economy was good in 2006 are ready to hit the water and the delivery bill is due. But now some clients are unable (or unwilling) to pay and the ships are sold instead on the open market for a bargain price. New orders have slowed to a trickle so expect the ship building industry to remain in recession for several years to come.

For another sign of slow sales and unsold inventory, check out these picutues of new unsold cars www.guardian.co.uk/business/gallery/2009/jan/16/unsold-cars

Here is another article claiming that the financial crisis is just the first in a series of interlinked crisises as one problem cascades to another. http://www.financialarmageddon.com/2009/09/still-in-the-economic-crisis.html

Update

CONSUMER CONFIDENCE INDEX drops in September.

The Great Depression

“The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.” - Milton Friedman, economist

Today I recommend reading a NYT story called Making Ends Meet in the Great Depression. It's nice to see the media reporting something factual instead of exaggerating the economic recession into a depression.

The NYT article contains first person accounts of individuals who experienced the Great Depression. Some stories surprised me

• The gizzard of a chicken is good eating?
• Possum meat is unappealing?
• You can pluck a live goose
• You can not darn synthetic socks?

Bottom Line

A common theme of the accounts is waste nothing, recycle & reuse.

Record Unemployment

"500 million Americans lose their jobs every month."- 2009, Nancy Pelosi (US Speaker of the House) [The US population is 306 million]

More bad economic news I’m afraid. U.S. job losses accelerate says Reuters. Job losses in January 2009 were 598,000, the most in 34 years, and the unemployment rate reached to a 16-year high.

"The economy is just falling into oblivion and it will get worse," - Greg Salvaggio, vice president for trading at Tempus Consulting in Washington

“January's sharp drop in employment brings job losses to 3.6 million since the start of the recession in December 2007” and "about half the decline occurred in the last three months." - U.S. Commissioner of Labor Statistics Keith Hall

"It is just another confirmation that we are in a deep and long recession, and the bottom is not even in sight. Manufacturing is incredibly weak -- it's going to be a long haul." - Robert MacIntosh, chief economist for Eaton Vance Management in Boston

Unfortunately the Democrat plan to throw money in all directions and hope that things are “stimulated” is unlikely to work. Here a few reasons why:

A new book, Welcome to Obamaland: I Have Seen Your Future and It Doesn't Work by James Delingpole, describes how the Stimulus plan & Obama look a lot like Tony Blair’s England from ten years ago. If we follow the British path, the US can expect

“a morass of sprawling government that will slowly start suffocating our economy, our liberties, and our culture… From the socialized medicine that will make us want to avoid going to the doctor even when our hand is on fire; to eco-fascism that will have us spending millions … to protect un-endangered, man-eating polar bears; to immigration non-reform that will leave us wondering what country we're living in anyway; to a further dumbing down of an already execrable school system, with more PC inanities, such as banning "competitive
games" because it might disturb children's self-esteem”

The article, Is Britain going bankrupt?, states “Alistair Darling [Chancellor of the Exchequer ] has had to admit that the British economy [today] faces the most sudden economic collapse since World War Two, and the worst budget deficit of any major country in the world”

Japan tried to spend it’s way out of recession with infrastructure projects. The New York Times (shock!) noted that Japan’s Big-Works Stimulus Is Lesson.

“Japan’s rural areas have been paved over and filled in with roads, dams and other big infrastructure projects, the legacy of trillions of dollars spent to lift the economy from a severe downturn caused by the bursting of a real estate bubble in the late 1980s. During those nearly two decades, Japan accumulated the largest public debt in the developed world — totaling 180 percent of its $5.5 trillion economy — while failing to generate a convincing recovery.”

Bottom Line

Will the US government learn from the mistakes of others? Don’t bet on it. Timothy Geithner, Obama’s Secretary of the Treasury, “was a young financial attaché in Japan during the collapse and subsequent doldrums.” But he got the lesson backwards and believes we need to spend more and faster than Japan did!

“Economists tend to divide into two camps on the question of Japan’s infrastructure spending: those, many of them Americans like Mr. Geithner [Obama’s Secretary of the Treasury], who think it did not go far enough; and those, many of them Japanese, who think it was a colossal waste.” - NYT

Who do you think is right?

Number of Public vs Government Workers

“The worst thing in this world, next to anarchy, is government” - Henry Ward Beecher

Part of preparedness is being aware of the risks and potential for problems. That includes looking at the economy, long-term trends, and the recovery from our current recession/depression. The graph below comes from Fabius Maximus in a posting titled America passes a milestone. It shows that the employees working for the government now exceeds the employees working in the manufacturing sector. This is NOT healthy for the county. With rare exceptions (NASA, military equipment, interstate roads) the government does not increase the Gross National Product – it does not create products, just laws and regulations.


Bottom LineSome government is certainly needed like Police, Fire, Military, and “simple” Food & Drug regulation. But do we really want 22 million government workers (7% of the US population) putting restrictions and restraints on companies and people? See my posting, Waiting to Be Rescued, about government bureaucracies.

"Within the political process, … government agencies are more often concerned with pleasing other political actors and finding ways to expand their budgets and power. This often makes them less sensitive to the direct needs of the people who rely on them to get specific tasks accomplished."

Global Economic Depression

“A ship is safe in harbor, but that's not what ships are for” - William
Shedd

The article Shipping rates hit zero as trade sinks from http://www.telegraph.co.uk/ reports that,

Freight rates for containers shipped from Asia to Europe have fallen to zero for the first time since records began, underscoring the dramatic collapse in trade since the world economy buckled in October. …"This is a whole new ball game," said one trader.

Why is this significant you ask? This is a contra-indicator for one of my favorite books, The World Is Flat by Thomas L. Friedman. While the world looks small and everybody is your neighbor or BFF via the internet, in order to exchange more than just ideas and pictures, we still need ships to carry goods between countries.

The shipping problem began last fall with the banking and credit crisis. Shippers were unable to obtain routine letters of credit “causing goods to pile up at ports even though there was a willing buyer at the other end.” The credit problem has been resolved, but the shipping industry is now plagued by global trade contraction:

Trade data from Asia's export tigers has been disastrous over recent weeks … “This is no regular cycle slowdown, but a complete collapse in foreign [US, UK and European] demand."

To keep ships sailing, shippers have cut their fees to zero and will ship containers at “bunker” (i.e. cost) rates so as to earn some money to cover crew salaries, insurance, docking fees and other fixed expenses.

Offering slots for free is akin to an airline giving away spare seats for nothing.

Bottom Line

The shipping crisis is further proof that we are experiencing a global economic depression. Do not expect a quick turnaround or a quick fix. The US “bailouts” are keeping companies alive but will do little to stimulate the US or world economy.

What should you do? Cut expenses and build up your savings now. We will be facing many rainy days ahead.