News What is wrong with the US economy? Part 2

[mheslep]

When there is a shortfall in aggregate demand, public construction projects are a very efficient way to pump money into the economy.

That's a simplified version of the Keynesian view; a more complete view would include the stumbling points:
1) As the government attempts to pump demand into the economy it must first take capital out of the economy by taxing or borrowing, or 'crowding out' the private economy. The argument by stimulus advocates would be that in the current economy that there is ample 'idle' capital so that crowding doesn't occur, but that's not clear to me that this is the case. If it is the case, it is certainly a temporary state.
2) 'Efficient' only has meaning in relation to alternatives, i.e. there are areas with better stimulus multipliers than infrastructure (amount of additional GDP for amount of additional government spending). The common numbers in use by advocates cite extending unemployment insurance yielding 1.64, increasing food stamps at 1.73, and infrastructure at 1.59. There are other studies looking at US averages and returning averages of 1.4 [Ramey] and even 1 [Hall/Woodward]
http://gregmankiw.blogspot.com/2008/12/spending-and-tax-multipliers.html
http://www.econbrowser.com/archives/2008/10/pocketfull_of_m.html
3) Inadequate demand may not be due to a lapse of means or will to buy or invest. It may instead be because nobody wants the goods produced by the current system, the same ole same ole; in that case the economy needs to restructure and reinvent itself. I believe this is the case in Japan, where (again) there's a great deal of data on large scale fiscal stimulus:

Between 1992 and 1995, Japan tried six spending programs totaling 65.5 trillion yen and cut income tax rates during 1994. In January 1998, Japan temporarily cut taxes again by 2 trillion yen. Then, in April of that year, the government unveiled a fiscal stimulus package worth more than 16.7 trillion yen, almost half of which was for public works. Again, in November 1998, another fiscal stimulus package worth 23.9 trillion yen was announced. A year later (November 1999), yet another fiscal stimulus package of 18 trillion yen was tried. Finally, in October 2000, Japan announced yet another fiscal stimulus package of 11 trillion yen. Overall during the 1990s, Japan tried 10 fiscal stimulus packages totaling more than 100 trillion yen, and each failed to cure the recession. What the spending programs have done, however, is put Japan's government in poor fiscal shape. The "on-budget" government spending has caused public debt to exceed 100 percent of GDP (highest in the G7), and even more debt is apparent when the "off-budget" sector is included.

http://mises.org/story/1099
Those yen budgets translate to a peak 10% of Japan's GDP.

4. Isn't fiscal policy an alternative answer?
Fiscal expansion is certainly an alternative way of pumping demand into the economy. And given Japan's grievous plight, coupled with the real uncertainty about what will work, I would advocate fiscal expansion as well as a commitment to inflation.
But I have doubts about fiscal policy's effectiveness on its own, for three reasons.

I think you bolded wrong words in the above text. I emphasized my view.

Fine, but I have no interest in what he advocates when trying to get to the fundamentals of the topic. I'm interested in the argument and the data. As I highlighted earlier, Krugman points out several failures with fiscal stimulus in Japan, and in the end hand waves it all away in favor of a what appears to be a personal preference.

..He is a 'master' when compared to individuals like you..

Do you feel that statement bolsters your argument?
http://en.wikipedia.org/wiki/Appeal_to_authority" and
http://en.wikipedia.org/wiki/Ad_hominem"

 

[misgfool]

That's a simplified version of the Keynesian view; a more complete view would include the stumbling points:
1) As the government attempts to pump demand into the economy it must first take capital out of the economy by taxing or borrowing, or 'crowding out' the private economy.
The argument by stimulus advocates would be that in the current economy that there is ample 'idle' capital so that crowding doesn't occur, but that's not clear to me that this is the case.

You have pointed out yourself in this thread that US banks are holding massive amounts of idle capital.

If it is the case, it is certainly a temporary state.

True.

2) 'Efficient' only has meaning in relation to alternatives, i.e. there are areas with better stimulus multipliers than infrastructure (amount of additional GDP for amount of additional government spending). The common numbers in use by advocates cite extending unemployment insurance yielding 1.64, increasing food stamps at 1.73, and infrastructure at 1.59. There are other studies looking at US averages and returning averages of 1.4 [Ramey] and even 1 [Hall/Woodward]
http://gregmankiw.blogspot.com/2008/12/spending-and-tax-multipliers.html
http://www.econbrowser.com/archives/2008/10/pocketfull_of_m.html

All public spending is beneficial if the amount goes back to the economy. So your examples do bring out good points. But again if you build those 100 nuclear plants, they will provide dividends far to the future.

3) Inadequate demand may not be due to a lapse of means or will to buy or invest. It may instead be because nobody wants the goods produced by the current system, the same ole same ole; in that case the economy needs to restructure and reinvent itself. I believe this is the case in Japan, where (again) there's a great deal of data on large scale fiscal stimulus:

That might be believable if it happened gradually, but now the collapse has been almost instantaneous. Are you trying to say that everyone got bored in goods at the same time? I would see that as quite improbable.

Between 1992 and 1995, ... sector is included.

At least we know now that tax cuts are totally useless, right?

Fine, but I have no interest in what he advocates when trying to get to the fundamentals of the topic.

Then why did you point them out in the first place? Still it is good to know we have the same goal.

I'm interested in the argument and the data. As I highlighted earlier, Krugman points out several failures with fiscal stimulus in Japan, and in the end hand waves it all away in favor of a what appears to be a personal preference.

