Mish's Global Economic Trend Analysis

Hussman Blasts Geithner, Bernanke, Keynes; Why Keynesian Stimulus Always Fails
San Jose Mayor Ponders Selling Water System; San Jose College 'Director of Institutional Effectiveness' Works Another Job While on Sick Leave
Vancouver Home Sales Drop 30 Percent , Calgary 42 Percent - First Comes Volume, Then Comes Price; Canada Housing Peak is Finally In
The Craigslist Jobs Indicator
Services ISM Growth Slows - Jobs, Imports, Export Orders Contract; Manufacturing vs. Services ISM - Which is More Important and Why?
Illinois Construction Workers Make $50-68 Hour, Strike for 15% more

Hussman Blasts Geithner, Bernanke, Keynes; Why Keynesian Stimulus Always Fails

Posted: 06 Jul 2010 10:48 PM PDT

In his latest post, John Hussman takes a well deserved swipe at illegal Fed operations, Geithner, Bernanke, and Keynesian stimulus.

Please consider a few snips from Implications of a Likely Economic Downturn.

.... With regard to "stimulus" plans, my difficulty with last year's policies is not so much an aversion to government spending as it is a rebuke of the notion that government spending is by its nature stimulative or beneficial to the economy. The issue is how this real value is used. Is it used to advance socially useful outcomes which private individuals, through some failure of coordination, could not achieve? Or is it used to defend bondholders, industries, and institutions with which the policymakers are most closely aligned?

The Keynesian view is that government spending is simply a monolithic letter "G." Keynes cared little about the productivity or lack thereof to which public resources were devoted, even writing " If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again... there need be no more unemployment." The only difference between Keynes and Tim Geithner is evidently that Geithner prefers to place the bottles a bit closer to Wall Street.

...Meanwhile, I continue to believe that both Bernanke and Geithner's hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed. The diversion of public resources to the bondholders of failing financials - to precisely the worst stewards of capital in society - is not stimulative, but ruthless. A second economic downturn should encourage the repudiation of the policies that Bernanke and Geithner pursued during the first.

Basic ethical principle dictates that policy makers should not burden ordinary Americans to pay the losses that well-informed bondholders voluntarily took when they lent money to failing institutions. From my perspective, it is urgent to recognize that Fannie Mae and Freddie Mac obligations are not legally obligations of the U.S. government, that its backing was always at best implicit, and that even the Treasury's distressingly generous 3-year promise to bail out Fannie and Freddie only takes those obligations through 2012. Longer-term GSE securities held by the Fed and by investors represent debt obligations of insolvent institutions, yet are still treated by investors as if they are default free. Congress should quickly clarify that FHA obligations are explicit government commitments and GSE debt is not. Traditionally, the Fed's open market operations have been almost exclusively using Treasuries. Any other securities were purchased on a repo basis only, which meant that the Fed would get its money back predictably, regardless of the quality of the security. Without these, the Fed can unconstitutionally engage in fiscal policy, and has recently done so by purchasing Fannie and Freddie debt outright. Congress should limit the Fed to purchasing sovereign debt of the U.S., with a limited role for sovereign debt of major, fiscally intact trading partners, or it should bless GSE debt explicitly so Americans understand that the U.S. dollar will ultimately become the Reichsmark.

...Interestingly, some observers lament that corporations and some individuals are holding their assets in "cash" rather than spending and investing those balances, apparently believing that this money is being "held back" from the economy. What is preposterous about this is that the "cash" that companies and individuals are observed to be holding is primarily in the form of government securities and base money created over the past couple of years, which somebody has to hold at every point in time until those liabilities are retired. This is not money that is waiting to be spent. It is a stack of IOUs representing resources that have already been squandered, and now somebody has to hold these pieces of paper until they are retired.

