US Economy

[jhk87]

Try again:

Historical facts don't change because of who is pointing it out. Unless you have historical proof that the financial crisis during the "free banking" period were actually more frequent or worse than what has happened in the post regulatory period, or can describe a convincing mechanism besides regulatory failure providing perverse incentives to explain the multiplicity of faiures, then the only people who have the most to lose from increased regulation is the taxpayers, who will be forced to fund more and more frequent bailouts.

Context is everything, as many an historian might tell you. The period you highlight also saw a world dominated by a few colonial powers with guaranteed access to cheap commodities and a highly stable, gold-backed pound. No free-thinking, wildly ambitious banker had thought of complex derivative products yet. Today's world is far more fluid, complex and dynamic.

I could point out that massive borrowing on  stock and commodity speculation led to Black Thursday in 1929 or that the economies that had deregulated their financial sectors most profoundly have been hit the worst - Canada was heavily regulated and did much better than either the Brits or the Americans.

 

[ModlrMike]

Canada was heavily regulated and did much better than either the Brits or the Americans.

...and appears to be doing so again.

 

[a_majoor]

Regulatory failure yet again. More unfunded liabilities. The gap grows ever wider:

http://www.washingtonpost.com/wp-dyn/content/article/2010/12/23/AR2010122304421.html

A remedy for beggar states

By George F. Will
Sunday, December 26, 2010

The nation's menu of crises caused by governmental malpractice may soon include states coming to Congress as mendicants, seeking relief from the consequences of their choices. Congress should forestall this by passing a bill with a bland title but explosive potential.

Principal author of the Public Employee Pension Transparency Act is Rep. Devin Nunes, a Republican from California, where about 80 cents of every government dollar goes for government employees' pay and benefits. His bill would define the scale of the problem of underfunded state and local government pensions and would notify states not to approach Congress like Oliver Twists, holding out porridge bowls and asking for more.

Corporate pension funds are heavily regulated, including pre-funding requirements. A federal agency, the Pension Benefit Guaranty Corp., copes with insolvent ones. By requiring transparency, the government gave the private sector an incentive to move to defined contributions from defined-benefit plans, which are now primarily luxuries enjoyed by public employees.

Less candor, realism and pre-funding are required of state and municipal governments regarding their pension plans. Nunes's bill would require them to disclose the size of their pension liabilities - and the often-dreamy assumptions behind the calculations. Noncompliant governments would be ineligible for issuing bonds exempt from federal taxation. Furthermore, the bill would stipulate that state and local governments are entirely responsible for their pension obligations and the federal government will provide no bailouts.

Nunes's bill would not traduce any state's sovereignty: Each would retain the right not to comply, choosing to forfeit access to the federally subsidized borrowing that facilitated their slide into trouble.

Those troubles are big. A study by Northwestern University's Kellogg School of Management calculates the combined underfunding of pensions in the all municipalities at $574 billion. States have an estimated $3.3 trillion in unfunded pension liabilities.

Nunes says that 10 states will exhaust their pension money by 2020, and all but eight states will by 2030.

States' troubles are becoming bigger. Hitherto, local governments have acquired infusions of funds from federal budget earmarks, which are now forbidden. Furthermore, states are suffering "ARRA hangover" - withdrawal from the American Recovery and Reinvestment Act, a.k.a. the 2009 stimulus. With about $150 billion for state and local governments, it raised the federal portion of state budgets from about a quarter to a third. Also, in 2009 and 2010, states and localities borrowed almost $200 billion through the ARRA's Build America Bonds program, under which Washington pays 35 percent of the interest costs. Republicans, in another victory over the president in negotiations on extending the Bush tax rates, extinguished that program, which they say primarily produced more public-sector employees.

There are legal provisions for municipalities to declare bankruptcy. Some have done so. As many as 200 are expected to default on debt next year. There are, however, no bankruptcy provisions for states. Some who favor providing such provisions say states are "too big to fail," and under bankruptcy, judges could rewrite union contracts or give states powers to do so, thereby reducing existing pension obligations. Unfortunately, government-administered bankruptcy of governments might be even more unseemly than Washington's political twisting of the bankruptcy process on behalf of General Motors and Chrysler, including the use of TARP funds supposedly restricted for "financial institutions."