You didn't read or comprehend the content of Krugmans ideas. What he says is that Japan was in a liquidity trap. He thought that what the government did was correct but the central bank should have committed in keeping the inflation at some target level i.e. monetary policy would have been predictable. And stay committed even after prices begin to rise. When the nominal interest rates were at zero with inflation at 5% the real rate would have been -5%. That would have discouraged saving money.

The way I see it, your problem is that you try to separate monetary policy and fiscal policy like only one of the can solve the situation. In my opinion they are like a mother and a father, if either one of them doesn't play along, there will be no kids.

Do you feel that statement bolsters your argument?
http://en.wikipedia.org/wiki/Appeal_to_authority" and
http://en.wikipedia.org/wiki/Ad_hominem"

You pushed me, but I guess I deserved that. Still

http://en.wikipedia.org/wiki/Humor"

 

[mheslep]

... So your examples do bring out good points. But again if you build those 100 nuclear plants, they will provide dividends far to the future.

Agreed. That should be vetting process - traditional cost benefit analysis. Unfortunately I have doubts that Congress can keep its hand out of the pie. Rep Frank was tagged today for rerouting TARP money to his home town bank; he personally called the TARP regulator for the bank.

At least we know now that tax cuts are totally useless, right?

No! If you mean the claim that all tax cuts at any rate pay for themselves - yes that's false (well some types appear to, depending on the tax rate, blah, blah). But there's no question that tax cuts also stimulate GDP, the question is how much? The debate that's raging at the moment between economists is how much stimulus do we get from spending and how much do we get from tax cuts. Pres. Obama's new CEA Chair Christina Romer came out with CEA numbers a couple days ago in a summary of the proposed stimulus plan.
http://otrans.3cdn.net/45593e8ecbd339d074_l3m6bt1te.pdf
She rates spending (multiplier ~1.5) more effective than tax cuts (~.8). On the other hand in 2007 she published a http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf" showing tax cuts had a multiplier of 3 - the difference is beyond me, I suppose the change in conditions has much to do with it.

http://en.wikipedia.org/wiki/Humor"

Always good advice

 

[misgfool]

Agreed. That should be vetting process - traditional cost benefit analysis. Unfortunately I have doubts that Congress can keep its hand out of the pie. Rep Frank was tagged today for rerouting TARP money to his home town bank; he personally called the TARP regulator for the bank.

That is a bit unfortunate, but if you give all of to the major banks, end result will be a few massive banks and no little or medium sized banks. So in effect the government is creating a monopoly situation to the financial sector. I think that when this crisis is over the government should split the biggest banks at least to five parts.

She rates spending (multiplier ~1.5) more effective than tax cuts (~.8). On the other hand in 2007 she published a http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf" showing tax cuts had a multiplier of 3 - the difference is beyond me, I suppose the change in conditions has much to do with it.

Here is what comes immediately to mind. Tax cuts have two possible ways of generating more growth:

a) people work more.
b) people have more money and they spend it

At the present there is so little work to be done that option a) won't/can't happen. Also when one thinks about a person making say $500000 a year working 60 hours a week, how much more could (s)he really work? Tax cuts might be justifiable in the mid income range, but it's hard to see a benefit from the highest earners.

Also if people get more money they are more likely to save it than spend so option b) won't happen. So in the current situation I can't see any benefit from tax cuts.

 

[mheslep]

Here is what comes immediately to mind. Tax cuts have two possible ways of generating more growth:

a) people work more.
b) people have more money and they spend it

At the present there is so little work to be done that option a) won't/can't happen. Also when one thinks about a person making say $500000 a year working 60 hours a week, how much more could (s)he really work?

Could just as easily cite the person working 40 hours a week now that might pick up to 60 w/ more take home.

Tax cuts might be justifiable in the mid income range, but it's hard to see a benefit from the highest earners.

The tax cuts on the table now are for businesses and middle income.

Also if people get more money they are more likely to save it than spend so option b) won't happen. So in the current situation I can't see any benefit from tax cuts.

There's been a lot of work done on explaining what people are likely to do with increased income. A major contribution is Friedman's http://en.wikipedia.org/wiki/Permanent_income_hypothesis" income theory. The more permanent, the more likely people are to consume or invest. So the more permanent the tax cuts, the more likely people are to spend or invest them rather than bank it. Of course that's a one time shot, and then the tax breaks contribute perhaps to the long term deficit.
Anecdotally there are many areas where tax cuts might help immediately. People are dumping their domestic help with the crunch. A tax break does two things in the first circulation round: gives the employer more income to go back and rehire day care, rehire the gardener, but it also makes the employee cheaper to hire, as their taxes also got cut. That is, tax breaks make labor less expensive. (high labor cost=takehome+taxes_high becomes lower labor cost=takehome+taxes_low). Lower labor costs => higher employment.
Now I don't say necessarily that tax cuts are the best way to go, just that they are far from useless; I favor the whatever policy is the most effective for the recovering the economy. Maybe some govt. spending is the most effective, maybe not.

 

[mgb_phys]

There's been a lot of work done on explaining what people are likely to do with increased income.

Sensible people will use it to pay off any credit card/mortgage debt and save the rest = bad.
Idiots will see this as more money in their pocket and buy imported consumer goods = bad.
Somebody will spend the money on local economic generating activates (like going to a restaurant) or invest it in wealth creating companies = good.

You are going to need a pretty accurately targeted tax cut!

