Thursday, April 30, 2009

Chrysler Files for Bankruptcy

Chrysler LLC filed for bankruptcy Thursday. But a deal has been reached to combine the company with Fiat in order to allow Chrysler to stay in business.

The bankruptcy filing, which was made in federal court in New York, comes after some of Chrysler's smaller lenders refused a Treasury Department demand to reduce the amount of money the troubled automaker owed them.

In remarks at the White House, President Obama said that the bankruptcy filing is not a failure for the company but "one more step on the path to Chrysler's revival."

Obama vowed the bankruptcy process would be quick, efficient and controlled. A senior administration official predicted it would be completed within 30 to 60 days. The combination with Fiat is also due to close during that period of time.

read the CNN article

Wednesday, April 29, 2009

GDP 1st Quarter 2009: Down 6.1%

Following the fourth quarter's 6.3 percent pace of contraction, the U.S. economy shrank at a seasonally adjusted annualized rate of 6.1 percent last quarter, surpassing the consensus estimate of minus 5.0 percent. This was the worst back-to-back performance in 60 years.

GDP 1st Quarter 2009: Down 6.1%

The U.S. economy shrank at a pace of 6.1% in the first quarter -- almost as much as it did in the fourth quarter of 2008, according to a government report Wednesday.

The drop was much worse than expected. According to economists surveyed by, expectations were for a drop of 4.7% in gross domestic product, the broadest measure of the nation's economic activity, from a year ago.

The first quarter decline was the second biggest drop recorded in 26 years, behind only the fourth quarter reading. GDP fell 6.3% in the last three months of last year.

Monday, April 20, 2009

Inflation Concerns

During the past eight months, the Federal Reserve has pumped more than $800 billion of cash into the nation's financial system, an action that in normal times could lead to an ugly inflation surge.

Fed Chairman Ben Bernanke is confident that isn't going to happen this time around. To quiet skeptics and reassure markets, he and his lieutenants have been going out of their way the past few days to explain why inflation isn't in the outlook and to lay out the tools they have in hand to fight it...

Inflation might seem like a distant worry today. Last week, the Labor Department reported that consumer prices in March fell year over year for the first time in 54 years. Rising unemployment and idle factory floors mean businesses have little incentive or capacity to raise wages or the prices they charge customers. There's a risk, in fact, that if the economy weakens much more, the opposite of inflation -- deflation -- could become a serious threat.

That's why the Fed's goal for now is to get inflation higher, not lower. It has effectively been printing money as part of its rescue efforts. When it buys mortgage-backed securities or makes commercial-paper loans, as it has been doing, it electronically credits its counterparty banks with cash in return, which pumps new cash into the financial system.

At some point when the economy recovers from recession, the Fed is going to have to withdraw this money and raise interest rates. Because the Fed is still ramping up many of its programs, the amount of money it will have to withdraw some day is sure to be even higher than today's astronomic levels...

By 2011, despite all the Fed's efforts to prepare itself, Mr. Kasriel sees inflation on the rise.

read the WSJ article
My thoughts: On inflation, the correct question is "when?", not "if". As Paul Volcker recently noted, the above trend is enough to cut purchasing power in half within a generation. The Fed has laid the foundation for a level of inflation that we have not seen since the 1970s. When it hits (2011, 2012, 2013) does not really matter. It is coming, and Bernanke is a moron if he thinks he can prevent it from happening.

Sunday, April 19, 2009

Cartoon: Economic Forecasts

Cartoon: Che Guevara

Peter Schiff on Obama and the Economy

Reading straight from the Keynesian playbook, Obama justified the creation of multi-trillion dollar deficits by asserting that the government must fill the spending void left by the contraction of consumer and business spending. As one of those mythical economists who do not agree with the President, I argue that it is precisely this type of boneheaded thinking that got us into this mess, and it’s the reason we are now headed for an inflationary depression...

Our economy is unsound precisely because it is built on a foundation of consumer debt. Instead of spending for today, we need to invest for tomorrow. However, we cannot save more unless we spend less. Production requires capital, which only comes into existence when resources are not consumed...

