May 012012
Part 1 of 2
Part 2 of 2
Myth 1: TARP has been repaid
Myth 2: TARP helped the average American
Myth 3: TARP made a profit
Providing Congress a dose of reality, special inspector general for TARP, Christy L. Romero, writes:
After 3½ years, the Troubled Asset Relief Program (“TARP”) continues to be an active and significant part of the Government’s response to the financial crisis. It is a widely held misconception that TARP will make a profit. The most recent cost estimate for TARP is a loss of $60 billion. Taxpayers are still owed $118.5 billion (including $14 billion written off or otherwise lost).
Romero continues, by pointing out the obvious…if you keep bailing people/entities out, they’ll never learn:
A recent working paper from Federal Reserve economists confirms that TARP encouraged high-risk behavior by insulating the risk takers from the consequences of failure – which is known as moral hazard. The Federal Reserve economists reported how the large banks that received Government bailouts through TARP are now taking more risks than banks that did not receive taxpayer money. According to the Federal Reserve economists, the loans that the bailed-out banks are making today are riskier than those of their non-bailed-out counterparts. In contrast, the Federal Reserve study indicates that community banks that received TARP funds are taking fewer risks than their larger counterparts, in part because they use the TARP funds to bolster their capital. Many of the same large banks have greatly increased their executive compensation despite the fact that regulators have stated that compensation played a role in causing the crisis by encouraging risky behavior.
The top-ranking EPA official goes on to explain his philosophy of policy enforcement [emphases added]:
I was in a meeting once and I gave an analogy to my staff…the Romans used to conquer little villages in the Mediterranean. They’d go into a little Turkish town somewhere, they’d find the first five guys they saw and they would crucify them. And then you know that town was really easy to manage for the next few years.
And so you make examples out of people who are in this case not compliant with the law. Find people who are not compliant with the law, and you hit them as hard as you can and you make examples out of them, and there is a deterrent effect there.
And, companies that are smart see that, they don’t want to play that game, and they decide at that point that it’s time to clean up.
Apr 252012
From IRA Analyst:
Over the weekend, we got to go through a lot of accumulated reading, the majority of which only confirms our view that US markets and investors are living in the eye of the proverbial hurricane. White the equity and bond markets in the US still have the outward appearance of normalcy, in the EU and around the world financial markets are in disarray. The only question seems to be when Americans will get the wake-up call. As the character Leon said memorably to Harrison Ford in Bladerunner: “Wake up. Time to die.”
One of the stranger sensations we get on a weekly basis is when we are asked how long US interest rates will remain low. The question is interesting because we all hope that the Fed keeps things as they are. An increase in interest rates pretty much implies the apocalypse, if you know what we mean, so asking about Ben Bernanke easing up on the gas pedal could be seen as a sign of economic naiveté. But leaving things as they are has a cost too.
Here in the good old U.S.A, we’ve been enhancing consumer purchasing power with low rates from the Fed and deficit spending by the Treasury for some 30 years. We all know we are living on borrowed time and that the immediate future is likely to be a complete fiasco, but somehow the smiling gold miner in us all allows the American people to remain optimistic.
Guest post by Agcapita
Charts That Count
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US Student Loans – See Any Similarities to the US Housing Market? $1 trillion (yes with a “t”) and counting. US student loans are a prime candidate to be the source of a future financial crisis with the predictable QE response, bank bail-outs and all around money supply shenanigans. It is estimated that $85 billion in student debt was delinquent in Q3 of 2011. The use of debt to fund secondary education in the US has risen sharply over the years:
The total U.S. student-loan debt has reached almost $1 trillion.
None of this will come as a surprise to those acquainted with the basic economic concept that you get more of whatever you subsidize and typically at higher than market clearing prices. So in the same way that artificially low interest rates and risk subsidies from Fannie Mae and Freddie Mac drove home ownership rates and prices to unsustainable levels, subsidized loans to students have lead to the rapid growth in what can only be described as the diploma mill business while at the same time pushing the cost of such education to stratospheric levels.
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Saskatchewan Farmland Values Increase 21% in 2011? According to the recently released report on farmland values issued by Farmland Credit Canada “In the second half of 2011, farmland values in Saskatchewan increased an average of 10.1%, the highest average increase across Canada. This followed gains of 11.6% and 2.7% in the previous two reporting periods, continuing the decade-long trend of price increases that began in 2002. In Saskatchewan, farmland values increased by an average of 1.8% per month in 2011. The results in Saskatchewan, which has 40% of Canada’s arable land, appear to mirror what’s occurring in the United States, where double-digit increases in farmland values have been reported in several corn and soybean states.”
“The ongoing strength of commodity prices combined with a land market that had historically increased at a slower rate than in other areas of the country are two contributing factors to the current value increase. The rising values are also attributed to good seeding and harvest conditions in most areas of the province, coupled with low interest rates.”
