News What is wrong with the US economy? Part 2

[Art]

Yes I am aware taxes are not the only issue. I assert that financially, for many US companies, taxes are often the most significant of these issues, thus the reason for locating in Ireland vs Scotland, France, or Germany, i.e. places even closer to dense markets.

Good, you are now in agreement with my post # 550

The lower tax rate is what makes Ireland the European country of choice amongst the other EU countries

As a caveat, I should add that although this is largely true as a general rule it does greatly over-simplify the cost-benefit analysis process, particularly as many of the companies which have subsidiaries in Ireland are very high tech and so need a highly educated work force and thus an education system geared to meeting their specialist needs.

In particular it doesn't translate into heavy industries where Ireland's island status makes it uncompetitive vis-a-vis freight costs which more than cancel out the tax advantage which is why Ireland does not have heavy industry.

 

[mathwonk]

my brilliant grNDDAUGHTER has suggested that some of our economic problems may be psychological.

E.g. when asked to solve the mystery of my missing automobile, she asked if i had gone out and waved my hand where the car had been parked, as it was conceivable that it had merely been rendered invisible.

when pressed further along this line of inquiry she confessed to having been practicing for some time this art in her household.

"And how much success have you had?" well, none yet.ok, but it was a good idea. At least it puts her about on par with henry Paulson's ideas, so far, but maybe the bailout will still work , too.

 

[Art]

ok, but it was a good idea. At least it puts her about on par with henry Paulson's ideas, so far, but maybe the bailout will still work , too.

The bailout is working.

It has stopped the meltdown of the financial sector.

The markets are now responding to the recessionary outlook resulting from the credit crisis which is normal market behaviour.

At least now there should be only a normal depression lasting 18 -24 mths. Without the bailout there would have been a collapse of the world's economy.

 

[mathwonk]

hmmmm... an interesting view. i doubt if my gd will buy this assessment though, she's very sharp. i presume you followed the market today.

 

[Art]

hmmmm... an interesting view. i doubt if my gd will buy this assessment though, she's very sharp. i presume you followed the market today.

The key indicator of whether or not the bailout is working is, are the banks lending again. To which the answer is yes. Credit is beginning to flow again as evidenced by the LIBOR rate falling and so by the only measure that matters the bailout is working.

The bailout was never claimed to be a panacea to cure all, it was a necessary measure to stop the free-fall into the abyss.

As Paul Krugman said ' this is not the answer this is just to avoid disaster'

Credit freeze: Signs of a thaw
Bank-to-bank lending rates dip for the second day in a row as lenders show more confidence. The easing comes a day after the government unveils its plan to buy equity in banks.

NEW YORK (CNNMoney.com) -- The credit markets continued to show signs of relief Wednesday, a day after the U.S. government announced plans to inject capital directly into banks by buying their stock.

The overnight bank-to-bank lending rate known as Libor slipped to 2.14% from 2.18%Tuesday, according to Bloomberg.com. The measure had been as high as 5.09% last Thursday.

Lower interbank lending rates signaled an increased willingness on the part of banks to lend to each other, which eventually translates into lower borrowing costs for consumers.

Frozen credit pipelines had stalled economies around the world, pushing lawmakers to make global coordinated efforts to increase liquidity and give banks the confidence to begin lending to each other again.

http://money.cnn.com/2008/10/15/markets/bondcenter/credit_markets/

 

[Astronuc]

The Japanese Finance Minister criticized the US plan as insufficient.

If none of the financial people in government or industry saw this coming, why the heck are they all making big bucks? It would seem they are all negligent and certainly did not do the job for which they drew lavish compensation.

Southwest Airlines posts 1st loss in 17 years - because they hedged against higher oil prices and the price of oil has fallen.
http://news.yahoo.com/s/ap/20081016/ap_on_bi_ge/earns_southwest

Southwest said Thursday it lost $120 million in the three months ended Sept. 30 even as revenue jumped 11.7 percent.

The airline took $247 million in charges, mostly to write down fuel-hedging contracts that are less valuable now that oil prices have plunged by nearly half since July.

Without the charges, Southwest managed its 70th straight quarter of operating profit — $69 million, or 9 cents per share, which was 2 cents per share better than Wall Street expected, according to a survey of analysts by Thomson Reuters.

A year ago, Southwest earned $162 million, or 22 cents a share, in the third quarter.
. . .

They were doing great when the price of oil was much greater than $80/bbl.

