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Archive for May 3rd, 2009

Every economic downturn has its brief moments of glory; those times on the downsize when new government economic data is released that shows something positive. And each kernal of good news in the midst of unmitigated disaster is treated by the government and the news media as a golden nugget of opportunity to support the conservative and liberal economic conviction that the calamity is caused by mass depression among the populace. And so members of the Obama administration and their sychophants in the news media have touted a few nuggets of gold amidst a mile high heap of economic cow dung and are now telling us good times are right around the corner. They’re figuring the absolute cure for the recession is a golden nugget of bullshit.

It may take a couple of years, but as the next election cycle approaches, Herr Obama, the master of the silver tongue of hope, will come to the conclusion that his cure for mass distemper will have relieved the unemployed of their desperation for life’s little pleasure (like jobs); but his cure will likely have resulted in rising unemployment and a tendency among the underlying population to blame the president for the economic madness that has scuttled their hopes and dreams. It’s possible the economy will come out of this funk, but if it does, the unemployment rate will remain stubbornly high. So whatever the outcome he faces two years from now , Obama will have no choice but to decide to change course in order to become reelectable.

He’ll need to figure out that being the next Herbert Hoover isn’t helping, that his remedy of hope for hopelessness is stupid, so he’ll mosey over to the political left, just a little, but not enough to help with his re-election campaign. At some point, he’ll need to become the next Roosevelt, but the odds are when he decides to become a great president, rather than hover just above George W. Bush on the all time lists, he’ll be too little and too late.

That’s when he’ll discover that conveying to the mass of citizens a nugget of hope is not a cure for a recession.

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During the last few months the Federal Reserve has lowered home mortgage interest rates to under 5 percent. The Tresury Department has purchased tens of millions of dollars of long-term T-bills, and put downward pressure on long term interest rates in doing so. And Congress has passed and the president signed another bailout package to save Wall Street investors.

Obama has set his heart on raising the value of the investment bonds backed by subprime, alt-A and liar loans. That’s why the government is willing to loan (at low interest rates) 85 percent of the purchase price of these bonds. Of the remaining 15 percent of their cost, the government will split the difference with the investor. In other words, the government is subsidizing rich investors to the tune of 92.5 percent of the price of these nearly worthless bonds. The cost of this program means the risks are mostly socialized and the profits largely privatized. In other words, this legislation is another entitlement program for the rich.

In 1933, President Franklin Roosevelt issued an appeal to Congress to initiate a government program whereby distressed homeowners could readjust their mortgages to reflect their current values, extend their payments and lower their interest rates. These actions would be subsidized by the U.S. Treasury. And this is precisely the kind of program the government created back then.

It would be most helpful for the economy to have such a program now, but that’s not on Obama’s agenda. Providing this kind of help to average Americans would undermine the prices of the bonds because the values of the homes would drop, monthly payments would fall, and both actions would cause the yield of the bonds to plummet. In other words, the value of these investor bonds would drop, and Obama has no intention of allowing this to occur.

There are two kinds of credit markets: One is where lenders such as credit unions and banks loan money to people and keep receiving interest and holding their loans on their books. That’s why these institutions won’t loan money to people who have bad credit ratings. This is called the old fashioned way of doing business.

The other credit market, the one favored by rich investors, is where banks and other lenders lend money so that people can buy houses, cars, boats and cheap plastic crap from China, and then the lenders sell these loans to investment entities, such as Citigroup and Goldman Sacs. And then these firms issue bonds with the homes as collateral.

The latter credit markets provide opportunities for billions of dollars of fees, and they also provide incentives for lenders to give credit to people that are unworthy of it in the old fashioned credit markets, because the old fashioned lenders kept those loans on their books and derived their income from the repayment of these loans. In other words, Obama wants to save the credit markets in which the standards for borrowers is, at times, virtually nonexistent.
This is why the federal government appears to be trying to reinflate the housing bubble; and that means government officials have no intention of dealing with the real problems the economy faces: the re-distribution of income and wealth from the lower income classes to the extreme upper class, and all of the governmental policies that have brought this about: Nafta, Cafta, The Financial Services Modernization Act, among many others.

Obviously, the United States should extract itself militarily from Iraq and Afganistan, and the government should follow the letter of the 1986 law granting illegal aliens amnesty. These three things have been nothing but big income re-distribution mechanisms in favor of the rich as they suck, and have sucked, the working people of the United States financially dry.

