Where is the US economy headed?

TARP watch dog isn't liking what he sees in terms of eliminating "too big to fail."



From the interview...

“I can’t tell you if we are safe; I don’t know.

“Banks that were too big to fail are bigger than ever. They’ve become consolidated. With government encouragement, some of the largest banks have become larger and are more interconnected than ever.

“You hear about moral hazard -- heads I win, tails the taxpayer pays for it. We certainly have not moved away from that. In fact, I think we’ve made it very clear… we’re not going to let our large financial institutions fail. And with that, I think we may be in a far more dangerous place today than we were a year ago.”

A year ago they said the danger was meltdown. There's only disintegration more dangerous than that. i.e. no food in the shops and no wages being paid.

Is he serious?

http://www.nytimes.com/2009/09/29/business/economy/29dollar.html?hp

Yep, Let's all wave bye-bye to our superpower status, we're done.

There could be some hyperbole, Spendius, but I think he is serious.
- TARP was supposed to encourage banks to start lending. That didn't happen.
Banks used the money instead to increase reserves (good) or acquire other banks (bad). Our economy is still frozen, with healthy companies being unable to access credit.
- Americans are spending less, saving more and paying down (credit card, for example) debt. Good for them, but bad for the economy which relies on consumer spending. Bad for China, Japan and (I was surprised to learn) Germany, three of our biggest suppliers of stuff.
- The crisis a year or so was from the residential real estate market. That has not yet played out and the next big shake-out will be in the commercial real estate market (shopping centers, hotels etc). We have way too much retail space in the U.S. and the banks have enormous exposure to loan losses in that arena.
(Amusingly, I have been learning all about the hotel business. An investment group wants to build one on a piece of property I control here in Charlottesville. I would own 40%. If it happens, yall are welcome to come stay there on me as long as you promise to not trash your room. Many hotels were built 5 or so years ago by some naive folks. They have balloon payments coming up in the next year and could be in trouble).
- Finally, banks are supposed to estimate what their losses on loans might be and build up a reserve for that with a charge to current earnings. They aint doing it. By way of example, suppose that JohnboyBank lent 100 quid each to Spendius and 9 of his pub-mates.. Good people but the economy turns bad and only half will pay me back. I should recognize that 500 pound loss and charge it to my earnings this year. Instead I claim (because I want to show good profits) that only the 100 to Spendius will turn out bad. There is a lot of that sh*t going on. The banks know it, the auditors know it but it goes on.
I am sorry, Spendius, for coming across as professorial in my writing. It is tough writing about economics. I do try - and often fail - to be light.

Your example sure points up differing perspectives. Large corporations want to show lots of income. It keeps the shareholders happy, and helps justify some astonishing compensation and bonuses.

I've done books for several individual or family held corporations, and it's a whole 'nuther world. They don't want or need anymore income than enough to keep the banks happy. Rather, they want to grow the business, and paying taxes on income is not part of the business plan. None have been in the business of lending money for interest, so reserves were never a question, but you should see what becomes current expense instead of depreciation. I'll save the stories till we run into one another again, but trust me.

rjb, I'll have to remember your offer. t.

Indeed, Roger. "Someone I know" has done that...with, of all things, light bulbs. He has about 300 florescent light bulbs burning, each costing about $19 but lasting for about 5 years and burning very little energy. This scoundrel has been known to buy 100 of them on Dec 30th and charging the cost to Maintenance if his profit was too high in that year.

I still believe banks are not managed well; they are still playing games with equities to earn income, and not from their core business of lending. I see very little hope for the future if banks continue to play with derivatives and gamesmanship over responsible banking; they've forgotten what they are all about, and turned into investment houses.

WE CAN PAPER THIS OVER
The Federal Deposit Insurance Corporation (FDIC) is the outfit that makes sure that if your bank fails you will not lose any money you have on deposit there (up to something like $250K).
I am stealing the data in this from an article in Forbes today.
The FDIC appears to have paid out or is on the hook for some $100B. And things are not getting better. So far in 2009, there have been 95 bank failures, 50 of them since the end of June. Many of them are quite small, in rural areas. But for the FDIC, it is like getting nibbled to death by ducks. $20M here, $70M there.
At the end of March, the FDIC reported there were 305 "problem banks." At the end of June, the number had risen to 416. The number at the end of September will be, according to Sheila Bair, head of the FDIC, "higher."
The FDIC does not get money from the Treasury, at least not yet. Instead, all banks are assessed an annual fee based on their size.
In June the banks were told to kick in $5.6B as a "single time assessment" to keep the FDIC afloat. That money is about gone.
The new plan is for banks to prepay the premiums that they would otherwise pay over the next few years (say, 2010, 2011 and 2012). Pay $45B today and pay no more until 2013. The FDIC gets $45B and the banks, while having to pony up the cash, can spread the cost over 3 years on their income statements.
All this does is move the issue of failing banks - and there will be a lot more of them - down the pike a piece.