Citigroup reported a $2.8 billion loss for its third quarter, as the banking giant took more than $13.2 billion in charges related mostly to its store of toxic mortgage assets. The quarterly loss, Citi's fourth in a row, was a stark reversal from the $2.2 billion it earned at the same time last year. Citigroup will lay-off about 10,000 people.

Merrill Lynch (NYSE: MER) today reported a net loss from continuing operations for the third quarter of 2008 of $5.1 billion, or $5.56 per diluted share, compared with a net loss from continuing operations of $2.4 billion, or $2.99 per diluted share, for the third quarter of 2007. Merrill Lynch's net loss for the third quarter of 2008 was $5.2 billion, or $5.58 per diluted share, compared with a net loss of $2.2 billion, or $2.82 per diluted share, for the year-ago quarter.
http://www.ml.com/index.asp?id=7695_7696_8149_88278_109853_111445

 

[Astronuc]

US stares at a $1 trillion deficit. How bad is that?
http://news.yahoo.com/s/csm/20081016/ts_csm/adebt

. . . .
If the deficit does reach $1 trillion this year, it would represent 7.5 percent of the gross domestic product, the highest percentage since World War II when it skyrocketed to 30 percent of GDP. "The big difference is back then we owed it to ourselves, to Americans," says David Walker, head of the Peter G. Peterson Foundation and former US comptroller general.

. . . .

Walker's focus is not just the national debt, which will grow to more than $10 trillion this year. Instead, he is looking at the national debt plus all the unfunded promises such as Social Security and Medicare, which have no future tax revenues to cover them. "At the end of the last fiscal year, that came to $53 trillion or about $550,000 per household," he says. "We may well have passed the point where the federal government's total financial hole exceeds the net worth of all Americans."

Walker estimates the US has about five years to show fiscal responsibility: "We will have to send a strong signal we can get our house in order."

That's not going to happen this fiscal year. Congress is expected to pile on new spending, such as an $80 billion reduction in taxes for individuals who would otherwise fall under the Alternative Minimum Tax (AMT) and $8 billion in hurricane Ike relief funds. So far, Congress has only appropriated $70 billion for the Iraq and Afghanistan effort, despite the fact that the wars have been costing about $150 billion per year. And revenues are likely to be considerably lower than anticipated.

"We have fewer people working, lower corporate profits, and losses in the markets," says Mr. Collender, who says one of the implications of the huge deficit will be that any of the plans by the presidential candidates for tax cuts or new spending programs will be put on hold.
. . . .

So the interest on the federal debt will exceed $450 billion or so.

 

[edward]

It is an ironic situation with Southwest Airlines. During the period of high fuel prices they were the only airline making money because they had hedged and were paying less for fuel.

 

[Gokul43201]

Southwest Airlines posts 1st loss in 17 years - because they hedged against higher oil prices and the price of oil has fallen.
http://news.yahoo.com/s/ap/20081016/ap_on_bi_ge/earns_southwest

This is still good news as far as the fundamentals of the company are concerned. So I don't think that should worry the market too much, despite the "historic" sounding nature of the report.

 

[Astronuc]

It is an ironic situation with Southwest Airlines. During the period of high fuel prices they were the only airline making money because they had hedged and were paying less for fuel.

But now the fuel prices have dropped, they'll be paying higher prices than others. I'm not show one protects against a price spike. They could have made some money selling fuel to other airlines.

We have seen gasoline prices drop in our area - now approaching $3.11 from a high near $4.59 for regular grade about 3 months ago. We have fairly high state taxes and distribution costs.

Back in the 90's and early 00's, aluminum companies in the NW had bought low-cost electricity contracts based on hydropower. When the price of electricity went way up, they decided to shutdown the production lines (and layoff people) and sell the electricity to California (or they sold it their contracts back to generators or to utilities who then sold the electricity to Ca). They could make more money re-selling electricity than from selling the aluminum they produced with cheap electricity. Once an aluminum line is shut down, it's difficult to restart it (so I was told). I would guess it has to do with the cost of starting up a cold furnace and having to scrap the first batch (?).

 

[mheslep]

Here's the data showing percentage of mortgages held by Fan/Fred vs private players. By 2003 they bundled or owned half of all US mortgages, after two decades of steep growth. Starting in ~2003/4 private entities took ~5% of their market share away. In that period Fan/Fred started grievously abusing their charter with their 'auto documentation' practices and the like to take back market share with lousy loans (bundled); they started increasing market share again by '07
http://www.econbrowser.com/archives/2008/07/gse_to_gdp_jul_08.gif
Source is an OFHEO (the regulator) report.

 

[turbo]

Gas here is back down to $2.86, for the time being.