Oliver Twist did not choose his fate. California, New York and Illinois - three states whose conditions are especially parlous - did. And in November, each of these deep-blue states elected Democratic governors beholden to public employee unions.

San Francisco is spending $400 million a year on public employees' pensions, up from $175 million in 2005. In November, San Franciscans voted on Proposition B, which would have required city employees to contribute up to 10 percent of their salaries to their pension plans, and to pay half the health-care premiums of their dependents. Michael Moritz, a venture capitalist, says: "A typical San Francisco resident with one dependent pays $953 a month for health care, while the typical city employee pays less than $10."

San Francisco voters defeated Proposition B. If they now experience a self-inflicted budgetary earthquake, there is no national obligation to ameliorate the disaster they, like many other cities and states, have chosen.

People seeking backdoor bailouts hope that the fourth branch of government, a.k.a. Ben Bernanke, will declare an emergency power for the Federal Reserve to buy municipal bonds to lower localities' borrowing costs. This political act might mitigate one crisis by creating a larger one - the Fed's forfeiture of its independence.

georgewill@washpost.com

 

[Kirkhill]

There is a problem with the data: banks and banking (including all financial institutions) in the late 19th and early to mid 20th century were nowhere near as large, relative to the population and money supply and, and, and, as they are today. The AEI comparison is not apt.

Surely the real difference is that the earlier economy was in large part a barter economy with one of the most common commodities bartered being gold.  Gold was regulated at a fixed rate by those Huguenot inheritors at the Bank of England.  Banks were not as big and the sums involved were not as big because beer cost a penny a pint, there were 240 pennies to the pound and there were 4 pounds, 5 shillings (or 17 Crowns) to the ounce of gold.  You didn't involve your bank when you went to your local pub.  Nowadays you do.....how many pay for their rounds with their Debit card?

In a world of imperfections where you always only get 2 out of every 3 things you want the gold standard still doesn't look like a bad bet.

 

[Redeye]

In a world of imperfections where you always only get 2 out of every 3 things you want the gold standard still doesn't look like a bad bet.

A gold standard will fail for exactly the same reason it failed last time - eventually someone will need to unhook from it like Nixon did.  Placing an artificial constraint on money suppy growth potentially crimps growth.  And at the end of the day, I don't really even understand why gold is viewed to have such "intrinsic" value.  It's shiny.  Great.  So are lots of things.  It's still as arbitrary a store of value as everything else including paper money.

 

[Kirkhill]

Gold has little "real" value.  However it has an "accepted" value.  It doesn't require that the entire world community accept that gold has a given value, or even any value at all.  It is sufficient that much of the world accepts that gold does have value and will pay over the odds for a peculiar inert and malleable metal.  Consequently it has value.

The same can not be said about the Dollar or the Euro or the Pound or any of the other currencies.  They retain value only so long as the market retains faith in the issuing Government (and we can disregard the fiction of the autonomous Central Bank - both Government and Bank reflect the nation and the bureaucracy which the both serve and master).

You say that gold imposes a discipline. I agree.

You say that Nixon walked away from that discipline. I agree.

You say that others would be inclined to follow Nixon.  Perhaps.

When Nixon walked away from gold the price of oil did not spike.  The value of the dollar crashed.  The relative prices of gold an oil remained similar. Only the purchasing power of the US Dollar, and all those paper currencies tied to it by Bretton Woods, declined.....and hyper inflation resulted.

The gold standard didn't fail.  Governments may choose not to operate using gold but that doesn't stop the market from using it.  A gold ring will still put food on the table and gas in the car anyplace in the world.

 

[GR66]

And at the end of the day, I don't really even understand why gold is viewed to have such "intrinsic" value.  It's shiny.  Great.  So are lots of things.  It's still as arbitrary a store of value as everything else including paper money.

You're right that our collective selection of Gold as a store of value is arbitrary, but there are some intrinsic characteristics beyond being "shiny" that make it maintain a relative value over time.  There is a finite amount of Gold available and it cannot be created in such a way as to deflate its value.  It is also not typically consumed in such a way as to become unavailable for future use (unlike other "valuables" such as fossil fuels, etc.).  So while our species COULD have picked something different in which to view as having near universal value it would still likely have ended up being something with similar characteristics.