 

[jal]

Tax breaks/cut are the most beneficial to the rich/wealthy/ in two ways.
1. They get to keep more of their profits.
2. They realize that an infrastructure spending plan may not benefit them and that it will eventually mean that they will get to pay a higher tax to pay back the gov. deficit spending.
jal

 

[Astronuc]

Tax breaks/cut are the most beneficial to the rich/wealthy/ in two ways.
1. They get to keep more of their profits.
2. They realize that an infrastructure spending plan may not benefit them and that it will eventually mean that they will get to pay a higher tax to pay back the gov. deficit spending.
jal

Warren Buffett made the point that he is undertaxed. His primary source of income is capital gains which are taxed at a much lower rate than income tax.

What some have done is move their cash/capital off-shore and then that is lent back to the US government, and so the gains are not taxed at all.

Here's an interesting commentary by Stiglitz:
http://www.cnn.com/2009/POLITICS/01/26/stiglitz.finance.crisis/index.html

Summary:
The bank bailout has failed to restart prudent lending by banks
Stiglitz says banks made reckless loans and were burned as a result
They borrowed so much money that they couldn't handle a downturn
Economist says it's time to consider government takeovers of weaker banks

. . .
Every day brings further evidence that the losses are greater than had been expected and more and more money will be required.

The question is at last being raised: Perhaps the entire strategy is flawed? Perhaps what is needed is a fundamental rethinking. The Paulson-Bernanke-Geithner strategy was based on the realization that maintaining the flow of credit was essential for the economy. But it was also based on a failure to grasp some of the fundamental changes in our financial sector since the Great Depression, and even in the last two decades.

For a while, there was hope that simply lowering interest rates enough, flooding the economy with money, would suffice; but three quarters of a century ago, Keynes explained why, in a downturn such as this, monetary policy is likely to be ineffective. It is like pushing on a string.
. . . .
Remarkably, Bush administration Treasury Secretary Henry Paulson and company simply didn't understand that the banks had made bad loans and engaged in reckless gambling. There had been a bubble, and the bubble had broken. No amount of talking would change these realities.
. . . .
Then came the idea of equity injection, without strings, so that as we poured money into the banks, they poured out money, to their executives in the form of bonuses, to their shareholders in the form of dividends.

Some of what they had left over they used to buy other banks -- to pursue strategic goals for which they could not have found private finance. The last thing in their mind was to restart lending.

The underlying problem is simple: Even in the heyday of finance, there was a huge gap between private rewards and social returns. The bank managers have taken home huge paychecks, even though, over the past five years, the net profits of many of the banks have (in total) been negative.

And the social returns have even been less -- the financial sector is supposed to allocate capital and manage risk, and it did neither well. Our economy is paying the price for these failures -- to the tune of hundreds of billions of dollars.
. . . .
Leverage, or borrowing, gives big returns when things are going well, but when things turn sour, it is a recipe for disaster. It was not unusual for investment banks to "leverage" themselves by borrowing amounts equal to 25 or 30 times their equity.

At "just" 25 to 1 leverage, a 4 percent fall in the price of assets wipes out a bank's net worth -- and we have seen far more precipitous falls in asset prices. Putting another $20 billion in a bank with $2 trillion of assets will be wiped out with just a 1 percent fall in asset prices. What's the point?
. . . .

Meanwhile - Tens of thousands more layoffs are announced
http://news.yahoo.com/s/ap/20090126/ap_on_bi_ge/business_outlook

A new survey by the National Association for Business Economics depicts the worst business conditions in the U.S. since the report's inception in 1982.

Thirty-nine percent of NABE's forecasters predicted job reductions through attrition or "significant" layoffs over the next six months, up from 32 percent in the previous survey in October. Around 45 percent in the current survey anticipated no change in hiring plans, while roughly 17 percent thought hiring would increase.

The recession, which started in December 2007, and is expected to stretch into this year, has been a job killer. The economy lost 2.6 million jobs last year, the most since 1945. The unemployment rate jumped to 7.2 percent in December, the highest in 16 years, and is expected to keep climbing.
. . . .
Thousands more jobs cuts were announced Monday. Pharmaceutical giant Pfizer Inc., which is buying rival drugmaker Wyeth in a $68 billion deal, and Sprint Nextel Corp., the country's third-largest wireless provider, said they each will slash 8,000 jobs. Home Depot Inc., the biggest home improvement retailer in the U.S., will get rid of 7,000 jobs, and General Motors Corp. said it will cut 2,000 jobs at plants in Michigan and Ohio due to slow sales.

Caterpillar Inc., the world's largest maker of mining and construction equipment, announced 5,000 new layoffs on top of several earlier actions. The latest cuts of support and management employees will be made globally by the end of March. An additional 2,500 workers already have accepted buyout offers, and ties have been severed with about 8,000 contract workers worldwide. In addition, about 4,000 full-time factory workers already have been let go.
. . . .

Caterpillar says to cut 20,000 jobs
http://news.yahoo.com/s/nm/20090126/bs_nm/us_caterpillar

Home Depot to cut 7,000 jobs, close Expo chain
http://news.yahoo.com/s/ap/20090126/ap_on_bi_ge/home_depot_job_cuts

Pfizer to buy Wyeth for $68B; cut 8,000 jobs
http://news.yahoo.com/s/ap/20090126/ap_on_bi_ge/pfizer_wyeth_acquisition

 

[turbo]

Fallen Lehman Brothers Chief Executive Richard Fuld sold his $13.3 million mansion to his wife for just $100 last November, according to Florida real estate records.