There is absolutely no evidence that governments have the foresight or incentives to make investments that facilitate real economic growth. “Five year plans” didn’t work in the Soviet Union and they won’t work here. If the government simply builds bridges to nowhere, society gains nothing...

If we are going to rebuild our economy on a solid foundation, the market, not the government, needs to draw the plans. When private citizens invest their own capital, those who invest wisely are rewarded with profits, while those who do not are punished with losses. Bad investments are therefore abandoned, with capital reallocated to more successful ventures. Conversely, when governments invest money, these checks and balances do not exist. There is nothing to correct bad investments, as losses are endlessly subsidized by taxpayers. In fact, the more a government plan fails, the more it tends to be funded in the hope that additional resources will finally achieve success...

However, once the dollar finally begins its collapse, he will have no choice but to match his rhetoric with action. It’s unfortunate that we cannot make these tough choices on our own terms, rather than waiting for our creditors to force our hand.

read the essay

My thoughts:
Schiff continues to be the only consistent commentator who has correctly predicted our current crisis and understands the path to sustainable economic growth.

Friday, April 17, 2009

Tea Party Cartoons

My thoughts: Why is so difficult for some people to grasp that there are some people who oppose taxes and spending?

Monday, April 13, 2009

Top 10%: Income Taxes Paid


Bernanke's Mistake

Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.

If history is any guide, says Allan Meltzer, the effort will end in tears. Inflation “will get higher than it was in the 1970s,” says Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over- year rate of 13.3 percent.

read the essay

My thoughts: It should be obvious to all that Bernanke has dropped the ball. When interest rates hit double digits it will be too late to avoid the problems he is laying the ground work for.

Saturday, April 11, 2009

The Mises Institute: Great Depression Seminar

The videos of the the recent (4/4/09) Mises Institute Conference. The Great Depression: What Can We Learn From It Today.

Walter Block, 80 Years Later: Parallels Between 1929 and 2009
Thomas DiLorenzo, A Recipe for the Next Great Depression
Jeffrey Tucker, Dissident Publishing: Then and Now
Douglas E. French, Bubble Economics
Thomas E Woods, Jr., Why You've Never Heard of the Great Depression of 1920

Paul Volcker and the Obama Administration

As an early supporter of Barack Obama, Paul Volcker gave the young presidential candidate gravitas and advice. He frequently sat by Mr. Obama's side at key economic events, and started carrying a cellphone for the first time, just to be able to brainstorm with the candidate from the campaign trail.

In the Obama White House, the role of the 81-year-old former chairman of the Federal Reserve has been more limited.

The one-time central banker has been put in charge of a presidential advisory board that hasn't yet had a formal meeting. It has been nearly a month since he has seen Mr. Obama. Mr. Volcker hasn't been a main player in key decisions handling the global financial crisis...

When Mr. Obama announced the blue-ribbon advisory group on Feb. 6, he praised Mr. Volcker as "one of the world's foremost economic policy experts." With big names like General Electric Co. Chief Executive Jeffrey Immelt, the group, Mr. Obama said, would provide "voices to come from beyond the Washington echo chamber...." At a ceremony in the White House's East Room, the president added that the group would "meet regularly" with him.

So far, the full group hasn't met. "The whole organizational side of this has been a nightmare," Mr. Volcker says. A White House spokeswoman says it will hold its first quarterly meeting in mid-May.

read the WSJ article

Tax Freedom Day: April 13, 2009

Tax Freedom Day® will arrive on April 13 this year, the 103rd day of 2009. That means Americans will work about three and a half months of the year, from January 1 to April 13, before they have earned enough money to pay this year's tax obligations at the federal, state and local levels. Tax Freedom Day falls a full two weeks earlier in 2009 than it did in 2007. In fact, not since 1967 has Tax Freedom Day come earlier than this year's April 13 date.

This shift has been driven by two factors: the recession has reduced tax collections even faster than it has reduced income; and the stimulus package, a.k.a. HR 1, the American Recovery and Reinvestment Act of 2009, includes large temporary tax cuts for 2009 and 2010. Nevertheless, in 2009, Americans will pay more in taxes than they will spend on food, clothing and housing combined.