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| “The Fog of Currency War”
Regards
Agcapita The New Yorker on the lasting impact of unemployment: Being unemployed is even more disastrous for individuals than you’d expect. Aside from the obvious harm—poverty, difficulty paying off debts—it seems to directly affect people’s health, particularly that of older workers. A study by the economists Till von Wachter and Daniel Sullivan found that among experienced male workers who lost their jobs during the 1981-82 recession mortality rates soared in the year after the layoffs. And the effects of unemployment linger. Many studies have shown that the lifetime earnings of workers who become unemployed during a recession are permanently reduced, and von Wachter and Sullivan found that mortality rates among laid-off workers were much higher than average even twenty years afterward. “…the Fed has had this zero interest rate policy in place since 2009. It took them a while to get there; they started cutting rates in 2007 and actually got down to zero by December 2008; so using 2009 as a starting point, 2009, 2010, 2011, now into 2012, so it’s over three years. And the Fed is telling us they intend to keep it in place for three more years: 2012, 2013, into 2014. So if they stick to that, that’s going to be six years of zero interest rates. That’s completely unprecedented.” — Jim Rickards Listen to the full interview with Jim Rickards conducted by Jim Puplava Debt Crisis – JapanGuest post by Glassman Wealth Services
By: Barry Glassman, CFP, president of Glassman Wealth Services Anytime you have to redraw or resize a chart to accommodate one piece of data – a severe outlier, if you will – you have to talk about it. Since it likely means something is amiss, you ignore it at your own peril. It begs the question, then, as to why the media, economists and politicians of the world continue to furiously debate the potential ripple effects of debt-laden economies like Greece, Spain, Italy and, to a lesser extent, the U.S., while ignoring the elephant in the room: Japan. Let’s take a step back and get some perspective. With the benefit of hindsight, most of us can look back at different points in our lives and wonder, “How did I miss that?” Take, for example, the dot-com bubble. Anyone who got burned when the bubble burst wishes they could go back in time and do things differently. But in 1998, when valuations for companies that were little more than business plans fetched millions of dollars, everyone seemed to have a reason or two to overlook the obvious flaws in this model. Similarly, just about everyone hopped on board the real estate express train – and got burned when it derailed in spectacular fashion. When we look back at the signs – such as the 2006 home affordability index – it’s clear that the gains in home prices simply could not continue. If we were to go back, then, and create charts using the valuations of houses and dot-com stocks as data points, we would have needed to redraw the scale of the chart to accommodate a few stratospheric outliers – a clear sign that something wasn’t quite right. Spider-Man’s “Spidey Sense” would have been ringing off the hook. Well, what we see from the chart below should be causing our early-warning systems to shift into full air-raid mode. Not only is the bubble representing Japan’s debt crisis a big giant outlier, it looks just overripe enough to burst. Or, as John Mauldin put’s it in his book, The End Game: “Japan is a bug in search of a windshield.”
What Mauldin means by this is that any entity, whether it is an individual, family or a nation-state, can handle debt a whole lot easier when interest rates are low. But when you’re already deeply leveraged, as Japan is, even the slightest upward tick in the cost of that debt will have a massive impact on that entity’s ability to keep servicing their debt. Translation: Bug meets windshield. Case in point: Mauldin estimates that a 1% hike in Japanese interest rates would eat up a full 10% of the nation’s tax revenue. Compounding the problem is that any additional small changes in the nation’s savings, growth or inflation rates could easily increase the cost of servicing its debt to a point of no return. Compare that to the U.S. where a bump in the interest rate from 2% to 3% could easily be digested. So why hasn’t Japan made the headlines for risk?
Add in Japan’s rapidly aging population, which could soon cause a downward shift in the nation’s savings rate, and you’re left without any good long-term solution to this equation. We’re fond of saying that growth solves everything. But in the case of Japan, growth – and the accompanying spike in inflation and borrowing costs – could be its worst nightmare. While no one might want to admit it, therefore, Japan might just be too big to save. Knowing the exact point when a bubble is going to burst is hard to predict, however, as our examples of the dot-com and housing markets show. That means that Japan might not find itself in any further dire straits for some time to come. The idea, then, is that we need to keep Japan on our radar so we can monitor any fluctuations in the nation’s borrowing rate due to things like inflation or even just plain old fear.
Economist John Kenneth Galbraith, in a conversation with host Harry Kreisler, looks back and reflects on the art of writing, U.S. policy toward the Third World during the Cold War, political leadership, and on his intellectual contributions. Apr 162012
Will Spain’s building debt crisis send global markets back towards chaos? Apr 142012
“The deflationary debt trap threatens to destroy a still incomplete political union,” he said in an article published in the Financial Times. While the European Central Bank’s injections of large sums of cheap funding into the financial markets through its long-term financing operation (LTRO) helped to prevent a credit crunch, it failed to solve the underlying problems of the eurozone where the gap between the richer countries such as Germany is widening against the indebted nations such as Greece. “The crisis has entered what may be a less volatile but more lethal phase,” Soros said.
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