Par for the course...

http://www.reuters.com/article/newsOne/idUSTRE50P04A20090126

 

[mheslep]

...l]

Summary:
...
Economist says it's time to consider government takeovers of weaker banks

Stiglitz cites the Swedish example? Sweden did indeed nationalize many banks. Why does Stiglitz not mention that Sweden later re-privatized those banks? Why, when proposing such a solution, does he not feel obligated to address the elephant in the room problem with nationalizing banks: politicians will want to personally direct who and who does not get loans. They already http://www.boston.com/news/nation/washington/articles/2009/01/23/frank_tried_to_get_hub_bank_a_bailout/" when given the opportunity.

 

[jal]

Economist says it's time to consider government takeovers of weaker banks

The US gov./tax payers does not have enough money. The system is bankrupt!
jal

 

[mgb_phys]

Meanwhile - Tens of thousands more layoffs are announced
http://news.yahoo.com/s/ap/20090126/ap_on_bi_ge/business_outlook


Caterpillar says to cut 20,000 jobs
http://news.yahoo.com/s/nm/20090126/bs_nm/us_caterpillar

Home Depot to cut 7,000 jobs, close Expo chain
http://news.yahoo.com/s/ap/20090126/ap_on_bi_ge/home_depot_job_cuts

Pfizer to buy Wyeth for $68B; cut 8,000 jobs
http://news.yahoo.com/s/ap/20090126/ap_on_bi_ge/pfizer_wyeth_acquisition

But it's not all bad news, citigroup bank just bought a new $50M jet
http://www.nypost.com/seven/01262009/news/nationalnews/just_plane_despicable_152033.htm

 

[Potential]

I think C is trying to back the $50M jet deal out after a senator began to take action.

 

[mgb_phys]

I think C is trying to back the $50M jet deal out after a senator began to take action.

Idiots, you don't buy a Jet in a recession, you lease it through a dozen intermediate subsidiaries registered in different Caribbean tax havens while claiming tax relief on all the money transfers.
These crooks (sorry banks) have just got lazy - what happened to proper organised crime ?

 

[Potential]

LOL. I wouldn't worry too much about the layoffs. Once the $1B M3 issued via private corporation Federal Reserve hits our pockets, start looking for the next bubble. A hyper-bubble, like no bubble we have seen before. Bubble went from Japan, to US, to China, in almost successive decades. The next bubble may be India. Or it could be precious metals. Price peak around 2014. All the cash has to go somewhere, right? Once the momentum starts in an investment vehicle, all the cash seems to be sucked by that vehicle. Could be like a hyper-Hoover vacuuum cleaner on steroids.

 

[Astronuc]

Stiglitz cites the Swedish example? Sweden did indeed nationalize many banks. Why does Stiglitz not mention that Sweden later re-privatized those banks? Why, when proposing such a solution, does he not feel obligated to address the elephant in the room problem with nationalizing banks: politicians will want to personally direct who and who does not get loans. They already http://www.boston.com/news/nation/washington/articles/2009/01/23/frank_tried_to_get_hub_bank_a_bailout/" when given the opportunity.

I don't necessarily agree with any solution that Stiglitz mentions. I'm not thrilled with the bailout, the way it was handled, or the results, or the next stimulus package. The people involved in this seem to be the same people who didn't see this coming, so why should they be trusted to develop an effective solution.


But 9 out of 10 bank CEOs are still employed despite the loses and the need for government bailout.
AP IMPACT: Bank layoffs mount as execs get bailout
http://news.yahoo.com/s/ap/20090127/ap_on_go_ca_st_pe/meltdown_executives


Meanwhile - Corning cuts 3,500 jobs as 4Q profit slumps
http://news.yahoo.com/s/ap/20090127/ap_on_bi_ge/earns_corning

or - Corning slashes up to 4,900 jobs to cut costs
http://news.yahoo.com/s/nm/20090127/bs_nm/us_corning

DuPont posts fourth-quarter loss, trims 2009 outlook
http://news.yahoo.com/s/nm/20090127/bs_nm/us_dupont

NEW YORK (Reuters) - DuPont Co posted a bigger-than-expected fourth-quarter loss on Tuesday, hurt by restructuring-related charges, a widening global recession and a slump in consumer spending, and the chemical maker lowered its 2009 earnings outlook.

 

[Astronuc]

The Commerce Department is set to release a report Friday expected to show the economy shrank at a pace of 5.4 percent in the October-December period, a much faster descent than the 0.5 percent decline logged in the prior quarter. If economists' forecasts are correct, it would mark the weakest quarterly showing since an annualized drop of 6.4 percent in the first quarter of 1982, when the country was suffering through a severe recession.

. . . .

http://biz.yahoo.com/ap/090130/economy.html

The report be out in the next couple of hours.


Update: Economy shrinks at 3.8 percent pace in fourth quarter, worst showing in quarter-century

WASHINGTON (AP) -- The economy shrank at a 3.8 percent pace at the end of 2008, the worst showing in a quarter-century, as the deepening recession forced consumers and businesses to throttle back spending.
. . . .
For all of 2008, the economy grew by just 1.3 percent. That was down from a 2 percent gain in 2007 and marked the slowest growth since the last recession in 2001.
. . . .

 

[Gokul43201]

I finally heard something on NPR a couple days ago about setting up a "bad bank". I never actually got to hear that news story (I was driving), but I guess this is something like the RTC of the post S&L era. If this is true, why has it taken so long to propose an RTC-like plan? I remember mheslep suggesting it here several months ago (Oct 08?), and I thought it was a (relatively) good idea back then. But I'm a layman when it comes to economics.

