Beer is not Recession Proof

February 23, 2009 · Posted in General Economics · Comment

An interesting statistic from FiveThirtyEight.com:

Beer, it seems, is no longer what’s for dinner.

The chart that follows details the quarterly change in alcohol purchased for home consumption, adjusted for inflation and dating all the way back to 1959. We can compare this against the quarterly change in real GDP:

As you can see, there has generally not been much of a relationship between alcohol purchases and changes in GDP — the correlation is essentially zero. Nor have alcohol purchases historically been any kind of lagging or leading indicator.

But something was very, very different in the fourth quarter of 2008. Sales of alcohol for off-premises consumption were down by 9.3 percent from the previous quarter, according to the Commerce Department. This is absolutely unprecedented: the largest previous drop had been just 3.7 percent, between the third and fourth quarters of 1991.

Beer accounts for almost all of the decrease, with revenues off by almost 14 percent. Wine and spirits were much more stable, with sales volumes declining by 1.6 percent and 0.9 percent respectively.

Now, there are several plausible explanations for this. Alcohol sales — but particularly beer — had been on something of a hot streak prior to the 4Q, so perhaps there was some reversion to the mean. Perhaps people are substituting Michelob and Coors for more expensive microbrews like Alpha King and Dogfish Head. (This is unpatriotic, by the way, since all the macrobrews are now owned by foreign-based multinational conglomerates. Stimulate your country — and your tastebuds!).

Perhaps retailers are discounting their prices, or brewers are passing along cost savings to their consumers (there had been a hops shortage for much of 2007-08). All of these are probably factors to some extent or another.

Nevertheless, it’s absolutely startling to see a major consumer staple experience a sales decline like this.

It’s not just beer, either. Sales of jewelry and watches were off by 7.2 percent in the fourth quarter, the third-largest drop ever recorded. Casino gambling receipts are down about 8.5 percent from a year ago, far and away the largest decrease ever over four consecutive quarters.

What’s doing well? The movies. The movies, also historically a recession-proof industry but not a counter-cyclical one, are doing terrifically well. Motion picture theaters increased their revenues by 10.9 percent in the fourth quarter, according to the Commerce Department. But the movies are not typically seen as extravagant. You don’t feel guilty after purchasing a movie ticket; you feel kind of wholesome.

I can’t escape the feeling that there’s something rather Weberian about it all: a manifestation of Calvinist guilt over both the present failures of the economy and its prior excesses. A deliberate effort to deny oneself pleasure.

Conspicuous non-consumption.

This is relevant because it simply shows the sheer magnitude of the changes of consumer behavior in the US. This is not just a little ditch in consumption. It is a seismic shift in consumer philosophy. Frugality is the new credo, all across the nation. This is of course a very healthy (literally and figuratively) development and exactly what is needed to go through the correction phase of the business cycle. The one large stumbling block in the way of this correction is as always the US government whose officials don’t understand the necessity of a corrective phase in the business cycle at all. Their measures ensure that this correction will take painstakingly long.

Tags: alcohol, beer, consumer spending

KrugmanWatch – Against Stupidity…

February 23, 2009 · Posted in Government · Comment

If it wasn’t so sad it would be amusing how Paul Krugman has everything precisely backwards:

The most valuable lesson I learned from the year I spent in Washington (1982-1983, on the staff of the Council of Economic advisers — I was the senior intl economist, the senior domestic economist was a guy named Larry Summers. What ever happened to him?) was the extent to which senior government figures have absolutely no idea what they’re talking about.

So when I read something like this:

“Why should we reward Fannie Mae and Freddie Mac with $200 billion in taxpayer dollars without first reforming these housing entities that were at the heart of the economic meltdown?” House Minority Leader John A. Boehner (R-Ohio) said in a statement.

and people ask what on earth Boehner might mean when he talks about taxpayers “rewarding” institutions that are owned by taxpayers, I go for Occam’s Razor: Boehner doesn’t have some complicated notion in mind, he either doesn’t know that the government took over F&F months ago, or he just doesn’t get this “government-owned” concept.

First of all, Krugman did not even attempt to explain what exactly is supposed to be wrong about Boehner’s “stupid” statement. Whether or not he believes that the taxpayers in any way own these institutions is completely irrelevant. Let’s assume, for the sake of the argument, that they do. So what? How does this in any way invalidate Boehner’s statement. Just as a shareholder of a publicly traded private business at an annual meeting could speak out against an extension of a company’s shareholder’s equity unless the company improves its current operations, a representative of the taxpayers has the right to demand the same of a business that is held by the public trust, on behalf of the shareholders. Why in the world would anyone argue in favor of removing even this last small check on absolute power?

