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Monday, August 31, 2009

We Need NEW Jobs, Part Two

Today's rant is a riff on the last commentary on the need to create new jobs. This week's Business Week focused on the fact that basic R & D in the U.S. is waning. The labs at Bell Labs, Xerox's PARC, and Hewlett-Packard's lab are just a few examples of very large labs that were extremely productive, but are now gone or sharply reduced. The basic research that came out such labs having been driving our economy for over fifty years. We really need to find some way to reignite our basic research engine.

Consider this fact; right now we need 6.7 million new jobs just to replace the ones lost forever in this recession, and another 10 million to keep up with population growth. In the 1990's, the U.S. economy created 2.2 million new jobs a year, but in 2007 it had fallen to 900,000 jobs. But there is more. There are roughly 130 million jobs in the U.S. Twenty percent (20%) pay $60,000 or more, while the other 80% pay an average of $33,000. One of the reasons for this discrepancy is that low paying jobs in fast food outlets cannot be out sourced, but research scientists can work any where.

We just spent $3 Billion on that ill-advised Cash for Clunkers program. That amount would have completely funded a basic research lab the size that Bell labs used to be. There is a huge need to fund and to encourage the creation of new labs, and the expansion of existing labs. We can do that in a lot of relatively inexpensive ways. For example, we could give companies a tax credit for the dollars they spend on basic research. Or we could fund new research labs run by universities and private organizations with one time grants. Or we could exclude the first X% of profits that Venture Capitalists realize on their investments in start up ventures, and maybe allow tax credits for up to X$ in losses on investments that do not pay out.

Now compare those expenditures with the $800 Billion we spent (?) to bail out Wall Street banks, and then compare the return on investment we are likely to see any time in the future.

There was a time, it seems to me, that Congress could see something beyond the next election, but apparently that now longer applies. And that is tragic because the future of the United States is much longer than the next election cycle.

Saturday, August 29, 2009

We Desperately Need NEW jobs!!

There are roughly 15 million people unemployed in the U.S., and as many as another 15 million are underemployed (working shorter hours) or have given up looking. The numbers say that pretty much everybody has significantly reduced their spending.

And that brings us to what economists call The Savings Paradox. The paradox is that it makes perfect sense for individuals to cut back on their spending, but since the economy is about 70% driven by consumer spending, what is good for individuals is not good for the whole economy.

So we are in great need of some new source of jobs to get people back to work so they can resume spending and drive the economy into a new expansion phase. For decades now, all the evidence says that the overwhelming source of NEW jobs is small businesses. The question becomes what has this administration done to support start up small businesses? And the answer is NOTHING!!

The primary thing that the government has done about the recession is to transfer huge amounts of your money to coffers of Goldman Sachs, and to a much lesser extent, other Wall Street banks. The result of that action has been to REDUCE the amount of lending done by these financial monsters.

Oh yes, they also transferred billions of dollars to new car dealers to clear out their lots. What has actually happened is that 2010's auto sales have been moved forward to 2009. What a stupid stunt!

Back to the real problem. The recession can not end until people go back to work. Since most of the jobs that were lost are not coming back, it is vitally necessary to create new jobs. And that means entrepreneurs starting new businesses, but the government is doing nothing to support that activity. In our new book, The Great Recession Conspiracy, we show exactly how to make this process work. Read all about it at

Friday, August 28, 2009

Here We Go Again

Today's Washington Post reports these unnerving facts;

1) J. P. Morgan Chase now holds more than $1 of every $10 on deposit in the entire U.S.
2) The Bank of America also holds more than $1 out of every $10.
3) Wells Fargo also holds more $1 out of every $10 on deposit.

Not only do these three banks control over 30% of ALL deposits in U.S. banks, they also issue 1/2 of all new mortgages and two out of every three credit cards.

Did anybody mention "Too Big To Fail"?????

Thursday, August 27, 2009

Now For The Other Shoe

So far, most of the attention has been on sub-prime mortgages, liar loans, etc. Now comes the problem of Option Arms (Adjustable Rate Mortgages). They are so awful that nobody offers them any more. They came in four flavors;
1) Make a payment that doesn't even cover the interest, let alone pay down the principle.
2) Pay just the interest.
3) The equivalent of a 30 year fixed rate mortgage.
4) The equivalent of a 15 year fixed rate mortgage.