So what are the disadvantages of setting up such a "bad bank" to absorb toxic assets? Is it just the slippery slope argument or is there a bigger criticism (I think we've embarked on a slippery slope of a different kind with bailouts anyway)?

 

[Astronuc]

I finally heard something on NPR a couple days ago about setting up a "bad bank". I never actually got to hear that news story (I was driving), but I guess this is something like the RTC of the post S&L era. If this is true, why has it taken so long to propose an RTC-like plan? I remember mheslep suggesting it here several months ago (Oct 08?), and I thought it was a (relatively) good idea back then. But I'm a layman when it comes to economics.

I think the delay was due to the national election - new administration, and new congress - and perhaps some belief that the $700 billion + $300-400 billion spent on Fannie Mae, Freddie Mac, AIG, . . . would do the trick.

So what are the disadvantages of setting up such a "bad bank" to absorb toxic assets? Is it just the slippery slope argument or is there a bigger criticism (I think we've embarked on a slippery slope of a different kind with bailouts anyway)?

I guess it comes down to who pays what, and how does one recover the investment. There is also the matter of conflicting philosophy about how much the government gets involved in micromanaging the economy.

What is the magic formula?


I would have thought that if people can't pay on a 30-yr mortgage, then set it to 40 year or whatever they can pay. I think the problem is that too many people got hit with high interest rates on their mortgages (from adjustable rate mortgages), a problem compounded by higher prices for basics, like fuel, food, medicine, . . . .

I'm not sure the magnitude of the problem, but I think a lot of the overleveraging is related to financing lifestyles on high interest credit cards, i.e. > 10% APR, and more like 18 - 30%, i.e. the 'subprime' credit card. The bust came when too many people could not pay (service) the cumulative debt. Many were forced to stop spending, which had an adverse impact on an economy that is about 2/3's consumer spending.

 

[mgb_phys]

I'm not sure the magnitude of the problem, but I think a lot of the overleveraging is related to financing lifestyles on high interest credit cards, i.e. > 10% APR, and more like 18 - 30%, i.e. the 'subprime' credit card. The bust came when too many people could not pay (service) the cumulative debt. Many were forced to stop spending, which had an adverse impact on an economy that is about 2/3's consumer spending.

And ironically now if everyone starts behaving responsibly - saving and not buying junk, the economy goes into a depression!

 

[mheslep]

...I would have thought that if people can't pay on a 30-yr mortgage, then set it to 40 year or whatever they can pay. ...

No! We want people to build more wealth, not bleed their futures dry with interest payments. The total interest paid on a $100k/30 yr/6% loan is ~$116k. The same loan over 40 years costs $164k in interest, i.e. it puts the lender $50k further out of pocket and probably still paying off a mortgage well into retirement. The thing to do if these mortgages must be renegotiated long term is to force a lower rate. That will give the mortgage backed securities a haircut, probably all of them since the blasted things are opaque.

 

[Astronuc]

Wall Street Bonuses May Go Way of Dodo Amid Bailouts
http://news.yahoo.com/s/bloomberg/20090130/pl_bloomberg/assovtyss6g8

Jan. 30 (Bloomberg) -- The Wall Street bonus, considered a sacred ritual, may become the industry’s biggest casualty as governments worldwide bail out financial institutions.

UBS AG was told to reduce bonuses after the Swiss government gave the country’s biggest bank a $59.2 billion lifeline. Bank of America Corp. is under pressure to scale back payouts after New York Attorney General Andrew Cuomo subpoenaed executives earlier this week for information on compensation and President Barack Obama said just yesterday that bonuses handed out by banks represent “the height of irresponsibility.”

The current system of “asymmetric compensation,” in which people are rewarded when they do well and aren’t required to return the rewards when they lose money, is detrimental to society and needs to change, said Nassim Taleb, a professor at New York University and author of “The Black Swan: The Impact of the Highly Improbable,” in an interview.

The worst economic crisis since the Great Depression, a $700 billion taxpayer bailout in the U.S. and the demise of three of the biggest securities firms -- Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. -- didn’t deter investment banks from offering year-end rewards to employees on top of their salaries.

Financial companies in New York City paid cash bonuses of $18.4 billion last year, the sixth-most in history, even as they posted record losses, according to data compiled by the office of state Comptroller Thomas DiNapoli. The payouts are split among everyone from managing directors to secretaries.

. . . .

That's good for NY State. Then on the other hand, the state was spending more based on the assumption the bonuses (and tax revenue) would be greater.

 

[Astronuc]

No! We want people to build more wealth, not bleed their futures dry with interest payments. The total interest paid on a $100k/30 yr/6% loan is ~$116k. The same loan over 40 years costs $164k in interest, i.e. it puts the lender $50k further out of pocket and probably still paying off a mortgage well into retirement. The thing to do if these mortgages must be renegotiated long term is to force a lower rate. That will give the mortgage backed securities a haircut, probably all of them since the blasted things are opaque.

Or people can just wait, and rent, until they can put down 10% or 20%, eh?

How about limits on maximum interest rates for mortgages and credit cards? Or people should just not borrow money.

Certainly the consumers want lower interest rates and to build wealth. But the people who loan the money want high rates of return so they can build even more wealth. It's the trickle up theory of money and capital. Those with the most money collect more money.


Update: Freddie Mac to rent foreclosed properties
http://news.yahoo.com/s/ap/20090130/ap_on_bi_ge/mortgage_giants_renters_3

Freddie Mac offering rents to foreclosed borrowers
http://news.yahoo.com/s/nm/20090130/us_nm/us_freddiemac_foreclosure_policy_1

No equity, but a place to live.

