Archive for January, 2009

Bank Bailout Could Cost $4 Trillion.

By: admin
Published: January 30th, 2009

From unFortune magazine

NEW YORK (Fortune) — The cost of the bank bailout is likely to be much higher than $700 billion.

While the Obama administration hasn’t asked Congress for more money yet, some experts warn that government spending on support for struggling financial services companies will ultimately reach into the trillions of dollars.

The first half of the controversial $700 billion program to help banks has already been spent — mostly on buying up preferred shares of troubled banks.

Part of the remaining $350 billion may be used to purchase troubled assets from bank balance sheets and place them in what Federal Deposit Insurance Corp. chief Sheila Bair has dubbed an “aggregator bank.”

And while taxpayers will surely recover some of that sum eventually, more money is likely to be needed in order for the bank rescue to work.

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Global Worries Over U.S. Stimulus Spending.

By: admin
Published: January 30th, 2009

From TNYT

DAVOS, Switzerland — Even as Congress looks for ways to expandPresident Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.

Few people attending the World Economic Forum question the need to kick-start America’s economy, the world’s largest, with a package that could reach $1 trillion over two years. But the long-term fallout from increased borrowing by the United Stated government, and its potential to drive up inflation and interest rates around the world, seems to getting more attention here than in Washington.

…Mr. Ferguson was particularly struck by the new borrowing because the roots of the current crisis lay in an excess of American debt at all levels, from homeowners to Wall Street banks.

“This is a crisis of excessive debt, which reached 355 percent of American gross domestic product,” he said. “It cannot be solved with more debt.”….

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Hidden Bonuses Enrich Government Contractors at Taxpayer Cost

By: admin
Published: January 30th, 2009

From Bloomberg

…In many cases, bureaucrats are motivated to give millions of dollars in bonuses to contractors no matter how poorly a company performs because generosity with taxpayer money may help them land better-paying jobs after they leave the government.

Contractors on dozens of jobs at federal departments collected more than $8 billion in what federal auditors said were unwarranted bonuses from 1999 to 2005.

‘A Total Mess’

In 2007, military radio maker Harris Corp. developed a hand- held computer for the 2010 census that failed to work in tests in a California heat wave. Still, the Commerce Department’s Census Bureau awarded Harris $14.2 million in bonuses in a contract that more than doubled in price to $1.3 billion from $600 million, according to federal investigators.

“Contracting is a total mess,” says John Lehman, who fought procurement waste as secretary of the Navy from 1981 to 1987 partly by banning costly contract changes once work was under way, according to Navy records.

“I don’t think in the history of the country it’s been as bad as it is today,” says Lehman, 66, now chairman of J.F. Lehman & Co., a New York-based private equity firm. “You have a system where no one is in charge and no one is held accountable.”

Total system breakdown.

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Why Your Bank Is Broke.

By: admin
Published: January 29th, 2009

From TIME 

Even without doing the math, you probably get that the government’s financial-rescue effort is failing. The signs are hard to miss. Your friend in finance got pink-slipped. A house sale down the street fell through because the buyer couldn’t get a mortgage. A local bank is closing a nearby branch or maybe shutting down altogether.

But do the math, and you can begin to understand how really botched this bailout has been. Since October, the government has deposited $165 billion into the accounts of the nation’s eight largest banks. Yet those same financial firms are now worth $418 billion less than they were four months ago. And the Congressional Budget Office estimates that the government’s preferred shares are worth at least $20 billion less. In Wall Street terms, that’s throwing good money after bad. All told, the government’s annualized rate of return on its investment in the nation’s largest banks is -1,096%. That’s well beyond Bernie Madoff territory; he topped out at a mere -100%.

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Keynes as Public Works Skeptic

By: admin
Published: January 28th, 2009

From Think Markets by Mario Rizzo

Paul Krugman raises a very good point: “Is it too much to ask that someone criticizing Keynes actually, you know, read Keynes…?” However, I suggest that the point also be applied to those who use Keynes to support their own ideas today. This latter group may be in for some surprises. 

Consider, for example, the idea of public works, like infrastructure spending, as a stimulus to the private economy. The non-partisan Congressional Budget Office has estimated that most of this spending will take quite a long time to have an impact. According to an Associated Press report:

“Overall, only $26 billion out of $274 billion in infrastructure spending would be delivered into the economy by the Sept. 30 end of the budget year, just 7 percent. Just one in seven dollars of a huge $18.5 billion investment in energy efficiency and renewable energy programs would be spent within a year and a half.”

Now listen to Keynes in 1942:

“Organized public works, at home and abroad, may be the right cure for a chronic tendency to a deficiency of effective demand. But they are not capable of sufficiently rapid organisation (and above all cannot be reversed or undone at a later date), to be the most serviceable instrument for the prevention of the trade cycle.”