Three quarters (75%) of the Option Arms were written as #1 with the borrower picking a monthly payment they liked regardless of the financial reality. But after some period of time, the interest rate is "re-set", and the payments can double.

Barclay's Capital says they expect 81% of the Option Arms written in 2007 to default, and it is beginning to happen now. Although fewer Option Arms were written compared to sub-prime mortgages, Option Arms are now defaulting at a rate twice as high as sub-prime defaults.

Get ready for more foreclosures and for more people to lose their homes.

Wednesday, August 26, 2009

It Ain't Over Until It Is Over

Wise old Yogi Berra got that right. A brand new problem is emerging from the debris of the Great Recession Bailout. The Federal Deposit Insurance Corporation is the organization that takes over failed banks and sells off their assets. It also guarantees that your deposits up to $250,000 will be paid.

The FDIC funds this activity with a fee it collects from member banks. Now here is the problem. The FDIC is just about broke. There are an increasing number of small and medium size banks going broke. A year ago, the FDIC had 252 banks on its "watch list". Today, it has 305.

The FDIC has just two ways to replenish its coffers. It can raise its fees on member banks, which can be expected to push more banks off the cliff. It can also borrow money from the U.S. Treasury, which will flood the economy with even more money (read inflation).

You may ask, why are these banks now in trouble? And the answer is that they have been avoiding valuing correctly, or selling, the home mortgages they have on their books.

Look at it this way. They have been kicking the can down the road and now the road is coming to an end.

So the message here is this: Beware of the happy talk clowns in Washington who want you to believe the Recession is over simply because some companies are beginning to replenish their inventories.

But Paul Krugman's question remains appropriate, "Who is going to buy all that stuff?"

Monday, August 24, 2009

How To Pay For Social Security

As you know, you are taxed at the rate of 6.2% of your income to finance Social Security. Your employer is taxed an equal amount. But when your income reaches $106,800 (if it does), the tax stops, e.g. is capped. Last year, there were 17,813,000 households in the U.S. who earned more than $100,000, but paid no more into Social Security than you did, but who will get exactly the same benefits as you will (do).

If all those rich folks made a Social Security contribution without a cap, it would raise $326 Trillion!! End of Social Security problem.

Write or email your congress persons. And do it now.

High Speed Rail Nutiness

Robert Samuelson, the Washington Post columnist, has a spot on column today. But first note that I usually don't much agree with Samuelson because he is often whiny about things. Today, however, he is right on target.

His point is that since 1971, we have spent $35 Billion in subsidies to keep Amtrak going. You can see the operating results for Amtrak in our book, The Great Recession Conspiracy, and they are pretty awful. In the U.S., 140 million people go to work every day and exactly 78,000 of them ride Amtrak, and you pick up $50 of the cost of each and every ticket.

Now the government is proposing spending $11 TRILLION on some high speed rail projects between now and 2019. This money would be "seed" money to build ten high speed rail corridors, i.e., Philadelphia to Pittsburgh, Los Angeles to San Franciso/Sacramento, etc.

Estimates are that construction costs could fall between $22 Million a mile to $132 Million a mile, so take $50 Million a mile as a working number and calculate the cost of each corridor for your self. The government says it will take 1 million cars of the road, and even if that were to come true, it is less than 1/2 of 1% of the 254 million registered vehicles.

Proponents of the high speed rail project point to Europe as a model of why it would work in the U.S. I have ridden the high speed trains in France and Spain, and they are quite nice. The country side does go by pretty fast at 200 MPH.

The problem is that Europe ain't America. First thing, population densities are very, very different. That means there are more densely populated metropolitan areas to support rail lines in Europe. In Britain, the 653 persons per square mile, in Germany 611, and 259 in France. In the U.S., it is 86 persons per square mile. And distances in the U.S. are much, much greater in the U.S. than in Europe. When the trip is about 400 miles, air travel is cheaper and, of course, much faster.

As you know, we have a marvelous transportation system called the Interstate Highway System which is in great need of repair, updating, and expansion. That is where our dollars should be going.