 

[Astronuc]

Stocks stumble as investors fear worsening economy
http://biz.yahoo.com/ap/090130/wall_street.html
Friday January 30, 6:41 pm ET
By Sara Lepro, AP
Stocks finish lower as investors fear worsening economy, worry 'bad bank' idea has hit snag

NEW YORK (AP) -- Wall Street ended its worst January ever by stumbling again over the banking system and the economy.

The major indexes all fell sharply for the second straight day, leaving the Dow Jones industrial average and Standard & Poor's 500 index with record percentage drops for January -- 8.84 percent and 8.57 percent, respectively. Some market watchers believe that's a bad omen for the rest of the year, as the market usually ends a year down after having fallen in January.

. . . .

Eleven months to go.

 

[jal]

If you thought that your ideas to fix the economic problems were not being considered or your solutions not being considered, then read the following from Reuters.
http://blogs.reuters.com/great-debate/2009/01/27/turning-the-tables-can-you-help-davos-leaders/
Turning the tables: Can you help Davos leaders?
======
Here is the web site:
http://www.weforum.org/en/events/AnnualMeeting2009/index.htm
Annual Meeting 2009
Davos-Klosters, Switzerland, 28 January - 1 February
"Shaping the Post-Crisis World"
=======
Obama is furious at Wall Street executives giving themselves billions of dollars in bonus.
The delegates at the Davos meeting feel the same way.

There is no law against giving yourself millions of dollars.
There is no way Obama can stop it. He cannot take away the TARP money and have the banks go bankrupt.

A new world order would make it against the laws for anyone to make more money than the man who has the most responsibility. No one can demonstrate that they have more responsibility than the president of the USA. Therefore, bonus etc. should be lower than that of the president of the USA.

A reporter asked the question to the White House Press secretary. duhduhduh
Cnn has also opened up a discussion on "fair pay/compensation" being no more than the president.
jal

 

[Astronuc]

January 31, 2009
Steep Slide in Economy as Unsold Goods Pile Up
http://www.nytimes.com/2009/01/31/business/economy/31econ.html
By LOUIS UCHITELLE

The economy shrank at an accelerating pace late last year, the government reported on Friday, adding to the urgency of a stimulus package capable of bringing the country back from a recession that appears to be deepening.

The actual decline in the gross domestic product — at a 3.8 percent annual rate — fell short of the 5 to 6 percent that most economists had expected for the fourth quarter. But that was because consumption collapsed so quickly that goods piled up in inventory, unsold but counted as part of the nation’s output.

“The drop in spending was so fast, so rapid, that production could not be cut fast enough,” said Nigel Gault, chief domestic economist at IHS Global Insight. “That is happening now, and the contraction in the current quarter, as a result, will probably exceed 5 percent.”

. . . .

The current quarter should reflect the reduction in production.

 

[russ_watters]

No! We want people to build more wealth, not bleed their futures dry with interest payments. The total interest paid on a $100k/30 yr/6% loan is ~$116k. The same loan over 40 years costs $164k in interest, i.e. it puts the lender $50k further out of pocket and probably still paying off a mortgage well into retirement.

One important caveat, though: virtually everyone makes more money as they get older, so buying a house on terms like that may be intended as a temporary thing for, say, 5 years, until a person is making enough money to afford a higher payment, at which point they refinance. One of my coworkers is 40 and after something like 7 years in his 30 year mortgage, just recently refinanced with a 20 year mortgage.

 

[Proton Soup]

believe it or not, people used to buy much smaller houses. and the prices of autos were not doubled with a bunch of gizmos that have nothing to do with propulsion.

 

[turbo]

believe it or not, people used to buy much smaller houses. and the prices of autos were not doubled with a bunch of gizmos that have nothing to do with propulsion.

My wife and I used to own a large house - more room than we needed, on a cul-de-sac in a nice neighborhood. The town started jacking up our property taxes, so we looked for a much smaller house in a town with reasonable tax rates, and unloaded the big house while the real-estate market was still pretty hot. We bought that big place simply because it was available at a VERY reasonable price, and I was working shift-work, so my wife was home alone at night a lot. I felt much better about her being alone in a very quiet neighborhood with neighbors we knew all around us. Our little log cabin is on a single floor, with no steps to climb, and it's easy to heat with reasonable taxes. All good things as we get older.

 

[OmCheeto]

There is no law against giving yourself millions of dollars.

There might be on Monday.

http://www.deccanherald.com/DeccanH...foreign20090131115733.asp?section=updatenews"
Deccan Herald
Saturday, January 31, 2009

Senator Claire McCaskill from Missouri yesterday introduced the legislation in the Senate in a bid to cap the top executives' salary at USD 400,000, which is also the pay package of the US President.

A Democratic lawmaker has introduced a legislation in the US Senate proposing to limit to USD 400,000 the salary of top bosses of any company that accepts federal bailout money, a day after President Barack Obama blasted Wall Street firms for their "shameful" act to dole out USD 18 billion in bonuses to CEOs.

If I recall correctly, there is a law in India that says no one can make more than the president there. Someone should do the math on how much the Forbes 400 would be worth collectively if this law had passed 20 years ago.

But what a silly idea.

 

[russ_watters]

believe it or not, people used to buy much smaller houses. and the prices of autos were not doubled with a bunch of gizmos that have nothing to do with propulsion.

Yes, I know. I have a better TV than my parents ever had too. Progress is great!