In short, instead of directing savings toward investments in real, productive assets that we would observe as physical output, fixed capital, and equipment (and claims on those assets in the form of corporate stocks and bonds), our economy has been forced to choke down a massive issuance of government liabilities in order to bail out bad debt. For every dollar of debt that should have defaulted, we now have two dollars of debt outstanding (the original debt, and a newly issued government security). What appears to be "sideline cash" is simply the evidence of past spending. Again, the crucial consideration is how the government spent the funds in the first place. Rapidly mounting evidence suggests that the answer is "not very well."

Advancing Socially Useful Outcomes

There is much more in the article that inquiring minds will want to investigate, including a "3-minute course in Keynesian Theory", much of which Hussman quickly and correctly rebuts.

My one point of disagreement with Hussman concerns whether or not government can "advance socially useful outcomes" and if so at what cost.

I do not believe it is the government's job to even attempt to do such a thing. Indeed, Fannie Mae and Freddie Mac are the direct result of Congress attempting to advance social outcomes.

By promoting home ownership with hundreds of "affordable home" programs, government drove up the costs. The ultimate irony is home prices are now crashing, thereby becoming more affordable, yet the government wants to halt the slide.

It is difficult to find any major government policies that successfully advanced socially useful outcomes. The one possibility that I can think of the interstate highway system.

However, as the link shows, the original purpose of the highway system had noting to do with enhancing trade or commerce, or creating jobs, but rather a way to quickly move troops and also to evacuate cities in case of nuclear attack.

Now we are paving roads that do not need to be paved just to put people to work quickly (and I might add at ridiculously inflated wages). That stimulus is now dead, and what pray tell did we get out of it?

Unfortunately, the track record of government programs actually achieving real net benefits is horrendous and made much worse by prevailing wage laws, notably the Davis Bacon Act.

Prevailing Wage Lunacy

Please note that Davis Bacon is yet another program designed to advance a socially useful outcomes (increase wages). However, the bill is now bankrupting cities, counties, and states.

I discussed Davis Bacon in Illinois Construction Workers Make $50-68 Hour, Strike for 15% more.

.... Any way you slice it, the whole prevailing wage concept is madness. It guarantees taxpayers pay the highest rate possible for every job filled by a union worker.

If given the chance, people would be lining up for miles for the jobs at $2 more than minimum wage.

There is a three-fold solution to this madness

1. Make Illinois a right-to work-state
2. Scrap Davis-Bacon
3. Require competitive non-union bidding on all projects involving Federal funds.

Please see Thoughts on the Davis Bacon Act for more on the insanity of prevailing wage laws.

In 1999 Ron Paul introduced a measure to repeal Davis-Bacon. Someone needs to try again, and again, and again, until that mad relic of the Great Depression is repealed.

Actually public unions should be banned completely.

Government should try to provide the most services for the least amount of money, not the fewest services for the greatest amount of money.

Sadly, public unions, in conjunction with prevailing wages laws, collective bargaining, and corrupt politicians all combine to insure taxpayers get the least for their hard earned dollars. Adding insult to injury, public unions have the gall to whine about it.

Misallocation of Public Resources with Mind-Numbing Speed

Hussman commented "Bernanke and Geithner's hands should be tied quickly. If we have learned anything over the past 18 months, it is clear that these bureaucrats can misallocate an enormous quantity of public resources with mind-numbing speed."

I certainly concur, and will up the ante by placing Congress in the same boat. How else do you get a $1.6 trillion deficit?

Why Government Stimulus Fails

Because government is never held accountable for costs, and because only the free market has any real chance of determining economically viable projects, Keynesian stimulus is always doomed to fail, creating "two dollars of debt outstanding (the original debt, and a newly issued government security) for every dollar of debt that should have defaulted".

Common Sense Policies

If Congress wants to do something that makes sense, how about lower wages for government workers (preventing many state layoffs), coupled with slashing corporate income taxes on profits generated and kept in the United States? The latter would promote hiring.

Current tax policy favors moving both jobs and capital overseas. Small businesses who cannot move workers or profits overseas, pay a hefty price.

The idea is to get the most from public spending, not the least. Those in the public sector who can find better opportunities elsewhere can leave.

Sadly, the Obama administration is busy with nonsensical stimulus ideas selected on the basis of speed rather than productivity while raising taxes and placing more burdens on small businesses.

Every one of those is a policy error, and as I have pointed out before, Policy Errors Cause Depressions.

As a direct result of those policy errors, the economy is doomed.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

San Jose Mayor Ponders Selling Water System; San Jose College 'Director of Institutional Effectiveness' Works Another Job While on Sick Leave

Posted: 06 Jul 2010 10:14 PM PDT

San Jose has budget troubles and is considering selling assets to help balance the budget. Mercury News reports San Jose considering plan to sell water system.

San Jose officials are considering leasing or selling the city's water system. Mayor Chuck Reed says the idea could help balance the budget. A sale could bring in $50 million or more—but also higher water bill for some residents.

One potential buyer is the private San Jose Water Co., which supplies 1 million people in San Jose and neighboring communities. The company's president sent the mayor a letter of interest in April but noted a sale would mean increasing some water bills—possibly by 29 percent.

A sale also would require a public vote.

San Jose's Structural Problems

San Jose needs to fix structural problems first because one-time fixes will not address the root cause of its budget woes: union wages and pension benefits.

I suggest San Jose outsource its entire police and fire departments to cut costs. If that does not work, then bankruptcy seems like a fine option.

San Jose college executive worked elsewhere while on sick leave

Please consider San Jose college leader worked at DeAnza College while on sick leave

A top executive at the financially troubled San Jose/Evergreen Community College District earned a full salary while on sick leave this spring — yet, during that same period, she earned a separate salary teaching at another nearby district.

Bayinaah Jones, whose title at SJECC is executive director of institutional effectiveness, earned $30,672 on sick leave there, but was apparently healthy enough to hold down a $5,775 teaching position in the Foothill-DeAnza Community College District.

The revelation comes at a time of economic hardship at community colleges, where students are shut out of classes due to budget cuts — and a mere $800 can provide a student with a valuable certificate in cosmetology or dental hygiene. It follows a searing state audit of the SJECC District's books, which was critical of spending by former Chancellor Rosa Perez — whose live-in partner is Jones.

Perez also took paid sick leave — for eight months, earning $25,000 each month — until retiring last Wednesday due to health reasons.

Records show that Jones took sick leave from her $123,000 position — "per my physician's order," she wrote in an e-mail message — in April, May and June of 2010. She remains sick, "until further notice."

In 2005, Perez hired Jones to be her executive assistant. She was quickly promoted to a newly created job as executive director of institutional effectiveness. The two women live together in a home they own in San Francisco.

In the last several years, according to documents obtained by KGO-TV, they took 18 business trips together to places such as El Salvador, Scotland and West Palm Beach — paid with district credit cards.

Criminal Fraud

The actions of Bayinaah Jones and Rosa Perez constitute criminal fraud in my opinion. Both should be prosecuted. Moreover, the idea that there needs to be an executive director of institutional effectiveness is ludicrous in the first place. The greed of this pair is galling.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Vancouver Home Sales Drop 30 Percent , Calgary 42 Percent - First Comes Volume, Then Comes Price; Canada Housing Peak is Finally In

Posted: 06 Jul 2010 04:50 PM PDT

The Globe and Mail reports Vancouver home sales drop sharply.

The Real Estate Board of Greater Vancouver reported yesterday that home sales fell 30.2 per cent in June from the inflated levels of a year earlier, and 5.8 per cent from May. New property listings rose 1.2 per cent from May and 32 per cent from a year earlier.

The Calgary Real Estate Board, meanwhile, reported sales of single family homes fell 16 per cent in June from May and 42 per cent from June of 2009, while condo sales fell 14 per cent from a month earlier and 40 per cent from a year earlier. Notable is that sales of high-end properties worth $1-million or more are rising, the group said.

"We are seeing continued moderation in Calgary's home sales in the face of higher mortgage rates, increased inventory levels and a decreasing number of first-time home buyers entering the market," said board president Diane Scott.

This pattern is quite similar to how things cascaded in the US once the top was in.

Housing Collapse Cascade Pattern

Volume drops precipitously
Prices soften a bit
Inventory levels rise slowly
High-end home prices remain relatively steady for a brief while longer
The real estate industry tries to convince everyone it's "business as usual" and homes are affordable because rates are low
Bubble denial kicks in with media articles everywhere touting the "fundamentals"
Stubborn sellers hold out for last year's prices as volume continues to shrink
Inventory levels reach new highs
Builders start offering huge incentives to clear inventory
Some sellers finally realize (too late) what is happening
Price declines hit the high-end
Increasingly desperate sellers get creative with incentives, offering new cars, below market interest rates, trips, etc
Gimmicks do not work
Price declines escalate sharply at all price levels
The Central Bank issues statements that housing is fundamentally sound
Prices collapse, inventory skyrockets, and builders holding inventory go bankrupt

Some of those may happen simultaneously or in a different order, but the whole mess starts with a huge plunge in volume.

I am now confident the peak in Canadian housing insanity is finally in.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

The Craigslist Jobs Indicator

Posted: 06 Jul 2010 12:19 PM PDT

Here is an email from "Taperwood" who has been tracking Craigslist classified ads for the Los Angeles and Seattle areas as a proxy for job openings and business demand.

Taperwood writes ...

Hello Mish

The Friday Craigslist Los Angeles and Seattle job listings I track are down considerably over the past month.

From the lows of 2009, where they averaged 700-800 in LA and 500's in Seattle, they spiked to over 1000 in LA and to 800 in Seattle starting around January/February 2010 until as recently as this May.

Then job listings started a gradual decline into the 900's in LA and 700's in Seattle. Last Friday, the numbers were barely 800 in LA and 580 in Seattle.

These numbers are getting uncomfortably close to the numbers of 2009.

Thanks Taperwood.

This informal indicator echoes the slowdown we saw in the June Services ISM released this morning.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Services ISM Growth Slows - Jobs, Imports, Export Orders Contract; Manufacturing vs. Services ISM - Which is More Important and Why?

Posted: 06 Jul 2010 09:21 AM PDT

In yet another sign the economy is cooling substantially, three components of the June Services ISM are now in contraction, with the overall index declining much faster than economists expected.

From the June 2010 ISM Report On Business®:

In June, the NMI registered 53.8 percent, indicating continued growth in the nonmanufacturing sector for the sixth consecutive month, but at a slightly slower rate than in May. A reading above 50 percent indicates the non-manufacturing sector economy is generally expanding; below 50 percent indicates the non-manufacturing sector is generally contracting.

Employment activity in the nonmanufacturing sector contracted in June after one month of growth. ISM's Non-Manufacturing Employment Index for June registered 49.7 percent.

Orders and requests for services and other non-manufacturing activities to be provided outside of the United States by domestically based personnel contracted in June after three consecutive months of growth.

ISM's Non-Manufacturing Imports Index contracted in June after three consecutive months of growth.

The above link also contains the Manufacturing ISM.

Recovery Withers on the Vine

There is really not much to like in either of the ISM reports.

Inquiring minds also note Factory Orders Fall More Than Expected; Recovery Withers on the Vine

You should not have to be a genius to figure out the rebound in manufacturing was a result of four factors now withering on the vine.

Inventory replenishment
Unsustainable stimulus
Housing incentives pushing demand forward on appliances
Rebound in auto sales from extremely depressed levels

Is Europe going to lead the world recovery? China? US Consumers?

The answers are No, No, and No

Manufacturing was the one bright spot but its best days are now long gone. Moreover China Manufacturing Slows for Second Month; US ISM Weaker than Expected; Weekly Unemployment Claims Stubbornly High; Existing Home Sales Plunge

Budgetary Murder

This depression (and we are in one, masked only by safety nets galore), is The Price We Pay For Budgetary Murder.

Unfortunately, the budgetary murder continues unabated, and that will prolong this depression.

Japan is in its mess because of Keynesian and Monetarist stimulus, we are in this mess because of Keynesian and Monetarist stimulus, and the UK is in its mess because of Keynesian and Monetarist stimulus. Yet the Keynesian clowns want more Keynesian stimulus and the Monetarist clowns want more Quantitative Easing.

No policy ever performs badly enough to cause its disciples to abandon it.

Manufacturing ISM vs. Non-Manufacturing ISM

Of the two reports, Non-Manufacturing ISM is the more important. Here are a couple of key points from a Video Discussion by Bloomberg Economist Rich Yamarone about the Services ISM.

1. 55% of all consumption is services based
2. Private employment is well over 85% in services

Contracting services employment is a big thing. Yamarone noted that contracting employment will affect consumer attitudes which in turn will affect consumer spending.

Actually, consumer attitudes affect consumer spending which in turn affects business hiring plans. Attitudes lead the way.

This report was weakest where it matters most: employment, imports, and exports.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Illinois Construction Workers Make $50-68 Hour, Strike for 15% more

Posted: 05 Jul 2010 11:30 PM PDT

Illinois construction workers live in fantasy land of business-as-usual. They are demanding 15% pay hikes when everyone of them ought to be fired with their jobs outsourced to the cheapest non-union shop.

Please consider Construction Workers Go On Strike.

Here in the Chicago area the highway construction workers went on strike....the reason they want a 5% raise each year over the next three year contract.....to cover the cost of increase healthcare cost!

The current salary for construction workers is between $50.00 and $68.00 per hour which include benefits.

Illinois is suffering from one of the worst recessions since the depression.... over 700,000 unemployed....Walmart has just announced they plan to build 24 new stores in the Chicagoland area.....most of the new jobs will pay $9.50 per hour....and there are conversations to raise this salary to $10.50 per hour....hundreds of unemployed workers have expressed willingness to take on these new jobs....with pleasure.....many people just want to work and get a paycheck.

Prevailing Wages

I am trying to get a more specific handle on the wages of an average construction worker. It is difficult because Illinois goes by prevailing wages (by county). Moreover, there are approximately 70 different labor classifications for Cook County, none of which is construction worker.

Click here the Illinois Department of Labor Prevailing Wage Documents.

Cook Country Highway Operating Engineer base pay ranges from $38-46 with benefits amounting to approximately another $20, not counting overtime, holiday pay, etc.

Interestingly, Cook Country painters get $38 an hour with health care benefits amounting to $8.35 an hour and pension benefits at $9.40 an hour.

The general category of Cook Country laborer gets $35.20 an hour with $9.13 in health care benefits and another $8.37 in pension benefits.

One also has to factor in pension and health care benefits to arrive at the totals mentioned in the first article.

However, given that many in the private sector do not have health care and most do not have pension plans anywhere close to what public workers get, favoring in pensions and health care benefits is the correct thing to do.

Any way you slice it, the whole prevailing wage concept is madness. It guarantees taxpayers pay the highest rate possible for every job filled by a union worker.

If given the chance, people would be lining up for miles for the jobs at $2 more than minimum wage.

There is a three-fold solution to this madness

1. Make Illinois a right-to work-state
2. Scrap Davis-Bacon
3. Require competitive non-union bidding on all projects involving Federal funds.

Please see Thoughts on the Davis Bacon Act for more on the insanity of prevailing wage laws.

In 1999 Ron Paul introduced a measure to repeal Davis-Bacon. Someone needs to try again, and again, and again, until that mad relic of the Great Depression is repealed.

Actually public unions should be banned completely.

Government should try to provide the most services for the least amount of money, not the fewest services for the greatest amount of money.

Sadly, public unions, in conjunction with prevailing wages laws, collective bargaining, and corrupt politicians all combine to insure taxpayers get the least for their hard earned dollars. Adding insult to injury, public unions have the gall to whine about it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Mish's Global Economic Trend Analysis

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