A Fiat currency however is the ultimate arbitrary store of value since there is literally NO instrinsic value to it.  I'm not saying that we should necessarily re-link our currencies to a Gold Standard (or any other standard) however many of our financial problems are a result of the lack of any type of forced constraint on our ability to spend and/or deflate our way out of natural financial constraints. 

 

[Kirkhill]

You're right that our collective selection of Gold as a store of value is arbitrary, but there are some intrinsic characteristics beyond being "shiny" that make it maintain a relative value over time.  There is a finite amount of Gold available and it cannot be created in such a way as to deflate its value.  It is also not typically consumed in such a way as to become unavailable for future use (unlike other "valuables" such as fossil fuels, etc.).  ...

Good points GR66.

The fact that gold is inert means that it is not affected by the environment.  It doesn't react with oxygen or water and thus is "incorruptible" in the old words.  It is unchanging and eternal and can be handed down from generation to generation. Solomon's gold is still in circulation as is Midas's and Croesus's.

 

[a_majoor]

Oddly enough, Gold was a relatively recent addition to the financial arsenal. For much of history, it was Silver that was the store of value, but massive discoveries of Silver in the 1500's destabilized the then global economy. Spain, as the source of most of the Silver, experienced monetary inflation with such odd effects as to make it too expensive to man galleys with trained sailors, causing a wholesale replacement of oarsmen with criminals and slaves...

Of course it took several hundred years for most of the world to change over to Gold, and the work of only a few decades to go to fiat money (FDR banned the private ownership of gold in the 1930's, Governments were working on ways to get out from under the discipline of the Gold standard for a long time).

 

[Flip]

Unfortunately, the west is having a very difficult time doing what it needs to do, which is to curtail retail spending and an emphasis on soft goods to rebuild the rotten heavy industrial core of the economy on a 21st-century model. Until this happens, we're going ot have to keep financing retail purchases - a very flimsy base for economic progress!

I have a biased opinion, but I think jhk87 is exactly right.
Balancing the US budget is important, but spending cuts and tax increases are only an "until next time" solution.
What's very clear to me ( because I run a small industrial business ) is that, in the west, we use phrases like"post industrial economy" as a social value.  Many people actually think industrial productivity is something to evolve beyond.

We have an astonishing number of people in the west actively seeking to shrink the industrial economy as if there would be no negative consequences.  This boggles my mind but have you paid any attention to what goes on in California theses days?  New regulation on industry has been an unrelenting trend for nearly a generation, and the results speak for themselves.

My perspective anyway, not academic at all, but there it is........ 

 

[Edward Campbell]

I have a biased opinion, but I think jhk87 is exactly right.
Balancing the US budget is important, but spending cuts and tax increases are only an "until next time" solution.
What's very clear to me ( because I run a small industrial business ) is that, in the west, we use phrases like"post industrial economy" as a social value.  Many people actually think industrial productivity is something to evolve beyond.

We have an astonishing number of people in the west actively seeking to shrink the industrial economy as if there would be no negative consequences.  This boggles my mind but have you paid any attention to what goes on in California theses days?  New regulation on industry has been an unrelenting trend for nearly a generation, and the results speak for themselves.

My perspective anyway, not academic at all, but there it is........

You are quite correct: the most valuable jobs - the ones all countries try hardest to get and keep - are (relatively) low skilled, highly paid and, above all, durable industrial/production jobs in factories, shipyards and the like. Why do you think the Chinese try so hard to hold on to their existing productivity advantages? Those "good," industrial jobs are the key to social harmony. There are, we read, huge battles going on in China between the government and those who want to "modernize" - which involves cutting or outsourcing (to e.g. lower wage Indonesia) those manual labour, metal bending, industrial jobs. Look, indeed, at California and Japan and Canada. It is not labour costs, themselves, that make some economies more or less productive - the most productive economies often have fairly high wage rates.

 

[GR66]

You are quite correct: the most valuable jobs - the ones all countries try hardest to get and keep - are (relatively) low skilled, highly paid and, above all, durable industrial/production jobs in factories, shipyards and the like. Why do you think the Chinese try so hard to hold on to their existing productivity advantages? Those "good," industrial jobs are the key to social harmony. There are, we read, huge battles going on in China between the government and those who want to "modernize" - which involves cutting or outsourcing (to e.g. lower wage Indonesia) those manual labour, metal bending, industrial jobs. Look, indeed, at California and Japan and Canada. It is not labour costs, themselves, that make some economies more or less productive - the most productive economies often have fairly high wage rates.