 

[mheslep]

There might be on Monday.
If I recall correctly, there is a law in India that says no one can make more than the president there. Someone should do the math on how much the Forbes 400 would be worth collectively if this law had passed 20 years ago.

But what a silly idea.

Well the proposal is not for everybody, just for "any company that accepts federal bailout money."

Edit: Many executives might actually jump at that presidential salary cap if it also came with the associated benefits, a four year lease on a private 747 jet (2), bullet proof limo (2), fleet of helicopters, world class security detail and communications, mansion on ~10 acres in the middle of DC with a residential staff of ~100, office staff of another ~100, 100s of acres for Camp David, etc. In other words, the value of the President's compensation is at least several $100m/yr, probably over $1B/yr.

 

[OmCheeto]

Well the proposal is not for everybody, just for "any company that accepts federal bailout money."

I thought they all were?

 

[turbo]

I would like to see some sort of salary caps for executives that are based on the average wages at their company. Something like "CEO's cannot be paid more than X times the compensation of the average compensation paid to all workers." It would also be a good idea to forbid the granting of stock options to executives - that promotes short-term thinking, stock manipulation through inflated or deflated earnings reports, and insider-trading. None of that activity actually produces wealth for our country - it's pretty much organized crime.

 

[mgb_phys]

Yes, I know. I have a better TV than my parents ever had too. Progress is great!

But in real dollars your 4" plasma cost the same as their 1970-20" color, which cost the same as their first 1950 B+W.
Whereas in cars the real dollar price keeps going up and is justified with bigger engines, DVD players and cup holders. Why can't I buy the equivalent of a 2CV, original mini or VW beetle.

 

[mheslep]

I would like to see some sort of salary caps for executives that are based on the average wages at their company. Something like "CEO's cannot be paid more than X times the compensation of the average compensation paid to all workers." It would also be a good idea to forbid the granting of stock options to executives - that promotes short-term thinking, stock manipulation through inflated or deflated earnings reports, and insider-trading. None of that activity actually produces wealth for our country - it's pretty much organized crime.

I've asked this before: why just CEOs? Why not big tort lawyers, professional athletes, movie stars? Why the continual call to arms only against business leaders? That is the people, at least some of them, that actually build things?

 

[mheslep]

I thought they all were?

From your link:
"...A Democratic lawmaker has introduced a legislation in the US Senate proposing to limit to USD 400,000 the salary of top bosses of any company that accepts federal bailout money,"

 

[turbo]

I've asked this before: why just CEOs? Why not big tort lawyers, professional athletes, movie stars? Why the continual call to arms only against business leaders? That is the people, at least some of them, that actually build things?

Because they are employers, not employees. If Carl Icahn can land a big movie deal or pitch for the Yankees, let him pull in a big contract as an employee. If he wants to make a ton of money every year, let him take his company(s) private and make his own rules. Publicly-traded companies should be subject to rules and regulations, for the good of our country, and salary-caps, elimination of stock-options, would be a fair way to accomplish this. If the big boys like Warren Buffet, T Boone Pickens, etc, want to go private, they should be able to make their own rules regarding compensation. If they want to keep their companies in the stock market, there should be limits on their compensation. Companies that are traded publicly should be treated as a public resource that cannot be raided and looted by excessive compensation, golden parachutes, insider trading, and short-term stock-price manipulation. We have had enough of this unfettered socialist "pretend" capitalism in which profit is privatized and risk is socialized.

 

[Proton Soup]

Yes, I know. I have a better TV than my parents ever had too. Progress is great!

that's really not the point. people are buying much more than they need. more than they can really afford. with smaller families to boot. it's not at all about progress. more often than not, it's about trying to maintain an image of prosperity, or putting on airs as people would once say.

also, for those of you that are environmentally-sensitive, it's a huge step backwards. it takes a lot of energy and resources to go on like this.

 

[mheslep]

Because they are employers, not employees. If Carl Icahn can land a big movie deal or pitch for the Yankees, let him pull in a big contract as an employee. If he wants to make a ton of money every year, let him take his company(s) private and make his own rules. Publicly-traded companies should be subject to rules and regulations, for the good of our country, and salary-caps, elimination of stock-options, would be a fair way to accomplish this. If the big boys like Warren Buffet, T Boone Pickens, etc, want to go private, they should be able to make their own rules regarding compensation. If they want to keep their companies in the stock market, there should be limits on their compensation.

Ok, that's an additional detail from the earlier post: you're restricting the cap to just publicly traded firms. Of course every big movie star, every big lawyer is an employer. They all have staff which may or may not be well paid.

Companies that are traded publicly should be treated as a public resource ...

Whoa. A public resource? Like water and parks? I start a company and play by the rules. It does well and a I then decide to sell some shares publicly, then the company becomes public resource by declaration? By that logic, any non shareholder, is then entitled to come take a part of it? Pitch a tent in the office?

 

[mheslep]

...also, for those of you that are environmentally-sensitive, it's a huge step backwards. it takes a lot of energy and resources to go on like this.

It doesn't necessarily require the current amount of energy and resources to enjoy this (Russ's wide screen TV ) lifestyle. The new energy Sec. Chu suggests it is possible for the entire world, population topping out at 10 billion people, to enjoy a western lifestyle - just not using the current energy technology.:

 

[turbo]

Whoa. A public resource? Like water and parks? If I start a company and play by the rules. It does well and a I then decide to sell some shares publicly, then the company becomes public resource by declaration? By that logic, any non shareholder, is then entitled to come take a part of it? Pitch a tent in the office?