Now it should not surprise us that someone like Krugman gets upset about anyone asking for checks and balances when it comes to government spending. This is just another outgrowth of his small and shallow theories that favor bureaucracy and government spending anywhere and anytime. So long as we turn away from this kind of nonsense and debunk it quickly and unconditionally, no major harm is inflicted.

Regarding the issue of government ownership: The one who doesn’t get the “government-owned” concept at all is of course Paul Krugman himself. The government is a group of people that funds its operations via taxation. Taxation has always been ans will always be a form of theft. There is no way anyone can refute this simple causality.

Ownership over goods (as an economic concept) means control by one or several persons over the location of those goods in space and time. It is very different from the legal concept of ownership. Ownership over a good can come about in 4 ways: Homesteading, Exchange, Production, and Theft.

If ownership is transferred from the taxpayer to the people managing the entities in question by the means of theft, it is without a doubt a fact that the entire operation is not in the taxpayer’s interest and that the taxpayer himself won’t have any control over the allocation of the goods controlled by these entities. Thus the taxpayer doesn’t even remotely own government institutions, such as Fannie Mae and Freddie Mac. Anyone who believes that the opposite is true, should ask himself how he can have the slightest impact on what course of action these entities will pursue in future. In particular he should ask himself if he was ever asked whether or not he even wants to have any stake in them in the first place.

But all this taken aside, the most important issue with government ownership of any business is The Trouble of Bureaucracy. Any thesis promulgated by Keynesian clowns such as Krugman completely breaks down at the latest when it is confronted with the problems caused by bureaucracy.

Please note that is is more than likely that Krugman has never ever dealt with the issue of ownership in economic terms or with the theory of bureaucracy. Thus we shall exculpate him from his mistakes, but at the same time hope that others won’t blindly follow his blatant and painful nonsense.

Tags: fannie mae, freddie mac, ownership, paul krugman, public ownership

KrugmanWatch – A Dark Age of macroeconomics (wonkish)

February 22, 2009 · Posted in General Economics · Comment

In A Dark Age of macroeconomics (wonkish) Krugman writes:

Brad DeLong is upset about the stuff coming out of Chicago these days — and understandably so. First Eugene Fama, now John Cochrane, have made the claim that debt-financed government spending necessarily crowds out an equal amount of private spending, even if the economy is depressed — and they claim this not as an empirical result, not as the prediction of some model, but as the ineluctable implication of an accounting identity.

Yes, every child understands that if the government spends money it has to come from somewhere. We shall see how well Krugman does in understanding this simple causality.

There has been a tendency, on the part of other economists, to try to provide cover — to claim that Fama and Cochrane said something more sophisticated than they did. But if you read the original essays, there’s no ambiguity — it’s pure Say’s Law, pure “Treasury view”, in each case. Here’s Fama:

The problem is simple: bailouts and stimulus plans are funded by issuing more government debt. (The money must come from somewhere!) The added debt absorbs savings that would otherwise go to private investment. In the end, despite the existence of idle resources, bailouts and stimulus plans do not add to current resources in use. They just move resources from one use to another.

And here’s Cochrane:

First, if money is not going to be printed, it has to come from somewhere. If the government borrows a dollar from you, that is a dollar that you do not spend, or that you do not lend to a company to spend on new investment. Every dollar of increased government spending must correspond to one less dollar of private spending. Jobs created by stimulus spending are offset by jobs lost from the decline in private spending. We can build roads instead of factories, but fiscal stimulus can’t help us to build more of both. This is just accounting, and does not need a complex argument about “crowding out.”

Yes, there is nothing new, strange, or arcane about these statements. They are simple common sense and don’t require any further elaboration.

Second, investment is “spending” every bit as much as consumption. Fiscal stimulus advocates want money spent on consumption, not saved. They evaluate past stimulus programs by whether people who got stimulus money spent it on consumption goods rather save it. But the economy overall does not care if you buy a car, or if you lend money to a company that buys a forklift.

Now here Cochrane errs: The economy does care very much whether money is spent on a consumer good or on a factor of production. The entire structure of production depends on it. How many consumer goods and how many factors of production are needed on the market is indicated to entrepreneurs via interest rates and prices. It is of primordial importance to understand this causality.