 

[Astronuc]

Here's the data showing percentage of mortgages held by Fan/Fred vs private players. By 2003 they bundled or owned half of all US mortgages, after two decades of steep growth. Starting in ~2003/4 private entities took ~5% of their market share away. In that period Fan/Fred started grievously abusing their charter with their 'auto documentation' practices and the like to take back market share with lousy loans (bundled); they started increasing market share again by '07
http://www.econbrowser.com/archives/2008/07/gse_to_gdp_jul_08.gif
Source is an OFHEO (the regulator) report.

Source for figure: http://www.econbrowser.com/archives/2008/07/did_fannie_and.html#more


I found the OFHEO report:

Report to Congress
http://www.ofheo.gov/media/annualreports/ReporttoCongress2008.pdf
April 15, 2008

Risk and Risk Management

The weakening of Enterprise underwriting standards and the contractual impediments to guarantee fee increases as market conditions worsened contributed to poor financial performance. The Enterprises also experienced substantial deterioration in the market values of their subprime- and Alternative A (Alt-A)-backed private-label securities portfolios, although the portfolios remained overwhelmingly AAA-rated and have not recorded substantial impairment losses. The credit quality of the Enterprises’ principal counterparties—seller-servicers,derivative issuers and mortgage insurance companies—also deteriorated, increasing counterparty risk. Both Enterprises have taken steps to better manage credit risk, modifying risk management and business practices, but continuing house price declines and market turmoil will impact 2008 results.

OFHEO found interest-rate risk management at both Enterprises generally to be satisfactory, although Fannie Mae’s risk management strategy is somewhat aggressive in light of higher and increasing credit-related losses. OFHEO identified shortcomings with certain risk measurement systems at both Enterprises. Liquidity risk management was satisfactory at both Enterprises.

Both Enterprises significantly improved their model risk management in 2007, but rapidly changing market conditions significantly increased model risk, particularly for credit and prepayment models. Given the lack of historical precedent for current conditions and the fact that models are estimated based on historical experience, Enterprise models have become less reliable and require greater management judgment, increasing the potential for error in pricing and other metrics.

I really have to wonder about there assessment of risk!

http://www.econbrowser.com/archives/2008/07/did_fannie_and.html#more
The fact that the volume of mortgages held outright or guaranteed by Fannie or Freddie grew so much faster than either total mortgages or GDP over this period would seem to establish a prima facie case that the enterprises contributed to the phenomenal growth of mortgage debt over this period. Krugman nevertheless concludes that the GSEs aren't responsible for our current mess:

But here's the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S.& L. fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that's because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn't do any subprime lending, because they can't: the definition of a subprime loan is precisely a loan that doesn't meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

http://www.nytimes.com/2008/07/14/opinion/14krugman.html

 

[mheslep]

T. Boone on falling oil/gas prices:
"It's temporary, I guarantee that,'' Pickens said of the price drop while speaking in Chicago on Tuesday. "This time next year (oil) will be back to $150 a barrel."
http://www.southtownstar.com/news/1221654,101508pickens.article

 

[Astronuc]

Executives saw conditions worsening before crash
http://news.yahoo.com/s/nm/us_businesscouncil_survey

KIAWAH ISLAND, South Carolina (Reuters) – Top U.S. executives were bracing for a downturn even before the financial markets collapsed late last month, according to a survey conducted in September by the Business Council.

Nearly three-quarters of the CEOs surveyed last month saw global conditions eroding over the next two quarters and 91.6 percent said U.S. conditions were worse in September than they had been six months earlier.

The results were released at the Council's biannual meeting at a South Carolina resort on Thursday. The survey, which compiled results from 71 chief executives at some of the largest U.S. companies, was conducted between September 5 and September 17.

"Most of the responses reflected in our data are from just before the most recent precipitous stock market declines which would have certainly further contributed to the already very downbeat perspective that came through," James McNerney, chairman of the Business Council and chief executive of Boeing Co, said at a press conference.

Since September 17, when the council received its last responses to the survey, the Standard and Poors' 500 index has lost more than 18 percent of its value.

"There's a definite sense that if we're not already in a recession it will be virtually impossible to avoid one," McNerney said.

When the survey was conducted, 7 percent of CEOs expected the U.S. economy to decline in 2009 and over 80 percent expected it to grow between 0 percent and 2 percent.

. . . .

Recession looms despite global interventions
http://news.yahoo.com/s/nm/20081016/bs_nm/us_financial5

I guess we'll see.