Now here is the really troubling thing about the High Speed Rail project. Our government never seems to learn anything from actual events. Amtrak is a horribly expensive boondoogle, but now we should expand it. If you would like more lessons in government "non-learning", see The Great Recession Conspiracy.

Friday, August 21, 2009

Good Grief!!

The President just announced that "they" didn't anticipate the reaction to the Cash for Clunkers program. Every sales person, every marketing manager, et al, could have told him what would happen when the price of something was reduced by $4,500. All of those economists and none of them have heard of price elasticity???

It seems clearer every day that nobody in the government has any notion of how the real world works. Is that because they have never had to experience the world you and I live in?

Wednesday, August 19, 2009

I am beginning to worry

One of the things that really impressed me when Barack Obama was running for the nomination, and again when he was running for president, was his superb political instincts (with an occasional slip up). But in the last six months, that skill seems to have eluded him on two very important occasions.

But first, let's get some things straight. The overwhelming number of his cabinet appointments have been superb. I have major reservations about Eric Holder, but I will give him the benefit of a doubt.

His economic team is a complete disaster!! The Goldman Sachs gang that can shoot straight and the truly scary Larry Summer are simply awful. We describe all of that in our book, The Great Recession Conspiracy.

What is beginning to worry me is the incredible ineptness of his handling of the health care crisis. And it is a crisis. We are now spending 18% of our GNP on health care and the rate of annual increase shows we are on track to reach 30% in a couple of years. Forty seven million U.S. citizens do not have health care insurance and are using emergency rooms for their health care needs. If you do not understand there is crisis, you might has well stop reading here.

In addition, we get lousy returns for our health care investment. Our life span is significantly shorter than our European contemporaries and our infant death rate is worthy of a third world country, to name a few shortcomings.

So the fact that we need health care reform is beyond question. But how the Obama team is going about the job is simply unbelievably awful, and the results of that incompetence appear every day.

First thing, there is NO health care bill, period. There are three Congressional "discussion papers", and they are all different. Since Obama has no Health Care bill, he has to defend bits and parts of the three working papers that he has had no hand in creating. Hence, he looks like a complete fool defending ideas he doesn't even believe in. On the other hand, the opposition can pick tiny pieces of insanity out of this working papers and crucify Obama on each of them. See the wack job from Alaska for one, but just one, example. For another see Chuck Grassely babbling about health care in the U.K. about which he knows absolutely nothing. He is, otherwise, a pretty sensible guy.

But here is the real problem. Obama has got everything bass ackward. When you sort out the wack jobs, there are still real concerns among really sensible people about how he intends to pay for his proposal. He should have addressed that incredibly important problem before he went on the present his proposal, whatever that turns out to be. Here is what he should have said and done.

There are six, relatively, simple steps he could have proposed to pay for his plan before the fight about what was in the proposed health care bill began. He would have automatically enlisted support of the "blue dog" Democrats who are worried about the costs, among others.

1) Outlaw pharmaceutical advertising directly to consumers. $40 billion dollars are spent annually to promote "prescription only" drugs directly to consumers. That is simply a stupid waste of money that big pharma could save to off set other new expenses.

2) Address fraud in Medicare as it exists today. Nobody knows exactly what the real number is, but most everybody agrees its somewhere between $1 and $500 BILLION. One example: Numerous clinics have been found to recruit "patients" from around the country, and paying them cash, while the clinic bills for a wide variety of phony procedures.

3) Fund digitizing medical records. An large number of medical problems occur every day because hospitals do not have accurate patient records for each patient. Each of those problems have a significant, and unnecessary, cost.

4) Recently, controlled experiments have shown that hospital infections can be reduced by 95% with simple programs of hand washing, specifically designed procedures, sterile gowns and gloves, etc., and the cost has come out at $17 per patient!! And the savings are in the hundreds of thousands of dollars in each hospital.

5) Computer programs and analysis show the cost/benefit results of various procedures and pharmaceuticals should be funded immediately. The same procedures at the Mayo Clinic cost $100,000 more than if they were performed at UCLA Medical Center. Peter Orzag has started this project and it should be funded immediately.