I don't think that those "(relatively) low skilled, highly paid" jobs really ARE the most valuable jobs for developed nations, even though they ARE the ones most countries try hardest to get and keep.  The reason is that those relatively low skills can be provided WITHOUT being as highly paid elsewhere.  Unless you are combining those production jobs with HIGHLY skilled elements (advanced designs, technologies and/or services) you're just not going to get high employment levels in the manufacturing/production sector. 

Even if you DO focus on the high-end "niche" and specialty product markets (as well as items that are simply too expensive to import), the manufacturing employment levels are not likely to be very high compared to historical levels.  This is because education, technology and capital are MUCH more fluid than in the past and industries can much more easily be moved or recreated in other areas in order to remain competitive. 

What capturing the high-end manufacturing market  does do though is inject more cash overall into the domestic economy which can then go toward paying for those services and industries that support this type of manufacturing (everything from marketing companies, lower-end manufacturers like packaging, financial services, construction, retail sales, etc). 

 

[Edward Campbell]

I don't think that those "(relatively) low skilled, highly paid" jobs really ARE the most valuable jobs for developed nations, even though they ARE the ones most countries try hardest to get and keep.  The reason is that those relatively low skills can be provided WITHOUT being as highly paid elsewhere.  Unless you are combining those production jobs with HIGHLY skilled elements (advanced designs, technologies and/or services) you're just not going to get high employment levels in the manufacturing/production sector. 

Even if you DO focus on the high-end "niche" and specialty product markets (as well as items that are simply too expensive to import), the manufacturing employment levels are not likely to be very high compared to historical levels.  This is because education, technology and capital are MUCH more fluid than in the past and industries can much more easily be moved or recreated in other areas in order to remain competitive. 

What capturing the high-end manufacturing market  does do though is inject more cash overall into the domestic economy which can then go toward paying for those services and industries that support this type of manufacturing (everything from marketing companies, lower-end manufacturers like packaging, financial services, construction, retail sales, etc).

You are correct: I should have said "socio-politically most valuable". In economic/productivity terms they are, indeed, expendable.

 

[Kirkhill]

Flip,

I will cheerfully invest in your company rather than buying a new entertainment center.  What will you offer me in return?  The entertainment center will occupy, inform and pleasure me and my family.  It has value. Does your company compete on those terms?

Remember, it's not about "benevolence" but "self-interest".

 

[Flip]

It is not labour costs, themselves, that make some economies more or less productive - the most productive economies often have fairly high wage rates.

I'll agree with that!

Costs of compliance wrt. environmental regulation, paper burden and taxes and chain of supply costs have a huge net effect.

And the "cash capture" model is not nearly complete in my opinion. There is more to value than cash!

What was Marx's phrase......"means of production? Add to that the concept of intellectual property and technology has a vertically integrating effect within an economy.  If you offshore chunks of that equation, you have off-shored profit, wages, taxes etc.

Kirkhill, my products are almost exclusively for industry.  My products help industrial enterprises remain in business and the employees therein to stay employed. But over the course of a generation I have watched major segments of the high tech industrial sector get subcontracted to Asia.  I can now buy, what used to be our major product, for less than it costs to buy the raw materials in North America.  Part of that shift is due to a fundamental change.  The "Military Industrial Complex" used to be a major driver of new technology. We now have a "Santa's Workshop" driven focus.  The major driver of new technology is new toys in million lot ( with tiny profit margins)  for the masses. 

 

[Rifleman62]

This article explains the situation clearly, and how it happened.

http://seekingalpha.com/article/246578-foreclosure-situation-to-worsen-in-2011-how-we-got-here

Foreclosure Situation to Worsen in 2011; How We Got Here

Richard Suttmeier

According to RealtyTrac, home repossessions will rise in 2011 from the record one million homes that were repossessed in 2010. There are five million homeowners who are at least two months behind on their mortgages, primarily due to job losses and declining home prices, which pushes more borrowers underwater.