The rules are poorly-defined and the SEC has done very little to rein in abuse. Remember Enron? Remember how dishonest bookkeeping, collusion with "auditors", and insider trading stripped wealth from employees, shareholders, and the US taxpayer? We need a higher standard of honesty, ethics, and responsibility in business. These people are benefiting from structures set up not only by private concerns, but by the US government, including the Fed, which tightly controls access to currency to ensure that these entities have favorable business climates in which to operate. A lot of taxpayer dollars goes to efforts to support big businesses at the expense of the middle-class. My wife and I have scrimped and saved for all our lives so that we could have a secure (not lavish) lifestyle in our retirement, and the Fed has depressed interest rates (in favor of businesses and banks) to the point that we can earn little or nothing on our savings. The flow of wealth to the wealthy continues undiminished, and it is high time that some balance is restored.

 

[Proton Soup]

It doesn't necessarily require the current amount of energy and resources to enjoy this (Russ's wide screen TV ) lifestyle. The new energy Sec. Chu suggests it is possible for the entire world, population topping out at 10 billion people, to enjoy a western lifestyle - just not using the current energy technology.:

lol, if only it weren't for that pesky little energy problem.

 

[mheslep]

... My wife and I have scrimped and saved for all our lives so that we could have a secure (not lavish) lifestyle in our retirement, and the Fed has depressed interest rates (in favor of businesses and banks) to the point that we can earn little or nothing on our savings.

What rate do you need? Inflation is nil. GE bond 9-10% yield to maturity. AAA paper.

 

[mheslep]

lol, if only it weren't for that pesky little energy problem.

http://www.lbl.gov/Publications/Director/assets/docs/AAAS_Keynote_B.pdf
Slide 20-21

 

[turbo]

What rate do you need? Inflation is nil. GE bond 9-10% yield to maturity. AAA paper.

Inflation is nil? Do you ever need/use health care? Do you eat food? Do you have to pay property taxes? All the unavoidable costs are going up and some of them are going up at impressive rates. It is possible to buy a car, clothing, etc, at reasonable prices in this economy, but unavoidable expenses out-strip any possible interest rates one can realize in any liquid investments.

 

[russ_watters]

But in real dollars your 4" plasma cost the same as their 1970-20" color, which cost the same as their first 1950 B+W.

I assume you meant 42" plasma...but yes. Electronics are deflationary due to technology advancing.

Whereas in cars the real dollar price keeps going up and is justified with bigger engines, DVD players and cup holders. Why can't I buy the equivalent of a 2CV, original mini or VW beetle.

I think that "justification" is a pretty good one. My mother paid $2,000 for her 1968 Camaro, which, according to an inflation calculator is about $12,000 now. Her Camaro didn't have A/C, power anything, airbags, much of a stereo, computerized engine control, etc., etc., etc. These things cost money and I suspect when you add them up, they'll account for the difference in cost between then and now (starting at $22,000).

 

[mheslep]

Inflation is nil? Do you ever need/use health care? Do you eat food? Do you have to pay property taxes? All the unavoidable costs are going up and some of them are going up at impressive rates. It is possible to buy a car, clothing, etc, at reasonable prices in this economy, but unavoidable expenses out-strip any possible interest rates one can realize in any liquid investments.

I'm sorry if you have some new and extraordinary expenses. I'm referring of course to the last 4-5 months. Of the items mentioned here, only health care is going up significantly. Obviously property taxes have dropped - for everyone (on average) in the United States. The price of gas has collapsed. The CPI for food in 2009 is 3 to 4%. This is not to say that some commissar in Maine could have decided to raise property taxe rates in a recession.

 

[russ_watters]

Because they are employers, not employees. If Carl Icahn can land a big movie deal or pitch for the Yankees, let him pull in a big contract as an employee. If he wants to make a ton of money every year, let him take his company(s) private and make his own rules. Publicly-traded companies should be subject to rules and regulations, for the good of our country, and salary-caps, elimination of stock-options, would be a fair way to accomplish this.

That's a "should", but not a "why". Why? is running a company not worth (for example) $10,000,000 a year? A ceo most certainly has more responsibility (more ability to help or hurt a lot of people) than CC Sabathia. So it makes a lot of sense to me that they should be compensated highly. How highly? Well that depends, but in the recent hubbub, I haven't seen much in the way of specifics, so it is hard to really judge if there was excess.

 

[russ_watters]

people are buying much more than they need.

Quite right - and my parents didn't need their old b/w tv any more than I need my plasma. But they wanted it, and I wanted my plasma. So I got it!

more than they can really afford.

Well that can be a problem - but if people can afford their "stuff", there is no good reason why they shouldn't have it.

...it's not at all about progress. more often than not, it's about trying to maintain an image of prosperity, or putting on airs as people would once say.

You really think people are that shallow that they buy stuff like a plasma for the image (well...pun intended). No, people mostly by "stuff" because they like "stuff". But heck, even if they did buy it because they wanted to make their friends jealous, so what? It's a free country!

...also, for those of you that are environmentally-sensitive, it's a huge step backwards. it takes a lot of energy and resources to go on like this.

What are you suggesting, that we de-industrialize? We have all the energy we need for the forseeable future, so I see no reason why that should be an issue.

lol, if only it weren't for that pesky little energy problem.

There is no energy problem - or, rather I should say, false environmentalism has created the image of an energy problem that doesn't really exist. But I assure you: we're not going to run out of energy in the next few hundred years. This BS pseudo-environmentalism will run it's course when energy starts getting expensive because of it or if global warming actually happens. Then the world will switch to nuclear power and we'll be set energywise for centuries.