New American Paradigm

National Debt Growing Too Large to Ignore

Yesterday we played "whose to blame" on our current deficit problems.  Not to get all partisan, but the correct answer is Bush and Congressional Republicans.  Congratulations, collect your free cookie at participating Subway's (note, none are actually participating to my knowledge.)

Today I just wanted to point out how dire the situation is.

To keep the debt from wrecking the economy, the U.S. would need to raise annual federal income taxes an average of $11,000 in 2019 for all families that pay them, an increase of about 55%. "The revenues needed are far too big to raise from high earners," says Alan Auerbach, an economist at the University of California at Berkeley. "The government will have to go where the money is, to the middle class." The most likely levy: a European-style value-added tax (VAT) that would substantially raise the price of everything from autos to restaurant meals.

National Debt: How We Got Here

Everyone is suddenly a deficit hawk.  While it's predictable that politicians would point the blame somewhere other than their own feet, it seems to be a particularly popular sport these days.

My rule of thumb, the ones wailing the most are usually overcompensating for something (see Sen. Larry Craig.)

What's strange about it is that normally recessions are the last time to be concerned with deficits.  Keynesian economics, which is by far the dominant political economic theory no matter what a handful of conservatives like to pretend, basically states that the government replaces business and consumer spending in rough times, and pays down that debt during good times.

The latter part is what we seem to have trouble with.  Democrats and Republicans both have programs they like to lavish money on in good times, and Republicans also REALLY like tax cuts.  Tax cuts to stimulate the economy, and tax cuts when the economy is well. 

Prosperity Without Growth Money Quotes

It's rare that you see a government agency in this country or any speak the truth when "conventional wisdom" is so diametrically opposed to what needs to be said.  In this case, the "conventional wisdom" is that we can continue to seek constant economic growth in a sustainable way.  It's a myth all of us repeat to each other almost as though our existence depended on it, because the signs are all around us that this simply is not possible.  I guess constant reinforcement is necessary to maintain mass hallucinations.

Despite all that, our cousins in the United Kingdom have had a commission reporting directly to the Prime Minister that is attempting to do just that.  You can read the whole report here, but I'm going to share some of the money quotes.

Americans Saving More, Investing Less

We've mentioned before the marked increase in personal savings before.  This is, of course, a very good thing.  Low personal savings are unhealthy in the long term, so it's only natural that this trend reverse.  Usually though, there are opportunities for investment and that's eventually what brings economies out from under recession.  People start businesses, buy equipment, or otherwise develop the infrastructure necessary for making money.  Otherwise they supply capital in the form of stocks or bonds so that others can do so on their behalf.

Unfortunately, that does not appear to be happening now.  Paul Krugman notes:

That saving ought to be translated into investment, but the investment demand is not there. Housing is flat on its back because it was overbuilt; housing bubbles collapsed not only in the United States, but across much of Europe. Many businesses cannot get access to capital because of the breakdown of the financial system. But even those that do have access to capital don't want to invest because consumer demand is not there. Between the housing bust and the sudden decision of consumers to save, after all, we have a world with lots of excess capacity. The GDP report that just came out says that business-fixed investment, non-residential fixed investment, essentially business investment, is falling at a 40 percent annual rate.

Why Are Americans Driving Less?

Infrastructurist has the details on some great news.  Americans are driving less, ending a steady climb in vehicle miles traveled since... well forever.

 

But it brings up an interesting question.  Is this really a change in behavior or just a reaction to increase in unemployment and reduction in discretionary trips.  Nate Silver, of FiveThirtyEight fame, takes a stab at digging into the stats.  Even though he was wrong about the Oscars, he's right about everything else.  He figures:

Healthy Cities Healthy Economy

The Congress for New Urbanism, commissioned by a group called CEOs for Cities, released the results of a study on how New Urbanist growth strategies pays off economic dividends.  If you watch the video, try your best to ignore the awful music, they apparently spent all their money on the research itself. 

The study found that the recent push for growth into rural areas has had disastrous results which we've explored here and here.  Perhaps most importantly, it finds that returning to development in cities over exurbs, is the key ingredient to solving any number of our nation's most pressing problems.   Haven't we all been searching for a silver bullet for climate change, lack of affordable housing, obesity, and excessive personal and public debt?

Geithner’s Requiem

Last month Treasury Secretary Timothy Geithner went to Capitol Hill in an attempt to calm the fears of Congress, investors, and banks. His mission… to give a broad outline of his plan so that an impatient audience would understand that a plan was forthcoming. Normally we would excuse a career finance geek who's used to operating behind the veil of secrecy of the Federal Reserve System for not being the most impressive of public speakers. Nor did anyone expect details of the plan given he had not yet begun to the skeleton crew left at the Treasury. But unfortunately his performance was so poor; his inability to answer questions so frustrating, and the plan so vague that it had the opposite effect. Not that I will ever have a chance to be Treasury Secretary, but I'm also confident that I'll ever be so bad at my job that I cause a small stock market crash.

A month later we are now starting to see details of the plan leak out and there are some things I and others find troubling. Here's the plan:

1. FDIC will set up partnerships with private investors to supply enough capital that it removes the risk from purchasing $2 Trillion or so in "toxic assets" that are weighing down banks. The theory here is that nobody will buy them because they can't figure out what they're worth. Once they are initially cleared this will then have the effect of restarting a market which is desperately needed to make this work. Even a dangerous investment has some terminal value, but it won't unless the investor is sure they can unload it later on.
2. Firms that invest in these assets will then be hired to manage them creating a secondary incentive to climb into the "bad asset" business.
3. Expansion of the TALF program which I'd call the "rest of us" part of the plan. Essentially it backs asset-backed securities (ABS) like student, auto, credit card and other consumer loans.

So what's the beef? Geithner was bashed mostly for his inability to explain how a fair market value would be determined that is fair to taxpayers but still is enough to have a positive effect on the banks. In addition, there was no indication how risk and profit would be distributed in this public/private partnership. Now we're seeing the reason he was reluctant to say, it appears the downside is all on the government side of the ledger and the upside to the investors.

To me and others the most troubling aspect of this plan is that it presumes that the assets are as Tim Duy puts it "there are no bad assets.  Only misunderstood assets." They seem to be convinced that the market is wrong and that these assets have some intrinsic value higher than where they are. There's a problem with that theory… it's wrong. Homes are only worth what people can afford, no more, and typically no less. The problem with the last decade or so is that creative dishonest lending practices inflated buying power by 40% in some cases. Take away the interest only, no money down, hybrid adjustable rate mortgages and that phony buying power disappears. It doesn't take an economist to figure out what happens when the buying power of potential homeowners is dramatically reduced.

So apparently our grand plan is to close our eyes and pretend that these assets are still worth more than they are, a nod to a philosophy Republicans have been falling all over themselves to end known as Mark to Market or Fair Value accounting. It used to be that if an asset appreciated or depreciated, the bank simply held it at the same value until the gain or loss was realized… reality be damned. You'd think that they would value honesty and integrity in financial reporting. By the way, I would not suggest trying this strategy at home. It could have disastrous consequences.

Husband: "Honey how much is in the bank account?"

Wife: "Let's say… A MILLION!"

Husband: "Ok I'm buying a boat."

Needless to say this story ends in a messy divorce. The problem being that when the government tries the same thing there is no court we can run to try to dump our spouse and boat on. I suppose if there are no more losses to book on these assets it won't be a problem and we'll in fact see a gain. But if there were no more losses, why would we need the government inducing investment?