 (Keynes, Collected Writings, vol. XXVII, p.122 ).

People need to pay more attention to Keynes’s mature policy ideas of the late 1930s and 1940s and less to his simple advice of the early ‘30s.  

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My New Spread the Wealth Grading Policy

By: admin
Published: January 28th, 2009

From Townhall.com by  Mike S. Adams

Good afternoon students! I’m writing you this email to announce that I’m making some changes in the grading policies I announced two weeks ago when I sent an email with an attached course syllabus. As you know, we now have a new president and I thought it would be nice to align our class policies with some of the policies he will be implementing over the next four years. These will be changes you can believe in and, I hope, changes that will inspire hope, which is our most important American value.

Previously, I announced that I would use a ten-point grading scale, which means that 90% of 100 is an “A,” 80% is a “B,” 70% is a “C,” and 60% is enough for a passing grade of “D.” I also announced that I will refrain from using a “plus/minus” system – even though the faculty handbook gives me that option.

The new policy I am announcing today is that those who score above 90 on the first exam will have points deducted and given to students at the bottom of the grade distribution. For example, if a student gets a 99, I will then deduct nine points and give them to the person with the lowest grade. If a person scores 95 I will then deduct five points and give them to the person with the second lowest grade. If someone scores 93 I will then deduct three points and give them to the next lowest person. And so on.

My point, rather obviously, is that any points above 90 are really not needed since you have an “A” regardless of whether you score 90 or 99. Nor am I convinced that you need to “save” those points for a rainy day. Those who are failing, however, need the points – not unlike the failing banks and automakers that need money to avoid the danger of bankruptcy.

After our second examination, I intend to take a more complex approach to the practice of grade redistribution. I will not be looking at your second test scores but, instead, at the average of your first two test scores. In the process, I may well decide to start taking some points from students in the “B” range. For example, if someone has an average of 85 after two tests I may take a few points and give them away to someone who is failing or who is in danger of failing. I think this is fair because the person with an 85 average is probably unlikely to climb up to an “A” or fall down to a “C.” I may be wrong in some individual cases but, of course, my principal concern is not the individual.

By the end of the semester I will abandon any formal guidelines and just redistribute points in a way that seems just, or fair, to me. I will not rely upon any standards other than my very strong and passionate feelings concerning social justice. In the process, I will not merely seek to eliminate inequality. I will also seek to eliminate the possibility of failure.

I know some are concerned that my system may impact their lives in a very profound way. Grade redistribution will undoubtedly cause some grade point average redistribution. And this, in turn, will mean that some people will not get into the law school or medical school of their choice. Or maybe some day you will be represented by a lawyer – or operated on by a doctor – who is not of the highest quality.

These are all, of course, legitimate long-term concerns. But I believe we need to remain focused on the short term. I think my new system will immediately help the self-esteem of those failing or in danger of failing. It should also help the self-esteem of those who are not in danger of failing. After all, it just feels good to give – even if the giving is compelled and not really “giving” in the literal sense.

Finally, I want to note that this idea was also inspired by a former presidential candidate named George McGovern. In a debate with the late William F. Buckley, McGovern said that people who earn more money should pay more taxes. Buckley replied that the rich do pay more in taxes – and more as a percentage of their income. McGovern looked confused.

But I don’t think there’s anything confusing about our pending social responsibilities. Whether we are talking about income or grades it does not matter how much or what percentage we are giving. The question is and should always be “Can we give more?”

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10 Reasons to Whack Obama’s Stimulus Plan

By: admin
Published: January 28th, 2009

From U.S. News and World Report by James Pethokoukis

Some people are going to oppose President Obama’s ginormous stimulus package just because they’re on a different political team. But when you look at the economic evidence, it sure seems like an economic recovery package that’s heavy on government spending and light on tax cuts is just the opposite of what we should be doing right now. Try this closing argument on for size:

1) A 2005 study by Andrew Mountford and Harald Uhlig “analyzed three types of policy shocks: a deficit-financed spending increase, a balanced budget spending increase (financed with higher taxes) and a deficit-financed tax cut, in which revenues increase but government spending stays unchanged. We found that a deficit-spending shock stimulates the economy for the first 4 quarters but only weakly compared to that for a deficit-financed tax cut.” In other words, FDR vs. Clinton vs. Reagan, Reagan wins.

2) Harvard economist Robert Barro looked at the multiplier effect of World War II military spending — supposedly the Mother of All Stimulus Plans and found that “wartime production siphoned off resources from other economic uses — there was a dampener, rather than a multiplier.” Barro prefers eliminating the corporate income tax to massive government spending.