And this means inflating the housing bubble is short sighted policy destined to fail. It is possible this policy might cause the economy to lurch out of the recession, but unemployment will remain high without immediate real remedies to what ails us. And this suggests any positive impact of the Obama and Federal Reserve policies will fail in the short and the long term, and a recession far worse than the current debacle will soon follow, or this one will continue to get worse.

Campaign finance reform is a necessity if only because the rich and their corporate lobbyists are the only entities with enough money to purchase the favors of legislators.

Obama does not look like the next coming of Franklin Roosevelt; instead he more closely resembles the second coming of Herbert Hoover.

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The Tea Parties: An Exercise in Simple Minds

I voted for Barack Obama because of only one issue: the Bush tax cuts.

Republican presidential candidate John McCain campaigned on a promise of extending Bush’s tax reductions for the rich, as well as subtracting another 80+ billion dollars from their tax bills. Obama insisted he was going to kill the Bush tax giveaways sometime after taking office, and my research showed this was the only intelligent thing to do.

The Bush tax cuts are one of the major reasons why only slightly more than 2 million private sector jobs have been created since June 2001 (less by the time you read this). On a per year average, this is the most pathetic job growth for any business expansion in United States history, no matter what criteria is used. The tax breaks are also a major reason why per capita real family income plummeted over $2,000 per year since Bush took office.

Republicans assume that if you give the rich such favors, they’ll invest their money and magically create jobs; but that’s not how most publicly traded limited liability corporations work.

When Bush slashed taxes for the investor class, he gave them billions of dollars they wouldn’t otherwise have had. CEO’s hungrily eyed the newly available cash because the stock markets had experienced large losses since the end of the Clinton years. In a time of weak demand, CEO’s needed to entice the beneficiaries of Bush’s generosity into purchasing their stocks, thereby bidding up their prices. In industry after industry, they did this by pushing up profits and dividends; and they achieved this by shipping jobs overseas, by laying people off and by cutting or holding steady real wages, salaries and benefits.

This is precisely how the Bush tax giveaways placed downward pressure on the growth of jobs, wages, salaries and benefits. And that’s why a ballot marked for McCain was a vote for increasing joblessness during the current financial crisis.

And here is where those tax cuts especially come into play. The problem with the U.S. economy isn’t the sub-prime mess. That’s only a symptom of the real problem. The mal-distribution of income and wealth during the past thirty years has created the current economic meltdown (That’s another story).

Obama’s stimulus may drag the economy out of the recession sometime next year, but without repealing the tax cuts, there should be a relatively swift return to economic meltdown after a short and feeble business expansion.

That’s why the president-elect should raise capital gains and income tax rates closer to fifty percent for any income beyond $250,000. Less money would then be available to bid up stock prices, and this would relieve pressure on CEO’s to cut jobs, wages, salaries and benefits.

To see the obvious, one only has to look at what occurred when President Clinton raised the top tax rate: record job creation, middle incomes rising in real terms, and the already giant wealth and income gap began to close, however slightly.

We also can’t forget the economy boomed from 1940 through the early 1960s, despite a 91 percent top tax rate. But those tax codes gave the affluent class incentives to invest in ways that helped the middle class sustain and grow; and this allowed many millionaires to pay a real tax rate far below 91 percent.

Obama and the Democrats would be doing all citizens a favor by raising the top tax rates while giving the wealthy tax breaks if they invest their money in industries that ensure domestic job, wage, salary, and benefits growth. Ultimately, this is what an economy is for, and that’s why Obama should follow through with his pledge to immediately reverse Bush’s tax cut folly.

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Could the Dow Sink Below 6,000?

In September 2007, I predicted the current recession, the Fed dropping the federal funds rate to zero, deflation, home mortgage interest rates “will drop below 5 percent and possibly 4 percent,” and numerous other things. Of those numerous other things I also said the Dow Jones Industrials will drop below 8,000 and “possibly” drop below 6,000.

My suggesting the Dow could plummet below 6,000 is not a 100% prediction, more of a strong feeling, a musing of a possibility that represents how weak the economy has become under the disastrous Republican economic policies of the last thirty years. And so we may yet reach that sad stage as billions of dollars of illusionary money disappears.

The below 6,000 possibility is now in sight. But we’re not likely to reach there overnight, it’s more a matter of months if we ever reach it, and there is yet a good possibility such a dubious outcome can be had.

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