While tax revenues are falling, government expenditures are expected to explode in 2009, also driven in significant part by HR 1. Tax Freedom Day, like almost all tax burden measures, ignores the current year's deficits. If the projected deficit for 2009 were counted as a tax, Tax Freedom Day would arrive on May 29 instead of April 13-the latest date ever for this deficit-inclusive measure.


Cartoon: Wall Street Reporting

Thursday, April 9, 2009

Bailout Bonds

During World War I, Americans were exhorted to buy Liberty Bonds to help their soldiers on the front.

Now, it seems, they will be asked to come to the aid of their banks — with the added inducement of possibly making some money for themselves.

As part of its sweeping plan to purge banks of troublesome assets, the Obama administration is encouraging several large investment companies to create the financial-crisis equivalent of war bonds: bailout funds.

The idea is that these investments, akin to mutual funds that buy stocks and bonds, would give ordinary Americans a chance to profit from the bailouts that are being financed by their tax dollars. But there is another, deeply political motivation as well: to quiet accusations that all of these giant bailouts will benefit only Wall Street plutocrats.

The potential risks — politically for the administration, and financially for would-be investors — are considerable.

The funds, the thinking goes, would buy troubled mortgage securities from banks, enabling the lenders to make the loans that are needed to rekindle the economy. Many of the loans that back these securities were made during the subprime era. If all goes well, the funds will eventually sell the investments at a profit.

read the NYT article

My thoughts: There was a reason that these assets were originally called "toxic" assets. They are a dangerous and virtually worthless investment that nearly caused the collapse of many Wall Street firms.

Cartoon: Underemployment

Cartoon: Ponzi Scheme

Wednesday, April 8, 2009

The Fed and the Bubble

Bubbles have been frequent in economic history, and they occur in the laboratories of experimental economics under conditions which -- when first studied in the 1980s -- were considered so transparent that bubbles would not be observed...

The 2001 recession might have ended the bubble, but the Federal Reserve decided to pursue an unusually expansionary monetary policy in order to counteract the downturn. When the Fed increased liquidity, money naturally flowed to the fastest expanding sector. Both the Clinton and Bush administrations aggressively pursued the goal of expanding homeownership, so credit standards eroded. Lenders and the investment banks that securitized mortgages used rising home prices to justify loans to buyers with limited assets and income. Rating agencies accepted the hypothesis of ever rising home values, gave large portions of each security issue an investment-grade rating, and investors gobbled them up.

But housing expenditures in the U.S. and most of the developed world have historically taken about 30% of household income. If housing prices more than double in a seven-year period without a commensurate increase in income, eventually something has to give. When subprime lending, the interest-only adjustable-rate mortgage (ARM), and the negative-equity option ARM were no longer able to sustain the flow of new buyers, the inevitable crash could no longer be delayed.

The price decline started in 2006. Then policies designed to promote the American dream instead produced a nightmare. Trillions of dollars of mortgages, written to buyers with slender equity, started a wave of delinquencies and defaults. Borrowers' losses were limited to their small down payments; hence, the lion's share of the losses was transmitted into the financial system and it collapsed.

read the WSJ article

Cartoon: Obama and General Motors

Cartoon: Reaganomics v Obamanomics

Tuesday, April 7, 2009

Obama Picking Winners and Losers

Edward Glaeser on Sound Policy

IN THE 1990s, American economists roamed the world preaching the virtues of fiscal restraint, the rule of law, free trade, and privatization. Today, those four policy pillars, once known as the Washington Consensus, are abandoned in the city that gave that consensus its name. These policies were never commandments from Mount Sinai, but they are important ingredients of long-run economic success. In a recession, putting today's needs ahead of tomorrow's prosperity is understandable, but even in bleak times, doing too much can be worse than doing too little...