6) 60%, 70%, 80%, 90% of our medical expenditure is spent on the last two weeks, two months, two years of life. You pick the combination of definitions that suits you, and the result is still the same, the majority of our health care expenditure is spent on end-of-life heroic procedures. A "living will" goes a very long way to avoid useless, heroic procedures and allows individuals to have a hand in final arrangements. I have a living will and everyone I know has one. Obama has one, but he has allowed the wacko jobs on the right fringe to hijack this very, very important issue and relabel it as "Killing Grannies".

Yes, I am beginning to worry that what will come out of Congress will be a counter-productive hash that will do nothing to solve the problem. Remember that every dollar spent on health care is a dollar that cannot be spent on education, repairing roads, invested in wind and solar power, and your own pet project.

Sunday, August 16, 2009

Time to Be an Optimist? Not Likely!

Business Week magazine this week claims to be optimistic about the economy. Here is the lead paragraph from the Editor's Memo.

"It's a tough time to be an optimist. Unemployment is a scourge, sapping the public's spirit and creating hardship for millions. Many key Presidential initiatives have sunk into the mire that passes for the legislative process and will emerge, if at all, muddied beyond recognition. The stimulus is trickling our inefficiently, elements of the financial industry resorting to their old, risky ways, and the huge cost of the current and proposed programs--from the auto bailout to cap-and-trade and health-care reform (not mention two wars)--threatens to produce unprecedented deficits."

This guy agrees with everything we have been saying here, and he comes out an optimist!!

Go figure.

Thursday, August 13, 2009

What The Government Really Should Have Done

There is a great deal of back slapping and self congratulation going on in Washington these days about how wise and courageous government policy pulled the country back from the abyss. That claim deserves some close scrutiny.

What actually happened is one man, basically, declared we were facing an abyss, Henry Paulson, former chairman of Goldman Sachs. He then convinced a few other people that there was an abyss. What there actually was is a couple of investment banks facing considerable losses because of their own bad judgment. And the lead troubled bank was Goldman Sachs.

Paulson's plan was to transfer huge amounts of your money to Goldman Sachs and a couple of other banks to keep them from bankruptcy.

So what should have happened? Those deeply troubled banks should have been made to change from investment banks to commercial banks. That can be done in less than 24 hours. In fact, that is what they did AFTER they received billions of dollars of your money.

As soon as they became commercial banks, they would have become wards of Federal Deposit Insurance Corporation, which would have forced them into bankruptcy, re-organized them, sold off assets, and cleaned up the mess. The FDIC is extremely skilled and practiced at that job and has been doing effectively for decades and is doing it today.

Would that action have cost a lot of money? Absolutely, but not nearly as much as the bail out plans that were actually put into place.

In addition, the policy of moral hazard would have been firmly established. Or, in Colin Powell's terms, "You break it, you own it".

In addition, we would not have to be faced with the egregious bonuses now being paid by the same Wall Street banks.

Finally, we would have solved the Too Big To Fail problem for once and for all. (maybe)

But if we had followed this plan, Goldman Sachs would probably be out of business today instead to rolling in record profits.

Oh damn, I knew there was something I overlooked in this scheme. Can you figure out what that would have been?

Wednesday, August 12, 2009

They are at it again!

Yes, the Business Cycle is driven by psychology. When everyone thinks things are going to get better, they actually do, so on one hand you can't complain about all the happy talk coming from Washington this week.

The trouble is that the facts undercut the happy talk. Right now, there are about 15 million unemployed Americans and about another 9 million are only working part time. With 67% to 70%
of the U.S. economy driven by consumer spending, recovery cannot begin until those people start spending money again, and that won't happen until they have jobs.

But the really scary part is that about 5 million have been unemployed for six months or more. The jobs they did are gone and they are not coming back, end of story. The government should be spending money on re-training those people for jobs that actually exist now! Instead they are spending $3 Billion on buying up old automobiles. That program has one good outcome and two very bad ones.

The good outcome is that auto dealers lots are now emptying out. But the first bad outcome is that there is every appearance that all the program has done is shift sales ahead by six to twelve months so that very shortly the auto companies and their dealers will be back begging for another bailout. What do you think the chances are that they will get it?