One in 45 households received a foreclosure filing in 2010, for a record high 2.9 million homes. RealtyTrac projects three million foreclosures in 2011, with 1.2 million repossessions. This hidden inventory is on top of the 700,000 homes on the books of banks within the $53.2 billion in Other Real Estate Owned (OREO). It will likely take three years to clean up these unwanted homes and some banks are abandoning OREO properties. This environment will reduce property appraisals, which will eventually filter through to lower home prices.

Foreclosure Players: The Home Owner, The Bank, The Investor

When a homeowner buys a home and takes out a mortgage, he is usually unaware of whether or not the bank holds the mortgage as an investment or has the mortgage pooled into a mortgage-backed security that is sold to an investor. Before the housing crisis began, many mortgages were sliced and diced into mortgage derivative structures sold in the private market, as well as to Fannie Mae (FNMA.OB) and Freddie Mac (FMCC.OB). Since Fannie and Freddie became government-owned through conservatorship, these GSEs have securitized roughly 90% of mortgage securities, as the private market fell off the map.

This tangled web is one of the major problems in trying to unravel how to help homeowners stay in their homes, and to accurately perform a foreclosure procedure when there is no hope of their doing so.

The Home Owner – May have bought a home he could not afford with a mortgage that he could not understand. As home values plunged, owners owed more than what the home was worth. Defaults resulted when mortgage payments increased because of higher mortgage rate adjustments, or because the homeowner lost his job, or felt screwed by the bank.

The Bank – May have exaggerated how easy it would be for the homeowner to afford adjustable mortgages. Most mortgages were packaged by the bank, entered into the securitization process, and were sold by Wall Street to investors around the world, who thought the mortgage securities were “AAA” rated -- and, in the case of Fannie and Freddie, were backed by the U.S. government, which was not true.

The Investor – The main reason to securitize and sell mortgage structures to investors is to spread the risk of default to a broader group. The problem was the false ratings and assumed U.S. backing of Fannie- and Freddie-backed securities. As a result, instead of investors taking a hit, tax payers have, through the conservatorship and guarantee assumption of Fannie and Freddie, which cost about $150 billion through 2010.

Now state attorneys general are meeting with mortgage securities investors, who want to shield themselves from losses that may result in settlements relative to the foreclosure dilemma. The so-called “too big to fail” banks are in the middle of this, as they risk having to buy back the mortgage securities they sold to investors. I see no problem with this as long as it’s done at a current market price, not at the original price. That’s what makes a market. The investor bought betting on gains, but market conditions have changed due to default and foreclosures, so the investor should simply sell the bonds back to the bank at a current market price, where the investor takes the loss. That’s the free-market solution.

At the end of 2007, the mortgage market totaled about $15 trillion, by some estimates. Of these, FDIC data shows only $2.25 billion were held as investments on the books of our nation’s banks at the end of 2007. At the end of Q3 2010, this asset class was down $364.9 billion or 16.3%. It’s hard to evaluate why mortgages had this huge decline, other than defaults and foreclosures, or packaging loans to Fannie Mae or Freddie Mac. They all did not go into OREO, which rose 338.2% to a record $53.2 billion. This stress in the banking system is a factor in making the foreclosure process even more difficult for the bank.

The bigger problem is how many mortgages are sliced and diced into Notional Amount of Derivatives, which grew 43.5% to $236.4 trillion at the end of Q3 2010. You can’t put Humpty Dumpty mortgages back together again as investors fight over whether they own the front door or even the kitchen sink of the underlying collateral known as the home.

I do not have a solution, and neither does our government, the legal folks sorting through the mess, or the financial market place.

 

[a_majoor]

Blue States like California or New York might be going down in flames:

http://thehill.com/homenews/house/139739-cantor-warns-no-bailout-of-the-states

Rep. Eric Cantor: 'No bailout of the states'
By Russell Berman - 01/24/11 08:24 PM ET
House Majority Leader Eric Cantor (R-Va.) issued a new threat against a federal bailout for ailing state governments Monday as GOP leaders girded for a confrontation with President Obama over spending.

Heading into Tuesday’s State of the Union address, Cantor showed no desire for increases in virtually any area of the federal government, and he doubled down on his opposition to new proposed spending on infrastructure and education, even in areas, like transportation, where he acknowledged there were deficiencies.

