Welcome To the Zero Credibility Bound

Last night’s “job bill” speech was nothing short of a travesty, a decisive and freakish reminder that America has been taken deeply down the worst possible path.

While somewhat surprising, I suppose it just makes sense that both the Federal Reserve and the Federal Government have simultaneously lost all credibility and that both are seemingly exhausted of policy tools.

When the window of reality opened briefly in 2008 with colossal failures and crisis in every direction, many Americans got a brief and uncomfortable sense of what it feels like to be truly concerned about their current wealth and future prosperity… a sharp contrast to the heyday of the housing boom era where levering up on residential real estate was all the rage.

With a host of broken, deteriorating and dysfunctional markets, stocks down over 50%, a few notable public bank runs and several earth shaking “buck breaking” money market events, the Feds panicked and abruptly snapped into a mode of propping and bailing using creative accounting trickery, blanket guarantees and boat loads of massive Keynesian boondoggles.

What we are now seeing, I believe, is the clear recognition that the propping and stimulus action was an unmitigated failure and further that the political process and institutions that brought us these “solutions” are as weak and phony as the “recovery” they attempted to manufacture.

Bernanke’s speech yesterday at the Economic Club of Minneapolis revealed this somewhat in his recounting of events of the past few years and his recognition that the massive housing slump has made all the difference to the severity of the recession and the lackluster “recovery”, a fact that the Federal Reserve appears to have underestimated at every turn.

With a litany of platitudes and talk of the “enduring strength” of the American economy, Bernanke concluded his speech by assuring listeners that the long term prospects of the U.S. economy does not have to be materially affected by the ongoing financial crisis so long as we take the necessary steps to “secure that outcome”.

President Obama did no better last night when he outlined a list of futile fiscal policy gimmicks that could have been borrowed right from the “American Recovery and Reinvestment Act” a 2009 policy action carrying over twice the supposed Keynesian punch that we all know did little to nothing to build a durable long term recovery.

It’s over folks… By hook or crook the Feds did their best to reassemble our Humpty Dumpty economy but it can’t be done… you can’t paper over the serious mistakes made by millions of households or the bad policy created by generations of Washington DC vote peddling hucksters.

Recovery and Reinvestment Act 2

The Obama administration is clearly in over its head.

Anyone expecting revolutionary proposals to come out of Thursday's joint session of Congress ought to set their expectations very low.

Like all "insane" (the Einstein definition) central planners and policy junkies, the Obama administration appears bent on proposing the same initiatives over and over again in hopes that somehow a different outcome will materialize.

Remember the "cash for clunkers" and "first time homebuyer tax credit" policy scams?  

How many of those ridiculous make-work road projects with the "Project Funded by the American Recovery and Reinvestment Act" signs do you estimate that you have driven by in the last couple of years? 10? 20?... More?  

What about the nearly $300 billion of Recovery and Reinvestment (remember recovery.gov) funds that have already been doled out to numerous government contractors in hopes of "saving or creating" jobs?

It should be perfectly clear from looking at measures like real GDP (particularly the recent benchmark revisions), the U6 unemployment rate, the length of stay on unemployment and food stamps participation that the Keynsian multiplier effect has been grossly overstated and that our "leaders" have only lead us further down an abyss of economic malaise, insolvency and likely default.

While there are whisper numbers of another $300 billion in proposals to be outlined by Obama on Thursday, you can bet that it will come in the form of more lame ideas and possibly a few temporary tax cuts.

It's important to recognize the point that we have now reached in this epic economic unwind.

The Federal Reserve, while bluffing about additional "policy tools", has all but tapped out while fiscal policy has clearly hit a wall with the administration similarly attempting to bluff it's way through to the next election.

So the feel-good proppers and liquidity pumpers have effectively lost all credibility having gained very little traction on the economy at the cost of trillions of dollars and the loss of our AAA credit rating while confidence on the part of the populace has taken a dramatic turn for the worse as a new recession looms on the horizon.

Is a new recession near?  Maybe... some sensitive economic indicators seem to signal so but in any event, it's clear that we are worse off and that policy action is fast becoming irrelevant.

The “Fake it Till You Make it” President and His Triple-A Country

Let’s take a moment to handicap the president’s remarkable press conference from earlier today.

First, citing Warren Buffett’s absurd notion that he would rate the U.S. government “quadruple-A” was nothing more than a silly gimmick… Of course Buffett, who is deeply invested in all things U.S. (rails, insurance, brick and mortar), would like to maintain a positive outlook on the U.S. but this is hardly a thoughtful or meaningful or even coherent assessment of our long term outlook.