The second bad outcome is that the Clunkers program has seriously reduced the supply of older, cheaper cars that low income people need to be able to buy to get on with their lives. Not only that but the prices on the used cars that are available has gone up. Even a dumb economist should know that when supply is shrunk and demand remains constant prices will go up!

But I guess you shouldn't be surprised by all of this since Washington's economic policies are being set by millionaire economists and lawyers who don't have the faintest idea how you and I live. And it looks like, given the evidence, that they truly don't give a damn either.

Friday, August 7, 2009

Goldman Sachs Strikes Again

Remember just a few weeks ago when President Obama was outraged at the huge bonuses being paid at Goldman Sachs and other Wall Street banks? Well, he has now gone silent on that subject.

The BBC reported yesterday that the reason for this new found silence is that Larry Summers convinced Obama that he was hurting the morale of Wall Street bankers by complaining about their outrageous bonuses.

Hurting the morale of Wall Street bankers? What about the morale of 15 million Americans without jobs who don't have salaries, let alone bonuses??

This administration, which started out with such high hopes, is rapidly becoming a bunch of spend thrift thugs. Best estimates are that a tiny 12 cents of out every Stimulus Bill dollar actually went to anything remotely able to stimulate the economy. The other 88 cents went to pet projects of Nancy Pelosi and her gang.

As we pointed out, and explained, in The Great Recession Conspiracy, the U.S. is on a direct path to bankruptcy. Since the U.S. cannot declare bankruptcy, it will print new money to pay the bills, and that is called inflation, pure and simple!

Thursday, August 6, 2009

Cash For Clunkers

Here are the top ten trade-ins;
1)1998 Ford Explorer
2)1997 Ford Explorer
3)1996 Ford Explorer
4)1999 Ford Explorer
5)Jeep Grand Cherokee
6)Jeep Cherokee
7)1995 Ford Explorer
8)1994 Ford Explorer
9)1997 Ford Windstar
10)1999 Dodge Caravan

And here is what they bought with their cash and trade-in;
1)Ford Focus
2)Honda Civic
3)Toyota Corolla
4)Toyota Prius
5)Ford Escape
6)Toyota Camry
7)Dodge Caliber
8)Hyundai Elantra
9)Honda Fit
10)Chevy Cobalt

Two easy conclusion; Ford has certainly learned the lesson of the market for improved mileage. The second is much more worrisome. Where are all the high quality Chevrolets that Fritz the new CEO said that GM now makes??

And remember that we now own GM. What do you think are the chances that our investment in GM will ever pay off?

But hang on, it gets worse. Yesterday, the government gave out $2.4 Billion in grants to develop electric vehicles. On the face of it, that is a good thing. As we said in our book, The Great Recession Conspiracy, we are in a long term trend to replace petroleum with electricity as a power source. However, GM got $146 Million of that money while Ford got only $30 Million. And what is GM going to spend that money on? The Chevy Volt! A years away from production car with a projected cost of $40,000!

When will the insanity end???

Wednesday, August 5, 2009

The Facts About The Recession

The happy talk idiots in the government are starting to babble that the recession is over, and that is pure crap!

Here are the facts:

More than 7 million people lost their jobs between January and June, 2009. That is the steepest job loss since World War II.

Unemployment is now averaging 24.5 weeks (over six months) and that is the longest since the government started tracking it in 1948.

Beware happy talk.

Change We Are Having A Hard Time Believing In

All during Obama's campaign for President, he repeatedly promised that he would change how Washington works. He also promised to take better care of the middle class, e.g., us. Now the score card is beginning to be clear.

The Treasury dumped Billions of dollars into big banks so they could modify "toxic" (their word, not mine) loans. There are roughly 4 million homeowners who need to modify their loans but only 9% (360,000) of those loans have been modified. Two of the big banks have even worse records. Wells Fargo has only modified 6% of its loans and Bank of America is even poorer at 4%.

We have talked about the obscene bonuses being awarded by Goldman Sachs and others as U.S. household incomes continue to decline, but here is brass ring to watch.

A bond trader who works for Citibank earned a bonus of $100 Million by trading in oil futures and driving up the price of gasoline. There are apparently no questions about the legality of his contract. But here is the kicker! We own a substantial portion of Citibank's stock, e.g., we own the damn place.