For our children to face this debt, they will need free trade, private ownership, and respect for private property. Eliminating fiscal restraint during a recession is understandable. Eliminating all four pillars of sound economic policy imposes too much of a cost on tomorrow for too little benefit today.

read the entire essay

Tyler Cowen on Blogging, Economics, and Other Stuff

The Cato Journal: The Financial Crisis

The Cato Journal

An Interdisciplinary Journal of Public Policy Analysis
Volume 29 Number 1, Winter 2009

The Financial Crisis

James A. Dorn
Editor's Note
(PDF, 2 pp., 47Kb)

Jeffrey A. Miron
Bailout or Bankruptcy?
(PDF, 17 pp., 380Kb)

Anna J. Schwartz
Origins of the Financial Market Crisis of 2008
(PDF, 5 pp., 81Kb)

Allan H. Meltzer
Reflections on the Financial Crisis
(PDF, 6 pp., 86Kb)

Donald L. Kohn
Monetary Policy and Asset Prices Revisited
(PDF, 14 pp., 157Kb)

Otmar Issing
Asset Prices and Monetary Policy
(PDF, 7 pp., 96Kb)

Jeffrey M. Lacker
What Lessons Can We Learn from the Boom and Turmoil?
(PDF, 11 pp., 131Kb)

Charles W. Calomiris
Financial Innovation, Regulation, and Reform
(PDF, 27 pp., 264Kb)

Bert Ely
Bad Rules Produce Bad Outcomes: Underlying Public-Policy Causes of the U.S. Financial Crisis
(PDF, 22 pp., 944Kb)

Lawrence H. White
Federal Reserve Policy and the Housing Bubble
(PDF, 11 pp., 133Kb)

Wolfgang Münchau
The Case for Policy Sustainability
(PDF, 4 pp., 71Kb)

Andrew A. Samwick
Moral Hazard in the Policy Response to the 2008 Financial Market Meltdown
(PDF, 9 pp., 114Kb)

Kevin Dowd
Moral Hazard and the Financial Crisis
(PDF, 26 pp., 262Kb)

Gerald P. O’Driscoll Jr.
Money and the Present Crisis
(PDF, 20 pp., 208Kb)

Roger W. Garrison
Interest-Rate Targeting during the Great Moderation: A Reappraisal
(PDF, 14 pp., 167Kb)

William Poole
The Way Forward: Incentives, Not Regulations
(PDF, 7 pp., 94Kb)

Monday, April 6, 2009

Jim Cramer: "They Are Doing Everything Right"

My thoughts: Worst analysis ever. A nearly explicit endorsement of fascism.

Friday, April 3, 2009

Unemployment Rate Hits 8.5%

The Labor Department reported a net job loss of 663,000 during the month of March and an increase in the unemployment rate from 8.1 percent to 8.5 percent.
At 8.5 percent, the unemployment rate reached its highest level since 1983 as the total number of unemployed people rose to 13.2 million. If those working part-time for "economic reasons" and those too discouraged to continue looking for work are included, the unemployment rate would have been 15.6 percent in March, the highest since this data series began in 1994.

Cartoon: Obama and the G-20

Falling Home Prices


Thursday, April 2, 2009

Chidem Kurdas on the Fed and the Current Crisis

Current conventional wisdom holds former chairman Alan Greenspan responsible for the Fed’s mistakes— such as keeping interest exceptionally low in 2002-2006 and not tamping down on excessive lending by banks. That staved off the recession in the aftermath of the stock market collapse, but created the twin credit-property bubbles and the current mess. John Taylor’s analysis of Fed’s easy money policy shows the central bank’s pivotal role in causing the crisis. And Gerald O’Driscoll of the Cato Institute makes short shrift of Greenspan’s responses to Taylor’s critique...

No question, Wall Street drank deeply and to its detriment. But that’s what financial people do, they make money from whatever opportunity that offers. It’s the Fed that created the opportunity, watched the party get out of hand and now will run a rehab center, further extending its reach. Great for the Fed.

For the rest of us, until we learn to impose limits and controls on government agencies, we will remain at the mercy of wrong-headed interventions, which create the problems that then lead to more interventions, more problems and so on. The Fed’s brief should be limited, not expanded. We appear to be going in the wrong direction.

read the entire post

Visions of the Future Republican v Democratic

Wednesday, April 1, 2009

Cartoon: 401k Fairy

Jay Leno on Obama and GM's Wagoner

According to the government, GM's Rick Wagoner was forced to resign because of poor performance. That’s embarrassing. You run an organization that loses billions of dollars and then get fired by a guy who heads up an organization that loses trillions of dollars.
~Jay Leno