3) Alberto Alesina of Harvard and Luigi Zingales of the University of Chicago want to adress the fear and confidence issue by creating “the incentive for people to take more risk and move their savings from government bonds to risky assets. There is no better way to encourage this than a temporary elimination of the capital-gains tax for all the investments begun during 2009 and held for at least two years.”

4) An initial CBO analysis found that a mere $26 billion out of $274 billion in infrastructure spending, just 7 percent, would be delivered into the economy by next fall. An update determined that just 64 percent of the stimulus would reach the economy by 2011.

5) University of Chicago economist and Nobel laureate Gary Becker doubts whether all this stimulus spending will do much to lower unemployment: “For one thing, the true value of these government programs may be limited because they will be put together hastily, and are likely to contain a lot of political pork and other inefficiencies. For another thing, with unemployment at 7% to 8% of the labor force, it is impossible to target effective spending programs that primarily utilize unemployed workers, or underemployed capital. Spending on infrastructure, and especially on health, energy, and education, will mainly attract employed persons from other activities to the activities stimulated by the government spending. The net job creation from these and related spending is likely to be rather small. In addition, if the private activities crowded out are more valuable than the activities hastily stimulated by this plan, the value of the increase in employment and GDP could be very small, even negative.”

6) Christina Romer, the new head of the Council of Economic Advisers, coauthored a paper in which the following was written about taxes: “Tax increases appear to have a very large, sustained, and highly significant negative impact on output. Since most of our exogenous tax changes are in fact reductions, the more intuitive way to express this result is that tax cuts have very large and persistent positive output effects.” And former Bush economic adviser Lawrence Lindsey tack on this addendum: “The macroeconomic benefits of tax cuts can be two to three times larger than common estimates of the benefits related to spending increases. The relative advantage of tax cuts over spending is even clearer when the recession is centered on the household balance sheet.”

7) Economists Susan Woodward and Robert Hall find that the multiplier effect from infrastructure spending maybe just 1-for-1, less than that 3-to-1 ratio for tax cuts that Romer found: “We believe that the one-for-one rule derived from wartime increases in military spending would also apply to increases in infrastructure spending in a stimulus package. We should not count on any inducement of higher consumption from the infrastructure stimulus.”

8) Economist John Taylor thinks it better to let the Federal Reserve deal with the short-term problems in the economy, while fiscal policy should attend to long-term issues: “In the current context of the U.S. economy, it seems best to let fiscal policy have its main countercyclical impact through the automatic stabilizer … It seems hard to improve on this performance with a more active discretionary fiscal policy, and an activist discretionary fiscal policy might even make the job of monetary authorities more difficult. It would be appropriate in the present American context, for discretionary fiscal policy to be saved explicitly for longer-term issues, requiring less frequent changes. Examples of such a longer-term focus include fiscal policy proposals to balance the non-Social Security budget over the next ten years, to reduce marginal tax rates for long run economic efficiency, or even to reform the tax system and Social Security.”

9) Massive stimulus didn’t work in the Great Depression. As this Heritage Foundation study notes: “After the stock market collapse in 1929, the Hoover Administration increased federal spending by 47 percent over the following three years. As a result, federal spending increased from 3.4 percent of GDP in 1930 to 6.9 percent in 1932 and reached 9.8 percent by 1940. That same year– 10 years into the Great Depression–America’s unemployment rate stood at 14.6 percent.” Same goes for Japan and its Great Stagnation of the 1990s.

10) Olivier Blanchard, the chief economist of the International Monetary Fund, coauthored a paper which found “that both increases in taxes and increases in government spending have a strong negative effect on private investment spending.”

 Bottom line: There is another model out there. One that worked in 2003, 1997 and 1981. But will America use it?

Sources:

1) http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2005-039.pdf

2) http://online.wsj.com/article/SB123258618204604599.html

3) http://online.wsj.com/article/SB123249646698200289.html

4) http://cboblog.cbo.gov/

5)http://www.becker-posner-blog.com/archives/2009/01/on_the_obama_st.htm

6)http://www.econ.berkeley.edu/~cromer/RomerDraft307.pdf

7)http://woodwardhall.wordpress.com/2008/12/11/measuring-the-effect-of-infrastructure-spending-on-gdp/

8)http://www.stanford.edu/~johntayl/Papers/Reassessing+Revised.pdf

9) http://www.heritage.org/research/economy/bg2222.cf

10) http://www.mitpressjournals.org/doi/abs/10.1162/003355302320935043?cookieSet=1&journalCode=qjec

11) http://www.weeklystandard.com/Content/Public/Articles/000/000/015/951hvyxc.asp?pg=

 

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