OBAMA: “Last week, we reached an agreement that will make historic cuts in defense and domestic spending. But, there’s not much further that we can cut in either of those categories. What we need to do now is combine those spending cuts with two additional steps. Tax reform that will ask those who can afford it to pay their fair share and modest adjustment to healthcare programs like Medicare.”

Here is a nearly perfect example of Obama either missing the severity of the situation or so ideologically rigid that he cannot see beyond his fraudulent tax and spend policy “solutions”.

There are not only plenty of domestic (and likely defense) cuts that can be made (food stamps, long term unemployment benefits, section-8 housing, government worker pensions, etc. etc.), these cuts are mandatory.

This is what the downgrade is all about. Classic social safety net programs cannot be protected or restructured they need to be dismantled.

This is what “austerity” means… serious real deal cuts and a rollback of fraudulent policy tools that we can no longer afford.

OBAMA: “Specifically, we should extend the payroll tax cut as soon as possible so that workers have more money in their paycheck next year and businesses have more customers next year. We should continue to make sure that if you are one of the millions of Americans who’s out there looking for a job, you can get the unemployment insurance that your tax dollars contributed to. … In fact, if Congress fails to extend the payroll tax cut and unemployment benefits that I have called for, it could mean one million fewer jobs and half a percent less growth. … We should also help companies that want to repair our roads and bridges and airports, so that thousands of construction workers that have been without a job the last few years can get a paycheck again. That will also help to spur economic growth.”

Again, the president appears to be compelled to pair an absurd and un-fundable policy tool with the obvious and sound benefit of extending the payroll tax cut.

Recipients receiving unemployment benefits for longer than the current 99 weeks have largely long surpassed the amount they paid into the system.

As I have noted before, unemployment insurance was NEVER intended to be an endless stipend and by perpetuating the idea that Congress can just continuously extend the benefits, the president is demonstrating that he has no idea of the severity of our current debt situation.

OBAMA: “I know we’re going through a tough time right now. We have been going through a tough time for the last two and a half years, I know a lot of people are worried about the future, but… here’s what I also know. There will always be economic factors that we can’t control; Earthquakes, spikes in oil prices, slowdowns in other parts of the world. But how we respond to those test, that’s entirely up to us. Markets will rise and fall but this is the United States of America. No matter what some agency may say, we’ve always been and always will be a triple-A country.”

This is probably the most pathetic statement of all… We always will be a “triple-A” country?

Guess what… no matter what fantasy the president or those in Washington DC want to believe in, we are NO LONGER a triple-A rated country.

Worse yet, the specter of additional downgrades loom in the near future and with the “leadership” on display in this press conference you can bet our sovereign debt rating is going lower.

Hoping Obama Housing Plan is For Real

This morning the Obama administration released their plan for revamping the government’s role in the nation’s housing market and after having just read the press release I’d have to say that I’m very enthusiastic for the plans goals.

While the “devil is in the details”, the administration has clearly done a thorough post-mortem on Fannie, Freddie and the whole “government-sponosred” housing racket and appears set to significantly dismantle and restructure the system with a priority on returning most functioning to the private market.

Particularly inspiring goals, especially in light of their political consequences, are the initiatives to eliminate any pricing advantages that the GSEs have previously enjoyed thus paving the way for greater private market competition and the inevitable wind-down of Fannie and Freddie, allowing the “conforming” loan limits to adjust back down in October 2011, establishing a target of 10% minimum down payment for government insured mortgages, elevating government directed rental initiatives to an equivalent status as home purchase programs and more directly targeting stable creditworthy households in need, and increasing FHA premiums and returning it to its original role as a premium-based balanced insurance fund.

It’s important to recognize that currently 90% of all home loans are guaranteed by the government (Fannie, Freddie, FHA etc.) and it appears that the administration clearly views this (as any rational observer would) as a condition that needs to be reversed through reforms of government initiatives and regulations affecting private financial institutions.

One likely outcome from the implementation of this plan is that access to housing (over a period of years) will likely become generally more constrained as the faux-government sponsored market created over the last few decades lifts to reveal costs more in-line with real market conditions and born primarily by private institutions and individuals.

While I have yet to fully digest the entire report, so far so good…

The Almost Daily 2¢ - The Audacity!