 

[mheslep]

A short while ago the editors of VOX EU, an economics portal for professionals launched in 2007, recognized a need to get in depth information on the subprime crisis out to decision makers. They consequently solicited VOX EU members for essays on the subject which they compiled into an online book. According to The Economist, the essays are being widely read by the central bankers.

http://www.voxeu.org/index.php?q=node/1352"

 

[Jimmy Snyder]

When the survey was conducted, 7 percent of CEOs expected the U.S. economy to decline in 2009 and over 80 percent expected it to grow between 0 percent and 2 percent.

Actually, Astronuc didn't say that, he was quoting Reuters. But the NBER may be reluctant to declare a recession if the economy grows between 0 and 2 percent. It seems that the overwhelming majority (over 80%) of CEOs don't think there is going to be a recession. And only 7% think the economy will decline at all, let alone go into recession. Does the 7% tail wag the 80% dog? Am I missing something? Perhaps I am, so don't give up hope.

 

[Jimmy Snyder]

The stock market runs mostly on emotion, typically and famously fear and greed.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_p0g99V7HUg&refer=home"
Right now Warren and I are the only two investors who are buying, everyone else is selling. But prices will not continue cheap forever. What I need for you people to do is to continue bad mouthing the market and the economy while we still have uninvested cash. This will take a few weeks for me, probably a little longer for Warren. Thanks in advance for your cooperation.

 

[mheslep]

The stock market runs mostly on emotion, typically and famously fear and greed.
http://www.bloomberg.com/apps/news?pid=20601087&sid=a_p0g99V7HUg&refer=home"
Right now Warren and I are the only two investors who are buying, ...

I am doing my part in the shadows - buying late at night when nobody is looking.

 

[Astronuc]

Actually, Astronuc didn't say that, he was quoting Reuters. But the NBER may be reluctant to declare a recession if the economy grows between 0 and 2 percent. It seems that the overwhelming majority (over 80%) of CEOs don't think there is going to be a recession. And only 7% think the economy will decline at all, let alone go into recession. Does the 7% tail wag the 80% dog? Am I missing something? Perhaps I am, so don't give up hope.

Just remember - the fundamentals of the economy are strong. Bush and McCain have declared is so.

On the other hand, David Walker, former Comptroller General of the United States and head of the GAO, has mentioned that the aggregate debt (including future obligations) exceed the net worth of the US.

But don't worry - it's only money.


I'd say we've been in a recession for at least 1 year - kind of like one would have cancer and feel fine for years, until it starts hurting and parts of the body start failing, and one requires surgery, radiation or chemotherapy in order to survive, but with diminished health for some time.

 

[kronon]

Economic booms and busts have been occurring regularly for centuries; either through excessive loans and consequent bankruptcy, or by creating and circulating an excess of money.

At the same time though, the economy has managed grow from a few bags of flour that the Settlers brought with them, to today being able to have whatever you could possibly need or want, and then some (garden ornaments or fluffy steering wheel cover anyone?). To of reached this level of prosperity so quickly is to me just staggering.

So the system appears to work, despite the fluctuations, and despite other negative consequences like unfair income disparity. Credit-induced Booms and busts just seem to be a part of the economic development process. But if that’s what it takes, then fine, because the outcome is worthwhile.

The deeper issues with the US economy are I believe related more with inefficient and wasteful use of finite resources. Do we really want to use finite fossil energy on things like plastic fake rocks that cover the water meter on the lawn? I think that's madness.

Just because someone is willing to pay, it does not mean that society should produce it. That is what I think is wrong with the US economy.

 

[mheslep]

More distractions from the want to be recession as the third quarter earnings reports start coming in:
Google 26% profit rise
IBM 22% profit rise
Honeywell net income 16% rise
Intel 25% profit rise
Exxon $9B/3rd qtr, still increasing from last years all time record.

 

[Astronuc]

More distractions from the want to be recession as the third quarter earnings reports start coming in:
Google 26% profit rise
IBM 22% profit rise
Honeywell net income 16% rise
Intel 25% profit rise
Exxon $9B/3rd qtr, still increasing from last years all time record.

That's great, but what's behind the numbers. How much of that profit is purchased on credit - some of which will not be paid? How does this compare to the $billions lost by the banks and financial institutions?

I learned recently about a deal between NYS and IBM that keeps people employed through the end of 2008. It is expected that the employees covered by the agreement will be laid off come Dec 31.