Yes, conveniently down the pike to just after the next election. And the proposed healthcare reform package is also conveniently scheduled to kick in just after the next election too. That way our fearless leaders will have a whole two or four years for the public outrage to subside, and given the short attention span of the American public, they hope to incur no consequences at all.

Foxie is again as expected trying to compare apples and crap! Health care reform is so far removed from the FDIC, it takes one with great imagination to even attempt any comparison.

Foxie has already forgotten that Obama inherited this crap (bank crash) from GWBush, but she's already attempting to tie both problems onto Obama.

Oops. I must apologize and retract part of what I said. The Forbes article made no mention about how far into the future the $45B prepayment would carry the banks. I said 2010, 2011, and 2012. I have no source for that; I was guessing.
Sorry. That was careless. I should know better.

Neverthless, if you look at the timeline for effect of a lot of the more controversial legislation they are working on, we won't be able to judge the actual effects of a lot of it until after the next elections. That is all the more reason that we have to really be paying attention now.

I am not meaning to change the subject, but:
Bedtime for Johnboy. But I did want to make note of this. Much was made today of the Consumer Confidence Index. It fell from 54.5 to 53.1 in September. The CCI is a privately funded thing. A number of economists were dismayed by this decline, noting that this is a bad sign as we head towards the holiday season. 70% of our economy is driven by personal spending. They had projected an increase in the CCI.
The stock market in general and retailers' stocks in particular took a bit of a hit.

Meanwhile, our friends at Rasmussen, in their polling, had a consumer index at 82.6 (using a different scale than the CCI), up 10 points from a month ago and up 23 points from the first of the year.
Go figure.

Okay, rjb, what are we supposed to do with that contradiction? LOL

I think he's serious from the standpoint that those who were too big to fail are bigger yet, that TARP funds aren't finding their way to those who need them to turn the economy around (namely, small businesses who depend on credit), and that we're far from being out of the woods.

Folks talk about the commercial RE bubble that's about to burst. I'm more concerned about the ALT-A and OPTION-ARM housing bubbles that are right on it's heels.

I pulled an email response from an Agora Financial reader (below). I'm on record as being against capital punishment, but I could be convinced to make an exception.

rjb, I am interested in your opinion of the last quarter of this year, your prediction, based upon your business, the level of confidence you have from monitoring your business, customers, etc.

We cannot continue to borrow and spend. Here is a good piece on the deficits and what should be done.


How Progressives Should Deal With The Deficit

This year, the federal deficit will exceed 11 percent of the gross domestic product -- higher than at any point in the country's post-war history. Last month, both the Congressional Budget Office (CBO) and the White House's Office of Management and Budget (OMB) released revised projections for the country's long-term budget deficit through 2019. Using a several assumptions, OMB "projected a cumulative $9 trillion deficit between 2010 and 2019, while the CBO pegged the total at $7.1 trillion." Recognizing that "if left unchecked, these long-term deficits could pose significant challenges" to America's future, the Center for American Progress and the Center on Budget and Policy Priorities are hosting a conference today that is "designed to lay the intellectual groundwork for efforts that the administration and Congress should undertake -- once the economy has fully recovered -- to put the nation on a more sustainable fiscal path." Bringing together experts ranging from Nobel Laureate Paul Krugman to former National Economic Council director Laura Tyson, the conference will examine not only the consequences of the current fiscal trajectory, but also opportunities for savings and options for raising revenue. However, in order to make plans to address the deficit, it is vital to first understand how it came to be.

HOW THE DEFICIT GOT SO LARGE: A common refrain from conservatives in Congress is that President Obama's spending proposals are "burying our children and grandchildren under a mountain of unsustainable debt," as House Minority Leader John Boehner (R-OH) put it in a statement after the new deficit projections came out. But the effort to place the lion's share of the blame for the current deficit on Obama's policies is misguided. As CAP's Michael Ettlinger and Michael Linden wrote last month, "the policies of the Bush administration, which included tax cuts during a time of war and a floundering economy, are clearly the primary source of the current deficits." According to Ettlinger and Linden, who base their analysis on CBO numbers, President Bush's policies are responsible for 40 percent of the 2009 and 2010 deficits. Without the changes to federal law enacted under Bush, "the current deficit would be only 4.7 percent of gross domestic product this year, instead of the eye-catching 11.2 percent -- despite the weak economy and the costly efforts taken to restore it. In 2010, the deficit would be 3.2 percent instead of 9.6 percent." The failure of Bush's economic policies -- "fiscal irresponsibility, regulatory indifference, fueling of an asset and credit bubble, a failure to focus on jobs and incomes, and inaction as the economy started slipping" -- also contribute significantly to the current fiscal picture because "the weak economy is responsible for 20 percent of the fiscal problems we face in 2009 and 2010." "President Obama's policies have also contributed to the federal deficit -- but only 16 percent of the projected budget deterioration for 2009 and 2010 are attributable to those policies." In the long run, "the single biggest budget headache" is programs like Medicare and Medicaid, which Obama is seeking to address with health care reform.