So much for our “new technology” president…

In a recent New York Times article President Obama states very clearly that he doesn’t find blogs to be a reliable source of information:

“Part of the reason we don’t spend a lot of time looking at blogs,” he said, “is because if you haven’t looked at it very carefully, then you may be under the impression that somehow there’s a clean answer one way or another — well, you just nationalize all the banks, or you just leave them alone and they’ll be fine.”

You know what I don’t find reliable?

Very obviously junk economic forecasts used as a basis for misguided and immensely costly public policy.

Take a look at this important chart from the Obama administration’s document titled “The Job Impact of The American Recovery and Reinvestment Plan” published on the 10th of January in advance of the house and senate votes.

Notice that the “With Recovery Plan” unemployment rate was forecast by an obviously delusional (or otherwise untruthful) Christina Romer and Jared Bernstein (key Obama economic advisers) to “top out” at about 8% unemployment…

Well, as of February the official unemployment rate was 8.1%... so less than 30 days later and we are above the peak estimate for their absurd and fictitious forecast…

You see… the notion that their pork-laden deficit spending plan could prevent the onslaught of double-digit unemployment was more than unreliable… it was total farce.

This really gets to the heart of the matter… the Obama administration is no “breath of fresh air” on the economic front… they are simply “more of the same” Washington insiders with no sense other than the thirst for control to guide their policy.

In fact, they now appear clearly, as Chief of Staff Rahm Emanuel put it recently, to have not let “a serious crisis to go to waste” when crafting a policy response that was short on immediate economic stimulus but long on longstanding big government objectives.

They have zero credibility (as the stock market has quite nicely demonstrated as of late) and I believe that soon it will be perfectly obvious to all how woefully unprepared and misguided the new president and his administration truly are.

The Almost Daily 2¢ - Unemployment, Foreclosures and The Obama Spin

If there is only one chart you can focus on today, make it the following which both demonstrates the relationship between rising unemployment and rising foreclosure activity and the housing booms mitigation of foreclosure activity during the dot-com bust as well as gives a clear indication of how early we still are in the contraction phase of the employment cycle (click for larger).

Although the chart above covers Middlesex County in Massachusetts, you can likely substitute just about any affluent suburban county that directly borders one of the country’s larger cities, especially cities in the northeast.

The two most important details that this chart reveals is that incidence of foreclosure and rates of unemployment should generally be expected to peak together and that unemployment “spikes” should be expected to take at least two to three years simply to get to the peak.

In fact, the average length of time to reach the peak of an unemployment spike (base month to peak month) for the last four recessionary periods was roughly 2.25 years.

So, unless you believe that either our current period of unemployment will be shorter than average or you include 2007 as a whole year of rising unemployment, we are likely looking at an additional year or possibly even nearly two years to simply reach the peak in unemployment.

Also, it’s important to keep in mind that even after the peak, periods of unemployment take a long time (many years) to play out and that our current predicament should be expected to heal particularly slowly as many millions of specialized workers are forced to make significant and complicated job changes in order to become productive workers again.

Another important detail the above chart reveals is that during the “dot-com” bust rising home prices all but eliminated the incidence of foreclosures as stressed households could either choose to borrow from their homes equity to stay afloat financially or simply sell their home at a profit and switch to a more modest housing arrangement.

Today though, there is no equity cushion.

Finally, I want to draw your attention to a chart that was supplied with president-elect Obama’s recent whitepaper titled “The Job Impact of the American Recovery and Reinvestment Plan”.

Comparing the Obama chart to past periods of unemployment it is clear that the Obama administration is more than optimistic.

Massive government spending notwithstanding, there is absolutely NO chance that unemployment could be made to peak by June of 2009… It’s simply not possible and reveals an early insight into the new administrations clever twist of spin.

Where the Bush administration was famous for their “the economy is fundamentally sound” spin, the Obama administrations appears poised to repeat effectively the same behavior with random propositions of “creating OR SAVING” millions of jobs as well as presenting forecasts that Obama’s own economic advisors must know are simply outlandish.

Question(s) of The Day - What's Obama Got Cooking?

What’s Obama got cooked up?

Obviously there will soon (very likely today) be some announcements coming out of the Obama pre-administration targeted towards shoring up confidence with Wall Street and Main Street… what’s coming?

Treasury Secretary announcement? Actual proposed policy announcements?

Will it work?

Question(s) of The Day - What's The Difference?

In terms of impact on the recession going forward, would there a difference between a President Obama or President McCain?

Won’t both Democrats and Republicans simply try to re-inflate the bubble through bailouts and freebies for both households and firms alike?