New York May Pay IBM To Not Fire Workers
http://www.informationweek.com/blog/main/archives/2008/07/new_york_may_pa.html
Posted by Paul McDougall, Jul 8, 2008

IBM and subsidies - http://www.recordonline.com/apps/pbcs.dll/article?AID=/20080727/BIZ21/80725017


NYS and local counties have given IBM huge tax reductions and subsidies. So IBM and their stockholders benefit from corporate welfare. So Republicans and Conservatives don't mind accepting welfare - as long as they don't pay taxes?

IBM cut wages to workers and gave bonuses to management.
http://www.ibmemployee.com/Highlights080719.shtml


NY like Ca is running substantial deficits, partly from reduced revenues (which just got bigger with layoffs on Wall Street), partly from corporate subsidies, partly from entitlements (the generosity disputable), and partly from borrowing to cover the decline in revenues. This is also what the federal government has done and is still doing.

 

[Jimmy Snyder]

That's great, but what's behind the numbers.

Yes, it is, and here is what is behind the numbers. If you borrow money to plant an apple tree, then your children and grandchildren will have to pay for it. Perhaps they can sell some of the apples. If you don't plant the tree, your children and grandchildren will have to pay for that too, but with what?

 

[mheslep]

...NYS and local counties have given IBM huge tax reductions and subsidies. So IBM and their stockholders benefit from corporate welfare. So Republicans and Conservatives don't mind accepting welfare - as long as they don't pay taxes?

Eh? You happen to know that 'IBM and their stockholders' are Republicans and Conservatives? How? Certainly NY state government leadership is not, that's land of the blue up there.

Also, guess who proposed the following:

...So here's the deal we can make with the auto companies. It's a piece of legislation I introduced called "Health Care for Hybrids," and it would allow the federal government to pick up part of the tab for the auto companies' retiree health care costs...

 

[Astronuc]

Eh? You happen to know that 'IBM and their stockholders' are Republicans and Conservatives? How? Certainly NY state government leadership is not, that's land of the blue up there.

Also, guess who proposed the following:

I know quite a few IBMers and quite a few conservatives and republicans who are stockholders of IBM as well as other companies. In my area, the population is about 2/3's republican/conservative, and in the nuclear industry, we have a lot of conservative/republicans, particularly in the south.

George Pataki (Rep) gave a lot of goodies to IBM during his tenure.


Meanwhile -

Prosecutors Said to Subpoena Lehman Executives

Federal prosecutors have issued subpoenas for a dozen Lehman Brothers executives in connection with three grand jury investigations of the investment bank's collapse, The New York Post's Zachery Kouwe reported.

At a hearing Thursday, Lehman's bankruptcy lawyer, Harvey Miller of Weil, Gotshal & Manges, said that United States attorneys in New York and New Jersey have subpoenaed 12 people. Among them, The Post said, was Richard S. Fuld Jr., the firm's chief executive.

The investigations appear to be centering on whether or not executives made false comments about the firm's health before it crumbled, the newspaper reported, citing unnamed sources.

Lehman executives including Fuld subpoenaed: report
http://www.reuters.com/article/ousiv/idUSTRE49G2X920081017

Well - we shall see.

 

[mheslep]

That's great, but what's behind the numbers. How much of that profit is purchased on credit - some of which will not be paid?

What would be a good number? Zero debt? Intel numbers for instance:
http://www.intc.com/intelAR2007/financial/balance/index.html
2007: $142M short term debt, $1.9B long term debt against ~$7B net income, not to mention $55B in assets covering everything from cash to plants.

 

[Astronuc]

What would be a good number? Zero debt? Intel numbers for instance:
http://www.intc.com/intelAR2007/financial/balance/index.html
2007: $142M short term debt, $1.9B long term debt against ~$7B net income, not to mention $55B in assets covering everything from cash to plants.

Actually, I was thinking about how much of IBM's products and services are purchased by customers on credit - some of which will or have filed bankruptcy. If IBM tried to sell a plant now, I imagine they would not get the book value. In fact, locally, they probably would not get a buyer.

 

[mheslep]

I know quite a few IBMers and quite a few conservatives and republicans who are stockholders of IBM as well as other companies. In my area, the population is about 2/3's republican/conservative, and in the nuclear industry, we have a lot of conservative/republicans, particularly in the south.

George Pataki (Rep) gave a lot of goodies to IBM during his tenure.

And this all stopped under Executive Club Spitzer and now Patterson?

 

[mheslep]

...Lehman executives including Fuld subpoenaed: report
http://www.reuters.com/article/ousiv/idUSTRE49G2X920081017

Hopefully that will be followed by a subpoena for Senator Dodd.
http://www.nytimes.com/2008/06/18/washington/18dodd.html?partner=rssnyt&emc=rss