There’s no ambiguity in either case: both Fama and Cochrane are asserting that desired savings are automatically converted into investment spending, and that any government borrowing must come at the expense of investment — period.

Nobody asserts that savings are automatically converted into investment. Money might just as well be saved up by one individual without any investment on the part of this particular person. If he just saves up the money he effectively steps back from the market and leaves factors of production and/or consumer goods available for use by other entepreneurs and/or consumers. I already pointed this out in Welcome to Krugmanland.

What’s so mind-boggling about this is that it commits one of the most basic fallacies in economics — interpreting an accounting identity as a behavioral relationship.

Wrong. What is Krugman talking about now? Nobody is interpreting an accounting identity as a behavioral relationship. All that the authors have done is explain behavioral relationships as such. Cochrane may have referred to the fact that this also makes sense accounting wise, but Krugman doesn’t understand this at all.

Yes, savings have to equal investment, but that’s not something that mystically takes place, it’s because any discrepancy between desired savings and desired investment causes something to happen that brings the two in line.

It’s like the fact that the capital account and the current account of the balance of payment have to sum to zero: that’s true, but it does not mean that an increase in capital inflows magically translates into a trade deficit, without anything else changing (what John Williamson used to call the doctrine of immaculate transfer). A capital inflow produces a trade deficit by causing the exchange rate to appreciate, the price level to rise, or some other change in the real economy that affects trade flows.

Again wrong. A capital inflow represents an inflow of factors of production. When money is borrowed from abroad and used to purchase factors of production from that same country, imports increase and create a tendency toward a trade deficit without any effect on the exchange rate, especially when the government meddles with this process. More on this in The US Current Account Deficit. Krugman also conveniently mentions “some other change in the real economy” without any further elaboration. The reader himself shall decide if he believes that this kind of cursory writing is even in the slightest acceptable in an economic inquiry.

Similarly, after a change in desired savings or investment something happens to make the accounting identity hold. And if interest rates are fixed, what happens is that GDP changes to make S and I equal.

That’s actually the point of one of the ways multiplier analysis is often presented to freshmen. Here’s the diagram:

A case of mistaken identity

In this picture savings plus taxes equal investment plus government spending, the accounting identity that both Fama and Cochrane think vitiates fiscal policy — but it doesn’t. An increase in G doesn’t reduce I one for one, it increases GDP, which leads to higher S and T.

This is all but laughable. No explanation at all is offered. We established above and at many other occasions that government spending needs to be funded by a restriction of private consumption/investment. Now Krugman “refutes” this by saying in effect: “Government expenses do NOT reduce private investment. Period.” But this doesn’t make his fallacy right. It merely shows that he has no way to argue his case on logical grounds.

Now, you don’t have to accept this model as a picture of how the world works.

OK. Thanks. Then why do you use it to argue your case. Mr. Krugman? The model is wrong. Everything derived from it is just as wrong.

But you do have to accept that it shows the fallacy of arguing that the savings-investment identity proves anything about the effectiveness of fiscal policy.

No. Wrong. We don’t have do accept a wrong thesis. There is no fallacy at all in believing that government spending has to be funded from somewhere. There is no fallacy to reject magic as the solution to our financial crisis. If anyone has to accept that his theory is a sheer fallacy, it would be Krugman himself. The fact that there is no such thing as effectiveness of fiscal policy has been shown long ago in The Trouble With Bureaucracy.

So how is it possible that distinguished professors believe otherwise?

The answer, I think, is that we’re living in a Dark Age of macroeconomics. Remember, what defined the Dark Ages wasn’t the fact that they were primitive — the Bronze Age was primitive, too. What made the Dark Ages dark was the fact that so much knowledge had been lost, that so much known to the Greeks and Romans had been forgotten by the barbarian kingdoms that followed.

And that’s what seems to have happened to macroeconomics in much of the economics profession. The knowledge that S=I doesn’t imply the Treasury view — the general understanding that macroeconomics is more than supply and demand plus the quantity equation — somehow got lost in much of the profession. I’m tempted to go on and say something about being overrun by barbarians in the grip of an obscurantist faith, but I guess I won’t. Oh wait, I guess I just did.

We do in fact live in the Dark Age of Macroeconomics. An age where Keynesian clowns such as Paul Krugman have launched a succcessful assault on logic and reason. An age where people like him are rewarded for their nonsense with Nobel Prices. An age where virtually every common sense causality suddely disappears in the sphere of economics.