Cantor flatly rejected any changes in the law that would allow state governments struggling with record budget deficits brought on by the economic recession and rising pension costs to restructure debt, including allowing them to declare bankruptcy.
“I don’t think that that is necessary, because state governments have at their disposal the requisite tools to address their fiscal ills,” the majority leader said, before going a step further.

“I think some ... have mentioned this Chapter 9 equivalent for states is somehow going to stave off some kind of federal bailout — we don’t need that to stave off a federal bailout. There will be no bailout of the states,” Cantor said. “States can deal with this and have the ability to do so on their own.”

The stark remarks set up a State of the Union in which heightened attempts at presenting a tone of civility between the parties will mask sharp differences across the board on policy. Hours before Obama is to speak at 9 p.m., House Republicans plan to approve a resolution instructing the chairman of the House Budget Committee, Rep. Paul Ryan (R-Wis.), to set spending at the level it stood at in 2008 or less. Ryan will also deliver the official GOP response to Obama’s speech.

While voicing support for reducing the deficit, Obama is expected to call for more investment — what Cantor called “a code word” for spending — in education, infrastructure and scientific research as part of a broader agenda to boost America’s global competitiveness. Those areas have traditionally won bipartisan support, but Cantor said they are in line for budget cuts, not increases.

“Transportation, education, defense — as I said before, everything is on the table,” the majority leader told reporters at his weekly briefing. “We’ve got to learn how to prioritize and do more with less in all areas of government. It just is what it is.”

Cantor acknowledged the need to “address” the nation’s aging transportation system, and cited congested and outmoded aviation networks and crumbling roads and bridges as national concerns. “I don’t think anybody would tell you that our nation’s transportation infrastructure is in a state of existence that we would accept,” he said.

But he struggled to answer the question of how those areas would be improved without more money. “It’s not some easy answer — just spend more,” Cantor said. “That’s not good enough, because the money’s not there. We don’t have the money.”

Cantor would not say directly whether Republicans would be open to budget increases in some areas, like infrastructure, if the overall level of spending were reduced to their satisfaction. “It won’t necessarily be a straight-up, flat decrease across the board,” he said. “Some programs may be eliminated, some cut more than others, absolutely.”

At the White House, press secretary Robert Gibbs would not expand on what to expect from the address beyond the preview Obama gave in a video addressed to his supporters on Sunday, in which he spoke about a competitiveness agenda. Obama, Gibbs said, will “spend most of his time talking about the economy, talking about the challenges that we face both in the short term in terms of doing whatever we can to help create jobs, in the medium and long term to continue working on issues like competitiveness and innovation, and ensuring that in the medium and the long term we get our fiscal house in order.”

He also declined to respond directly to Republican leaders who signaled their opposition to any new spending on infrastructure, education and research.

Gibbs said the need to get a handle on spending was obvious. “We’re not going to have a debate in Washington about whether we need to make some changes and whether we need to control spending,” he said. “We’re going to have, hopefully, a bipartisan discussion and work together on how we go about doing that.”

 

[Redeye]

It's a sad irony given that Blue States like California, through the federal tax system, essentially prop up Red States.  And sadder still that it's a populist ballot initiative in the case of California, the infamous Proposition 13 is what has financially hobbled the state.

Blue States like California or New York might be going down in flames:

http://thehill.com/homenews/house/139739-cantor-warns-no-bailout-of-the-states

 

[a_majoor]

What has financially hobbled the bankrupt states is spending more than they receive in tax revenues. Proposition 13 was the voters telling California pols they were not willing to be taxed at a higher and higher rates. California's bankruptcy is the Politicians and their various clients (public service unions, political rent seekers) flipping the taxpayer the finger.

Charles Dickens summed it up best:

"Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

 

[Redeye]

Except that Prop 13 capped rates at levels unsustainable given the services Californians reasonably expect from their government, sto that they cannot adjust their tax rates appropriately, to deliver those services.

It's become a politically untouchable thing, adding to the misery.  While there are many cases of waste and inefficiency in the state, those aren't the reason for the problem.

What has financially hobbled the bankrupt states is spending more than they receive in tax revenues. Proposition 13 was the voters telling California pols they were not willing to be taxed at a higher and higher rates. California's bankruptcy is the Politicians and their various clients (public service unions, political rent seekers) flipping the taxpayer the finger.

Charles Dickens summed it up best: