Mish's Global Economic Trend Analysis

Edge of Financial Chasm
Hypocrite Geithner Says Private Sector Must Drive Economy
Sunday Funnies 2010-07-25 Reflections on the Middle Class
William Black: "Unlimited Taxpayer Bailout" of FDIC Coming; FDIC Shell Game Hides the Bailout

Posted: 25 Jul 2010 09:02 PM PDT

Here is an interesting story with an Oregon slant that reflects problems all states now face. Please consider Oregon budget stands at precarious crossroad.

Oregon government stands at the edge of a financial chasm as precarious as any in its 151-year history, hemmed in by the global recession, questionable spending decisions and a budget-draining combo of skyrocketing expenses and sluggish growth.

Consider this sobering fact: State expenses, including payroll, health and retirement benefits, and debt payments, are slated to rise by nearly $4 billion over the next two years -- a 26 percent jump. During the same period, however, revenues to pay those expenses are expected to increase by a little less than $2 billion, or about 14 percent -- and that assumes a return to a robust economy.

Oregon simply can't keep up.

Lacking a substantial tax increase, which appears unlikely, the state won't have the money to offer the same level of services, pay and benefits to the same number of people.

The state has faced tough times before, but this crisis is a game changer, economists and political leaders agree. Past budgetary tricks, such as borrowing or sweeping money from other state funds, won't cut it.

The only way out, they say, is to make dramatic, permanent changes. The choices that lie ahead affect not only the state budget, but the kind of place Oregon will become: What kind of schools will we have? Which criminals will go to prison? Who gets help when they need it? What kind of business climate do we want? And how much do we all pay in taxes?

"The public is going to have to understand that we will have a very different Oregon in 2020 than we did in 2010," says John Tapogna, president of ECONorthwest, one of the state's top economic consulting firms.

There is much more in the article including a lengthy discussion of four problems Oregon faces.

Problem 1: Our income is shrinking
Problem 2: We have more people in need
Problem 3: We've locked up a lot of money
Problem 4: We can't grow our way out

Email Anecdotes

Here are some anecdotes from reader Denise in response to Oregon's Public Employee Retirement System (PERS) in Deep Trouble, Taxpayers on the Hook

Hello Mish

I Read your post on Oregon's Public Employee Retirement System's troubles with interest. We just returned from visiting a friend on the Oregon coast - and have spent many vacations in the state over the years.

The coast is struggling badly. There are homes for sale everywhere. Available commercial properties abound.

We saw housing developments with only a few completed homes, most empty, and often surrounded by empty lots with weeds many feet high. One condo complex located in the Florence marina has 30+ units available. Only two have sold despite a list of enticements. I wouldn't want to be one of the two owners - it was practically screaming bank foreclosure coming.

And despite that this is their high season - do or die for many coastal businesses - the roads were practically deserted, hotels available everywhere - and miles of empty beaches. We spoke with many restaurant and lodging owners and they all agreed that it's never been worse.

Hard to be optimistic for the economy of the beautiful Oregon Coast.

Denise

Universal Problems

Those are problems all states face, not just Oregon.

It is one hell of a list of problems and states will face those even if the economy starts to grow at a fair pace.

Problem 3 is the crucial one. The "locked up" category includes pension promises that cannot be met and public union salaries way out of line with private sector salaries.

End of the Line for Meaningful Can-Kicking Delays

When it comes to state budgets, the low lying fruit has been picked. Indeed all the fruit has been picked and next year's harvest has been spoken for as well. Thus it's the end of the line for state's ability to kick the can down the road in a meaningful way, if employment does not dramatically pick up soon.

Here's a hint: it won't.

The only question is how long the administration and the Fed can keep this mess from flying apart like a pile of straw in a tornado. Obama's goal of course, is to delay that tornado until after the election. However, people are so fed up with Obama now, that election-wise it probably does not matter.

Obama is likely to lose the House in the upcoming election and enough seats in the Senate that he will not be able to pass his agenda. Hopefully, republicans will start doing a better job than they did under president Bush. Arguably that is a long shot. However, people have had enough of Obama's offering the worst possible combination of corporatism, socialism, and war-mongering that either side has to offer.

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

Hypocrite Geithner Says Private Sector Must Drive Economy

Posted: 25 Jul 2010 01:46 PM PDT

Like most politicians, Treasury Secretary Tim Geithner likes to talk out of both sides of his mouth, generally saying contradictory things in sound bites that may sound reasonable at first glance, but look idiotic upon closer inspection.

For example please consider Private sector must drive economy: Geithner

During an interview on NBC's "Meet the Press," Geithner also said the government has big plans for reforming Fannie Mae and Freddie Mac, the housing finance giants that now stand behind most of the mortgages in the U.S. after being bailed out by taxpayers during the 2008 financial crisis.

Geithner said Sunday that he doesn't expect a double-dip recession, citing encouraging signs in the economy. "The most likely thing is you see an economy that gradually strengthens over the next year or two," he said. Watch Geithner on Meet the Press.

Businesses are still "very cautious" and are trying to get as much productivity from current employees as possible, Geithner explained.

"They are in a very strong financial condition though. I think that's very promising because there's a lot of pent-up demand and there's a lot of capacity still for them to step up and start to invest and hire again," he added. "The government can help but we need to make this transition now to a recovery led by private investment."

There's a "good case" for the government to support small businesses, the unemployed and help states keep teachers in classrooms, but the transition to growth led by the private sector must happen, Geithner said.

Still, he stressed that the current system of housing finance has to change.

"We're not going to preserve Fannie and Freddie in anything like their current form. We're going to have to bring fundamental change to that market," Geithner said.

There's still a good case for the government preserving some type of guarantee to make sure that people can finance a house even in a very damaging recession, he explained.

"We're also going to have to take a look at the broad set of policies we put in place to help encourage home ownership and particularly help low income Americans get access to affordable housing," Geithner said. "We're going to take a very broad look at how best to do that."

No Pent Up Demand

For starters Geithner is wrong about pent up demand. The only pent up demand is in the opposite sense Geithner suggests.

Pent Up Demand Reality

There is pent up demand for baby boomers to save more
There is pent up demand for baby boomers to downsize
There is pent up demand for banks to dump shadow housing inventory on the market and that will further suppress housing
There is pent up demand for anyone with credit card bills to pay them down given outrageous interest rates banks charge for revolving credit vs. what one can make in CDs.

Although those are all necessary, nothing in that list remotely have anything to do with a private sector recovery in the manner Geithner presumes. Indeed, I expect a Expect Second-Half Housing and Durable Goods Crash.

The key reason is consumer spending plans have crashed as noted in Consumption Inflection Point - No One Wants Credit; Consumer Spending Plans Plunge

Thus, in regards to pent up demand Geithner is a fool, is lying, or both.

Geithner Hypocrisy

If that was not bad enough, we have to suffer with Geithner talking out of both sides of his mouth. While I certainly agree that the private sector needs to drive the economy, note his many statements to the contrary.

"The government can help but we need to make this transition ...".
"There's a good case for the government to support small businesses ..."
"There's still a good case for the government preserving some type of guarantee to make sure that people can finance a house even in a very damaging recession ..."

How long is the "transition"?

Geithner does not say, so I will offer a translation: Forever.

Geithner is a clueless Keynesian clown who has no idea how the economy works. Not only do we have to put up with his blatant lies, we have to deal with his hypocritical never-ending government solutions.

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

Sunday Funnies 2010-07-25 Reflections on the Middle Class

Posted: 25 Jul 2010 10:05 AM PDT

Video Games You Can Win

People are wasting massive amounts of time on video games with dozens of levels and components that need to be mastered. I have found a solution. Video games easy to master.

Here are some examples of video games you can win.

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

William Black: "Unlimited Taxpayer Bailout" of FDIC Coming; FDIC Shell Game Hides the Bailout

Posted: 25 Jul 2010 12:26 AM PDT

Last Friday seven more banks failed bringing the total bank failures to 103.

U.S. bank failures this year have surpassed a bleak milestone of 100 as regulators shut down banks in Georgia, Florida, South Carolina, Kansas, Nevada, Minnesota and Oregon.

The seven bank seizures announced Friday bring to 103 the failures so far in 2010. The pace of bank closures this year is well ahead of that of 2009, which saw a total of 140 banks shuttered amid the recession and mounting loan defaults. That was the highest annual tally since 1992, at the height of the savings and loan crisis.

The number of banks on the FDIC's confidential "problem" list jumped to 775 in the first quarter, from 702 three months earlier, even as the industry as a whole had its best quarter in two years.

More Failures Coming

The FDIC is now deep in the red and the situation is getting worse every week. The situation would be even worse were it not for widespread "extend and pretend" tactics that keep woefully insolvent banks in business.

FDIC Shell Game To Hide Bad Assets

To address the situation, the FDIC is going to start selling U.S.-guaranteed FDIC senior certificates. However, it has no Congressional authority to do so according to former thrift regulator William Black.

Unlimited Taxpayer Bailout

Black claims an "unlimited taxpayer bailout" of the FDIC is on the way.

Barrons discusses the situation in Uncle Sam Rides Again: Banking on a Bailout?

BEFORE THE FINANCIAL CRISIS is unwound, the Federal Deposit Insurance Corp. expects to have taken over some 300 failed banks. The rapid closures have drained the agency's cash reserves.

The FDIC must sell assets to continue the closings. It has about $37 billion of bad-bank assets to sell, but the stockpile would bring only 10 to 50 cents on the dollar.

Enter the FDIC's Securitization Pilot Program, the sale of U.S.-guaranteed FDIC senior certificates. This enables the FDIC to push much of the losses off its books, thanks to the U.S. guarantee of principal and interest. The program starts with a $500 million issue.

"They aren't really selling the bad assets. They're selling the equivalent of a Treasury bond without congressional approval," says William Black, a former thrift regulator. "It hides the economic substance of what's really happening—an unlimited taxpayer bailout."

The FDIC contests the characterization, saying it doesn't expect a claim on the guarantee because of an equity cushion to absorb the losses, and the use of only performing mortgages in the pools. The agency says a lot of resources stand between it and the taxpayer.

Foot in the Door Ploy

Notice how the $500 million start gets the FDIC foot in the taxpayer's door. At some point Congress will probably grant authority to the FDIC just as the Fed got unlimited funding for Fannie Mae.

President Obama and the Democrats are making matters worse by permanently upping the FDIC limit to 250,000 in the financial reform legislation that just passed.

Moral Hazards

FDIC is a moral hazard. Many banks that failed were able to stay in business because of taxpayer deposits at above market rates. For example, no one in their right mind would have had deposits at Corus Bank, a bank with many troubled loans to Florida and Nevada condo developers.

Corus bank would have failed long before it did, without the FDIC guarantee. Not only was the bank able to attract funding by offering above market rates, Corus contributed to the enormous property bubble in Florida and other places.

Instead of preventing risky bank practices in the first place, or upping the insurance rate on risky bank practices to cover excessive risk, the FDIC is about to get an unlimited taxpayer sponsored bailout by selling U.S.-guaranteed FDIC senior certificates, even though it has no authority to do so.

FDIC Legacy

As a result of the inept policy decisions by the FDIC, instead of having small bank failures widely spread out over time, we have had concentrated bank failures in a short period of time.

Taxpayers will be the ones to pay the price. This is the legacy of FDIC and its failed moral hazard policies.

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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