So here is where the score card gets filled out. The administration has done very little to help home owners and even less to create jobs for ordinary folks, so watch to see how they handle the $100 million pay day.

Monday, August 3, 2009

They just don't get it!

Today's Washington Post ends a story on how the recession is ending with the following paragraph.

"Even as the nation starts producing more goods and services, though, the joblessness is expected to continue rising--both because the expansion is expected to be weak initially and because businesses are behaving with extreme caution, making them reluctant to hire even if they do see rising demand for their products."

That sentence is so wrong headed, it is hard to know where to start. First of all, the idea that the nation is producing more goods and services is based on a distortion of the facts, e.g., they left out automobiles and aircraft to get a tiny positive number. Add those two factors back in and the drop in production is substantial.

Next, the next expansion, whether weak or strong, cannot begin with ever increasing unemployment. Fifteen million unemployed with benefits expiring will never produce the improving confidence in the future needed to end a contraction.

There won't be any increase in demand until people have jobs and confidence in the future. Period. Neil Irwin, the Washington Post Staff Writer responsible for this silliness obviously has not read our book, The Great Recession Conspiracy.

Sunday, August 2, 2009

The Unintended Consquences of Social Systems

Let's begin with the fact that ALL of the government's economic team are millionaires and in some cases multi-millionaires. That explains a lot about the incredibly stupid decisions they are making.

Remember that Cars for Clunkers requires that a car, to be destroyed in return for a $4,500 credit toward a new car purchase, has to be driveable. Today, according to, I could buy a 2002 Ford Focus LX Sedan for $4,500 and that there are hundreds more cars for sale for less than that amount within 50 miles of where I am sitting. All of them are driveable.

Under normal conditions, the dealer taking in a used car in trade for a new car would sell the used car at a local auction. Those low level auctions are the primary source of the used cars that are sold in the little independent auto sales lots in your city.

What is happening now is that the number of used cars for sale at those auctions is reduced so the supply for independent lots is restricted. Remember what happens when the supply of something is limited and the demand remains the same. That's right; the price goes up!

So what the Cash for Clunkers has accomplished is to raise the price of used cars for the very people who are most hurt by the Wall Street banker's recession, i.e., the gardeners, housekeepers, nannies, etc. for the Wall Street bankers and the Obama economic team.

Another Government Screw-Up

There are currently 15 million people in the U.S. who are unemployed and 10% of them (1.5 million) are facing an immediate end to their unemployment insurance benefits. The stimulus bill could have put a lot of those people back to work if the money had been given to city mayors across the country. Instead, the money was given to governors who immediately played politics with the money. For example, high speed rail transport may be a good idea, but it will be years and years before it creates any jobs.

But the dumbest idea to come from Washington lately is the Cash for Clunkers program. We talked about the inappropriateness of the program earlier, but a whole new problem has emerged. The first $1 Billion Congress appropriated for the program was gone in a couple of weeks. Now the House of Representatives has voted another $2 Billion to extend it.

When will the hand out stop? What will happen next year when new car sales are low because the Cash for Clunkers program simply shifted demand forward a year?

If car owners can get a bail out gift, why not washing machine owners? We could get rid of old washing machines and replace them with new machines that conserve water and electricity. Wouldn't that be a good idea? What is your good idea for the next bail out?

And let's be clear about this; Cash for Clunkers is not about stimulating the economy, creating jobs, or anything actually important for the economy-it simply about clearing the car lots of car dealers across the country.

Saturday, August 1, 2009

The Recession Is NOT Over

If you have read our new book, The Great Recession Conspiracy, you understand that the Business Cycle is driven by psychology, not finances. As we discussed the other day, there is no sign that consumer attitudes are becoming positive about the future. Unemployment continues to increase so there is no basis for confidence.

If you understand the Business Cycle, you know that credit is the hand maiden of the Business Cycle. Credit expands when the economy is expanding and shrinks when the economy is contracting. Now the facts; the fifteen largest U. S. banks actually REDUCED their lending by 2.8% in the second quarter compared with the first quarter.

So here is the bottom line; pay attention to what people actually do and ignore the number waving fools in the government and on Wall Street.