THE RISK OF INACTION: In a paper released today, Ettlinger and Linden make the case for why, when it comes to the federal deficit and debt, it is necessary for progressives to "deal with it." "There is little dispute that deficits do harm if they are large enough and sustained long enough," write Ettlinger and Linden. "High levels of government borrowing can reduce domestic investment, lower future incomes, raise interest rates, and spur inflation. These can damage the economy and hurt people who see their wages fail to keep up with rising costs or find the price of borrowing to purchase a home prohibitively expensive." Additionally, "substantial deficits projected far into the future can cause a fundamental shift in market expectations and a related loss of confidence both at home and abroad." Beyond the potentially negative economic effects of sustained deficits, "the nation's ability to handle a crisis can be limited by a large level of debt." "If the nation had entered the current recession with a larger level of existing debt, it would have seriously constrained our ability to respond," write Ettlinger and Linden. "Since economic growth is key to restoring fiscal health, a failure to respond to the crisis and get the economy growing again would have only exacerbated our fiscal problems."

WHAT CAN BE DONE: The deficit can't be brought into line by either spending cuts alone or tax increases alone. Instead, a comprehensive approach is needed. "President Bush left the country with a wrecked federal balance sheet and progressives have no choice but to deal with it," says CAP President and CEO John Podesta. "The only way to stabilize the debt-to-GDP ratio and get it going in the right direction is to restrain domestic and defense spending, bend the curve on health care costs, and add new revenues. As progressives we need to debate the policy merits and likelihood of enacting a range of options -- including designing a small and more progressive value-added tax, changes to the corporate tax code, and taxing upper income earners beyond reversing the Bush tax cuts." "This will clearly require a balanced approach, and it is important that the balance is right so that the solution is not worse than the problem," write Ettlinger and Linden. Today's conference is a first step towards finding that balance.

americanprogressaction.org

I made a bunch of notes and realized my response would run waaay too long.
Here are the headlines:
You must realize that Charlottesville is an anomaly. 200K metro area almost totally revolving around UVA with some 18K students and perhaps 10K employees. Jobs that don't pay blue-collar folks as much as they deserve but gives them a lot of protection from lay-offs. We have virtually no manufacturing and we have boatloads of retirees - well off retirees - moving here.
Sales at my businesses started to suffer in October, 2008, but started to bounce back in June. For 2009, I see a 5% increase over last year. Done without compromising margins. That suggests that my customers are a bit more confident.
Last year we cut $100K out of inventory and we are on target to match that in 2009. That is good for me but bad for the manufacturers who supply us.
That is happening throughout retailing.
Nationwide, the DOW will break through 10000 as many companies easily beat last year's 3Q comps. For what that is worth. I think holiday sales will be flat to slightly higher, but the good news is that that will be achieved without the fire-sale discounts to clear out inventory.
I certainly, Okie, don't want to come across as very optimistic. New numbers out today on manufacturing and job losses still suck.
I hope this short answer gives you some notion of where my head is at. Thank you for asking.

Here's my 2 cents as a woman who runs a business that could be considered a luxury for most people - The wealthy people are spending again, but not on restaurants, travel and cars, but rather they are nesting. My business is up over last year because people are staying home more and want to invest in their surroundings. Instead of three weeks in Italy they are having their pool gardens redesigned or adding an outdoor fireplace. I also cater to people who have an environmental conscience and that part of our business is way up. Instead of putting in a jacuzzi and deck they are digging a natural pond and having it landscaped in an environmentally sensitive way. I have turned acres of lawn into meadow gardens this season.

On the other hand, I've had more job seekers than ever. I average about three calls per week. Some are burned out cubicle people who think working in the great outdoors might be their salvation - it usually isn't and most move on. Others have recently lost jobs in manufacturing or retail. The first question I get after "are you hiring?" is "do you offer any health benefits?" - "no" is the answer to the last one. I then suggest if health insurance is an issue that they should apply to the McDonald's in our town that has a "Now Hiring" sign in front.