Paul Krugman bears partial responsibility for this unfortunate development. It will take decades to repair the intellectual damage caused by people like him, not speaking of the damages done to people’s lives as a result of irresponsible policies of credit expansion and big government.

Tags: crowding out, government spending in the US, paul krugman

Strategy Room with Judge Napolitano, Ron Paul, Peter Schiff

February 21, 2009 · Posted in Politics · Comment

Great panel discussing the scams, boondoggles, and crimes perpetrated by the Bush and the Obama administrations.

Part 1/6:

Part 2/6:

Part 3/6:

Part 4/6:

Part 5/6:

Part 6/6:

Tags: andrew napolitano, fiscal stimulus, peter schiff, ron paul, stimulus

KrugmanWatch – About that deflation risk

February 19, 2009 · Posted in General Economics · 1 Comment

Paul Krugman is a terribly confused economist. His shallow theories justify virtually every measure of government intervention and sound palatable to the common man who seeks intellectual justification for false policies.

We shall expose his falsehoods on a regular basis in this blog.

In About that deflation risk Krugman writes:

There has been a distinct change in tone from the Obama team today, as they seem to have become suddenly aware that there’s a real risk that the stimulus plan will either fail to pass, or be emasculated to the point that it doesn’t come close to doing the job. Obama himself has warned of catastrophe if we fail to act, and — finally!– denounced the tax-cut philosophy.

It is of course not surprising that Krugman blindly supports the common notion that there was some kind of tax cut philosophy at work under the Bush administration and that the financial crisis is proof that it failed. It is probably unnecessary to point it out again, but whoever cares to look at the actual numbers will immediately realize that all these tirades against a supposed tax cut philosophy are complete nonsense. As I explained in Obama Makes an Unnecessary Gamble:

The tax cuts were completely insignificant, the spending kept on growing. In fact, the only period in the post war history of the US where taxes where higher than now was from 1997 through 2002. That aside, taxes are at an all time high right now. So please , everyone, stop spreading the nonsense that what has happened in the past 8 years is a proof that a policy of limited government, little government spending and low taxes has failed.

So to everyone reading Krugman, assuming he is even remotely right on tax cuts, please can that notion immediately. Krugman goes on to write:

Meanwhile, Larry Summers has finally made the point I’ve been pushing for a while — that we’re at major risk of falling into a deflationary trap.

It’s at best amusing, but certainly not surprising that Krugman is about 3 years late with this realization. In fact he still talks about the possibility of a deflation. He doesn’t realize its past existence. The US had begun slipping into a deflationary period in mid 2006 already, when the True Money Supply growth had begun dropping below 3%. This was precisely when the housing bubble begun to deflate and one by one the other bubbles, viz. stocks, commodities, foreign exchange, followed. My economic indicator, the true money supply, enabled me to predict these developments a long time ago. This asset price deflation keeps going on to this date. Now, almost 3 years later, after the money supply has actually begun to grow by more than 3% again, Krugman begins to realize that there might be a deflation looming.

But worse yet, he doesn’t even know what the essence of a deflation is. A deflation is a correction of the previous misallocations created by inflation: The over-employment of resources in risky longer-term projects and an underemployment of resources in the consumer goods and basic materials industries, coupled with an over-consumption of consumer goods and a lack of capital from savings. The Business Cycle would certainly be an appropriate read for Mr. Krugman.

The worst thing the government can do is to try and fight the deflation. It will accomplish nothing but to slow the correction and create a long and painful period of adjustment, very much like the lost decade in Japan.

I thought it might be useful to present a bit of evidence behind that concern. The figure above plots an estimate of the output gap — the difference between actual and potential GDP, as a percentage of potential — and the change in the inflation rate. Both series are taken from the IMF WEO database, for convenience, and use data from 1980-2007.

It’s not a perfect fit — this is economics, not physics, and anyway stuff besides the output gap bounces inflation around from year to year. But still, there’s a clear correlation, driven largely but not entirely by the deep slump and disinflation of the early 1980s, and an implied slope of about 0.5 — that is, every percentage point by which real GDP fall short of potential tends to reduce the inflation rate by about half a point over the course of the year.

What exactly is this supposed to be evidence for? Krugman plots a change in inflation rate against a so called output gap which is supposed to be the gap between actual and potential GDP. How does he determine potential GDP? Either way, all this is based on inflation and GDP data provided by the government, data that is highly unsatisfactory and insufficient. It may be too much to ask of Krugman to expect him to have looked into alternative measures that actually provide useful information, such as True GDP. Either way, we all know we are seeing effects of a long term deflation as I explained above, Krugman doesn’t need to provide more proof for it. But he is dead wrong in viewing it as an evil.

And right now the CBO is saying that in the absence of a policy action the average output gap will average 6.8 percent over the next two years. Do the math: if anything like the historical relationship between output and inflation holds, we’re looking at major deflation.

OK, maybe that relationship won’t hold — getting to actual deflation may take a deeper slump than merely reducing the inflation rate. And maybe a regression driven in part by 80s data isn’t a good guide to current events. But deflation is a huge risk — and getting out of a deflationary trap is very, very hard.

We truly are flirting with disaster.

Yes, we are in a deflation and have been for many years. We don’t need Mr. Krugman to dwell on the obvious for us. Nor do we need to listen to his utter nonsense regarding its dangers. All we need to do is look at good data. Everyone shall decide for himself if he trusts indicators that correctly predicted future developments years ago, or if he trusts a Keynesian clown who saw absolutely nothing of this coming in time, who can do nothing but sway with shallow common notions, and apply a substantially flawed kindergarten theory whenever he needs to.

To get a taste of what expects you when reading The Conscience of a Liberal, this well qualified amazon review certainly tells a lot:

Paul Krugman continues to spin dubious conclusions from fuzzy thinking. First of all, Krugman should be discredited simply because he buys into the idea that the government has shrunk in the last few years. Anyone who thinks that George W. Bush has been an exemplar of limited government has obviously been living underneath a rock for the last eight years. The War on Terror has been a mammoth by itself, but Bush’s appointment of inflation-happy Fed chief Ben Bernanke, the Medicare Prescription plan, “No Child Left Behind”, etc. and compassionate “conservatism” in general have been every bit as welfare statist as a liberal like Krugman. Also Krugman falls for a whole lot of historical nonsense like many. For instance, he talks about the huge gap between rich and poor during the Industrial Revolution, completely ignoring the role that high tariffs, the National Banking Act, and government subsidies for numerous industries such as railroads had in the whole way. Not to mention new laws that were passed during the Industrial Revolution which exempted many industries from punishment for violating other people’s property with pollution. He claims that the New Deal is what created the Middle Class in the 50’s. Apparently someone forgot to tell him that after FDR died and WWII ended, most New Deal programs were abolished (Social Security might still be with us, but it’s headed for a collapse) and federal spending was cut by over a trillion dollars. Plus, the prospects of peace really helped out the Stock Market. Much of this and more was covered in the far more scholarly “Depression, War, and Cold War” by Robert Higgs, someone who’s far more of an economist than Paul Krugman with his discredited Keynesian ideology is.

Tags: deflation, paul krugman

Imbalance Increases in Eurozone

February 18, 2009 · Posted in Global Economics · Comments Off

Bloomberg writes Steinbrueck Says Euro States May Bail Out Members:

German Finance Minister Peer Steinbrueck said euro-region countries may be forced to bail out cash-strapped members of the 16-nation bloc, going further than his counterparts in saying euro states can’t be allowed to fail.

“Some countries are slowly getting into difficulties with their payments,” Steinbrueck said late yesterday in a speech in Dusseldorf. “The euro-region treaties don’t foresee any help for insolvent countries, but in reality the other states would have to rescue those running into difficulty.”

Steinbrueck’s comments underscore mounting investor concerns as European nations pile on debt to bail out banks and counter the deepest recession since World War II. The EU governing treaty says member states aren’t liable for other members’ obligations.

While declining to identify countries facing problems, the German finance chief said Ireland, which has a widening budget deficit, is in a “very difficult situation.” The comment came in response to a question from the audience. Ireland’s debt- rating outlook was cut by Moody’s Investors Service Jan. 30.

The European Commission predicts budget shortfalls this year of 11 percent of gross domestic product in Ireland, 3.7 percent in Greece, 6.2 percent in Spain and 3.8 percent in Italy, compared with 2.9 percent in Germany. The EU ceiling is 3 percent.

The 3% ceiling won’t matter anymore from hereon. Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. The Euro will keep taking its beating for it.

Euro Weakens

The euro fell below $1.26 for the first time since early December. The difference in yield, or spread, between 10-year Irish and German bonds widened nine basis points to 257 basis points today. It widened by almost six times since the middle of last year as investors demanded higher premiums to hold Irish debt.

The Irish government is committed to restoring sustainability to public finances by 2013, the Dublin-based finance ministry said today in an e-mailed statement. At 41 percent of gross domestic product, the country’s debt is below the EU average of 60 percent, it said.

EU rules don’t “really constrain the ability of euro area countries to support one another during a period of exceptional stress,” David Mackie, chief European economist at JPMorgan Chase & Co. in London, said in a research note. “It’s hard to imagine that the region as a whole wouldn’t come up with a package of measures to support the individual economy.”

Governments including Germany’s may call in help from international organizations first before committing funds and pushing their own budgets deeper into the red to help others.

There is nothing much that international groups can do. Please consider in particular IMF Running Out Of Cash:

Dominique Strauss-Kahn said the Fund needed an urgent cash infusion if it was to continue bailing out troubled economies in the future. Mr Strauss-Kahn also indicated that the world’s advanced economies were now tipping from recession into full-blown depression, cementing fears about the scale of the economic slump in rich nations.

Who will bail out the IMF? I little while ago I wrote about the disastrous balance sheet of the Federal Reserve Bank, and concluded with a question. Who will bailout the Federal Reserve once it needs help? The IMF? It seems like the IMF will need help first.

European member states needs to come to their senses. An absolute and unconditional abandonment of any more bailout talks is highly necessary. Member states need to consolidate their finances, cut spending, trim down their obtrusive bureaucracies and cut their unsustainable tax burdens. Germany, France, and Italy should be leading the way in these efforts. The European Commission needs to put an end to its disastrous policy of subsidizing agriculture.

Individual responsibility per member state rather than complete collectivism should be aspired. Unfortunately Europe has not been very keen on individual responsibility. In Germany, France, and Italy, all one can hear is rants about “neoliberalism”, “anarchism”, “capitalism on steroids” which supposedly are to blame for the financial crisis.

The sentiment in the US is not at all different. As the US economy continues its decline, Europe is unwittingly joining the bandwaggon.

Tags: euro, europe, eurozone, imf

Trump Entertainment may file bankruptcy

February 17, 2009 · Posted in Business · 2 Comments

Reuters writes:

Trump Entertainment Resorts Inc, Donald Trump’s casino group, is expected to file Tuesday for bankruptcy, The Wall Street Journal reported.

The company’s board was scheduled to meet late Monday night to decide whether to authorize the filing, the newspaper reported in its online edition. Otherwise, the casino operator would be forced into bankruptcy involuntarily by creditors, the newspaper said.

Such a filing would mark the third appearance in bankruptcy court for Trump Entertainment, which most recently emerged from bankruptcy proceedings in 2005, the newspaper said.

Trump’s recent move was already a harbinger of this:

Real estate tycoon Donald Trump said on Friday he has decided to resign from the board of Trump Entertainment Resorts (TRMP.O) due to disagreements with bondholders who want the casino group to file for bankruptcy.

Trump, chairman and founder of the firm, said in a statement that he will leave amid “internal turmoil” that was being “compounded by dramatically deteriorating revenues.” His daughter Ivanka Trump is also resigning, he said.

The statement did not say when Trump’s resignation would be offered or take effect.

Trump’s announcement comes after the company missed a $53.1 million bond interest payment due on December 1 as a sharp downturn in consumer spending hit casino revenues.

Trump said the company represents less than 1 percent of his net worth, and that “my investment in it is worthless to me now.”

The Wall Street Journal reported on Friday that bondholders are planning to force the company into involuntary Chapter 11 bankruptcy early in the coming week, a move Trump has resisted.

There is a lot more to be liquidated in Trump’s empire. One thing is for sure: The banks will not lend him any more money or extend credit lines to wreck more projects. Donald Trump is and has always been a lousy entrepreneur. An excessive credit expansion helped him cover it up. Now credit is contracting. This The golden days are over for “The Donald”.

Tags: donald trump, trump entertainment

Lending Can’t be Forced

February 14, 2009 · Posted in General Economics · Comment

Moneymorning writes As Big Banks are Criticized for not Lending, Small Banks Find They Can’t Lend:

While congressional leaders this week excoriated the leaders of banks that have received billions of dollars in government bailout money for not doing enough to end the credit crisis, it may actually be consumer fear of borrowing that’s blunting banks’ efforts to lend.

Chief executives of eight big U.S. banks that have received the taxpayer-provided rescue money were in Washington this week to testify before Congress told U.S. lawmakers that their institutions have lent out more than $400 billion. Skeptical congressional leaders excoriated the executives for not doing enough to end the credit freeze that’s blunting consumer confidence and threatening to plunge the U.S. economy into an even deeper recession.

But the U.S. consumer may now be the real culprit. Banks want to make loans. The problem is that fear-frozen consumers just aren’t biting, said Curtis Hage, CEO of closely held Home Federal Bank of Sioux Falls, S.D., which received $25 million worth of federal bailout money via the Troubled Assets Relief Program.

“If there was a greater demand out there for loans, we’d be out there after them like a dog after a bone,” said Hage.

The upshot: Big banks are under the congressional microscope, even though the appetite for loans among many typical American consumers seems to have dried up. Small bankers around the country are finding that, for now, many customers are sitting tight.

Congressional leaders didn’t want to hear that as they grilled the CEOs of big U.S. banks earlier this week.

“There is a great deal of anger about the financial institutions here,” House Financial Services Committee Chairman Barney Frank, D-Mass, told the CEOs. “There is anger about us, and there is anger about the executive branch. If you want to give the money back, we’ll take it.”

TARP was designed to thaw frozen credit markets, then-Treasury Secretary Henry Paulson told Congress on Nov. 24. But lending nationwide actually slowed after the Treasury Department began giving 389 banks $236 billion in TARP money on Oct. 28.

Outstanding loans and credits at commercial banks fell to $7.057 trillion in the week ending Jan. 28 from $7.266 trillion in October, according to the Federal Reserve.
The CEO’s of the big banks that received the first allocation of $125 billion of TARP funds were put on the hot seat yesterday (Thursday) as Congress demanded to know exactly what they had done with the government money, MarketWatch reported.

But they defended their actions, saying they had actually increased lending, largely because of funds they had received from the bailout program. In fact, two bank chiefs said they lent out even more money than they received from TARP.

“We are actively putting our capital to work,” said Goldman Sachs (GS) CEO Lloyd C. Blankfein.

Wells Fargo & Co. (WFC) CEO John G. Stumpf said that his bank made $72 billion in new loans in the fourth quarter, adding that the loans were almost three times what the bank received in bailout funds.

Bank of America Corp. (BAC) CEO Kenneth D. Lewis said the bank lent roughly $127 billion in the fourth quarter. More than half that money was doled out to commercial real estate and businesses.

Citigroup Inc. (C) CEO Vikram S. Pandit said that the bank provided more than $75 billion in new loans to consumers and businesses in the fourth quarter.

But some question whether enough lending is taking place. Based on a 1 to 10 lending ratio, critics argue that these banks should be lending $1.3 trillion based on the $125 billion allocated to them.

House members reiterated their concerns about how banks are using the government money and raised questions about whether banks have been using the capital injections for making acquisitions instead of lending.

In fact, Money Morning was one of the first news organizations to really examine how TARP money was being misdirected, and wasn’t being deployed as originally intended. As our ongoing investigation has demonstrated, billions in U.S. bank rescue funds are financing buyouts worldwide – instead of lending at home. Some of those buyouts deals are being done in markets as far away as China, even as banks outright refused to discuss the matter.

For its part, the Obama administration will mandate that any TARP funds it releases to banks will be directed specifically for lending, Treasury Secretary Timothy Geithner said on Tuesday (Feb. 10).

But by essentially targeting Wall Street banks, Congress may be missing out on what’s really happening – or not happening – out on Main Street.

C.R. “Rusty” Cloutier of MidSouth Bank in Lafayette, La., wants to do his part for the economy by lending locally for cars, homes, and small businesses – if only he could get his customers to cooperate.

After his bank received a $20 million cash infusion from TARP on Jan. 9 he went on the road to 14 “town hall” meetings, hoping to entice borrowing by consumers in its business market.

“What we want to do is make people aware we have $250 million to lend,” Cloutier said. But, at one meeting, the 20 or so customers in the audience were outnumbered by bank employees handing out cookies and bottled water. Not one person asked for an application.

While he has attracted a few fresh borrowers, people are “very, very nervous” about taking on significant new debt, the 61-year-old banker said. “Credit hasn’t tightened, but the ability to find creditworthy borrowers has tightened.”

Some MidSouth officials wonder if the bank did the right thing in accepting TARP assistance, said Will G. Charbonnet Sr., MidSouth’s chairman.

The $20 million was in exchange for 20,000 preferred MidSouth shares, which the Treasury Department bought for $1,000 each, according to the bank. MidSouth pays a 5% annual dividend. In addition, the Treasury received 208,768 warrants for common shares, according to Bloomberg.

I wrote about this a while ago in Where Has All the Money Gone. A few more people seem to be understanding it now. Count out Congress, whose members are ranting and shouting day in and day out about the lack of credit, tightness of credit, and stingy banks.

People are sick and tired of borrowing, spending, and debt. They want to save up money and/or consolidate debt which they have failed to do for the longest time.

Most of these banks are now sitting on liabilities that pay out a fixed 5% annually without being able to pass the money on at a premium. Expect them to either buy back those shares (if they can) or at least not to accept any more government money from hereon out.

Tags: banks, lending, tarp

US Repeating Japan’s Mistakes

February 14, 2009 · Posted in Global Economics · 2 Comments

Moneymorning writes U.S. Making Same Mistakes that Led to Japan’s Lost Decade, Say Analysts:

Experts on the Japanese financial crisis, which culminated in 10 years of stagnation known as the “Lost Decade,” are fearful that the United States is making similar mistakes with its recent bailout efforts.

The two meltdowns started in much the same way – with busted stock-and-real-estate bubbles. With both the United States and Japan, whose market manias ignited by laughably loose credit policies, smoldered under a lack of oversight from government regulators, market analysts or such private-sector sentinels as credit-rating agencies, and were finally fanned into a frenzied financial conflagration by the promise of easy profits.

The real estate bubble popped and Japan paid the price then, as the United States is paying now. Banks were left holding trillions of yen in loans that were virtually worthless.

By early 2004, houses were selling at 1/10th their peak value, and commercial real estate was selling for less than 1/100th of its peak-market value.

The Nikkei 225 stock index had dropped by almost three-quarters from its heights. All told, an estimated $20 trillion in stock market and real-estate wealth vaporized (although one could easily argue that the peak values weren’t real to start with).

Over the course of a decade, a succession of government policymakers waded through the crisis and routinely fell short of solving it. The Japanese lowered interest rates, increased government spending, pumped cash directly into banks and even tapped private capital to help buy some of the bad assets from banks.

All of these measures failed. Japanese taxpayers are estimated to have recouped less than half of what it cost the government to bailout the nation’s banking sector.

Yet, the U.S. government has employed many of the exact same tactics.

The benchmark Federal Funds rate stands a range of 0.0% to 0.25%. More than $350 billion has been poured into financial institutions in an effort to shore up their balance sheets and spur lending. And last week, newly appointed Treasury Secretary Timothy Geithner outlined his proposal for a Public-Private Investment Fund, which will buy up many of the toxic assets that have bogged down banks’ balance sheets.

“I thought America had studied Japan’s failures,” Hirofumi Gomi, a top official at the Japanese Financial Services Agency, told the International Herald Tribune. “Why is it making the same mistakes?”

Indeed, many analysts believe the largest U.S. banks to be insolvent, with more liabilities on their balance sheets than assets. These analysts believe the only thing left for U.S. officials to do is the same thing Japan ended up doing: Force major banks to declare their bad debts, and then weed out the weakest and recapitalize the survivors.

Japan’s delay in aggressively seizing control of the banking sector cost the economy trillions of dollars and years growth.

“The historical record shows that you have to do it eventually,” Adam S. Posen, a senior fellow at the Peterson Institute for International Economics, told the New York Times. “Putting it off only brings more troubles and higher costs in the long run.”

Nouriel Roubini, a professor of economics at the Stern School of Business at New York University, estimates that total losses on loans by U.S. financial firms and the fall in the market value of the assets they hold will reach $3.6 trillion, with half of that risk falling squarely on the shoulders of banks.

“The United States banking system is effectively insolvent,” Roubini said.

However, the government is hoping that over time, the economy will start to recover and some of the bad debt that banks are currently holding will start to regain its value.

“If [financial institutions] had to sell these securities today, the losses would be far beyond their capital at this point,” Raghuram Rajan, a professor of finance and economist at the University of Chicago told the Times. “But if the prices of these assets will recover over the next year or so, if they don’t have to sell at distress prices, the banks could have a new lease on life by giving them some time.”

The strategy has worked before, notably during the Latin America debt crisis of the 1980s. The total risk to the nine money-center banks in New York was estimated at more than three times their capital, the Times reported. But regulators did not force those banks to value the loans at the hugely depreciated value of the market and averted a catastrophe.

Marking assets to market is the only way to allow for the correction of this business cycle. The longer we wait for it, the longer it will take. If we wait 10 years it will take 10 years, if we wait longer it will take longer.

Tags: financial crisis, japan, US